12 CFR 204.3 Computation and maintenance.
(a) Maintenance of required reserves. A depository institution, a
U.S. branch or agency of a foreigh bank, and an Edge or Agreement
Corporation shall maintain reserves against its deposits and
Eurocurrency liabilities in accordance with the procedures prescribed in
this section and 204.4 and the ratios prescribed in 204.9. Penalties
shall be assessed for deficiencies in required reserves in accordance
with the provisions of 204.7. Every depository institution, U.S. branch
or agency of a foreign bank, and Edge or Agreement Corporation shall
file reports of deposits in accordance with the instructions of the
Board, based on the level of its deposits and reservable liabilities
consistent with the Board's need for data to carry out its
responsibility to monitor and control monetary and credit aggregates.
For purposes of this part, the obligations of a majority owned (50% or
more) U.S. subsidiary (except an Edge or Agreement Corporation) of a
depository institution shall be regarded as obligations of the parent
depository institution.
(1) United States branches and agencies of foreign banks. (i) A
foreign bank's United States branches and agencies operating within the
same State and within the same Federal Reserve District shall prepare
and file a report of deposits on an aggregated basis.
(ii) United States branches and agencies of the same foreign bank
shall, if possible, assign the low reserve tranche on transaction
accounts ( 204.9(a)) to only one office or to a group of offices filing
a single aggregated report of deposits. If the low reserve tranche
cannot be fully utilized by a single office or by a group of offices
filing a single report of deposits, the unused portion of the tranche
may be assigned to other offices of the same foreign bank until the
amount of the tranche is exhausted. The foreign bank shall determine
this assignment subject to the restriction that if a portion of the
tranche is assigned to an office in a particular State, any unused
portion must first be assigned to other offices located within the same
State and within the same Federal Reserve District, that is, to other
offices included on the same aggregated report of deposits. If
necessary in order to avoid under-utilization of the low reserve
tranche, the allocation may be changed at the beginning of a calendar
month. Under other circumstances, the low reserve tranche may be
reallocated at the beginning of a calendar year.
(2) Edge and Agreement Corporations. (i) An Edge or Agreement
Corporation's offices operating within the same State and within the
same Federal Reserve District shall prepare and file a report of
deposits on an aggregated basis.
(ii) An Edge or Agreement Corporation shall, if possible, assign the
low reserve tranche on transaction accounts ( 204.9(a)) to only one
office or to a group of offices filing a single aggregated report of
deposits. If the low reserve tranche cannot be fully utilized by a
single office or by a group of offices filing a single report of
deposits, the unused portion of the tranche may be assigned to other
offices of the same institution until the amount of the tranche is
exhausted. An Edge or Agreement Corporation shall determine this
assignment subject to the restriction that if a portion of the tranche
is assigned to an office in a particular State, any unused portion must
first be assigned to other offices located within the same State and
within the same Federal Reserve District, that is, to other offices
included on the same aggregated report of deposits. If necessary in
order to avoid under-utilization of the low reserve tranche, the
allocation may be changed at the beginning of a calendar month. Under
other circumstances, the low reserve tranche may be reallocated at the
beginning of a calendar year.
(3) Allocation of exemption from reserve requirements. (i) In
determining the reserve requirements of a depository institution, the
exemption provided for in 204.9(a) shall apply in the following order
of priorities:
(A) First, to net transaction accounts that are first authorized by
federal law in any state after April 1, 1980; and
(B) Second, to other net transaction accounts.
(ii) A depository institution, United States branches and agencies of
the same foreign bank, or an Edge or Agreement corporation shall, if
possible, assign the reserve requirement exemption of 204.9(a) to only
one office or to a group of offices filing a single aggregated report of
deposits. If the reserve requirement exemption cannot be fully utilized
by a single office or by a group of offices filing a single report of
deposits, the unused portion of the exemption may be assigned to other
offices of the same institution until the amount of the exemption or
reservable liabilities is exhausted. A depository institution, foreign
bank, or Edge or Agreement corporation shall determine this assignment
subject to the restriction that if a portion of the exemption is
assigned to an office in a particular state, any unused portion must
first be assigned to other offices located within the same state and
within the same Federal Reserve District, that is, to other offices
included on the same aggregated report of deposits. The exemption may
be reallocated at the beginning of a calendar year, or, if necessary to
avoid underutilization of the exemption, at the beginning of a calendar
month. The amount of the reserve requirement exemption allocated to an
office or group of offices may not exceed the amount of the low reserve
tranche allocated to such office or offices under this paragraph.
(b) Form of reserves. Reserves shall be held in the form of (1)
vault cash, (2) a balance maintained directly with the Federal Reserve
Bank in the District in which it is located, or (3) a pass through
account. Reserves held in the form of a pass through account shall be
considered to be a balance maintained with the Federal Reserve.
(c) Computation of required reserves for institutions that report on
a weekly basis. (1) Required reserves are computed on the basis of
daily average balances of deposits and Eurocurrency liabilities during a
fourteen-day period ending every second Monday (the ''computation
period''). Reserve requirements are computed by applying the ratios
prescribed in 204.9 to the classes of deposits and Eurocurrency
liabilities of the institution. The reserve balance that is required to
be maintained with the Federal Reserve shall be maintained during a
fourteen-day period (the ''maintenance period'') which begins on a
Thursday and ends on the second Wednesday thereafter.
(2) A reserve balance shall be maintained during a given maintenance
period based on the daily average net transaction accounts held by the
depository institution during the computation period that began
immediately prior to the beginning of the maintenance period.
(3) In determining the reserve balance that is required to be
maintained with the Federal Reserve, the daily average vault cash held
during the computation period that ended seventeen days prior to the
beginning of the maintenance period is deducted from the amount of the
institution's required reserves.
(d) Computation of required reserves for institutions that report on
a quarterly basis. For a depository institution that is permitted to
report quarterly, required reserves are computed on the basis of the
depository institution's daily average deposit balances during a
seven-day computation period that begins on the third Tuesday of March,
June, September, and December. In determining the reserve balance that
such a depository institution is required to maintain with the Federal
Reserve, the daily average vault cash held during the computation period
is deducted from the amount of the institution's required reserves. The
reserve balance that is required to be maintained with the Federal
Reserve shall be maintained during a corresponding period that begins on
the fourth Thursday following the end of the institution's computation
period and ends on the fourth Wednesday after the close of the
institution's next computation period.
(e) Computation of transaction accounts. Overdrafts in demand
deposit or other transaction accounts are not to be treated as negative
demand deposits or negative transaction accounts and shall not be netted
since overdrafts are properly reflected on an institution's books as
assets. However, where a customer maintains multiple transaction
accounts with a depository institution, overdrafts in one account
pursuant to a bona fide cash management arrangement are permitted to be
netted against balances in other related transaction accounts for
reserve requirement purposes.
(f) Deductions allowed in computing reserves. (1) In determining the
reserve balance required under this part, the amount of cash items in
process of collection and balances subject to immediate withdrawal due
from other depository institutions located in the United States
(including such amounts due from United States branches and agencies of
foreign banks and Edge and Agreement Corporations) may be deducted from
the amount of gross transaction accounts. The amount that may be
deducted may not exceed the amount of gross transaction accounts.
However, if a depository institution maintains any transaction accounts
that are first authorized under Federal law after April 1, 1980, it may
deduct from these balances cash items in process of collection and
balances subject to immediate withdrawal due from other depository
institutions located in the United States only to the extent of the
proportion that such newly authorized transaction accounts are of the
institution's total transaction accounts. The remaining cash items in
process of collection and balances subject to immediate withdrawal due
from other depository institutions located in the United States shall be
deducted from the institution's remaining transaction accounts.
(2) United States branches and agencies of a foreign bank may not
deduct balances due from another United States branch or agency of the
same foreign bank, and United States offices of an Edge or Agreement
Corporation may not deduct balances due from another United States
office of the same Edge Corporation.
(3) Balances ''due from other depository institutions'' do not
include balances due from Federal Reserve Banks, pass through accounts,
or balances (payable in dollars or otherwise) due from banking offices
located outside the United States. An institution exercising fiduciary
powers may not include in ''balances due from other depository
institutions'' amounts of trust funds deposited with other banks and due
to it as a trustee or other fiduciary.
(g) Availability of cash items as reserves. Cash items forwarded to
a Federal Reserve Bank for collection and credit shall not be counted as
part of the reserve balance to be carried with the Federal Reserve until
the expiration of the time specified in the appropriate time schedule
established under Regulation J, ''Collection of Checks and Other Items
and Transfers of Funds'' (12 CFR part 210). If a depository institution
draws against items before that time, the charge will be made to its
reserve account if the balance is sufficient to pay it; any resulting
impairment of reserve balances will be subject to the penalties provided
by law and by this part. However, the Federal Reserve Bank may, at its
discretion, refuse to permit the withdrawal or other use of credit given
in a reserve account for any time for which the Federal Reserve bank has
not received payment in actually and finally collected funds.
(h) Carryover of excesses or deficiencies. Any excess or deficiency
in a required reserve balance for any maintenance period that does not
exceed the greater of two percent of the institution's required reserves
(including required clearing balances and net of the required clearing
balance penalty free band where applicable) or $25,000, shall be carried
forward to the next maintenance period. Any carryover not offset during
the next period may not be carried forward to subsequent periods.
(i) Pass-through rules -- (1) Procedure. (i) A nonmember depository
institution required to maintain reserve balances (''respondent'') may
select only one institution to pass through its required reserves.
Eligible institutions through which respondent required reserve balances
may be passed (''correspondents'') are Federal Home Loan Banks, the
National Credit Union Administration Central Liquidity Facility, and
depository institutions that maintain required reserve balances at a
Federal Reserve office. In addition, the Board reserves the right to
permit other institutions, on a case-by-case basis, to serve as
pass-through correspondents. The correspondent chosen must subsequently
pass through the required reserve balances of its respondents directly
to the appropriate Federal Reserve office. The correspondent placing
funds with the Federal Reserve on behalf of respondents will be
responsible for reserve account maintenance as described in paragraphs
(i) (3) and (4) of this section.
(ii) Respondent depository institutions or pass-through
correspondents may institute, terminate, or change pass-through
arrangements for the maintenance of required reserve balances by
providing all documentation required for the establishment of the new
arrangement and/or termination of the existing arrangement to the
Federal Reserve Bank in whose territory the respondent is located. The
time period required for such a change to be effected shall be specified
by each Reserve Bank in its operating circular.
(iii) U.S. branches and agencies of foreign banks and Edge and
Agreement Corporations may (a) act as pass-through correspondents for
any nonmember institution required to maintain reserves or (b) pass
their own required reserve balances through correspondents. In
accordance with the provision set forth in paragraph (i)(3) of this
section, the U.S. branches and agencies of a foreign bank or offices of
an Edge and Agreement Corporation filing a single aggregated report of
deposits may designate any one of the other U.S. offices of the same
institution to serve as a pass-through correspondent for all of the
offices filing such a single aggregated report of deposits.
(2) Reports. (i) Every depository institution that maintains
transaction accounts or nonpersonal time deposits is required to file
its report of deposits (or any other required form or statement)
directly with the Federal Reserve Bank of its District, regardless of
the manner in which it chooses to maintain required reserve balances.
(ii) The Federal Reserve Bank receiving such reports shall notify the
reporting depository institution of its reserve requirements. Where a
pass-through arrangement exists, the Reserve Bank will also notify the
correspondent passing respondent reserve balances through to the Federal
Reserve of its respondent's required reserve balances.
(iii) The Federal Reserve will not hold a correspondent responsible
for guaranteeing the accuracy of the reports of deposits submitted by
its respondents to their local Federal Reserve Banks.
(3) Account maintenance. (i) A correspondent that passes through
required reserve balances of respondents whose main offices are located
in the same Federal Reserve territory in which the main office of the
correspondent is located shall have the option of maintaining such
required reserve balances in one of two ways:
(a) A correspondent may maintain such balances, along with the
correspondent's own required reserve balances, in a single commingled
account at the Federal Reserve Bank office in whose territory the
correspondent's main office is located, or
(b) A correspondent may maintain its own required reserve balance in
an account with the Federal Reserve Bank office in whose territory its
main office is located. The correspondent, in addition, would maintain
in a separate commingled account the required reserve balances passed
through for respondents whose main offices are located in the same
Federal Reserve territory as that of the main office of the
correspondent.
(ii) A correspondent that passes through required reserve balances of
respondents whose main offices are located outside the Federal Reserve
territory in which the main office of the correspondent is located shall
maintain such required reserve balances in a separate commingled account
at each Federal Reserve office in whose territory the main offices of
such respondents are located.
(iii) A Reserve Bank may, at its discretion, require a pass-through
correspondent to consolidate in a single account the reserve balances of
all of its respondents whose main offices are located in any territory
of that Federal Reserve District.
(4) Responsibilities of parties. (i) Each individual depository
institution is responsible for maintaining its required reserve balance
with the Federal Reserve Bank either directly or through a pass-through
correspondent.
(ii) A pass-through correspondent shall be responsible for assuring
the maintenance of the appropriate aggregate level of its respondents'
required reserve balances. A Reserve Bank will compare the total
reserve balance required to be maintained in each reserve account with
the total actual reserve balance held in such reserve account for
purposes of determining required reserve deficiencies, imposing or
waiving penalties for deficiencies in required reserves, and for other
reserve maintenance purposes. A penalty for a deficiency in the
aggregate level of the required reserve balance will be imposed by the
Reserve Bank on the correspondent maintaining the account.
(iii) Each correspondent is required to maintain detailed records for
each of its respondents in a manner that permits Reserve Banks to
determine whether the respondent has provided a sufficient required
reserve balance to the correspondent. A correspondent passing through a
respondent's reserve balance shall maintain records and make such
reports as the Federal Reserve System requires in order to insure the
correspondent's compliance with its responsibilities for the maintenance
of a respondent's reserve balance. Such records shall be available to
the Federal Reserve Banks as required.
(iv) The Federal Reserve Bank may terminate any pass-through
relationship in which the correspondent is deficient in its
recordkeeping or other responsibilities.
(v) Interest paid on supplemental reserves (if such reserves are
required under 204.6 of this part) held by respondent(s) will be
credited to the commingled reserve account(s) maintained by the
correspondent.
(5) Services. (i) A depository institution maintaining its reserve
balances on a pass-through basis may obtain available Federal Reserve
System services directly from its local Federal Reserve office. For
this purpose, the pass-through account in which a respondent's required
reserve balance is maintained may be used by the respondent for the
posting of entries arising from transactions involving the use of such
Federal Reserve services, if the posting of these types of transactions
has been authorized by the correspondent and the Federal Reserve. For
example, access to the wire transfer, securities transfer, and
settlement services that involve charges to the commingled reserve
account at the Reserve Bank will require authorization from the
correspondent and the Reserve Bank for the type of transaction that is
occurring.
(ii) In addition, in obtaining Federal Reserve services, respondents
maintaining their required reserves on a pass-through basis may choose
to have entries arising from the use of Federal Reserve services posted
to:
(a) With the prior authorization of all parties concerned, the
reserve account maintained by any institution at a Federal Reserve Bank,
or (b) an account maintained for clearing purposes at a Federal Reserve
Bank by the respondent.
(iii) Accounts at Federal Reserve Banks consisting only of
respondents' reserve balances that are passed through by a correspondent
to a Federal Reserve Bank may be used only for transactions of
respondents. A correspondent will not be permitted to use such
pass-through accounts for purposes other than serving its respondents'
needs.
(iv) A correspondent may not apply for Federal Reserve credit on
behalf of a respondent. Rather, a respondent should apply directly to
its Federal Reserve Bank for credit. Any Federal Reserve credit
obtained by a respondent may be credited, at the respondent's option and
with the approval of the parties concerned, to the reserve account in
which its required reserves are maintained by a correespondent, to a
clearing account maintained by the respondent, or to any account to
which the respondent is authorized to post entries arising from the use
of Federal Reserve services.
(45 FR 56018, Aug. 22, 1980, as amended at 45 FR 58100, Sept. 2,
1980; 45 FR 81537, Dec. 11, 1980; 46 FR 32430, June 23, 1981; 47 FR
44707, Oct. 12, 1982; 47 FR 55206, Dec. 8, 1982; 48 FR 17335, 17336,
Apr. 22, 1983; 51 FR 9635, Mar. 20, 1986; 55 FR 50541, Dec. 7, 1990)
12 CFR 204.4 Transitional adjustments.
The following transitional adjustments for computing Federal reserve
requirements shall apply to all member and nonmember depository
institutions, except for reserves imposed under 204.5 and 204.6.
(a) Nonmembers. Except as provided below, the required reserves of a
depository institution that was engaged in business on July 1, 1979, but
was not a member of the Federal Reserve System on or after that date
shall be determined by reducing the amount of required reserves computed
under 204.3 in accordance with the following schedule:
However, an institution shall not reduce the amount of required
reserves on any category of deposits or accounts that are first
authorized under Federal law in any state after April 1, 1980.
(b) New members. The required reserves of nonmember depository
institution that was engaged in business but was not a member bank
during the period between July 1, 1979 and September 1, 1980, inclusive,
and which becomes a member of the Federal Reserve System after September
1, 1980, shall be determined under paragraph (a) as if it had remained a
nonmember and adding to this amount an amount determined by multiplying
the difference between its required reserves computed using the ratios
specified in 204.9(a) and its required reserves computed as if it had
remained a nonmember times the percentage specified below in accordance
with the following schedule:
(c) De novo institutions. (1) The required reserves of any
depository institution that was not engaged in business on September 1,
1980, shall be computed under 204.3 in accordance with the following
schedule:
This paragraph also shall apply to a United States branch or agency
of a foreign bank if such branch or agency is the foreign bank's first
office in the United States. Additional branches or agencies of such a
foreign bank shall be entitled only to the remaining phase-in available
to the initial office.
(2) Notwithstanding paragraph (e)(1) of this section, the required
reserves of any depository institution that:
(i) Was not engaged in business on November 18, 1981; and
(ii) Has $50 million or more in daily average total transaction
accounts, nonpersonal time deposits and Eurocurrency liabilities for any
computation period after commencing business; shall be 100 percent of
the required reserves computed under 204.3 starting with the
maintenance period that begins seventeen days after the computation
period during which such institution has daily average total transaction
accounts, nonpersonal time deposits and Eurocurrency liabilities of $50
million or more.
(d) Nonmember depository institutions with offices in Hawaii. Any
depository institution that, on August 1, 1978, (1) was engaged in
business as a depository institution in Hawaii, and (2) was not a member
of the Federal Reserve System at any time on or after such date shall
not maintain reserves imposed under this part against deposits held or
maintained at its offices located in Hawaii until January 2, 1986.
Beginning January 2, 1986, the required reserves on deposits held or
maintained at offices located in Hawaii of such a depository institution
shall be determined by reducing the amount of required reserves under
204.3 in accordance with the following schedule:
(e) Mergers and consolidations. The following rules concerning
transitional adjustments apply to mergers and consolidations of
depository institutions.
(1) Where all depository institutions involved in a merger or
consolidation are subject to the same paragraph of the transitional
adjustment rules contained in paragraphs (a) through (d) of this section
during the reserve computation period immediately preceding the merger,
the surviving institution shall continue to compute its transitional
adjustment of required reserves under such applicable paragraph, except
that the amount of reserves which shall be maintained shall be reduced
by an amount determined by multiplying the amount by which the required
reserves during the computation period immediately preceding the date of
the merger (computed as if the depository institutions had merged)
exceeds the sum of the actual required reserves of each depository
institution during the same computation period, times the appropriate
percentage as specified in the following schedule:
(2)(i) Where the depository institutions involved in a merger or
consolidation are not subject to the same paragraph of the transitional
adjustment rules contained in paragraphs (a) through (d) of this section
and such merger or consolidation occurs:
(A) On or after July 1, 1979, between a nonmember bank and a bank
that was a member bank on or after July 1, 1979, and the survivor is a
nonmember bank;
(B) On or after March 31, 1980, between a member bank and a nonmember
bank and the survivor is a member bank; or
(C) On or after September 1, 1980, between any other depository
institutions.
The required reserves of the surviving institution shall be computed
by allocating its deposits, Eurocurrency liabilities, other reservable
claims, balances due from other depository institutions and cash items
in process of collection to each depository institution involved in the
merger transaction and applying to such amounts the transitional
adjustment rule of paragraphs (a) through (d) of this section to which
each such depository institution was subject during the reserve
computation period immediately prior to the merger or consolidation.
(ii) The deposits of the surviving institution shall be allocated
according to the ratio that daily average total required reserves of
each depository institution involved in the merger were to the sum of
daily average total required reserves of all institutions involved in
the merger or consolidation during the reserve computation period
immediately preceding the date of the merger.
(A) If the merger occurs before November 6, 1980, such ratio of daily
average total required reserves shall be computed using the reserve
requirement ratios in 204.9(b).
(B) If the merger occurs on or after November 6, 1980, such ratio of
daily average total required reserves shall be computed using the
reserve requirement ratios in 204.9(a) without regard to the
transitional adjustments of this section.
(iii) The low reserve tranche on transaction accounts ( 204.9(a))
shall be allocated to each institution involved in the merger or
consolidation using the ratio computed in paragraph (e)(2)(ii) and the
reserve requirement tranches on demand deposits ( 204.9(b)) shall be
allocated to member bank deposits using such ratio of daily average
total required reserves.
(iv) The vault cash of the surviving depository institution also will
be allocated to each institution involved in the merger or consolidation
according to the ratio that daily average total required reserves of
each depository institution involved in the merger was to the sum of
daily average total required reserves of all institutions involved in
the merger or consolidation during the reserve computation period
immediately preceding the date of the merger.
(v) The amount of reserves which shall be maintained shall be reduced
by an amount determined by multiplying the amount by which the required
reserves during the computation period immediately preceding the date of
the merger (computed as if the depository institutions had merged)
exceeds the sum of the actual required reserves of each depository
institution during the same computation period, times the appropriate
percentage as specified in the following schedule:
(45 FR 56018, Aug. 22, 1980, as amended at 45 FR 73015, Nov. 4, 1980;
45 FR 81537, Dec. 11, 1980; 46 FR 32430, June 23, 1981; 46 FR 57668,
Nov. 25, 1981; 47 FR 14482, Apr. 5, 1982; 47 FR 44708, Oct. 12, 1982;
48 FR 2314, Jan. 19, 1983; 50 FR 51509, Dec. 17, 1985; 51 FR 9636,
Mar. 20, 1986)
12 CFR 204.5 Emergency reserve requirement.
(a) Finding by Board. The Board may impose, after consulting with
the appropriate committees of Congress, additional reserve requirements
on depository institutions at any ratio on any liability upon a finding
by at least five members of the Board that extraordinary circumstances
require such action.
(b) Term. Any action taken under this section shall be valid for a
period not exceeding 180 days, and may be extended for further periods
of up to 180 days each by affirmative action of at least five members of
the Board for each extension.
(c) Reports to Congress. The Board shall transmit promptly to
Congress a report of any exercise of its authority under this paragraph
and the reasons for the exercise of authority.
(d) Reserve requirements. At present, there are no emergency reserve
requirements imposed under this section.
(45 FR 56018, Aug. 22, 1980)
12 CFR 204.6 Supplemental reserve requirement.
(a) Finding by Board. Upon the affirmative vote of at least five
members of the Board and after consultation with the Board of Directors
of the Federal Deposit Insurance Corporation, the Federal Home Loan Bank
Board, and the National Credit Union Administration Board, the Board may
impose a supplemental reserve requirement on every depository
institution of not more than 4 percent of its total transaction
accounts. A supplemental reserve requirement may be imposed if:
(1) The sole purpose of the requirement is to increase the amount of
reserves maintained to a level essential for the conduct of monetary
policy;
(2) The requirement is not imposed for the purpose of reducing the
cost burdens resulting from the imposition of basic reserve
requirements;
(3) Such requirement is not imposed for the purpose of increasing the
amount of balances needed for clearing purposes; and
(4) On the date on which supplemental reserve requirements are
imposed, the total amount of basic reserve requirements is not less than
the amount of reserves that would be required on transaction accounts
and nonpersonal time deposits under the initial reserve ratios
established by the Monetary Control Act of 1980 (Pub. L. 96-221) in
effect on September 1, 1980.
(b) Term. (1) If a supplemental reserve requirement has been imposed
for a period of one year or more, the Board shall review and determine
the need for continued maintenance of supplemental reserves and shall
transmit annual reports to the Congress regarding the need for
continuing such requirement.
(2) Any supplemental reserve requirement shall terminate at the close
of the first 90-day period after the requirement is imposed during which
the average amount of supplemental reserves required are less than the
amount of reserves which would be required if the ratios in effect on
September 1, 1980, were applied.
(c) Earnings Participation Account. A depository institutions's
supplemental reserve requirement shall be maintained by the Federal
Reserve Banks in an Earnings Participation Account. Such balances shall
receive earnings to be paid by the Federal Reserve Banks during each
calendar quarter at a rate not to exceed the rate earned on the
securities portfolio of the Federal Reserve System during the previous
calendar quarter. Additional rules and regulations maybe prescribed by
the Board concerning the payment of earnings on Earnings Participation
Accounts by Federal Reserve Banks.
(d) Report to Congress. The Board shall transmit promptly to the
Congress a report stating the basis for exercising its authority to
require a supplemental reserve under this section.
(e) Reserve requirements. At present, there are no supplemental
reserve requirements imposed under this section.
(45 FR 56018, Aug. 22, 1980, as amended at 45 FR 81537, Dec. 11,
1980)
12 CFR 204.7 Penalties.
(a) Charges for deficiencies -- (1) Assessment of charges.
Deficiencies in a depository institution's required reserve balance,
after application of the 2 percent carryover provided in 204.3(h) are
subject to reserve deficiency charges. Federal Reserve Banks are
authorized to assess charges for deficiencies in required reserves at a
rate of 2 percent per year above the lowest rate in effect for
borrowings from the Federal Reserve Bank on the first day of the
calendar month in which the deficiencies occurred. Charges shall be
assessed on the basis of daily average deficiencies during each
maintenance period. Reserve Banks may, as an alternative to levying
monetary charges, after consideration of the circumstances involved,
permit a depository institution to eliminate deficiencies in its
required reserve balance by maintaining additional reserves during
subsequent reserve maintenance periods.
(2) Waivers. (i) Reserve Banks may waive the charges for reserve
deficiencies except when the deficiency arises out of a depository
institution's gross negligence or conduct that is inconsistent with the
principles and purposes of reserve requirements. Each Reserve Bank has
adopted guidelines that provide for waivers of small charges. The
guidelines also provide for waiving the charge once during a two-year
period for any deficiency that does not exceed a certain percentage of
the depository institution's required reserves. Decisions by Reserve
Banks to waive charges in other situations are based on an evaluation of
the circumstances in each individual case and the depository
institution's reserve maintenance record. If a depository institution
has demonstrated a lack of due regard for the proper maintenance of
required reserves, the Reserve Bank may decline to exercise the waiver
privilege and assess all charges regardless of amount or reason for the
deficiency.
(ii) In individual cases, where a federal supervisory authority
waives a liquidity requirement, or waives the penalty for failing to
satisfy a liquidity requirement, the Reserve Bank in the District where
the involved depository institution is located shall waive the reserve
requirement imposed under this part for such depository institution when
requested by the federal supervisory authority involved.
(b) Penalties for Violations. Violations of this part may be subject
to assessment of civil money penalties by the Board under authority of
section 19(1) of the Federal Reserve Act (12 U.S.C 505) as implemented
in 12 CFR part 263. In addition, the Board and any other Federal
financial institution supervisory authority may enforce this part with
respect to depository institutions subject to their jurisdiction under
authority conferred by law to undertake cease and desist proceedings.
(44 FR 56018, Aug. 22, 1980, as amended at 56 FR 15495, Apr. 17,
1991)
12 CFR 204.8 International banking facilities.
(a) Definitions. For purposes of this part, the following
definitions apply:
(1) International banking facility or IBF means a set of asset and
liability accounts segregated on the books and records of a depository
institution, United States branch or agency of a foreign bank, or an
Edge or Agreement Corporation that includes only international banking
facility time deposits and international banking facility extensions of
credit.
(2) International banking facility time deposit or IBF time deposit
means a deposit, placement, borrowing or similar obligation represented
by a promissory note, acknowledgment of advance, or similar instrument
that is not issued in negotiable or bearer form, and
(i) (A) That must remain on deposit at the IBF at least overnight;
and
(B) That is issued to
(1) Any office located outside the United States of another
depository institution organized under the laws of the United States or
of an Edge or Agreement Corporation;
(2) Any office located outside the United States of a foreign bank;
(3) A United States office or a non-United States office of the
entity establishing the IBF;
(4) Another IBF; or
(5) A foreign national government, or an agency or instrumentality
thereof, /13/ engaged principally in activities which are ordinarily
performed in the United States by governmental entities; an
international entity of which the United States is a member; or any
other foreign international or supranational entity specifically
designated by the Board; /14/ or
(ii) (A) That is payable
(1) On a specified date not less than two business days after the
date of deposit;
(2) Upon expiration of a specified period of time not less than two
business days after the date of deposit; or
(3) Upon written notice that actually is required to be given by the
depositor not less than two business days prior to the date of
withdrawal;
(B) That represents funds deposited to the credit of a non-United
States resident or a foreign branch, office, subsidiary, affiliate, or
other foreign establishment (foreign affiliate) controlled by one or
more domestic corporations provided that such funds are used only to
support the operations outside the United States of the depositor or of
its affiliates located outside the United States; and
(C) That is maintained under an agreement or arrangement under which
no deposit or withdrawal of less than $100,000 is permitted, except that
a withdrawal of less than $100,000 is permitted if such withdrawal
closes an account.
(3) International banking facility extension of credit or IBF loan
means any transaction where an IBF supplies funds by making a loan, or
placing funds in a deposit account. Such transactions may be
represented by a promissory note, security, acknowledgment of advance,
due bill, repurchase agreement, or any other form of credit transaction.
Such credit may be extended only to:
(i) Any office located outside the United States of another
depository institution organized under the laws of the United States or
of an Edge or Agreement Corporation;
(ii) Any office located outside the United States of a foreign bank;
(iii) A United States or a non-United States office of the
institution establishing the IBF;
(iv) Another IBF;
(v) A foreign national government, or an agency or instrumentality
thereof, /15/ engaged principally in activities which are ordinarily
performed in the United States by governmental entities; an
international entity of which the United States is a member; or any
other foreign international or supranational entity specifically
designated by the Board; /16/ or
(vi) A non-United States resident or a foreign branch, office,
subsidiary, affiliate or other foreign establishment (foreign affiliate)
controlled by one or more domestic corporations provided that the funds
are used only to finance the operations outside the United States of the
borrower or of its affiliates located outside the United States.
(b) Acknowledgment of use of IBF deposits and extensions of credit.
An IBF shall provide written notice to each of its customers (other than
those specified in 204.8(a)(2)(i)(B) and 204.8(a)(3) (i) through (v))
at the time a deposit relationship or a credit relationship is first
established that it is the policy of the Board of Governors of the
Federal Reserve System that deposits received by international banking
facilities may be used only to support the depositor's operations
outside the United States as specified in 204.8(a)(2)(ii)(B) and that
extensions of credit by IBFs may be used only to finance operations
outside of the United States as specified in 204.8(a)(3)(vi). In the
case of loans to or deposits from foreign affiliates of U.S. residents,
receipt of such notice must be acknowledged in writing whenever a
deposit or credit relationship is first established with the IBF.
(c) Exemption from reserve requirements. An institution that is
subject to the reserve requirements of this part is not required to
maintain reserves against its IBF time deposits or IBF loans.
Deposit-taking activities of IBFs are limited to accepting only IBF time
deposits and lending activities of IBFs are restricted to making only
IBF loans.
(d) Establishment of an international banking facility. A depository
institution, an Edge or Agreement Corporation or a United States branch
or agency of a foreign bank may establish an IBF in any location where
it is legally authorized to engage in IBF business. However, only one
IBF may be established for each reporting entity that is required to
submit a Report of Transaction Accounts, Other Deposits and Vault Cash
(Form FR 2900).
(e) Notification to Federal Reserve. At least fourteen days prior to
the first reserve computation period that an institution intends to
establish an IBF it shall notify the Federal Reserve Bank of the
district in which it is located of its intent. Such notification shall
include a statement of intention by the institution that it will comply
with the rules of this part concerning IBFs, including restrictions on
sources and uses of funds, and recordkeeping and accounting
requirements. Failure to comply with the requirements of this part
shall subject the institution to reserve requirements under this part or
result in the revocation of the institution's ability to operate an IBF.
(f) Recordkeeping requirements. A depository institution shall
segregate on its books and records the asset and liability accounts of
its IBF and submit reports concerning the operations of its IBF as
required by the Board.
(46 FR 32429, June 23, 1981, as amended at 51 FR 9636, Mar. 20, 1986;
56 FR 15495, Apr. 17, 1991)
/13/ Other than states, provinces, municipalities, or other regional
or local governmental units or agencies or instrumentalities thereof.
/14/ The designated entities are specified in 12 CFR 204.125.
/15/ See Footnote 13.
/16/ See Footnote 14.
12 CFR 204.9 Reserve requirement ratios.
(a)(1) Reserve percentages. The following reserve ratios are
prescribed for all depository institutions, Edge and Agreement
Corporations, and United States branches and agencies of foreign banks:
(2) Exemption from reserve requirements. Each depository
institution, Edge or agreement corporation, and U.S. branch or agency of
a foreign bank is subject to a zero percent reserve requirement on an
amount of its transaction accounts subject to the low reserve tranche in
paragraph (a)(1) of this section not in excess of $3.6 million
determined in accordance with 204.3(a)(3) of this part.
(b) Reserve ratios in effect during last computation period prior to
September 1, 1980.
For purposes of computing the reserves under this part, that would
have been required using the reserve ratios that were in effect on
August 31, 1980, the reserve ratio on time deposits of a member bank
shall be the average time deposit ratio of the member bank during the
14-day period ending August 6, 1980, except that the reserve ratio on
time deposits of a nonmember bank that was a member bank on or after
July 1, 1979, but which became a nonmember bank before March 31, 1980,
may be the average time deposit ratio of the nonmember during the 14-day
period ending August 27, 1980.
(45 FR 56018, Aug. 22, 1980. Redesignated at 46 FR 32429, June 23,
1981 and amended at 55 FR 50541, Dec. 7, 1990; 56 FR 60055, Nov. 27,
1991)
12 CFR 204.9 Interpretations
12 CFR 204.121 Bankers' banks.
(a) (1) The Federal Reserve Act, as amended by the Monetary Control
Act of 1980 (title I of Pub. L. 96-221), imposes Federal reserve
requirements on depository institutions that maintain transaction
accounts or nonpersonal time deposits. Under section 19(b)(9), however,
a depository institution is not required to maintain reserves if it:
(i) Is organized solely to do business with other financial
institutions;
(ii) Is owned primarily by the financial institutions with which it
does business; and
(iii) Does not do business with the general public.
Depository institutions that satisfy all of these requirements are
regarded as bankers' banks.
(2) In its application of these requirements to specific
institutions, the Board will use the following standards:
(i) A depository institution may be regarded as organized solely to
do business with other depository institutions even if, as an incidental
part to its activities, it does business to a limited extent with
entities other than depository institutions. The extent to which the
institution may do business with other entities and continue to be
regarded as a bankers' bank is specified in paragraph (a)(2)(iii) of
this section.
(ii) A depository institution will be regarded as being owned
primarily by the institutions with which it does business if 75 per cent
or more of its capital is owned by other depository institutions. The
75 per cent or more ownership rule applies regardless of the type of
depository institution.
(iii) A depository institution will not be regarded as doing business
with the general public if it meets two conditions. First, the range of
customers with which the institution does business must be limited to
depository institutions, including subsidiaries or organizations owned
by depository institutions; directors, officers or employees of the
same or other depository institutions; individuals whose accounts are
acquired at the request of the institution's supervisory authority due
to the actual or impending failure of another depository institution;
share insurance funds; and depository institution trade associations.
Second, the extent to which the depository institution makes loans to,
or investments in, the above entities (other than depository
institutions) cannot exceed 10 per cent of total assets, and the extent
to which it receives deposits (or shares if the institution does not
receive deposits) from or issues other liabilities to the above entities
(other than depository institutions) cannot exceed 10 per cent of total
liabilities (or net worth if the institution does not receive deposits).
If a depository institution is unable to meet all of these
requirements on a continuing basis, it will not be regarded as a
bankers' bank and will be required to satisfy Federal reserve
requirements on all of its transaction accounts and nonpersonal time
deposits.
(b) (1) Section 19(c)(1) of the Federal Reserve Act, as amended by
the Monetary Control Act of 1980 (title I of Pub. L. 96-221) provides
that Federal reserve requirements may be satisfied by the maintenance of
vault cash or balances in a Federal Reserve Bank. Depository
institutions that are not members of the Federal Reserve System may also
satisfy reserve requirements by maintaining a balance in another
depository institution that maintains required reserve balances at a
Federal Reserve Bank, in a Federal Home Loan Bank, or in the National
Credit Union Administration Central Liquidity Facility if the balances
maintained by such institutions are subsequently passed through to the
Federal Reserve Bank.
(2) On August 27, 1980, the Board announced the procedures that will
apply to such pass-through arrangements (45 FR 58099). Section
204.3(i)(1) provides that the Board may permit, on a case-by-case basis,
depository institutions that are not themselves required to maintain
reserves (bankers' banks) to act as pass-through correspondents if
certain criteria are satisfied. The Board has determined that a
bankers' bank may act as a pass-through correspondent if it enters into
an agreement with the Federal Reserve to accept responsibility for the
maintenance of pass-through reserve accounts in accordance with
Regulation D (12 CFR 204.3(i)) and if the Federal Reserve is satisfied
that the quality of management and financial resources of the
institution are adequate in order to enable the institution to serve as
a pass-through correspondent in accordance with Regulation D.
Satisfaction of these criteria will assure that pass-through
arrangements are maintained properly without additional financial risk
to the Federal Reserve.
(3) In order to determine uniformly the adequacy of managerial and
financial resources, the Board will consult with the Federal supervisor
for the type of institution under consideration. Because the Board does
not possess direct experience with supervising depository institutions
other than commerical banks, and does not intend to involve itself in
the direct supervision of such institutions, it will request the
National Credit Union Administration to review requests from credit
unions that qualify as bankers' banks and the Federal Home Loan Bank
Board to review requests from savings and loan associations that qualify
as bankers' banks, regardless of charter or insurance status. (The
Board, itself, will consider requests from all commercial banks that
qualify as bankers' banks.) If the Federal supervisor does not find the
institution's managerial or financial resources to be adequate, the
Board will not permit the institution to act as a pass-through
correspondent. In order to assure the continued adequacy of managerial
and financial resources, it is anticipated that the appropriate Federal
supervisor will, on a periodic basis, review and evaluate the managerial
and financial resources of the institution in order to determine whether
it should continue to be permitted to act as a pass-through
correspondent. It is anticipated that, with respect to state chartered
institutions, the Federal supervisor may discuss the request with the
institute State supervisor. The Board believes that this procedure will
promote uniformity of treatment for all types of bankers' banks, and
provide consistent advice concerning managerial ability and financial
strength from supervisory authorities that are in a better position to
evaluate these criteria for depository institutions that are not
commerical banks.
(4) Requests for a determination as to whether a depository
institution will be regarded as a bankers' bank for purposes of the
Federal Reserve Act or for permission to act as a pass-through
correspondent may be addressed to the Federal Reserve Bank in whose
District the main office of the despository institution is located or to
the Secretary, Board of Governors of the Federal Reserve System,
Washington, DC 20551. The Board will act promptly on all requests
received directly or through Federal Reserve Banks.
(45 FR 69879, Oct. 22, 1980)
12 CFR 204.122 Secondary market activities of international banking
facilities.
(a) Questions have been raised concerning the extent to which
international banking facilities may purchase (or sell) IBF-eligible
assets such as loans (including loan participations), securities, CDs,
and bankers' acceptances from (or to) third parties. Under the Board's
regulations, as specified in 204.8 of Regulation D, IBFs are limited,
with respect to making loans and accepting deposits, to dealing only
with certain customers, such as other IBFs and foreign offices of other
organizations, and with the entity establishing the IBF. In addition,
an IBF may extend credit to a nonbank customer only to finance the
borrower's non-U.S. operations and may accept deposits from a nonbank
customer that are used only to support the depositor's non-U.S.
business.
(b) Consistent with the Board's intent, IBFs may purchase
IBF-eligible assets /1/ from, or sell such assets to, any domestic or
foreign customer provided that the transactions are at arm's length
without recourse. However, an IBF of a U.S. depository institution may
not purchase assets from, or sell such assets to, any U.S. affiliate of
the institution establishing the IBF; an IBF of an Edge or Agreement
corporation may not purchase assets from, or sell assets to, any U.S.
affiliate of the Edge or Agreement corporation or to U.S. branches of
the Edge or Agreement corporation or to U.S. branches of the Edge or
Agreement corporation other than the branch /2/ establishing the IBF;
and an IBF of a U.S. branch or agency of a foreign bank may not purchase
assets from, or sell assets to any U.S. affiliates of the foreign bank
or to any other U.S. branch or agency of the same foreign bank. /2/
(This would not pevent an IBF from purchasing (or selling) assets
directly from (or to) any IBF, including an IBF of an affiliate, or to
the institution establishing the IBF; such purchases from the
institution establishing the IBF would continue to be subject to
Eurocurrency reserve requirements except during the initial four-week
transition period.) Since repurchase agreements are regarded as loans,
transactions involving repurchase agreements are permitted only with
customers who are otherwise eligible to deal with IBFs, as specified in
Regulation D.
(c) In the case of purchases of assets, in order to determine that
the Board's use-of-proceeds requirement has been met, it is necessary
for the IBF (1) to ascertain that the applicable IBF notices and
acknowledgments have been provided, or (2) in the case of loans or
securities, to review the documentation underlying the loan or security,
or accompanying the security (e.g., the prospectus or offering
statement), to determine that the proceeds are being used only to
finance the obligor's operations outside the U.S., or (3) in the case of
loans, to obtain a statement from either the seller or borrower that the
proceeds are being used only to finance operations outside the U.S., or
in the case of securities, to obtain such a statement from the obligor,
or (4) in the case of bankers' acceptances, to review the underlying
documentation to determine that the proceeds are being used only to
finance the parties' operations outside the United States.
(d) Under the Board's regulations, IBFs are not permitted to issue
negotiable Euro-CDs, bankers' acceptances, or similar instruments.
Accordingly, consistent with the Board's intent in this area, IBFs may
sell such instruments issued by third parties that qualify as
IBF-eligible assets provided that the IBF, its establishing institution
and any affiliate of the institution establishing the IBF do not
endorse, accept, or otherwise guarantee the instrument.
(46 FR 62812, Dec. 29, 1981, as amended at 52 FR 47694, Dec. 16,
1987)
/1/ In order for an asset to be eligible to be held by an IBF, the
obligor or issuer of the instrument, or in the case of bankers'
acceptances, the customer and any endorser or acceptor, must be an
IBF-eligible customer.
/2/ Branches of Edge or Agreement corporations and agencies and
branches of foreign banks that file a consolidated report for reserve
requirements purposes (FR 2900) are considered to be the establishing
entity of an IBF.
12 CFR 204.123 Sale of Federal funds by investment companies or trusts
in which the entire beneficial interest is held exclusively by
depository institutions.
(a) The Federal Reserve Act, as amended by the Monetary Control Act
of 1980 (Title I of Pub. L. 96-221) imposes Federal Reserve requirements
on transaction accounts and nonpersonnel time deposits held by
depository institutions. The Board is empowered under the Act to
determine what types of obligations shall be deemed a deposit.
Regulation D -- Reserve Requirements of Depository Institutions exempts
from the definition of deposit those obligations of a depository
institution that are issued or undertaken and held for the account of a
domestic office of another depository institution (12 CFR
204.2(a)(1)(vii)(A)(1)). These exemptions from the definition of deposit
are known collectively as the Federal funds or interbank exemption.
(b) Title IV of the Depository Institutions Deregulation and Monetary
Control Act of 1980 authorizes Federal savings and loan associations to
invest in open-ended management investment companies provided the funds'
investment portfolios are limited to the types of investments that a
Federal savings and loan association could hold without limit as to
percentage of assets (12 U.S.C. 1464(c)(1)(Q)). Such investments
include mortgages, U.S. Government and agency securities, securities of
states and political subdivisions, sales of Federal funds and deposits
held at banks insured by the Federal Deposit Insurance Corporation. The
Federal Credit Union Act authorizes Federal credit unions to aggregate
their funds in trusts provided the trust is limited to such investments
that Federal credit unions could otherwise make. Such investments
include loans to credit union members, obligations of the U.S.
government or secured by the U.S. government, loans to other credit
unions, shares or accounts held at savings and loan associations or
mutual savings banks insured by FSLIC or FDIC, sales of Federal funds
and shares of any central credit union whose investments are
specifically authorized by the board of directors of the Federal credit
union making the investment (12 U.S.C. 1757(7)).
(c) The Board has considered whether an investment company or trust
whose entire beneficial interest is held by depository institutions, as
defined in Regulation D, would be eligible for the Federal funds
exemption from Reserve requirements and interest rate limitations. The
Board has determined that such investment companies or trusts are
eligible to participate in the Federal funds market because, in effect,
they act as mere conduits for the holders of their beneficial interest.
To be regarded by the Board as acting as a conduit and, thus, be
eligible for participation in the Federal funds market, an investment
company or trust must meet each of the following conditions:
(1) The entire beneficial interest in the investment company or trust
must be held by depository institutions, as defined in Regulation D.
These institutions presently may participate directly in the Federal
funds market. If the entire beneficial interest in the investment
company or trust is held only by depository institutions, the Board will
regard the investment company or trust as a mere conduit for the holders
of its beneficial interest.
(2) The assets of the investment company or trust must be limited to
investments that all of the holders of the beneficial interest could
make directly without limit.
(3) Holders of the beneficial interest in the investment company or
trust must not be allowed to make third party payments from their
accounts with the investment company or trust. The Board does not
regard an investment company or trust that offers third party payment
capabilities or other similar services which actively transform the
nature of the funds passing between the holders of the beneficial
interest and the Federal funds market as mere conduits.
The Board expects that the above conditions will be included in
materials filed by an investment company or trust with the appropriate
regulatory agencies.
(d) The Board believes that permitting sales of Federal funds by
investment companies or trusts whose beneficial interests are held
exclusively by depository institutions, that invest solely in assets
that the holders of their beneficial interests can otherwise invest in
without limit, and do not provide third party payment capabilities offer
the potential for an increased yield for thrifts. This is consistent
with Congressional intent to provide thrifts with convenient liquidity
vehicles.
(47 FR 8987, Mar. 3, 1982, as amended at 52 FR 47695, Dec. 16, 1987)
12 CFR 204.124 Repurchase agreement involving shares of a money market
mutual fund whose portfolio consists wholly of United States Treasury
and Federal agency securities.
(a) The Federal Reserve Act, as amended by the Monetary Control Act
of 1980 (title I of Pub. L. 96-221) imposes Federal reserve requirements
on transaction accounts and nonpersonal time deposits held by depository
institutions. The Board is empowered under the Act to determine what
types of obligations shall be deemed a deposit (12 U.S.C. 461).
Regulation D -- Reserve Requirements of Depository Institutions exempts
from the definition of deposit those obligations of a depository
institution that arise from a transfer of direct obligations of, or
obligations that are fully guaranteed as to principal and interest by,
the United States government or any agency thereof that the depository
institution is obligated to repurchase (12 CFR 204.2(a)(1)(vii)(B)).
(b) The National Bank Act provides that a national bank may purchase
for its own account investment securities under limitations and
restrictions as the Comptroller may prescribe (12 U.S.C. 24, 7). The
statute defines investment securities to mean marketable obligations
evidencing indebtedness of any person in the form of bonds, notes, and
debentures. The Act further limits a national bank's holdings of any
one security to no more than an amount equal to 10 percent of the bank's
capital stock and surplus. However, these limitations do not apply to
obligations issued by the United States, general obligations of any
state and certain obligations of Federal agencies. In addition,
generally a national bank is not permitted to purchase for its own
account stock of any corporation. These restrictions also apply to
state member banks (12 U.S.C. 335).
(c) The Comptroller of the Currency has permitted national banks to
purchase for their own accounts shares of open-end investment companies
that are purchased and sold at par (i.e., money market mutual funds)
provided the portfolios of such companies consist solely of securities
that a national bank may purchase directly (Banking Bulletin B-83-58).
The Board of Governors has permitted state member banks to purchase, to
the extent permitted under applicable state law, shares of money market
mutual funds (MMMF) whose portfolios consist solely of securities that
the state member bank may purchase directly (12 CFR 208.123).
(d) The Board has determined that an obligation arising from a
repurchase agreement involving shares of a MMMF whose portfolio consists
wholly of securities of the United States government or any agency
thereof /1/ would not be a deposit for purposes of Regulations D and Q.
The Board believes that a repurchase agreement involving shares of such
a MMMF is the functional equivalent of a repurchase agreement directly
involving United States government or agency obligations. A purchaser
of shares of a MMMF obtains an interest in a pro rata portion of the
assets that comprise the MMMF's portfolio. Accordingly, regardless of
whether the repurchase agreement involves United States government or
agency obligations directly or shares in a MMMF whose portfolio consists
entirely of United States government or agency obligations, an equitable
and undivided interest in United States and agency government
obligations is being transferred. Moreover, the Board believes that
this interpretation will further the purpose of the exemption in
Regulations D and Q for repurchase agreements involving United States
government or Federal obligations by enhancing the market for such
obligations.
(50 FR 13011, Apr. 2, 1985, as amended at 52 FR 47695, Dec. 16, 1987)
/1/ The term United States government or any agency thereof as used
herein shall have the same meaning as in 204.2(a)(1)(vii)(B) of
Regulation D, 12 CFR 204.2(a)(1)(vii)(B).
12 CFR 204.125 Foreign, international, and supranational entities
referred to in 204.2(c)(1)(iv)(E) and 204.8(a)(2)(i)(B)(5).
The entities referred to in 204.2(c)(1)(E) and 204.8(a)(2)(i)(B)(5)
are:
Bank for International Settlements.
European Atomic Energy Community.
European Coal and Steel Community.
The European Communities.
European Development Fund.
European Economic Community.
European Free Trade Association.
European Fund.
European Investment Bank.
Andean Development Corporation.
Andean Subregional Group.
Caribbean Development Bank.
Caribbean Free Trade Association
Caribbean Regional Development Agency.
Central American Bank for Economic Integration.
The Central American Institute for Industrial Research and
Technology.
Central American Monetary Stabilization Fund.
East Caribbean Common Market.
Latin American Free Trade Association.
Organization for Central American States.
Permanent Secretariat of the Central American General Treaty of
Economic Integration.
River Plate Basin Commission.
African Development Bank.
Banque Centrale des Etats de l'Afrique Equatorial et du Cameroun.
Banque Centrale des Etats d'Afrique del'Ouest.
Conseil de l'Entente.
East African Community.
Organisation Commune Africaine et Malagache.
Organization of African Unity.
Union des Etats de l'Afrique Centrale.
Union Douaniere et Economique de l'Afrique Centrale.
Union Douaniere des Etats de l'Afrique de l'Ouest.
Asia and Pacific Council.
Association of Southeast Asian Nations.
Bank of Taiwan.
Korea Exchange Bank.
Central Treaty Organization.
Regional Cooperation for Development.
(52 FR 47695, Dec. 16, 1987, as amended at 56 FR 15495, Apr. 17,
1991)
12 CFR 204.126 Depository institution participation in ''Federal
funds'' market.
(a) Under 204.2(a)(1)(vii)(A), there is an exemption from Regulation
D for member bank obligations in nondeposit form to another bank. To
assure the effectiveness of the limitations on persons who sell Federal
funds to depository institutions, Regulation D applies to nondocumentary
obligations undertaken by a depository institution to obtain funds for
use in its banking business, as well as to documentary obligations.
Under 204.2(a)(1)(vii) of Regulation D, a depository institution's
liability under informal arrangements as well as those formally embodied
in a document are within the coverage of Regulation D.
(b) The exemption in 204.2(a)(1)(vii)(A) applies to obligations owed
by a depository institution to a domestic office of any entity listed in
that section (the exempt institutions). The exempt institutions
explicitly include another depository institution, foreign bank, Edge or
agreement corporation, New York Investment (article XII) Company, the
Export-Import Bank of the United States, Minbanc Capital Corp., and
certain other credit sources. The term exempt institutions also
includes subsidiaries of depository institutions:
(1) That engage in businesses in which their parents are authorized
to engage; or
(2) The stock of which by statute is explicitly eligible for purchase
by national banks.
(c) To assure that this exemption for liabilities to exempt
institutions is not used as a means by which nondepository institutions
may arrange through an exempt institution to sell Federal funds to a
depository institution, obligations within the exemption must be issued
to an exempt institution for its own account. In view of this
requirement, a depository institution that purchases Federal funds
should ascertain the character (not necessarily the identity) of the
actual seller in order to justify classification of its liability on the
transaction as Federal funds purchased rather than as a deposit. Any
exempt institution that has given general assurance to the purchasing
depository institution that sales by it of Federal funds ordinarily will
be for its own account and thereafter executes such transactions for the
account of others, should disclose the nature of the actual lender with
respect to each such transaction. If it fails to do so, the depository
institution would be deemed by the Board as indirectly violating section
19 of the Federal Reserve Act and Regulation D.
(52 FR 47695, Dec. 16, 1987)
12 CFR 204.127 Nondepository participation in ''Federal funds'' market.
(a) The Board has considered whether the use of interdepository
institution loan participations (IDLPs) which involve participation by
third parties other than depository institutions in Federal funds
transactions, comes within the exemption from deposit classification for
certain obligations owed by a depository institution to an institution
exempt in 204.2(a)(1)(vii)(A) of Regulation D. An IDLP transaction is
one through which an institution that has sold Federal funds to a
depository institution, subsequently sells or participates out that
obligation to a nondepository third party without notifying the
obligated institution.
(b) The Board's interpretation regarding Federal funds transactions
(12 CFR 204.126) clarified that a depository institutions's liability
must be issued to an exempt institution described in
204.2(a)(1)(vii)(A) of Regulation D for its own account in order to come
within the nondeposit exemption for interdepository liabilities. The
Board regards transactions which result in third parties gaining access
to the Federal funds market as contrary to the exemption contained in
204.2(a)(1)(vii)(A) of Regulation D regardless of whether the
nondepository institution third party is a party to the initial
transaction or thereafter becomes a participant in the transaction
through purchase of all or part of the obligation held by the selling
depository institution.
(c) The Board regards the notice requirements set out in 12 CFR
204.126 as applicable to IDLP-type transactions as described herein so
that a depository institution selling Federal funds must provide to the
purchaser --
(1) Notice of its intention, at the time of the initial transaction,
to sell or participate out its loan contract to a nondepository third
party, and
(2) Full and prompt notice whenever it (the selling depository
institution) subsequently sells or participates out its loan contract to
a non-depository third party.
(52 FR 47695, Dec. 16, 1987)
12 CFR 204.128 Deposits at foreign branches guaranteed by domestic
office of a depository institution.
(a) In accepting deposits at branches abroad, some depository
institutions may enter into agreements from time to time with depositors
that in effect guarantee payment of such deposits in the United States
if the foreign branch is precluded from making payment. The question
has arisen whether such deposits are subject to Regulation D, and this
interpretation is intended as clarification.
(b) Section 19 of the Federal Reserve Act which establishes reserve
requirements does not apply to deposits of a depository institution
''payable only at an office thereof located outside of the States of the
United States and the District of Columbia'' (12 U.S.C. 371a; 12 CFR
204.1(c)(5)). The Board rule in 1918 that the requirements of section 19
as to reserves to be carried by member banks do not apply to foreign
branches (1918 Fed. Res. Bull. 1123). The Board has also defined the
phrase Any deposit that is payable only at an office located outside the
United States, in 204.2(t) of Regulation D, 12 CFR 204.2(t).
(c) The Board believes that this exemption from reserve requirements
should be limited to deposits in foreign branches as to which the
depositor is entitled, under his agreement with the depository
institution, to demand payment only outside the United States,
regardless of special circumstances. The exemption is intended
principally to enable foreign branches of U.S. depository institutions
to compete on a more nearly equal basis with banks in foreign countries
in accordance with the laws and regulations of those countries. A
customer who makes a deposit that is payable solely at a foreign branch
of the depository institution assumes whatever risk may exist that the
foreign country in which a branch is located might impose restrictions
on withdrawals. When payment of a deposit in a foreign branch is
guaranteed by a promise of payment at an office in the United States if
not paid at the foreign office, the depositor no longer assumes this
risk but enjoys substantially the same rights as if the deposit had been
made in a U.S. office of the depository institution. To assure the
effectiveness of Regulation D and to prevent evasions thereof, the Board
considers that such guaranteed foreign-branch deposits must be subject
to that regulation.
(d) Accordingly, a deposit in a foreign branch of a depository
institution that is guaranteed by a domestic office is subject to the
reserve requirements of Regulation D the same as if the deposit had been
made in the domestic office. This interpretation is not designed in any
respect to prevent the head office of a U.S. bank from repaying
borrowings from, making advances to, or supplying capital funds to its
foreign branches, subject to Eurocurrency liability reserve
requirements.
(52 FR 47696, Dec. 16, 1987)
12 CFR 204.129 Serial, sinking fund redemption, and amortized issues as
capital.
(a) Section 204.2(a)(1)(vii) contains several exceptions which
exclude certain liabilities from the definition of deposit. For a
member bank, the exception in 204.2(a)(1)(vii)(C) means any liability
that:
(1) Bears on its face, in boldface type, the following:
This obligation is not a deposit and is not insured by the Federal
Deposit Insurance Corporation.;
(2) Is subordinated to the claims of the depositors:
(3) Is unsecured and is ineligible as collateral for a loan by the
issuing bank and expressly states so on its face;
(4) (i) Has an original maturity of at least seven years or, in the
case of a liability that provides for any type of scheduled repayments
of principal, has an average maturity /1/ of at least seven years /2/
and
(ii) Provides that once any such repayment of principal begins, all
scheduled repayments shall be made at least annually and the amount
repaid in each year is no less than in the prior year;
(5) Is issued subject to a requirement that no repayment (other than
a regularly scheduled repayment already approved by the appropriate
Federal bank regulatory agency), including but not limited to a payment
pursuant to acceleration of maturity, may be made without the prior
written approval of the appropriate Federal bank regulatory agency; /3/
and
(6) Is in an amount of at least $500.
(b) The appropriate Federal bank regulatory agency may approve the
issuance of an obligation that is less than $500 if such lesser amount
is necessary:
(1) To satisfy the preemptive rights of shareholders in the case of a
convertible debt obligation;
(2) To maintain a ratable unit offering to holders of preemptive
rights in the case of an obligation issued exclusively as part of a unit
including shares of stock which are subject to such preemptive rights;
or
(3) To satisfy shareholders' ratable claims in the case of an
obligation issued wholly or partially in exchange for shares of voting
stock or assets pursuant to a plan of merger, consolidation,
reorganization, or other transaction where the issuer will acquire
either a majority of such shares of voting stock or all or substantially
all of the assets of the entity whose assets are being acquired; and
has been approved by the appropriate Federal bank regulatory agency as
an addition to the capital structure of the issuing bank.
(c) The appropriate Federal bank regulatory agency may approve the
issuance of an obligation that is less than $500 if such lesser amount
is necessary to meet all of the requirements in the preceding clause
except the maturity requirement or the requirement that scheduled
repayments shall be in amounts at least equal to those made in a
previous year; and with respect to which the appropriate Federal bank
regulatory agency has determined that exigent circumstances require the
issuance of such obligations without regard to the provisions of this
part; or was issued or publicly offered before June 30, 1970, with an
original maturity of more than two years.
(d) Total outstanding capital notes should not exceed 50 percent of a
State member bank's equity capital.
(e) The issuance must be consistent with the Board's capital adequacy
guidelines (appendix A to Regulation Y, 12 CFR part 225).
(52 FR 47696, Dec. 16, 1987)
/1/ The average maturity of an obligation or issue repayable in
scheduled periodic payments shall be the weighted average of the
maturities of all such scheduled repayments.
/2/ In a serial issue, the member bank may offer no note with a
maturity of less than five years.
/3/ For the purposes of this part, the appropriate Federal bank
regulatory agency is the Comptroller of the Currency in the case of
national bank and the Board of Governors in the case of a State member
bank.
12 CFR 204.130 Eligibility for NOW Accounts.
(a) Summary. In response to many requests for rulings, the Board has
determined to clarify the types of entities that may maintain NOW
accounts at member banks.
(b) Individuals. (1) Any individual may maintain a NOW account
regardless of the purposes that the funds will serve. Thus, deposits of
an individual used in his or her business including a sole proprietor or
an individual doing business under a trade name is eligible to maintain
a NOW account in the individual's name or in the ''DBA'' name. However,
other entities organized or operated to make a profit such as
corporations, partnerships, associations, business trusts, or other
organizations may not maintain NOW accounts.
(2) Pension funds, escrow accounts, security deposits, and other
funds held under various agency agreements may also be classified as NOW
accounts if the entire beneficial interest is held by individuals or
other entities eligible to maintain NOW accounts directly. The Board
believes that these accounts are similar in nature to trust accounts and
should be accorded identical treatment. Therefore, such funds may be
regarded as eligible for classification as NOW accounts.
(c) Nonprofit organizations. (1) A nonprofit organization that is
operated primarily for religious, philanthropic, charitable,
educational, political or other similar purposes may maintain a NOW
account. The Board regards the following kinds of organizations as
eligible for NOW accounts under this standard if they are not operated
for profit:
(i) Organizations described in section 501(c)(3) through (13), and
(19) of the Internal Revenue Code (26 U.S.C. (I.R.C. 1954) section
501(c)(3) through (13) and (19));
(ii) Political organizations described in section 527 of the Internal
Revenue Code (26 U.S.C. (I.R.C. 1954) section 527); and
(iii) Homeowners and condominium owners associations described in
section 528 of the Internal Revenue Code (26 U.S.C. (I.R.C. 1954)
section 528), including housing cooperative associations that perform
similar functions.
(2) All organizations that are operated for profit are not eligible
to maintain NOW accounts at depository institutions.
(3) The following types of organizations described in the cited
provisions of the Internal Revenue Code are among those not eligible to
maintain NOW accounts:
(i) Credit unions and other mutual depository institutions described
in section 501(c)(14) of the Internal Revenue Code (26 U.S.C. (I.R.C.
1954) section 501(c)(14));
(ii) Mutual insurance companies described in section 501(c)(15) of
the Internal Revenue Code (26 U.S.C. (I.R.C. 1954) section 501(c)(15));
(iii) Crop financing organizations described in section 501(c)(16) of
the Internal Revenue Code (26 U.S.C. (I.R.C. 1954) section 501(c)(16));
(iv) Organizations created to function as part of a qualified group
legal services plan described in section 501(c)(20) of the Internal
Revenue Code (26 U.S.C. (I.R.C. 1954) section 501(c)(20)); or
(v) Farmers' cooperatives described in section 521 of the Internal
Revenue Code (26 U.S.C. (I.R.C. 1954) section 521).
(d) Governmental units. Governmental units are generally eligible to
maintain NOW accounts at member banks. NOW accounts may consist of
funds in which the entire beneficial interest is held by the United
States, any State of the United States, county, municipality, or
political subdivision thereof, the District of Columbia, the
Commonwealth of Puerto Rico, American Samoa, Guam, any territory or
possession of the United States, or any political subdivision thereof.
(e) Funds held by a fiduciary. Under current provisions, funds held
in a fiduciary capacity (either by an individual fiduciary or by a
corporate fiduciary such as a bank trust department or a trustee in
bankruptcy), including those awaiting distribution or investment, may be
held in the form of NOW accounts if all of the beneficiaries are
otherwise eligible to maintain NOW accounts. The Board believes that
such a classification should continue since fiduciaries are required to
invest even temporarily idle balances to the greatest extent feasible in
order to responsibly carry out their fiduciary duties. The availability
of NOW accounts provides a convenient vehicle for providing a short-term
return on temporarily idle trust funds of beneficiaries eligible to
maintain accounts in their own names.
(f) Grandfather provision. In order to avoid unduly disrupting
account relationships, a NOW account established at a member bank on or
before August 31, 1981, that represents funds of a nonqualifying entity
that previously qualified to maintain a NOW account may continue to be
maintained in a NOW account.
(52 FR 47697, Dec. 16, 1987)
12 CFR 204.131 Participation by a depository institution in the
secondary market for its own time deposits.
(a) Background. In 1982, the Board issued an interpretation
concerning the effect of a member bank's purchase of its own time
deposits in the secondary market in order to ensure compliance with
regulatory restrictions on the payment of interest on time deposits,
with the prohibition against payment of interest on demand deposits, and
with regulatory requirements designed to distinguish between time
deposits and demand deposits for federal reserve requirement purposes
(47 FR 37878, Aug. 27, 1982). The interpretation was designed to ensure
that the regulatory early withdrawal penalties in Regulation Q used to
achieve these three purposes were not evaded through the purchase by a
member bank or its affiliate of a time deposit of the member bank prior
to the maturity of the deposit.
(b) Because the expiration of the Depository Institutions
Deregulation Act (title II of Pub. L. 96-221) on April 1, 1986, removed
the authority to set interest rate ceilings on deposits, one of the
purposes for adopting the interpretation was eliminated. The removal of
the authority to set interest rate ceilings on deposits required the
Board to revise the early withdrawal penalties which were also used to
distinguish between types of deposits for reserve requirement purposes.
Effective April 1, 1986, the Board amended its Regulation D to
incorporate early withdrawal penalties applicable to all depository
institutions for this purpose (51 FR 9629, Mar. 20, 1986). Although the
new early withdrawal penalties differ from the penalties used to enforce
interest rate ceilings, secondary market purchases still effectively
shorten the maturities of deposits and may be used to evade reserve
requirements. This interpretation replaces the prior interpretation and
states the application of the new early withdrawal penalties to
purchases by depository institutions and their affiliates of the
depository institution's time deposits. The interpretation applies only
to situations in which the Board's regulatory penalties apply.
(c) Secondary market purchases under the rule. The Board has
determined that a depository institution purchasing a time deposit it
has issued should be regarded as having paid the time deposit prior to
maturity. The effect of the transaction is that the depository
institution has cancelled a liability as opposed to having acquired an
asset for its portfolio. Thus, the depository institution is required
to impose any early withdrawal penalty required by Regulation D on the
party from whom it purchases the instrument by deducting the amount of
the penalty from the purchase price. The Board recognizes, however,
that secondary market sales of time deposits are often done without
regard to the identity of the original owner of the deposit. Such sales
typically involve a pool of time deposits with the price based on the
aggregate face value and average rate of return on the deposits. A
depository institution purchasing time deposits from persons other than
the person to whom the deposit was originally issued should be aware of
the parties named on each of the deposits it is purchasing but through
failure to inspect the deposits prior to the purchase may not be aware
at the time it purchases a pool of time deposits that it originally
issued one or more of the deposits in the pool. In such cases, if a
purchasing depository institution does not wish to assess an applicable
early withdrawal penalty, the deposit may be sold immediately in the
secondary market as an alternative to imposing the early withdrawal
penalty.
(d) Purchases by affiliates. On a consolidated basis, if an
affiliate (as defined in 204.2(q) of Regulation D) of a depository
institution purchases a CD issued by the depository institution, the
purchase does not reduce their consolidated liabilities and could be
accomplished primarily to assist the depository institution in avoiding
the requirements of the Board's Regulation D. Because the effect of the
early withdrawal penalty rule could be easily circumvented by purchases
of time deposits by affiliates, such purchases are also regarded as an
early withdrawals of the time deposit, and the purchase should be
treated as if the depository institution made the purchase directly.
Thus, the regulatory requirements for early withdrawal penalties apply
to affiliates of a depository institution as well as to the institution
itself.
(e) Depository institution acting as broker. The Board believes that
it is permissible for a depository institution to facilitate the
secondary market for its own time deposits by finding a purchaser for a
time deposit that a customer is trying to sell. In such instances, the
depository institution will not be paying out any of its own funds, and
the depositor does not have a guarantee that the depository institution
will actually be able to find a buyer.
(f) Third-party market-makers. A depository institution may also
establish and advertise arrangements whereby an unaffiliated third party
agrees in advance to purchase time deposits issued by the institution.
The Board would not regard these transactions as inconsistent with the
purposes that the early withdrawal penalty is intended to serve unless a
depository institution pays a fee to the third party purchaser as
compensation for making the purchases or to remove the risk from
purchasing the deposits. In this regard, any interim financing provided
to such a third party by a depository institution in connection with the
institution's secondary market activity involving the institution's time
deposits must be made substantially on the same terms, including
interest rates and collateral, as those prevailing at the same time for
comparable transactions with other similarly situated persons and may
not involve more than the normal risk of repayment.
(g) Reciprocal arrangements. Finally, while a depository institution
may enter into an arrangement with an unaffiliated third party wherein
the third party agrees to stand ready to purchase time deposits held by
the depository institution's customers, the Board will regard a
reciprocal arrangement with another depository institution for purchase
of each other's time deposits as a circumvention of the early withdrawal
penalty rule and the purposes it is designed to serve.
(52 FR 47697, Dec. 16, 1987)
12 CFR 204.132 Treatment of Loan Strip Participations.
(a) Effective March 31, 1988, the glossary section of the
instructions for the Report of Condition and Income (FFIEC 031-034; OMB
control number 7100-0036; available from a depository institution's
primary federal regulator) (Call Report) was amended to clarify that
certain short-term loan participation arrangements (sometimes known or
styled as loan strips or strip participations) are regarded as
borrowings rather than sales for Call Report purposes in certain
circumstances. Through this interpretation, the Board is clarifying
that such transactions should be treated as deposits for purposes of
Regulation D.
(b) These transactions involve the sale (or placement) of a
short-term loan by a depository institution that has been made under a
long-term commitment of the depository institution to advance funds.
For example, a 90-day loan made under a five-year revolving line of
credit may be sold to or placed with a third party by the depository
institution originating the loan. The depository institution
originating the loan is obligated to renew the 90-day note itself (by
advancing funds to its customer at the end of the 90-day period) in the
event the original participant does not wish to renew the credit.
Since, under these arrangements, the depository institution is obligated
to make another loan at the end of 90 days (absent any event of default
on the part of the borrower), the depository institution selling the
loan or participation in effect must buy back the loan or participation
at the maturity of the 90-day loan sold to or funded by the purchaser at
the option of the purchaser. Accordingly, these transactions bear the
essential characteristics of a repurchase agreement and, therefore, are
reportable and reservable under Regulation D.
(c) Because many of these transactions give rise to deposit
liabilities in the form of promissory notes, acknowledgments of advance
or similar obligations (written or oral) as described in
204.2(a)(1)(vii) of Regulation D, the exemptions from the definition of
deposit incorporated in that section may apply to the liability incurred
by a depository institution when it offers or originates a loan strip
facility. Thus, for example, loan strips sold to domestic offices of
other depository institutions are exempt from Regulation D under
204.2(a)(1)(vii)(A)(1) because they are obligations issued or undertaken
and held for the account of a U.S. office of another depository
institution. Similarly, some of these transactions result in
Eurocurrency liabilities and are reportable and reservable as such.
(53 FR 24931, July 1, 1988)
12 CFR 204.132 Pt. 205
12 CFR 204.132 PART 205 -- ELECTRONIC FUND TRANSFERS
Sec.
205.1 Authority, purpose, and scope.
205.2 Definitions and rules of construction.
205.3 Exemptions.
205.4 Special requirements.
205.5 Issuance of access devices.
205.6 Liability of consumer for unauthorized transfers.
205.7 Initial disclosure of terms and conditions.
205.8 Change in terms; error resolution notice.
205.9 Documentation of transfers.
205.10 Preauthorized transfers.
205.11 Procedures for resolving errors.
205.12 Relation to State law.
205.13 Administrative enforcement.
205.14 Services offered by financial institutions not holding
consumer's account.
Appendix A to Part 205 -- Model Disclosure Clauses
Supplements I and II to Part 205 -- Official Staff Interpretations
Authority: Pub. L. 95-630, 92 Stat. 3730 (15 U.S.C. 1693b).
12 CFR 205.1 Authority, purpose, and scope.
(a) Authority. This regulation, issued by the Board of Governors of
the Federal Reserve System, implements title IX (Electronic Fund
Transfer Act) of the Consumer Credit Protection Act, as amended (15
U.S.C. 1601 et seq.).
(b) Purpose and scope. In November 1978, the Congress enacted the
Electronic Fund Transfer Act. The Congress found that the use of
electronic systems to transfer funds provides the potential for
substantial benefits to consumers, but that the unique characteristics
of these systems make the application of existing consumer protection
laws unclear, leaving the rights and liabilities of users of electronic
fund transfer systems undefined. The Act establishes the basic rights,
liabilities, and responsibilities of consumers who use electronic money
transfer services and of financial institutions that offer these
services. This regulation is intended to carry out the purposes of the
Act, including, primarily, the protection of individual consumers
engaging in electronic transfers. Except as otherwise provided, this
regulation applies to all persons who are financial institutions as
defined in 205.2(i).
(Information collection requirements contained in this regulation
have been approved by the Office of Management and Budget under the
provisions of 44 U.S.C. 3501 et seq. and have been assigned OMB control
number 7100-0200)
(44 FR 18480, Mar. 28, 1979, as amended at 49 FR 40797, Oct. 18,
1984)
12 CFR 205.2 Definitions and rules of construction.
For the purposes of this regulation, the following definitions apply,
unless the context indicates otherwise:
(a)(1) Access device means a card, code, or other means of access to
a consumer's account, or any combination thereof, that may be used by
the consumer for the purpose of initiating electronic fund transfers.
(2) An access device becomes an accepted access device when the
consumer to whom the access device was issued:
(i) Requests and receives, or signs, or uses, or authorizes another
to use, the access device for the purpose of transferring money between
accounts or obtaining money, property, labor or services;
(ii) Requests validation of an access device issued on an unsolicited
basis; or
(iii) Receives an access device issued in renewal of, or in
substitution for, an accepted access device, whether such access device
is issued by the initial financial institution or a successor.
(b) Account means a demand deposit (checking), savings, or other
consumer asset account (other than an occasional or incidental credit
balance in a credit plan) held either directly or indirectly by a
financial institution and established primarily for personal, family, or
household purposes.
(c) Act means the Electronic Fund Transfer Act (title IX of the
Consumer Credit Protection Act, 15 U.S.C. 1601 et seq.).
(d) Business day means any day on which the offices of the consumer's
financial institution are open to the public for carrying on
substantially all business functions.
(e) Consumer means a natural person.
(f) Credit means the right granted by a financial institution to a
consumer to defer payment of debt, incur debt and defer its payment, or
purchase property or services and defer payment therefor.
(g) Electronic fund transfer means any transfer of funds, other than
a transaction originated by check, draft, or similar paper instrument,
that is initiated through an electronic terminal, telephone, or computer
or magnetic tape for the purpose of ordering, instructing, or
authorizing a financial institution to debit or credit an account. The
term includes, but is not limited to, point-of-sale transfers, automated
teller machine transfers, direct deposits or withdrawals of funds, and
transfers initiated by telephone. It includes all transfers resulting
from debit card transactions, including those that do not involve an
electronic terminal at the time of the transaction. The term does not
include payments made by check, draft, or similar paper instrument at an
electronic terminal.
(h) Electronic terminal means an electronic device, other than a
telephone operated by a consumer, through which a consumer may initiate
an electronic fund transfer. The term includes, but is not limited to,
point-of-sale terminals, automated teller machines, and cash dispensing
machines.
(i) Financial institution means a State or National bank, a State or
Federal savings and loan association, a State or Federal mutual savings
bank, a State or Federal credit union, or any other person who, directly
or indirectly, holds an account belonging to a consumer. The term also
includes any person who issues an access device and agrees with a
consumer to provide electronic fund transfer services.
(j) Preauthorized electronic fund transfer means an electronic fund
transfer authorized in advance to recur at substantially regular
intervals.
(k) State means any State, territory or possession of the United
States, the District of Columbia, the Commonwealth of Puerto Rico, or
any political subdivision of any of the above.
(l) Unauthorized electronic fund transfer means an electronic fund
transfer from a consumer's account initiated by a person other than the
consumer without actual authority to initiate the transfer and from
which the consumer receives no benefit. The term does not include any
electronic fund transfer (1) initiated by a person who was furnished
with the access device to the consumer's account by the consumer, unless
the consumer has notified the financial institution involved that
transfers by that person are no longer authorized, (2) initiated with
fraudulent intent by the consumer or any person acting in concert with
the consumer, or (3) that is initiated by the financial institution or
its employee.
(m) Footnotes have the same legal effect as the text of the
regulation.
(44 FR 18480, Mar. 28, 1979, as amended at 44 FR 59470, Oct. 15,
1979; 45 FR 8263, Feb. 2, 1980; 49 FR 40798, Oct. 18, 1984)
12 CFR 205.3 Exemptions.
This Act and this regulation do not apply to the following:
(a) Check guarantee or authorization services. Any service that
guarantees payment or authorizes acceptance of a check, draft, or
similar paper instrument and that does not directly result in a debit or
credit to a consumer's account.
(b) Wire transfers. Any wire transfer of funds for a consumer
through the Federal Reserve Communications System or other similar
network that is used primarily for transfers between financial
institutions or between businesses.
(c) Certain securities or commodities transfers. Any transfer the
primary purpose of which is the purchase or sale of securities or
commodities regulated by the Securities and Exchange Commission or the
Commodity Futures Trading Commission.
(d) Certain automatic transfers. Any transfer under an agreement
between a consumer and a financial institution which provides that the
institution will initiate individual transfers without a specific
request from the consumer.
(1) Between a consumer's accounts within the financial institution,
such as a transfer from a checking account to a savings account;
(2) Into a consumer's account by the financial institution, such as
the crediting of interest to a savings account; 1a
(3) From a consumer's account to an account of the financial
institution, such as a loan payment; 1a or
(4) From a consumer's account to an account of another consumer,
within the financial institution, who is a member of the transferor's
family.
(e) Certain telephone-initiated transfers. Any transfer of funds
that (1) is initiated by a telephone conversation between a consumer and
an officer or employee of a financial institution and (2) is not under a
telephone bill-payment or other prearranged plan or agreement in which
periodic or recurring transfers are contemplated.
(f) Trust accounts. Any trust account held by a financial
institution under a bona fide trust agreement.
(g) Preauthorized transfers to small financial institutions. (1) Any
preauthorized transfer to or from an account if the assets of the
account-holding financial institution are $25 million or less on
December 31. 1a
(2) If the account-holding financial institution's assets
subsequently exceed $25 million, the institution's exemption for this
class of transfers shall terminate one year from the end of the calendar
year in which the assets exceed $25 million.
(44 FR 18480, Mar.28, 1979, as amended at 45 FR 66347, Oct. 6, 1980;
46 FR 2973, Jan. 13, 1981; 46 FR 9920, Jan. 30, 1981; 47 FR 44713,
Oct. 12, 1982)
1aThe financial institution remains subject to section 913 of the Act
regarding compulsory use of electronic fund transfers. A financial
institution may, however, require the automatic repayment of credit that
is extended under an overdraft credit plan or that is extended to
maintain a specified minimum balance in the consumer's account.
Financial institutions also remain subject to sections 915 and 916
regarding civil and criminal liability.
12 CFR 205.4 Special requirements.
(a) Services offered by two or more financial institutions. Two or
more financial institutions that jointly provide electronic fund
transfer services may contract among themselves to comply with the
requirements that this regulation imposes on any or all of them. When
making disclosures under 205.7 and 205.8, a financial institution that
provides electronic fund transfer services under an agreement with other
financial institutions need make only those disclosures which are within
its knowledge and the purview of its relationship with the consumer for
whom it holds an account.
(b) Multiple accounts and account holders. (1) If a consumer holds
two or more accounts at a financial institution, the institution may
combine the disclosures required by the regulation into one statement
(for example, the financial institution may mail or deliver a single
periodic statement or annual error resolution notice to a consumer for
multiple accounts held by that consumer at that institution).
(2) If two or more consumers hold a joint account from or to which
electronic fund transfers can be made, the financial institution need
provide only one set of the disclosures required by the regulation for
each account.
(c) Additional information; disclosures required by other laws. At
the financial institution's option, additional information or
disclosures required by other laws (for example, Truth in Lending
disclosures) may be combined with the disclosures required by this
regulation.
(44 FR 59470, Oct. 15, 1979, as amended at 45 FR 8263, Feb. 6, 1980)
12 CFR 205.5 Issuance of access devices.
(a) General rule. A financial institution may issue an access device
to a consumer only:
(1) In response to an oral or written request or application for the
device; 1b or
(2) As a renewal of, or in substitution for, an accepted access
device, whether issued by the initial financial institution or a
successor.
(3) As a renewal of, or in substitution for, an access device issued
before February 8, 1979 (other than an accepted access device, which can
be renewed or substituted under paragraph (a)(2) of this section),
provided that the disclosures set forth in 205.7(a)(1), (2), and (3)
accompany the renewal or substitute device; except that for a renewal
or substitution that occurs before July 1, 1979, the disclosures may be
sent within a reasonable time after the renewal or substitute device is
issued.
(b) Exception. Notwithstanding the provisions of paragraph (a)(1) of
this section, a financial institution may distribute an access device to
a consumer on an unsolicited basis if:
(1) The access device is not validated;
(2) The distribution is accompanied by a complete disclosure, in
accordance with 205.7(a), of the consumer's rights and liabilities that
will apply if the access device is validated;
(3) The distribution is accompanied by a clear explanation that the
access device is not validated and how the consumer may dispose of the
access device if validation is not desired; and
(4) The access device is validated only in response to the consumer's
oral or written request or application for validation and after
verification of the consumer's identity by any reasonable means, such as
by photograph, fingerprint, personal visit, or signature comparison. An
access device is considered validated when a financial institution has
performed all procedures necessary to enable a consumer to use it to
initiate an electronic fund transfer.
(c) Relation to Truth in Lending. (1) The Act and this regulation
govern:
(i) Issuance of access devices;
(ii) Addition to an accepted credit card, as defined in 12 CFR
226.12(a)(2), footnote 21 (Regulation Z), of the capability to initiate
electronic fund transfers; and
(iii) Issuance of access devices that permit credit extensions only
under a preexisting agreement between a consumer and a financial
institution to extend the credit when the consumer's account is
overdrawn or to maintain a specified minimum balance in the consumer's
account.
(2) The Truth in Lending Act (15 U.S.C. 1601 et seq.) and 12 CFR part
226 (Regulation Z), which prohibit the unsolicited issuance of credit
cards, govern
(i) Issuance of credit cards as defined in 12 CFR 226.2(a)(15);
(ii) Addition of a credit feature to an accepted access device; and
(iii) Issuance of credit cards that are also access devices, except
as provided in paragraph (c)(1)(iii) of this section.
(44 FR 18480, Mar. 28, 1979. Redesignated and amended at 44 FR 59470,
Oct. 15, 1979; 45 FR 8263, Feb. 6, 1980; 46 FR 2973, Jan. 13, 1981;
48 FR 14880, Apr. 6, 1983)
1bIn the case of a joint account, a financial institution may issue
an access device to each account holder for whom the requesting holder
specifically requests an access device.
12 CFR 205.6 Liability of consumer for unauthorized transfers.
(a) General rule. A consumer is liable, within the limitations
described in paragraph (b) of this section, for unauthorized electronic
fund transfers involving the consumer's account only if:
(1) The access device used for the unauthorized transfers is an
accepted access device;
(2) The financial institution has provided a means (such as by
signature, photograph, fingerprint, or electronic or mechanical
confirmation) to identify the consumer to whom the access device was
issued; and
(3) The financial institution has provided the following information,
in writing, to the consumer:
(i) A summary of the consumer's liability under this section, or
under other applicable law or agreement, for unauthorized electronic
fund transfers and, at the financial institution's option, notice of the
advisability of promptly reporting loss or theft of the access device or
unauthorized transfers.
(ii) The telephone number and address of the person or office to be
notified in the event the consumer believes that an unauthorized
electronic fund transfer has been or may be made.
(iii) The financial institution's business days, as determined under
205.2(d), unless applicable State law or an agreement between the
consumer and the financial institution sets a liability limit not
greater than $50.
(b) Limitations on amount of liability. The amount of a consumer's
liability for an unauthorized electronic fund transfer or a series of
related unauthorized transfers shall not exceed $50 or the amount of
unauthorized transfers that occur before notice to the financial
institution under paragraph (c) of this section, whichever is less,
unless one or both of the following exceptions apply:
(1) If the consumer fails to notify the financial institution within
2 business days after learning of the loss or theft of the access
device, the consumer's liability shall not exceed the lesser of $500 or
the sum of
(i) $50 or the amount of unauthorized electronic fund transfers that
occur before the close of the 2 business days, whichever is less, and
(ii) The amount of unauthorized electronic fund transfers that the
financial institution establishes would not have occurred but for the
failure of the consumer to nofity the institution within 2 business days
after the consumer learns of the loss or theft of the access device, and
that occur after the close of 2 business days and before notice to the
financial institution.
(2) If the consumer fails to report within 60 days of transmittal of
the periodic statement any unauthorized electronic fund transfer that
appears on the statement, the consumer's liability shall not exceed the
sum of
(i) The lesser of $50 or the amount of unauthorized electronic fund
transfers that appear on the periodic statement or that occur during the
60-day period, and
(ii) The amount of unauthorized electronic fund transfers that occur
after the close of the 60 days and before notice to the finanical
institution and that the financial institution establishes would not
have occurred but for the failure of the consumer to notify the
financial institution within that time.
(3) Paragraphs (b)(1) and (2) of this section may both apply in some
circumstances. Paragraph (b)(1) shall determine the consumer's
liability for any unauthorized transfers that appear on the periodic
statement and occur before the close of the 60-day period, and paragraph
(b)(2)(ii) of this section shall determine liability for transfers that
occur after the close of the 60-day period.
(4) If a delay in notifying the financial institution was due to
extenuating circumstances, such as extended travel or hospitalization,
the time periods specified above shall be extended to a reasonable time.
(5) If applicable State law or an agreement between the consumer and
financial institution imposes lesser liability than that provided in
paragraph (b) of this section, the consumer's liability shall not exceed
that imposed under that law or agreement.
(c) Notice to financial institution. For purposes of this section,
notice to a financial institution is given when a consumer takes such
steps as are reasonably necessary to provide the financial institution
with the pertinent information, whether or not any particular officer,
employee, or agent of the financial institution does in fact receive the
information. Notice may be given to the financial institution, at the
consumer's option, in person, by telephone, or in writing. Notice in
writing is considered given at the time the consumer deposits the notice
in the mail or delivers the notice for transmission by any other usual
means to the financial institution. Notice is also considered given
when the financial institution becomes aware of circumstances that lead
to the reasonable belief that an unauthorized electronic fund transfer
involving the consumer's account has been or may be made.
(d) Relation to Truth in Lending. (1) A consumer's liability for an
unauthorized electronic fund transfer shall be determined solely in
accordance with this section if the electronic fund transfer
(i) Was initiated by use of an access device that is also a credit
card as defined in 12 CFR 226.2(a)(15), or
(ii) Involves an extension of credit under an agreement between a
consumer and a financial institution to extend the credit when the
consumer's account is overdrawn or to maintain a specified minimum
balance in the consumer's account.
(2) A consumer's liability for unauthorized use of a credit card that
is also an access device but that does not involve an electronic fund
transfer shall be determined solely in accordance with the Truth in
Lending Act and 12 CFR part 226 (Regulation Z).
(44 FR 18480, Mar. 28, 1979, as amended at 44 FR 33839, June 13,
1979; 44 FR 46434, Aug. 8, 1979; Redesignated and amended at 44 FR
59470, Oct. 15, 1979; 48 FR 14881, Apr. 6, 1983, 53 FR 52653, Dec. 29,
1988)
12 CFR 205.7 Initial disclosure of terms and conditions.
(a) Content of disclosures. At the time a consumer contracts for an
electronic fund transfer service or before the first electronic fund
transfer is made involving a consumer's account, a financial institution
shall disclose to the consumer, in a readily understandable written
statement that the consumer may retain, the following terms and
conditions of the electronic fund transfer service, as applicable:
(1) A summary of the consumer's liability under 205.6, or other
applicable law or agreement, for unauthorized electronic fund transfers
and, at the financial institution's option, the advisability of promptly
reporting loss or theft of the access device or unauthorized transfers.
(2) The telephone number and address of the person or office to be
notified when the consumer believes that an unauthorized electronic fund
transfer has been or may be made.
(3) The financial institution's business days, as determined under
205.2(d).
(4) The type of electronic fund transfers that the consumer may make
and any limitations on the frequency and dollar amount of transfers.
The details of the limitations need not be disclosed if their
confidentiality is essential to maintain the security of the electronic
fund transfer system.
(5) Any charges for electronic fund transfers or for the right to
make transfers.
(6) A summary of the consumer's right to receive documentation of
electronic fund transfers, as provided in 205.9, 205.10(a), and
205.10(d).
(7) A summary of the consumer's right to stop payment of a
preauthorized electronic fund transfer and the procedure for initiating
a stop-payment order, as provided in 205.10(c).
(8) A summary of the financial institution's liability to the
consumer for its failure to make or to stop certain transfers under
section 910 of the Act.
(9) The circumstances under which the financial institution in the
ordinary course of business will disclose information to third parties
concerning the consumer's account.
(10) A notice that is substantially similar to the following notice
concerning error resolution procedures and the consumer's rights under
them:
as soon as you can, if you think your statement or receipt is wrong
or if you need more information about a transfer listed on the statement
or receipt. We must hear from you no later than 60 days after we sent
you the FIRST statement on which the problem or error appeared.
(1) Tell us your name and account number (if any).
(2) Describe the error or the transfer you are unsure about, and
explain as clearly as you can why you believe it is an error or why you
need more information.
(3) Tell us the dollar amount of the suspected error.
If you tell us orally, we may require that you send us your complaint
or question in writing within 10 business days.
We will tell you the results of our investigation within 10 business
days after we hear from you and will correct any error promptly. If we
need more time, however, we may take up to 45 days to investigate your
complaint or question. If we decide to do this, we will recredit your
account within 10 business days for the amount you think is in error, so
that you will have the use of the money during the time it takes us to
complete our investigation. If we ask you to put your complaint or
question in writing and we do not receive it within 10 business days, we
may not recredit your account.
If we decide that there was no error, we will send you a written
explanation within 3 business days after we finish our investigation.
You may ask for copies of the documents that we used in our
investigation.
(b) Timing of disclosures for accounts in existence on May 10, 1980.
A financial institution shall mail or deliver to the consumer the
information required by paragraph (a) of this section on or before June
9, 1980, or with the first periodic statement required by 205.9(b)
after May 10, 1980, whichever is earlier, for any account that is open
on May 10, and
(1) From or to which electronic fund transfers were made prior to May
10, 1980;
(2) With respect to which a contract for such transfers was entered
into between a consumer and a financial institution; or
(3) For which an access device was issued to a consumer.
(44 FR 59470, Oct. 15, 1979, as amended at 45 FR 8263, Feb. 6, 1980)
12 CFR 205.8 Change in terms; error resolution notice.
(a) Change in terms. A financial institution shall mail or deliver a
written notice to the consumer at least 21 days before the effective
date of any change in a term or condition required to be disclosed under
205.7(a) if the change would result in increased fees or charges,
increased liability for the consumer, fewer types of available
electronic fund transfers, or stricter limitations on the frequency or
dollar amounts of transfers. Prior notice need not be given where an
immediate change in terms or conditions is necessary to maintain or
restore the security of an electronic fund transfer system or account.
However, if a change required to be disclosed under this paragraph is to
be made permanent, the financial institution shall provide written
notice of the change to the consumer on or with the next regularly
scheduled periodic statement or within 30 days, unless disclosure would
jeopardize the security of the system or account. However, if such a
change is to be made permanent, the financial institution shall provide
written notice of the change to the consumer on or with the next
regularly scheduled periodic statement or within 30 days, unless
disclosure would jeopardize the security of the system or account.
(b) Error resolution notice. For each account from or to which
electronic fund transfers can be made, a financial institution shall
mail or deliver to the consumer, at least once each calendar year, the
notice set forth in 205.7(a)(10). Alternatively, a financial
institution may mail or deliver a notice that is substantially similar
to the following notice on or with each periodic statement required by
205.9(b):
as soon as you can, if you think your statement or receipt is wrong
or if you need more information about a transfer on the statement or
receipt. We must hear from you no later than 60 days after we sent you
the FIRST statement on which the error or problem appeared.
(1) Tell us your name and account number (if any).
(2) Describe the error or the transfer you are unsure about, and
explain as clearly as you can why you believe there is an error or why
you need more information.
(3) Tell us the dollar amount of the suspected error.
We will investigate your complaint and will correct any error
promptly. If we take more than 10 business days to do this, we will
recredit your account for the amount you think is in error, so that you
will have use of the money during the time it takes us to complete our
investigation.
(44 FR 59471, Oct. 15, 1979, as amended at 45 FR 8264, Feb. 6, 1980)
12 CFR 205.9 Documentation of transfers.
(a) Receipts at electronic terminals. At the time an electronic fund
transfer is initiated at an electronic terminal by a consumer, the
financial institition shall make available2 to the consumer a written
receipt of the transfer(s) that clearly sets forth the following
information, as applicable:
(1) The amount of the transfer. A charge for the transfer may be
included in this amount if the terminal is owned or operated by a person
other than the financial institution holding the consumer's account,
provided the amount of the charge is disclosed on the receipt and on a
sign posted on or at the terminal.
(2) The calendar date the consumer initiated the transfer.
(3) The type of transfer and the type of the consumer's account(s)3
to or from which funds are transferred, such as ''withdrawal from
checking,'' ''transfer from savings to checking,'' or ''payment from
savings.'' These descriptions may be used for transfers to or from
accounts that are similar in function to checking accounts (such as
share draft or negotiable order of withdrawal accounts) or to savings
accounts (such as share accounts). Codes may be used only if they are
explained elsewhere on the receipt.
(4) A number or code that uniquely identifies the consumer initiating
the transfer, the consumer's account(s), or the access device used to
initiate the transfer.
(5) The location (in a form prescribed by paragraph (b)(1)(iv) of
this section) of the terminal at which the transfer was initiated or an
identification (such as a code or terminal number).
(6) The name of any third party to or from whom funds are
transferred; a code may be used only if it is explained elsewhere on
the receipt. This requirement does not apply if the name is provided by
the consumer in a form that the electronic terminal cannot duplicate on
the receipt.
(b) Periodic statements. For any account to or from which electronic
fund transfers can be made, the financial institution shall mail or
deliver a statement for each monthly or shorter cycle in which an
electonic fund transfer has occurred, but at least a quarterly statement
if no transfer has occurred. The statement shall include the following,
as applicable:
(1) For each electronic fund transfer occurring during the cycle,4
(i) The amount of the transfer. If a transfer charge was added at
the time of initiation by the owner or operator of an electronic
terminal in accordance with paragraph (a)(1) of this section, that
charge may be included in the amount of the transfer.
(ii) The date the transfer was credited or debited to the consumer's
account.
(iii) The type of transfer and the type of the consumer's account(s)
to or from which funds were transferred.
(iv) For each transfer initiated by the consumer at an electronic
terminal4a, the location that appeared on the receipt or, if an
identification (such as a code or terminal number) was used, that
identification and one of the following descriptions of the terminal's
location:
(A) The address, including number and street (the number may be
omitted if the street alone uniquely identifies the terminal location)
or intersection, city, and state or foreign country; /5/
(B) A generally accepted name for a specific location (such as a
branch of the financial institution, a shopping center, or an airport),
city, and state or foreign country;6 or
(C) The name of the entity at whose place of business the terminal is
located or which owns or operates the terminal (such as the financial
institution7 or the seller of goods or services), city, and state or
foreign country. 8
(v) The name of any third party to or from whom funds were
transferred. 9
(2) The number(s) of the consumer's account(s) for which the
statement is issued.
(3) The amount of any fees or charges, other than a finance charge
under 12 CFR 226.7(f), assessed against the account during the statement
period for electronic fund transfers or the right to make such
transfers, or for account maintenance.
(4) The balances in the consumer's account(s) at the beginning and at
the close of the statement period.
(5) The address and telephone number to be used for inquiry or notice
of errors, preceded by ''Direct Inquiries To:'' or similar language.
Alternatively, the address and telephone number may be provided on the
notice of error resolution procedures set forth in 205.8(b).
(6) If the financial institution uses the notice procedure set forth
in 205.10(a)(1)(iii), the telephone number the consumer may call to
ascertain whether a preauthorized transfer to the consumer's account has
occurred.
(c) Documentation for certain passbook accounts. In the case of a
consumer's passbook account which may not be accessed by any electronic
fund transfers other than preauthorized transfers to the account,9a the
financial institution may, in lieu of complying with paragraph (b) of
this section, upon presentation of the consumer's passbook, provide the
consumer with documentation by entering in the passbook or on a separate
document the amount and date of each electronic fund transfer made since
the passbook was last presented.
(d) Periodic statements for certain non-passbook accounts. If a
consumer's account other than a passbook account may not be accessed by
any electronic fund transfers other than preauthorized transfers to the
account,9a the financial institution need provide the periodic statement
required by paragraph (b) of this section only quarterly.
(e) Use of abbreviations. A financial institution may use commonly
accepted or readily understandable abbreviations in complying with the
documentation requirements of this section.
(f) Receipt requirements for certain cash-dispensing terminals. The
failure of a financial institution to comply with the requirement of
paragraph (a) of this section that a receipt be made available to the
consumer at the time an electronic fund transfer is initiated at an
electronic terminal shall not constitute a violation of the Act or this
regulation, provided:
(1) The transfer occurs at an electronic terminal that:
(i) Does not permit transfers other than cash withdrawals by the
consumer,
(ii) Cannot make a receipt available to the consumer at the time the
transfer is initiated,
(iii) Cannot be modified to provide a receipt at that time, and
(iv) Was purchased or ordered by the financial institution prior to
February 6, 1980; and
(2) The financial institution mails or delivers a written receipt to
the consumer that complies with the other requirements of paragraph (a)
of this section on the next business day following the transfer.
(g) Delayed effective date for certain periodic statement
requirements. The failure of a financial institution to describe an
electronic fund transfer in accordance with the requirements of
paragraphs (b)(1) (iv) and (v) of this section shall not constitute a
violation of the Act or this regulation unless the transfer occurs on or
after August 10, 1980, if, when a transfer involves a payment to another
person, the financial institution, upon the consumer's request, and
without charge, promptly provides the consumer with proof that such a
payment was made.
(h) Periodic statements for certain intra-institutional transfers. A
financial institution need not provide the periodic statement required
by paragraph (b) of this section for an account accessed only by
electronic fund transfers initiated by the consumer to or from another
account of the consumer for which the financial institution documents
transfers in compliance with paragraph (b) of this section.
(i) Documentation for foreign-initiated transfers. Failure to
provide the terminal receipt and periodic statement required by
paragraphs (a) and (b) of this section for a particular electronic fund
transfer shall not be deemed a failure to comply with this regulation,
if:
(1) The transfer is not initiated in a state as defined in 205.2(k);
and
(2) In accordance with 205.11, the financial institution treats an
inquiry for clarification or documentation as a notice of error and
corrects the error.
(45 FR 8264, Feb. 6, 1980, as amended at 45 FR 25383, Apr. 15, 1980;
45 FR 66347, Oct. 6, 1980; 47 FR 44713, Oct. 12, 1982; 49 FR 40798,
Oct. 18, 1984)
2A financial institution may arrange for a third party, such as a
merchant to make the receipt available.
3If more than one account of the same type may be accessed by a
single access device, the accounts must be uniquely identified unless
the terminal is incapable of such identification and was purchased or
ordered by the financial institution prior to February 6, 1980. The
type of account need not be identified if the access device may access
only one account at that terminal.
4The information required by paragraph (b)(1) of this section may be
provided on accompanying documents. Codes explained on the statement or
on accompanying documents are acceptable.
4aA financial institution need not identify the terminal location for
deposits of cash, checks, drafts, or similar paper instruments at
electronic terminals.
/5/ The city and state may be omitted if all the terminals owned or
operated by the financial institution providing the statement (or by the
system in which it participates) are located in the same city. The
state may be omitted if all the terminals owned or operated by the
financial institution providing the statement (or by the system in which
it participates) are located in that state. The state may also be
omitted for transfers occurring at terminals within 50 miles of the
financial institution's main office.
6See Footnote 5.
7If the financial institution providing the statement owns or
operates terminals at more than one location, it shall describe the
location of its electronic terminals by use of paragraph (b)(1)(iv)(A)
or (B) of this section.
8See Footnote 5.
9A financial institution need not identify third parties whose names
appear on checks, drafts, or similar paper instruments deposited to the
consumer's account at an electronic terminal.
9aAccounts that also are accessible by the intra-institutional
transfers described in paragraph (h) of this section may continue to be
documented in accordance with paragraph (c) or (d) of this section.
12 CFR 205.10 Preauthorized transfers.
(a) Preauthorized transfers to a consumer's account. (1) Where a
consumer's account is scheduled to be credited by a preauthorized
electronic fund transfer from the same payor at least once every 60
days, except where the payor provides positive notice to the consumer
that the transfer has been initiated, the financial institution shall
provide notice by one of the following means:
(i) The institution shall transmit oral or written notice to the
consumer, within 2 business days after the transfer, that the transfer
occurred;
(ii) The institution shall transmit oral or written notice to the
consumer, within 2 business days after the date on which the transfer
was scheduled to occur, that the transfer did not occur; or
(iii) The institution shall provide a readily available telephone
line that the consumer may call to ascertain whether or not the transfer
occured, and shall disclose the telephone number on the initial
disclosures required by 205.7 and on each periodic statement.
(2) A financial institution that receives a preauthorized transfer of
the type described in paragraph (a)(1) of this section shall credit the
amount of the transfer as of the day the funds for the transfer are
received.
(b) Preauthorized transfers from a consumer's account; written
authorization. Preauthorized electronic fund transfers from a
consumer's account may be authorized by the consumer only in writing,
and a copy of the authorization shall be provided to the consumer by the
party that obtains the authorization from the consumer.
(c) Consumer's right to stop payment. A consumer may stop payment of
a preauthorized electronic fund transfer from the consumer's account by
notifying the financial institution orally or in writing at any time up
to 3 business days before the scheduled date of the transfer. The
financial institution may require written confirmation of the
stop-payment order to be made within 14 days of an oral notification if,
when the oral notification is made, the requirement is disclosed to the
consumer together with the address to which confirmation should be sent.
If written confirmation has been required by the financial institution,
the oral stop-payment order shall cease to be binding 14 days after it
has been made.
(d) Notice of transfers varying in amount. Where a preauthorized
electronic fund transfer from the consumer's account varies in amount
from the previous transfer relating to the same authorization, or the
preauthorized amount, the financial institution or the designated payee
shall mail or deliver, at least 10 days before the scheduled transfer
date, a written notice of the amount and scheduled date of the transfer.
If the financial institution or designated payee informs the consumer
of the right to receive notice of all varying transfers, the consumer
may elect to receive notice only when a transfer does not fall within a
specified range of amounts or, alternatively, only when a transfer
differs from the most recent transfer by more than an agreed-upon
amount.
(44 FR 59471, Oct. 15, 1979, as amended at 45 FR 8265, Feb. 6, 1980)
12 CFR 205.11 Procedures for resolving errors.
(a) Definition of error. For purposes of this section, the term
error means:
(1) A unauthorized electronic fund transfer;
(2) An incorrect electronic fund transfer to or from the consumer's
account;
(3) The omission from a periodic statement of an electronic fund
transfer to or from the consumer's account that should have been
included;
(4) A computational or bookkeeping error made by the financial
institution relating to an electronic fund transfer;
(5) The consumer's receipt of an incorrect amount of money from an
electronic terminal;
(6) An electronic fund transfer not identified in accordance with the
requirements of 205.9 or 205.10(a); or
(7) A consumer's request for any documentation required by 205.9 or
205.10(a), or for additional information or clarification concerning an
electronic fund transfer. This includes any request for documentation,
information, or clarification in order to assert an error within the
meaning of paragraphs (a)(1) through (6) of this section. It does not
include a routine inquiry about the balance in the consumer's account or
a request for duplicate copies of documentation or other information
that is made only for tax or other record-keeping purposes.
(b) Notice of error from consumer. (1) A notice of an error is an
oral or written notice from the consumer that
(i) Is received by the financial institution10 no later than 60 days
after the institution
(A) Transmitted a periodic statement or provided documentation under
205.9(c) on which the alleged error is first reflected; or
(B) Transmitted additional information, clarification, or
documentation described in paragraph (a)(7) of this section that was
initially requested in accordance with paragraph (b)(1)(i)(A) of this
section;
(ii) Enables the financial institution to identify the consumer's
name and account number; and
(iii) Except for errors described in paragraph (a)(7) of this
section, indicates the consumer's belief, and the reasons for that
belief, that an error exists in the consumer's account or is reflected
on documentation required by 205.9 or 205.10(a), and indicates to the
extent possible the type, the date, and the amount of the error.
(2) A financial institution may require a written confirmation to be
received within 10 business days of an oral notice if, when the oral
notice is given, the consumer is advised of the requirement and of the
address to which confirmation must be sent.
(c) Investigation of errors. (1) After receiving a notice of an
error, the financial institution shall promptly investigate the alleged
error, determine whether an error occurred, and transmit the results of
its investigation and determination to the consumer within 10 business
days.
(2) As an alternative to the 10-business-day requirement of paragraph
(c)(1) of this section, the financial institution shall investigate the
alleged error and determine whether an error occurred, promptly but in
no event later than 45 calendar days after receiving a notice of an
error, and shall transmit the results of its investigation and
determination to the consumer, provided
(i) The financial institution provisionally recredits the consumer's
account in the amount of the alleged error (including interest where
applicable) within 10 business days after receiving the notice of error.
If the financial institution has a reasonable basis for believing that
an unauthorized electronic fund transfer may have occurred and that it
has satisfied the requirements of 205.6(a), it may withhold a maximum
of $50 from the amount recredited;
(ii) The financial institution, promptly but no later than 2 business
days after the provisional recrediting, orally reports or mails or
delivers notice to the consumer of the amount and date of the
recrediting and of the fact that the consumer will have full use of the
funds pending the determination of whether an error occurred;
(iii) The financial institution gives the consumer full use of the
funds provisionally recredited during the investigation; and
(iv) If the financial institution determines that no error occurred
and debits the account, the institution gives notice of the debiting and
continues to honor certain items as required by paragraph (f)(2) of this
section.
(3) A financial institution shall comply with all requirements of
this section except that it need not provisionally recredit the
consumer's account if --
(i) It requires but does not receive timely written confirmation of
oral notice of an error; or
(ii) The notice of an error involves an account that is subject to
the margin requirements or other aspects of Regulation T (12 CFR part
220).
(4) If a notice of an error involves an electronic fund transfer that
was not initiated in a state as defined in 205.2(k), or involves an
electronic fund transfer resulting from a point-of-sale debit card
transaction, the applicable time periods for action in subsections (c),
(e), and (f) shall be 20 business days in place of 10 business days, and
90 calendar days in place of 45 calendar days.
(d) Extent of required investigation. (1) A financial institution
complies with its duty to investigate, correct, and report its
determination regarding an error described in paragraph (a)(7) of this
section by transmitting the requested information, clarification, or
documentation within the time limits set forth in paragraph (c) of this
section. If the institution has provisionally recredited the consumer's
account in accordance with paragraph (c)(2) of this section, it may
debit the amount upon transmitting the requested information,
clarification, or documentation.
(2) Except in the case of services covered by 205.14, a financial
institution's review of its own records regarding an alleged error will
satisfy its investigation responsibilities under paragraph (c) of this
section if the alleged error concerns a transfer to or from a third
party and there is no agreement between the financial institution and
the third party11 regarding the type of electronic fund transfer alleged
in the error.
(3) A financial institution may make, without investigation, a final
correction to a consumer's account in the amount or manner alleged by
the consumer to be in error, but must comply with all other applicable
requirements of this section.
(e) Procedures after financial institution determines that error
occurred. If the financial institution determines that an error
occurred, it shall
(1) Promptly, but no later than 1 business day after its
determination, correct the error (subject to the liability provisions of
205.6 (a) and (b)), including, where applicable, the crediting of
interest and the refunding of any fees or charges imposed, and
(2) Promptly, but in any event within the 10-business-day or 45-day
time limits, orally report or mail or deliver to the consumer notice of
the correction and, if applicable, notice that a provisional credit has
been made final. 12
(f) Procedures after financial institution determines that no error
occurred. If the financial institution determines that no error
occurred or that an error occurred in a different manner or amount from
that described by the consumer,
(1) The financial institution shall mail or deliver to the consumer a
written explanation of its findings within 3 business days after
concluding its investigation, but in no event later than 10 business
days after receiving notice of the error if the institution is
proceeding under paragraph (c)(1) of this section. The explanation
shall include notice of the consumer's right to request the documents
upon which the institution relied in making its determination.
(2) Upon debiting a provisionally recredited amount, the financial
institution
(i) Shall orally report or mail or deliver notice to the consumer of
the date and amount of the debiting and the fact that the financial
institution will honor checks, drafts, or similar paper instruments
payable to third parties and preauthorized transfers from the consumer's
account (using the provisionally recredited funds) for 5 business days
after transmittal of the notice.
(ii) Shall honor checks, drafts, or similar paper instruments payable
to third parties and preauthorized transfers from the consumer's account
(without charge to the consumer as a result of an overdraft) for 5
business days after transmittal of the notice. The institution need
only honor items that it would have paid if the provisionally recredited
funds had not been debited.
(3) Upon the consumer's request, the financial institution shall
promptly mail or deliver to the consumer copies of the documents on
which it relied in making its determination.
(g) Withdrawal of notice of error. The financial institution has no
further error resolution responsibilities as to a consumer's assertion
of an error if the consumer concludes that no error did in fact occur
and voluntarily withdraws the notice.
(h) Reassertion of error. A financial institution that has fully
complied with the requirements of this section with respect to an error
has no further responsibilities under this section if the consumer
subsequently reasserts the same error, regardless of the manner in which
it is reasserted. This paragraph does not preclude the assertion of an
error defined in paragraphs (a) (1) through (6) of this section
following the assertion of an error described in paragraph (a)(7) of
this section regarding the same electronic fund transfer.
(i) Relation to Truth in Lending. Where an electronic fund transfer
also involves an extension of credit under an agreement between a
consumer and a financial institution to extend credit when the
consumer's account is overdrawn or to maintain a specified minimum
balance in the consumer's account, the financial institution shall
comply with the requirements of this section rather than those of 12 CFR
226.13 (a), (b), (c), (e), (f), and (h).
(45 FR 8265, Feb. 6, 1980, as amended at 48 FR 14881, Apr. 6, 1983;
49 FR 40798, Oct. 18, 1984)
10A financial institution may require the consumer to give notice
only at the telephone number or address disclosed by the institution,
provided the institution maintains reasonable procedures to refer the
consumer to the specified telephone number or address if the consumer
attempts to give notice to the institution in a different manner.
11Institutions do not have an agreement for purposes of paragraph
(d)(2) of this section solely because they participate in transactions
under the federal recurring payments program, or that are cleared
through an automated or other clearing house or similar arrangement for
the clearing and settlement of fund transfers generally, or because they
agree to be bound by the rules of such arrangements. An agreement that
a third party will honor an access device is an agreement for purposes
of this paragraph.
12This notice requirement may be satisfied by a notice on a periodic
statement that is mailed or delivered within the 10-business-day or
45-day time limits and that clearly identifies the correction to the
consumer's account.
12 CFR 205.12 Relation to State law.
(a) Premption of inconsistent State laws. The Board shall determine,
upon the request of any State, financial institution, or other
interested party, whether the Act and this regulation preempt State laws
relating to electronic fund transfers. Only those State laws that are
inconsistent with the Act and this regulation shall be preempted and
then only to the extent of the inconsistency. A State law is not
inconsistent with the Act and this regulation if it is more protective
of a consumer.
(b) Standards for preemption. The following are examples of the
standards the Board will apply in determining whether a State law, or a
provision of that law, is inconsistent with the Act and this regulation.
Inconsistency may exist when State law:
(1) Requires or permits a practice or act prohibited by the Act or
this regulation;
(2) Provides for consumer liability for unauthorized electronic fund
transfers which exceeds that imposed by the Act and this regulation;
(3) Provides for longer time periods than the Act and this regulation
for investigation and correction of errors alleged by a consumer, or
fails to provide for the recrediting of the consumer's account during
the institution's investigation of errors as set forth in 205.11(c);
or
(4) Provides for initial disclosures, periodic statements, or
receipts that are different in content from that required by the Act and
this regulation except to the extent that the disclosures relate to
rights granted to consumers by the State law and not by the Act or this
regulation.
(c) Procedures for preemption. Any request for a determination shall
include the following:
(1) A copy of the full text of the State law in question, including
any regulatory implementation or judicial interpretation of that law;
(2) A comparison of the provisions of State law with the
corresponding provisions in the Act and this regulation, together with a
discussion of reasons why specific provisions of State law are either
consistent or inconsistent with corresponding sections of the Act and
this regulation; and
(3) A comparison of the civil and criminal liability for violation of
State law with the provisions of sections 915 and 916(a) of the Act.
(d) Exemption for State-regulated transfers. (1) Any State may apply
to the Board for an exemption from the requirements of the Act and the
corresponding provisions of this regulation for any class of electronic
fund transfers within the State. The Board will grant such an exemption
if the Board determines that:
(i) Under the law of the State that class of electronic fund
transfers is subject to requirements substantially similar to those
imposed by the Act and the corresponding provisions of this regulation,
and
(ii) There is adequate provision for State enforcement.
(2) To assure that the Federal and State courts will continue to have
concurrent jurisdiction, and to aid in implementing the Act:
(i) No exemption shall extend to the civil liability provisions of
section 915 of the Act; and
(ii) After an exemption has been granted, for the purposes of section
915 of the Act, the requirements of the applicable State law shall
constitute the requirements of the Act and this regulation, except to
the extent the State law imposes requirements not imposed by the Act or
this regulation.
(44 FR 59471, Oct. 15, 1979)
12 CFR 205.13 Administrative enforcement.
(a) Enforcement by Federal agencies. (1) Administrative enforcement
of the Act and this regulation for certain financial institutions is
assigned to the Comptroller of the Currency, Board of Governors of the
Federal Reserve System, Board of Directors of the Federal Deposit
Insurance Corporation, Office of Thrift Supervision, National Credit
Union Administration Board, Secretary of Transportation, and Securities
and Exchange Commission.
(2) Except to the extent that administrative enforcement is
specifically committed to other authorities, compliance with the
requirements imposed under the Act and this regulation is enforced by
the Federal Trade Commission.
(b) Issuance of staff interpretations. (1) Unofficial staff
interpretations are issued at the staff's discretion where the
protection of section 915(d) of the Act is neither requested nor
required, or where a rapid response is necessary.
(2)(i) Official staff interpretations are issued at the discretion of
designated officials. No interpretations will be issued approving
financial institutions' forms or statements. Any request for an
official staff interpretation of this regulation shall be made in
writing and addressed to the Director of the Division of Consumer and
Community Affairs, Board of Governors of the Federal Reserve System,
Washington, DC 20551. The request shall contain a complete statement of
all relevant facts concerning the transfer or service, and shall include
copies of all pertinent documents.
(ii) Within 5 business days of receipt of a request, an
acknowledgment will be sent to the person making the request. If the
designated officials deem issuance of an official staff interpretation
to be appropriate, the interpretation will be published in the Federal
Register to become effective 30 days after the publication date. If a
request for public comment is received, the effective date will be
suspended. The interpretation will then be republished in the Federal
Register and the public given an opportunity to comment. Any official
staff interpretation issued after opportunity for public comment shall
become effective upon publication in the Federal Register.
(3) Any request for public comment on an official staff
interpretation of this regulation shall be made in writing and addressed
to the Secretary, Board of Governors of the Federal Reserve System,
Washington, DC 20551. It must be postmarked or received by the
Secretary's office within 30 days of the interpretation's publication in
the Federal Register. The request shall contain a statement setting
forth the reasons why the person making the request believes that public
comment would be appropriate.
(4) Pursuant to section 915(d) of the Act, the Board has designated
the Director and other officials of the Division of Consumer and
Community Affairs as officials duly authorized to issue, at their
discretion, official staff interpretations of this regulation.
(c) Record retention. (1) Evidence of compliance with the
requirements imposed by the Act and this regulation shall be preserved
by any person subject to the Act and this regulation for a period of not
less than 2 years. Records may be stored by use of microfiche,
microfilm, magnetic tape, or other methods capable of accurately
retaining and reproducing information.
(2) Any person subject to the Act and this regulation that has actual
notice that it is being investigated or is subject to an enforcement
proceeding by an agency charged with monitoring that person's compliance
with the Act and this regulation, or that has been served with notice of
an action filed under section 910, 915, or 916(a) of the Act, shall
retain the information required in paragraph (c)(1) of this section that
pertains to the action or proceeding until final disposition of the
matter, unless an earlier time is allowed by order of the agency or
court.
(44 FR 59472, Oct. 15, 1979, as amended at 45 FR 8266, Feb. 6, 1980;
50 FR 8708, Mar. 5, 1985, 54 FR 53539, Dec. 29, 1989)
12 CFR 205.14 Services offered by financial institutions not holding
consumer's account.
(a) Compliance by service-providing institution. Except as provided
in this section, where a financial institution issues an access device
to a consumer to be used for initiating electronic fund transfers to or
from the consumer's account held by another financial institution, and
the service-providing institution does not have an agreement with the
account-holding institution regarding the service, the service-providing
institution shall comply with all requirements of the Act and this
regulation that relate to the service or the electronic fund transfers
made by the consumer under the service. For this purpose, the following
special rules shall apply:
(1) Section 205.6 shall require the service-providing institution to
reimburse the consumer for unauthorized electronic fund transfers in
excess of the limits set by that section.
(2) Sections 205.7, 205.8, and 205.9 shall require the
service-providing institution to provide those disclosures and
documentation that are within its knowledge and the purview of its
relationship with the consumer. The service-providing institution need
not furnish a periodic statement to the consumer under 205.9(b), if the
service-providing institution:
(i) Issues a debit card, to be used by the consumer to initiate
electronic fund transfers, that bears the name of the service-providing
institution and an address or telephone number that can be used to
contact the service-providing institution;
(ii) Transmits the applicable transaction identification information
specified by 205.9(b)(1) to the consumer's account-holding institution,
in the format prescribed by the automated clearing house system used to
clear the fund transfers;
(iii) Discloses to the consumer, in addition to the information
required by 205.7, that the service-providing institution (not the
account-holding institution) is responsible for all electronic fund
transfers made with the debit card, and that all inquiries and error
notices related to such transfers should be directed to the
service-providing institution; that the service-providing institution
will not issue a periodic statement, and that the consumer should retain
all terminal receipts to verify transactions; and that the consumer
must notify the service-providing institution concerning loss or theft
of the debit card;
(iv) Provides on or with the receipts required by 205.9(a) the
address and telephone number to be used for inquiries and error notices
and for reporting the loss or theft of the debit card; and
(v) Extends the time period set forth in 205.6(b)(1) for notice of
loss or theft of a debit card, from 2 business days to 4 business days
after the consumer learns of the loss or theft; and extends the time
periods set forth in 205.6(b)(2) and 205.11(b)(1) for reporting
unauthorized transfers or alleged errors, from 60 days to 90 days
following the transmittal of a periodic statement.
(3) Section 205.11(b)(1)(i) shall require the service-providing
institution to extend by a reasonable time the time periods within which
notice of an error must be received if a delay in notifying the
service-providing institution was due to the fact that the consumer
initially notified or attempted to notify the account-holding
institution.
(4) Section 205.11(c)(2)(i) and (e)(1) shall require the
service-providing institution to transfer funds, in the appropriate
amount and within the applicable time period, to the consumer's account
at the account-holding institution.
(5) Section 205.11(c)(2)(ii) shall require the service-providing
institution to disclose the date on which it initiates a transfer to
effect the provisional recredit.
(6) Section 205.11(f)(2) shall require the service-providing
institution to notify the account-holding institution of the date until
which the account-holding institution must honor any debit to the
account as required by 205.11(f)(2). If an overdraft results, the
service-providing institution shall promptly reimburse the
account-holding institution in the amount of the overdraft.
(b) Compliance by account-holding institution. An account-holding
institution described in paragraph (a) of this section need not comply
with the requirements of the act and this regulation with respect to
electronic fund transfers to or from the consumer's account made by the
service-providing institution, except that the account-holding
institution shall:
(1) Comply with 205.9 by providing a periodic statement and
describing each transaction from the service-providing institution that
is debited or credited to the consumer's account in accordance with
205.9(b); /13/ but the account-holding institution has no liability for
failure to provide this information if the failure is due to its not
having received the necessary information from the service-providing
institution in the prescribed format; and
(2) Comply with 205.11 by promptly providing to the
service-providing institution, upon its request, information or copies
of documents required for the purpose of investigating alleged errors or
for furnishing copies of documents to the consumer; and by honoring
debits to the account in accordance with 205.11(f)(2).
(c) Definition of agreement. For purposes of this section, an
agreement between the service-providing and the account-holding
institutions regarding the electronic fund transfer service refers to a
specific agreement(s) among institutions (or among institutions and
another person that participates in the operation of the service) which
sets forth the rights and obligations of the institutions with respect
to a service involving the issuance of an access device to the consumer.
Institutions do not have such an agreement solely because they
participate in transactions that are cleared through an automated or
other clearing house or similar arrangement for the clearing and
settlement of fund transfers generally, or because they agree to be
bound by the rules of such an arrangement.
(45 FR 8266, Feb. 6, 1980, as amended at 52 FR 30911, Aug. 18, 1987)
/13/ Account-holding institutions shall not be required to furnish
the terminal location as part of the transaction description until July
1, 1990. In addition, account-holding institutions with assets of $25
million or less shall not be required to comply with section 205.9(b)
until July 1, 1990.
12 CFR 205.14 Pt. 205, App. A.
12 CFR 205.14 Appendix A to Part 205 -- Model Disclosure Clauses
This appendix contains model disclosure clauses for optional use by
financial institutions to facilitate compliance with the disclosure
requirements of 205.5 (a)(3), (b)(2), and (b)(3), 205.6(a)(3), 205.7,
and 205.14(a)(2). Section 915(d)(2) of the Act provides that use of
these clauses in conjunction with other requirements of the regulation
will protect financial institutions from liability under sections 915
and 916 of the Act to the extent that the clauses accurately reflect the
institutions' electronic fund transfer services.
Financial institutions need not use any of the clauses, but may use
clauses of their own design in conjunction with the model clauses. The
inapplicable words or portions of phrases in parentheses should be
deleted. The underscored catchlines are not part of the clauses and
should not be used as such. Financial institutions may make
alterations, substitutions, or additions in the clauses in order to
reflect the services offered, such as technical changes (e.g.,
substitution of a trade name for the word card, deletion of inapplicable
services, or substitution of lesser liability limits in section A(2)).
Sections A(3) and A(9) include references to a telephone number and
address. Where two or more of these clauses are used in a disclosure,
the telephone number and address need not be repeated if referenced.
(a) Accounts using cards. You cannot use the enclosed card to
transfer money into or out of your account until we have validated it.
If you do not want to use the card, please (destroy it at once by
cutting it in half).
(b) Accounts using codes. You cannot use the enclosed code to
transfer money into or out of your account until we have validated it.
If you do not want to use the code, please (destroy this notice at
once).
(a) Liability disclosure. (Tell us AT ONCE if you believe your
(card) (code) has been lost or stolen. Telephoning is the best way of
keeping your possible losses down. You could lose all the money in your
account (plus your maximum overdraft line of credit). If you tell us
within 2 business days, you can lose no more the $50 if someone used
your (card) (code) without your permission.) (If you believe your (card)
(code) has been lost or stolen, and you tell us within 2 business days
after you learn of the loss or theft, you can lose no more than $50 if
someone used your (card) (code) without your permission.)
If you do NOT tell us within 2 business days after you learn of the
loss or theft of your (card) (code), and we can prove we could have
stopped someone from using your (card) (code) without your permission if
you had told us, you could lose as much as $500.
Also, if your statement shows transfers that you did not make, tell
us at once. If you do not tell us within 60 days after the statement
was mailed to you, you may not get back any money you lost after the 60
days if we can prove that we could have stopped someone from taking the
money if you had told us in time.
If a good reason (such as a long trip or a hospital stay) kept you
from telling us, we will extend the time periods.
(a) Address and telephone number. If you believe your (card) (code)
has been lost or stolen or that someone has transferred or may transfer
money from your account without your permission, call:
(Telephone number)
or write:
(Name of person or office to be notified)
(Address)
(a) Business day disclosure. Our business days are (Monday through
Friday) (Monday through Saturday) (any day including Saturdays and
Sundays). Holidays are (not) included.
(a) Account access. You may use your (card) (code) to (1) withdraw
cash from your (checking) (or) (savings) account.
(2) Make deposits to your (checking) (or) (savings) account.
(3) Transfer funds between your checking and savings accounts
whenever you request.
(4) Pay for purchases at places that have agreed to accept the (card)
(code).
(5) Pay bills directly (by telephone) from your (checking) (or)
(savings) account in the amounts and on the days you request.
Some of these services may not be available at all terminals.
(b) Limitations on frequency of transfers.
(1) You may make only (insert number, e.g., 3) cash withdrawals from
our terminals each (insert time period, e.g., week).
(2) You can use your telephone bill-payment service to pay (insert
number) bills each ((insert time period)) (telephone call).
(3) You can use our point-of-sale transfer service for (insert
number) transactions each (insert time period).
(4) For security reasons, there are (other) limits on the number of
transfers you can make using our (terminals) (telephone bill-payment
service) (point-of-sale transfer service).
(c) Limitations on dollar amounts of transfers.
(1) You may withdraw up to (insert dollar amount) from our terminals
each ((insert time period)) (time you use the (card) (code)).
(2) You may buy up to (insert dollar amount) worth of goods or
services each ((insert time period)) (time you use the (card) (code)) in
our point-of-sale transfer service.
(a) Per transfer charge. We will charge you (insert dollar amount)
for each transfer you make using our (automated teller machines)
(telephone bill-payment service) (point-of-sale transfer service).
(b) Fixed charge. We will charge you (insert dollar amount) each
(insert time period) for our (automated teller machine service)
(telephone bill-payment service) (point-of-sale transfer service).
(c) Average or minimum balance charge. We will only charge you for
using our (automated teller machines) (telephone bill-payment service)
(point-of-sale transfer service) if the (average) (minimum) balance in
your (checking account) (savings account) (accounts) falls below (insert
dollar amount). If it does, we will charge you (insert dollar amount)
each (transfer) ((insert time period)).
(a) Account information disclosure. We will disclose information to
third parties about your account or the transfers you make: (1) Where
it is necessary for completing transfers, or
(2) In order to verify the existence and condition of your account
for a third party, such as a credit bureau or merchant, or
(3) In order to comply with government agency or court orders, or
(4) If you give us your written permission.
(a) Terminal transfers. You can get a receipt at the time you make
any transfer to or from your account using one of our (automated teller
machines) (or) (point-of-sale terminals).
(b) Preauthorized credits. If you have arranged to have direct
deposits made to your account at least once every 60 days from the same
person or company,
(we will let you know if the deposit is (not) made.)
(the person or company making the deposit will tell you every time
they send us the money.)
(you can call us at (insert telephone number) to find out whether or
not the deposit has been made.)
(c) Periodic statements. You will get a (monthly) (quarterly)
account statement (unless there are no transfers in a particular month.
In any case you will get the statement at least quarterly).
(d) Passbook account where the only possible electronic fund
transfers are preauthorized credits. If you bring your passbook to us,
we will record any electronic deposits that were made to your account
since the last time you brought in your passbook.
(a) Right to stop payment and procedure for doing so. If you have
told us in advance to make regular payments out of your account, you can
stop any of these payments. Here's how:
Call us at (insert telephone number), or write us at (insert
address), in time for us to receive your request 3 business days or more
before the payment is scheduled to be made. If you call, we may also
require you to put your request in writing and get it to us within 14
days after you call. (We will charge you (insert amount) for each
stop-payment order you give.)
(b) Notice of varying amounts. If these regular payments may vary in
amount, (we) (the person you are going to pay) will tell you, 10 days
before each payment, when it will be made and how much it will be. (You
may choose instead to get this notice only when the payment would differ
by more than a certain amount from the previous payment, or when the
amount would fall outside certain limits that you set.)
(c) Liability for failure to stop payment of preauthorized transfer.
If you order us to stop one of these payments 3 business days or more
before the transfer is scheduled, and we do not do so, we will be liable
for your losses or damages.
(a) Liability for failure to make transfers. If we do not complete a
transfer to or from your account on time or in the correct amount
according to our agreement with you, we will be liable for your losses
or damages. However, there are some exceptions. We will not be liable,
for instance:
If, through no fault of ours, you do not have enough money in your
account to make the transfer.
If the transfer would go over the credit limit on your overdraft
line.
If the automated teller machine where you are making the transfer
does not have enough cash.
If the (terminal) (system) was not working properly and you knew
about the breakdown when you started the transfer.
If circumstances beyond our control (such as fire or flood) prevent
the transfer, despite reasonable precautions that we have taken.
There may be other exceptions stated in our agreement with you.
ALL QUESTIONS ABOUT TRANSACTIONS MADE WITH YOUR (NAME OF CARD) CARD
MUST BE DIRECTED TO US (NAME OF SERVICE PROVIDER), AND NOT TO THE BANK
OR OTHER FINANCIAL INSTITUTION WHERE YOU HAVE YOUR ACCOUNT. We are
responsible for the (name of service) service and for resolving any
errors in transactions made with your (name of card) card.
We will not send you a periodic statement listing transactions that
you make using your (name of card) card. The transactions will appear
only on the statement issued by your bank or other financial
institution. SAVE THE RECEIPTS YOU ARE GIVEN WHEN YOU USE YOUR (NAME OF
CARD) CARD, AND CHECK THEM AGAINST THE ACCOUNT STATEMENT YOU RECEIVE
FROM YOUR BANK OR OTHER FINANCIAL INSTITUTION. If you have any
questions about one of these transactions, call or write us at
(telephone number and address) (the telephone number and address
indicated below).
IF YOUR (NAME OF CARD) CARD IS LOST OR STOLEN, NOTIFY US AT ONCE by
calling or writing to us at (telephone number and address).
(44 FR 18480, Mar. 28, 1979, as amended at 44 FR 59473, Oct. 15,
1979; 45 FR 8267, Feb. 6, 1980; 52 FR 30912, Aug. 18, 1987)
12 CFR 205.14 Pt. 205, Supp. I
12 CFR 205.14 Supplement I to Part 205 -- Official Staff
Interpretations
March 23, 1981.
This is in response to your letter of . . ., in which you request
that the Board determine the extent to which the Michigan statute
governing electronic fund transfers is preempted by the Federal
Electronic Fund Transfer (EFT) Act and Regulation E. The following is
an official staff interpretation making such a determination, under
authority delegated by the Board on August 8, 1980 (45 FR 54011).
Preemption determinations have been made only with regard to those
sections of the Michigan statute for which a decision was specifically
requested. As section 919 of the Act provides, financial institutions
will incur no liability for a good faith failure to comply with a State
requirement that has been determined to be inconsistent and that is
preempted.
The following general analysis was used in making the determinations
about preemption. If the State law is the same as Federal law, no
preemption occurs. If the State law is different from Federal law, but
financial institutions can comply with both, State law is not preempted
and institutions must comply with both laws. If State law is different
from Federal law, and institutions may violate State law by complying
with Federal law, the laws are inconsistent within the meaning of
205.12 (a) and (b). In this case, if State law is more protective of
the consumer, State law is not preempted. Otherwise, Federal law
preempts State law and institutions need comply only with Federal law.
The preemption determinations were based on a section-by-section
analysis of the Michigan statute and Regulation E. After consideration
of the inconsistencies between each requirement of a given section and
the corresponding requirement in the Federal law, the section was viewed
as a whole. A comparison of groups of related sections was also made.
The statutory language, which refers to inconsistencies in
''provisions'' of Federal and State statutes, supports this type of
analysis. This approach also avoids the formation of the very complex
hybrid rules that would result from preemption of individual
requirements within each section.
You asked that several specific sections of the Michigan statute be
preempted. The final preemption determinations are as follows:
1. Section 13 of the Michigan statute regarding issuance of
unsolicited access devices is inconsistent with 205.5 of Regulation E,
but is more protective of the consumer and therefore is not preempted by
the Federal law. State law provisions contributing to this conclusion
include the requirements that an unsolicited access device be accepted
in writing by the consumer; that additional information be given to the
consumer after acceptance; and that the issuance of unsolicited access
devices be limited to a financial institution's own customers (whereas
Regulation E permits issuance to any consumer).
2. Section 5(4) of the State statute, which defines unauthorized use
of an access device, is inconsistent with 205.2(1) of Regulation E.
Since the State provisions covering liability for unauthorized use of an
access device have been preempted, the definition of unauthorized use is
also preempted. This treatment of related sections is necessary for a
meaningful result.
3. Section 14 of the State statute, which governs the consumer's
liability for unauthorized use of an account, is inconsistent with
205.6 of Regulation E. The State provision is not more protective of
the consumer and is preempted. The negligence standard contained in the
State statute could result in the consumer's increased exposure to
liability. Under the State statute, negligent consumers appear to be
liable for all unauthorized transfers, and non-negligent consumers may
be liable for such transfers if they fail to notify a financial
institution within 30 days of an unauthorized transfer. Regulation E
limits liability based on the promptness of a consumer's notice to the
financial institution, and imposes unlimited liability for subsequent
transfers after 60 days have elapsed, rather than after 30 days as the
State statute provides. Preemption of a negligence standard is also
supported by the EFT Act's legislative history, which shows that the
Congress rejected a negligence standard in the Federal law in favor of
liability based on promptness of notification.
4. Section 15 of the State statute governing error resolution
procedures is inconsistent with 205.11 of Regulation E. Section
205.12(b)(3) of Regulation E specifies that longer time periods for
error resolution provide a basis for a finding of inconsistency. The
State statute permits a possible 70 days for errors to be resolved,
while Regulation E permits a maximum of 45 days. Because the Michigan
law is not more protective of the consumer, it is preempted.
5. Sections 17 and 18 of the State statute, which cover receipt and
periodic statement requirements, are inconsistent with 205.9 of
Regulation E. Under 205.12(b)(4), inconsistency may exist if State law
provisions for receipts or periodic statements are different in content
from those required under Federal law. Such differences exist between
the requirements of the Michigan statute and the Federal provisions.
The State statute is not more protective of the consumer since it
provides for the consumer's paying the cost of getting a terminal
receipt if a machine cannot furnish one at the time of a transfer. The
State provisions governing receipts and periodic statements are
therefore preempted.
6. Section 19 of the State statute regarding initial disclosures is
inconsistent with 205.7 of Regulation E, but is not preempted. Since
the State provision requires initial disclosures to be given when an
access card is issued, rather than at any time before the first
electronic fund transfer is made, as Regulation E provides, the State
law is more protective of the consumer. Therefore, the Michigan
provision stands. Two items in the disclosure statement, however, must
conform to the Federal requirements. Because the corresponding
substantive sections of Federal law have preempted State law, the
liability disclosure and the error resolution disclosure must conform to
the Federal requirements.
The scope of the Michigan statute appears to be narrower than that of
the Federal EFT Act and seems to cover only terminal-based transfers.
To the extent that this is the case, the Federal provisions will
continue to govern all electronic fund transfers that are outside the
scope of the State statute.
This is an official staff interpretation of Regulation E, issued
pursuant to 205.13(b)(2) of Regulation E. It is limited to the facts
and issues discussed above.
Sincerely,
Janet Hart,
Director.
(46 FR 19217, Mar. 30, 1981)
12 CFR 205.14 Pt. 205, Supp. II
12 CFR 205.14 Supplement II to Part 205 -- Official Staff
Interpretations
The following is an official staff interpretation of Regulation E (12
CFR part 205) issued pursuant to 205.13(b). Sectional references are to
the regulation or the Electronic Fund Transfer Act (15 U.S.C. 1693 et
seq.).
2-1 Q: Access devices. What are some examples of access devices?
A: Access devices include debit cards, personal identification
numbers (PINs), telephone transfer and telephone bill payment codes, and
other means that may be used by a consumer to initiate an electronic
fund transfer. The term does not include magnetic tapes or other
devices used internally by a financial institution to initiate
electronic fund transfers. ( 205.2(a)(1))
2-2 Q: Profit-sharing and pension accounts. Are profit-sharing and
pension accounts covered by the definition of account?
A: When such accounts are established under a trust agreement, as is
generally the case, they are exempt from coverage by 205.3(f). (
205.2(b))
2-3 Q: Escrow accounts. Escrow accounts are frequently established
to assure payment of items such as real estate taxes, insurance
premiums, and completion of repairs or improvements; are they
considered asset accounts?
A: No. These funds are not consumer asset accounts for purposes of
the regulation. In an arrangement of this type, the funds are not
solely in the consumer's control; control is shared with a financial
institution, escrow agent, or other party. ( 205.2(b))
2-4 Q: U.S. Savings Bond accounts. Is an account that is
established to accumulate funds for the purchase of U.S. Savings Bonds
subject to the regulation?
A: No. Such accounts generally are not established by or in the
control of the consumer, who has merely authorized the purchase of bonds
in a given denomination and has set the periodic amount to be withheld
or transferred for this purpose. ( 205.2(b))
2-5 Q: Christmas or vacation club accounts. Are Christmas club or
vacation club accounts subject to the regulation?
A: Christmas club and vacation club accounts are consumer asset
accounts. In a great many cases, however, they are not subject to the
regulation because all electronic transfers to and from the account have
been authorized in advance by the consumer and are to or from another
account of the consumer at the same institution. ( 205.2 (b) and (g),
205.3(d))
2-5.5 Q: Retail repurchase agreements. A retail repurchase
agreement (repo) is essentially a loan made to a financial institution
by a consumer that is collateralized by government or government-insured
securities. Is a repo an account for purposes of Regulation E?
A: While repos may not be deposits for purposes of some other
banking regulations, repos are accounts as defined in Regulation E. (
205.2(b))
2-6 Q: Business day -- substantially all business functions. In the
definition of business day, what does ''substantially all business
functions'' include?
A: The phrase includes both the public and the back-office
operations of the institution. For example, if the offices of an
institution are open on Saturdays for handling some consumer
transactions (such as deposits, withdrawals, and other teller
transactions), but not for performing internal functions (such as
investigating account errors), then Saturday is not a business day for
that institution. In this case, Saturday does not count toward the
various business-day standards set by the regulation for reporting lost
or stolen access devices, resolving errors, etc. ( 205.2(d))
2-7 Q: Business day -- telephone line. If an institution makes a
telephone line available on Sundays for reporting the loss or theft of
an access device, but performs no other business functions, is Sunday a
business day?
A: No. Mere availability of a telephone line does not satisfy the
''substantially all business functions'' standard. ( 205.2(d))
2-8 Q: Business day -- duration. Does business day refer only to
the hours during which the financial institution carries on
substantially all business functions?
A: For purposes of the various business-day standards set by the
regulation, a business day includes the entire 24-hour period ending at
midnight. This means that a notice satisfies the time limits even if
given outside business hours. The regulation does not, however, require
that telephone lines be available on a 24-hour basis. ( 205.2(d))
2-9 Q: Business day -- short hours. If a financial institution
engages in substantially all business functions until 12 noon on
Saturdays instead of its normal 3 p.m. closing, are Saturdays business
days?
A: The financial institution may determine, at its election, whether
an abbreviated day is a business day. The regulation does not specify
the number of hours that an institution must be open in order to have a
business day. ( 205.2(d))
2-10 Q: Fund transfer -- payments in currency. The term electronic
fund transfer excludes payments made by check, draft, or similar paper
instrument at an electronic terminal. What about payments made in
currency at an electronic terminal?
A: Payments in currency are not electronic fund transfers because
they do not debit or credit a consumer's account. ( 205.2(g))
2-11 Q: Fund transfer -- deposits of currency, checks. Does the
term electronic fund transfer include deposits of currency and checks at
an automated teller machine (ATM)?
A: A deposit made at an ATM or other electronic terminal is an
electronic fund transfer for purposes of the regulation if there is a
specific agreement between the financial institution and the consumer
for the provision of EFT services to or from the particular account to
which the deposit is made. ( 205.2(g); see 205.9(b)(1)(iv), footnote
4a)
2-12 Q: Fund transfer -- payroll allotments to repay credit. Does
the term electronic fund transfer include preauthorized payroll
allotments that are made directly to a creditor to repay a credit
extension?
A: No, because these payments to a creditor do not debit or credit a
consumer asset account. ( 205.2(g))
2-12.5 Q: Fund transfer -- withholding of income tax on interest. A
financial institution electronically debits a portion of the interest on
a consumer account for transmittal to the Internal Revenue Service, to
comply with withholding requirements. Is the debit subject to the
regulation?
A: No. ( 205.2(g))
2-12.6 Q: Fund transfer -- electronic payment of government
benefits. A recipient of government benefits, such as public assistance
or food stamps, receives the benefits from an automated teller machine
or a staffed electronic terminal. For example, the recipient presents
an identification card to a clerk, the card is run through an electronic
terminal, the recipient's identity is verified by some means (such as a
photograph, personal identification number, or signature), and the
benefits are given in the form of cash, food stamps, or food items. The
benefits are disbursed from an account of the governmental entity paying
the benefits, not an account established by or in the control of the
consumer. Are these transactions subject to Regulation E?
A: No, since there is no debit or credit to a consumer asset
account. (See questions 2-4 and 2-12.) ( 205.2(b) and (g))
2-13 Q: Fund transfer -- withdrawal at another institution. A
financial institution issues an identification card to its customer for
use at other financial institutions. To obtain funds, the consumer
presents the card and signs a withdrawal authorization at the remote
financial institution, which obtains approval by telephone from the
account-holding institution before disbursing the funds to the consumer.
The consumer's account is memo posted for the designated amount, but
debiting of the consumer's account does not occur until the
account-holding institution receives the signed withdrawal
authorization. Is this an electronic fund transfer?
A: No, because the fund transfer is initiated by the consumer by
paper means. ( 205.2(g))
2-14 Q: Fund transfer -- check truncation. Are check truncation
systems covered?
A: No, because the fund transfer is initiated by check, draft, or
similar paper instrument. ( 205.2(g))
2-15 Q: Fund transfer -- payee information, non-electronic form. If
the payor provides the payee information (names, account numbers, and
amount of individual credits) to the financial institution holding the
payees' accounts by means of a paper listing and the institution then
prepares MICR-encoded deposit slips, are these transfers subject to the
regulation?
A: These transfers are not electronic fund transfers for purposes of
the regulation. ( 205.2(g))
2-16 Q: Fund transfer -- composite checks. An employer or other
payor delivers a composite check made payable to a financial institution
for crediting to consumers' accounts at the institution. The payee
information is contained on magnetic tape. Are these transfers subject
to the regulation?
A: No, these transfers are not electronic fund transfers. (
205.2(g)).
2-17 Q: Fund transfer -- ACH. If the financial institution in
question 2-16 holds only some of the consumers' accounts, and forwards
the remaining credits to other institutions via an automated clearing
house (ACH), are the subsequent transfers subject to the regulation?
A: Yes. The transfers made via the ACH are electronic fund transfers
and are covered. ( 205.2(g))
2-18 Q: Fund transfer -- Social Security deposits, correspondent
bank. Under the U.S. Treasury's direct deposit program, Social Security
benefits are sent via the ACH to the consumer's financial institution.
Some institutions receive fund transfers through a correspondent bank,
which sends a computer print-out listing the payees and the payment
amounts, together with a composite check payable to the financial
institution. Are these transfers subject to the regulation?
A: Yes. Transfers made via the ACH are electronic fund transfers. (
205.2(g))
Note: The Board is considering a regulatory amendment under its
section 904(c) authority that, if adopted, would change this answer in
the case of some institutions. See the Supplementary Information
portion of this Federal Register notice. (See 46 FR 46876, Sept. 23,
1981)
2-19 Q: Fund transfer -- preauthorized debits by magnetic
tape/composite check. A company obtains authorization from consumers to
debit their accounts periodically. The financial institution debits the
consumers' accounts in accordance with billing information contained on
magnetic tape provided by the payee, and sends the payee a composite
check. Are these transfers subject to the regulation?
A: Yes, they are electronic fund transfers. ( 205.2(g))
2-20 Q: Fund transfer -- preauthorized debits by paper drafts, ACH.
A consumer authorizes a company to debit an account automatically for a
payment. The company presents a paper draft that ultimately is debited
against the consumer's account at the financial institution. Is the
transfer subject to the regulation? What if the transfer is instead
initiated through an ACH?
A: A transfer initiated by a draft drawn against the consumer's
account is not an electronic fund transfer. Transfers via the ACH, on
the other hand, are subject to the regulation. ( 205.2(g))
2-21 Q: Fund transfer -- preauthorized debits by individual checks.
A consumer signs an agreement authorizing the financial institution to
make recurring payments to another party from the consumer's account, or
to make recurring interest payments to the consumer. The institution
periodically generates an individual check to the payee by computer.
Are these transfers subject to the regulation?
A: No. The transfers are initiated by check (even though the check
is computer-generated) and are exempt. ( 205.2(g))
2-21.5 Q: Fund transfer -- debit card transaction. A consumer uses
a debit card to purchase goods or services or to obtain cash. The card
is used to generate a sales slip and no electronic terminal is involved.
The consumer's asset account is later debited for the amount of the
transaction. Is this transfer subject to the regulation?
A: Yes. The definition of ''electronic fund transfer'' covers
transfers resulting from debit card transactions whether or not an
electronic terminal is involved at the time of the transaction. (See
question 2-24.) ( 205.2(g))
2-22 Q: Electronic terminal -- telephone bill payment. If a
consumer uses a pay-by-phone plan to initiate a payment, must the
financial institution provide a terminal receipt?
A: No. A telephone is not an electronic terminal for purposes of the
receipt requirement, although the transfer itself is subject to the
regulation. ( 205.2(h))
2-23 Q: Home terminals. Some financial institutions offer home
banking services to their customers. The service will typically involve
the use, for example, of a home computer terminal or a television set
that is linked to the financial institution's computer by means of
telephone or cable-television lines. Does the in-home equipment used by
the consumer to initiate fund transfers qualify as an electronic
terminal, and are the transfers subject to the terminal receipt
requirement?
A: Any transfer, to or from the consumer's asset account, that is
initiated by means of the home banking equipment is an electronic fund
transfer and is subject to the regulation. However, although not
expressly excluded from the definition of electronic terminal, the home
banking equipment used by the consumer for initiating fund transfers is
analogous to a telephone in function. The home banking terminal is
therefore similarly excepted from the electronic terminal definition and
is not subject to the terminal receipt requirement. ( 205.2(h))
2-24 Q: Point-of-sale terminals. Does the regulation cover POS
transactions in which the consumer presents an access device such as a
debit card, and does the terminal receipt requirement apply?
A: The regulation applies to all transfers resulting from debit card
transactions at point of sale whether or not an electronic terminal is
involved. However, if there is no electronic terminal, a terminal
receipt is not required and the periodic statement need not disclose
terminal location. Point-of-sale terminals are electronic terminals for
purposes of the regulation if they capture data electronically, for
debiting or crediting to the consumer's asset account, using the
consumer's access device -- for example, when the consumer's personal
identification number is required, in part, to activate the terminal.
(See question 2-21.5. Also see 205.11(c)(4) regarding the extension of
certain error resolution deadlines.) ( 205.2(h) and 205.9(a))
2-25 Q: Teller-operated terminals. Does electronic terminal include
a computer terminal operated by a teller or other employee of a
financial institution, for purposes of the terminal receipt requirement?
A: Electronic terminal does not generally include computer equipment
operated by a financial institution's employees or used internally by
the financial institution to process transfers.
However, transfers initiated at such terminals by means of the
consumer's access device (using the consumer's personal identification
number, for example) are electronic fund transfers, and are subject to
other requirements of the regulation. If the access device is used only
for identification purposes or for determining the account balance, on
the other hand, the transfers are not electronic fund transfers for
purposes of the regulation. ( 205.2(h))
2-25.5 Q: Card-activated telephones. Does the regulation cover
transfers to pay for calls made from a telephone that is activated when
the consumer inserts a card into a magnetic strip or card reader, and
does the terminal receipt requirement apply?
A: The regulation applies to transfers initiated electronically. As
a result the electronic transfers from a consumer's account to pay for
telephone calls are covered by the regulation as electronic fund
transfers. A receipt is not required provided the only transfer of
funds occurring as a result of the use of the card at the combination
telephone/reader is to pay for the charges incurred by use of the
telephone. ( 205.2(h))
2-26 Q: Unauthorized transfer by institution's employee. A
financial institution's employee fraudulently takes money from a
consumer's account by electronic means. Is the consumer liable for
these transfers?
A: No. Unauthorized electronic fund transfers exclude any transfer
initiated by the financial institution or its employees. The
regulation's liability provisions do not apply and the consumer has no
liability for such transfers. ( 205.2(1), 205.6)
2-27 Q: Unauthorized transfers -- access device obtained from the
consumer. A consumer is robbed or induced by fraud to furnish another
person with an access device. Are transfers initiated at an ATM by the
person who obtained the access device from the consumer ''unauthorized
electronic fund transfers''?
A: The transfers are unauthorized for purposes of Regulation E.
Although the definition of ''unauthorized electronic fund transfer''
excludes any transfer initiated by a person ''who was furnished with the
access device to the consumer's account by the consumer,'' it assumes
that the consumer has authorized the person to make transfers with the
access device. This exclusion does not apply when the access device is
''furnished'' as the result of a robbery, or as the result of a fraud on
the consumer in which the consumer does not authorize the use of the
access device to make transfers. But if the consumer furnishes an
access device and grants actual authority to make transfers to another
person (a family member or coworker, for example) who then exceeds that
authority, the consumer is liable for the transfers unless the financial
institution has been notified that transfers by that person are no
longer authorized. ( 205.2(l))
2-28 Q: Unauthorized transfers -- forced initiation. A consumer is
forced by a robber (at gunpoint, for example) to withdraw cash at an
ATM. Do the liability limits for unauthorized transfers apply?
A. Yes. The transfer is unauthorized for purposes of Regulation E.
Under these circumstances, the actions of the robber are tantamount to
use of a stolen access device. ( 205.2(l) and 205.6)
3-1 Q: Check guarantee/authorization -- memo posting. A consumer's
account is memo posted electronically at the time a payment to a third
party is guaranteed or authorized under a check guarantee or
authorization service, but the financial institution does not pay out
the funds until the check is received. Is the service exempt?
A: Yes. Although a temporary hold is placed on the funds in the
consumer's account, the guarantee does not result in a direct debit to
the account. Debiting occurs when the check or draft is presented for
collection. ( 205.3(a))
3-2 Q: Wire transfer -- instructions on magnetic tape. If a
transfer of funds to a financial institution is sent by Fedwire or a
similar network, and the instructions for crediting individual
consumers' accounts are transmitted on magnetic tape, are the transfers
exempt?
A: Yes. A Fedwire or similar transfer of funds is exempt. (
205.3(b))
3-3 Q: Wire transfer -- followed by ACH transfers. A company sends
funds by Fedwire or a similar network from one financial institution to
another, and transfers via ACH are then made from the second institution
to the accounts of company employees at still other institutions. Are
the subsequent transfers exempt?
A: No. Although the Fedwire transfer is exempt, the ACH transfers to
employees' accounts are subject to the regulation. ( 205.3(b),
205.2(g))
3-3.5 Q: Securities exemption -- asset management accounts. Some
consumer financial services include both an electronic fund transfer
service and the purchase and sale of securities. An example is a
program involving a debit card issued by a bank or other card issuer
which the consumer uses to purchase goods or services, and a money
market mutual fund held by a broker. Debits are processed by the card
issuer and transmitted to the broker for payment from the money market
mutual fund. Are such transfers exempt from coverage under the
securities exemption?
A: No. The exemption applies only to transfers whose ''primary
purpose'' is the purchase or sale of securities -- for example, a
telephone order to a stockbroker to buy or sell securities. It does not
apply to transfers resulting from use of the card for the purchase of
goods or services or to obtain cash. (A transaction involving the
purchase or sale of securities also remains subject to the Board's
margin requirements under Regulation T (12 CFR part 220) and other
applicable securities regulations.) ( 205.3(c))
3-3.6 Q: Payment of dividends or interest on securities. A payment
of interest or dividends on securities is made by electronic fund
transfer into a consumer's account. The payment may be made, for
example, by a discount brokerage firm into an account at an affiliated
depository institution or, for government securities, by a Federal
Reserve Bank into the consumer's account at a depository institution.
Is the transfer covered by Regulation E?
A: Yes. The securities exemption does not apply since there is no
purchase or sale of securities. ( 205.3(c))
3-4 Q: Telephone transfer plans -- applicability of
intra-institutional exemption. A consumer calls a financial
institution, under a telephone transfer plan, to request a transfer of
funds from a savings to a checking account. Does the exemption for
automatic intra-institutional transfers apply?
A: No, because even though the transfer is between the consumer's
accounts at the same institution, it occurs under a telephone transfer
plan. (See question 3-17.) ( 205.3(d))
3-5 Q: Compulsory use -- preauthorized loan payments. Preauthorized
loan payments to the institution in which the consumer holds an account
are exempt from the act and regulation generally, but are subject to the
statutory prohibition against requiring repayment by means of
preauthorized electronic fund transfers. If an institution required
automatic payment by electronic means on credit agreements made before
May 10, 1980, must the institution now offer those consumers an
alternative means of repayment?
A: No, it is not necessary to do so. However, if a consumer who
entered into such an agreement now asks to repay by other than
electronic means, the financial institution should honor the request. (
205.3(d)(3), section 913)
Q 3-6: Compulsory use -- salary payments. Preauthorized transfers
from a financial institution to a consumer's account at the same
institution are exempt from the act and regulation generally but are
subject to the statutory prohibition against requiring an employee (as a
condition of employment) to receive payroll deposits by electronic means
at a particular institution. Does this prohibition apply to a financial
institution as an employer?
A: Yes. The prohibition applies to all employers, including
financial institutions. To comply with the law, an employer could, for
example, give its employees a choice of the method of receiving payment
-- letting the employee choose between having pay deposited at a
particular institution, or receiving payment by check or cash. Or, an
employer could mandate payment by electronic means, but allow the
employee to choose the institution to receive direct deposits.
As in the case of preauthorized loan payments, the compulsory-use
prohibition does not require an employer to offer alternative means of
payment to employees who agreed to electronic deposits at a particular
financial institution before May 10, 1980. However, if an employee asks
to terminate this arrangement, the employer should honor the request. (
205.3(d)(2), section 913)
3-7 Q: Compulsory use -- payments from pledged savings. Under
certain types of graduated payment mortgages, a pledged savings account
is used to supplement the monthly payments made by the borrower during
an initial term -- for example, in the first five years of the loan.
The lender debits the pledged account automatically for the prescribed
sum each month. That automatic transfer of funds is an integral feature
of this type of alternative mortgage. Does the prohibition against
compulsory use of electronic fund transfers bar this type of program?
A: No. The legislative history of the prohibition against compulsory
use makes clear that it is permissible to offer a reduced annual
percentage rate or some other cost-related incentive for an automatic
repayment feature. The special terms of the pledged-account mortgage
appear to be such an incentive. ( 205.3(d)(3), section 913)
3-7.5 Q: Compulsory use -- biweekly loan programs. A lender offers
consumers the option of a mortgage or other loan involving biweekly
payments. Use of this option results in a somewhat lower total finance
charge than a plan involving monthly payments. An integral part of this
option is a requirement that consumers make the biweekly payments by
preauthorized electronic fund transfers. Does this requirement violate
the act's prohibition against compulsory use of electronic fund
transfers?
A: No, because the biweekly repayment plan is optional and because
the lower finance charge resulting from the more frequent payments
offers a cost-related incentive. ( 205.3(d)(3), section 913)
3.8 Q: Automatic transfers -- to joint account holder; to family
member. A consumer authorizes a financial institution to make periodic
transfers from the consumer's account to an account held jointly with
another consumer at the same institution. Are these transfers exempt?
What about transfers to a family member's account?
A: Automatic transfers between a consumer's accounts within a
financial institution are exempt; there need not be complete identity
of account holders on the two accounts. Intra-family transfers that
occur automatically within a financial institution are also exempt. (
205.3(d) (1) and (4))
3-9 Q: Automatic transfers -- stop-payment charges/other items. A
financial institution electronically debits or credits consumer accounts
for stop-payment charges, NSF charges, overdraft charges, provisional
recredits, error adjustments, and similar items. Are these transfers
exempt?
A: Yes. These are intra-institutional transfers that are initiated
by the financial institution automatically, on the occurrence of certain
events. ( 205.3(d))
3-10 Q: Automatic transfers -- group life insurance. A financial
institution offers group life insurance coverage to its account holders.
The insurance can be obtained only through the financial institution,
and the premiums can be paid only by means of an aggregate payment from
the financial institution. Consumers' accounts are debited for their
share of the premiums, and the financial institution makes payment on
behalf of participating account holders for the total premium due under
the group policy. Are these transfers exempt?
A: Yes. The debit to an individual consumer's account is an
automatic transfer to an account of the financial institution. Because
the group insurance can be obtained only through the institution, the
transfer can be regarded as a bona fide intra-institutional transfer,
even though the funds are ultimately transferred to a third party. (
205.3(d)(3))
3-11 Q: Automatic transfers -- check order charges. Check order
charges are electronically debited to an account at the consumer's
request. Checks can only be obtained and paid for through the financial
institution. Are these transfers exempt?
A: Yes. ( 205.3(d)(3))
3-12 Q: Automatic transfers -- paired institutions in Rhode Island.
Rhode Island has a banking system that sanctions the pairing of a thrift
institution with a commercial bank. The paired institutions frequently
share quarters and have common tellers and teller stations. Customers
receive a unified statement that distinguishes the two accounts by
number and type, but not by institution. Are transfers that occur
within the thrift-commercial pair intra-institutional transfers for
purposes of the exemption for automatic transfers?
A: Yes. Under the unique circumstances that exist in Rhode Island,
transfers within the paired institutions qualify for intra-institutional
status. ( 205.3(d))
3.13 Q: Automatic transfers -- affiliated institutions. Does a
transfer to or from an account of the consumer at a subsidiary
institution (or within the same holding company) qualify as an
intra-institutional transfer?
A: No. ( 205.3(d))
3.14 Q: Telephone transfer plan -- existence of plan. A financial
institution transfers funds in response to a consumer's telephone
request. Is the transfer subject to the regulation?
A: The transfer is an electronic fund transfer for purposes of the
regulation if it occurs under a written plan or agreement between the
consumer and the financial institution. In the absence of a written
plan or agreement, telephone transfers that are made as an accommodation
to the consumer are not covered. ( 205.3(e))
3-15 Q: Telephone transfers -- existence of plan; signature card.
A signature card signed by the consumer when the account was established
contains a clause authorizing the financial institution to honor the
consumer's telephone request for fund transfers. It is basically a
hold-harmless agreement for the institution's behalf in the event the
consumer requests and the institution agrees, at the time of the
request, to make the transfer. Does the signature card constitute a
written agreement?
A: A hold-harmless authorization on a signature card does not, by
itself, constitute a written plan or agreement for purposes of the
regulation. ( 205.3(e))
3-16 Q: Telephone transfers -- existence of plan; limits for
Regulation D purposes. In order to comply with Regulation D (Reserve
Requirements of Depository Institutions), an institution prints a legend
on a signature card or periodic statement or in a passbook, limiting the
number of telephone transfers that the consumer can make from a savings
account. Is this deemed to constitute a written plan?
A: No. The legend serves as a limitation on the account and does
not, by itself, constitute a written plan or agreement. ( 205.3(e))
3-17 Q: Telephone transfer plan -- manual completion. A consumer
signs a telephone transfer agreement authorizing the financial
institution to transfer funds between accounts within the institution.
To inititate a transfer, the consumer telephones an employee of the
institution, who then completes the transfer manually by means of debit
memos, deposit slips, etc. Is the transfer exempt?
A: No. The transfer is inititated by telephone under a telephone
transfer plan, and is therefore covered. The fact that the transfer is
completed manually does not change this result. (See question 3-4.) (
205.3(e), 205.2(g))
3-18 Q: Telephone transfer plan -- individual transfers. A
financial institution's telephone transfer plan requires the consumer to
make a separate request for each transfer from the consumer's account.
That is, the consumer cannot authorize successive periodic payments to
the designated payee by means of a single telephone call. Is this plan
exempt?
A: No. The plan is covered. Even though the consumer cannot
authorize recurring payments by means of one telephone request, there is
an agreement that permits the consumer to inititate transfers from time
to time. ( 205.3(e))
3-19 Q: Telephone transfer plans -- frequency of use. Many
consumers who sign up for a telephone transfer plan use it only
occasionally, others not at all. Are transfers under the plan exempt,
since the institution does not know when (or whether) a telephone
transfer will be made?
A: No. Transfers under the plan are not exempt, because any transfer
that does occur will be occurring under the prearranged plan. (
205.3(e))
3-19.5 Q: Telephone transfers -- money market deposit accounts,
retail repurchase agreements. Are telephone transfers between a money
market deposit account (or a retail repo account) and another account
within the institution subject to the regulation?
A: The answer depends on whether the transfers are made pursuant to
a written plan or agreement in which periodic or recurring transfers are
contemplated. An agreement that merely permits the consumer to
telephone institutions for the rollover of all or a portion of the funds
at maturity does not meet this test. ( 205.3(e))
3-20 Q: Trust accounts -- IRAs under custodial agreements. A
financial institution holds certain Individual Retirement Accounts
(IRAs) under custodial agreements. The custodial agreement is identical
to a trust agreement, except that the parties are identified as
depositor and custodian, rather than as grantor and trustee. Under the
Internal Revenue Code, these accounts qualify as trusts so long as they
otherwise meet the requirements for an IRA. Do these custodial accounts
qualify for the regulation's exemption for trust accounts?
A: Yes. So long as the custodial agreements are the functional
equivalent of trust agreements, they are exempt. ( 205.3(f))
3-21 Q: Trust accounts -- bona fide trust agreement. What is a bona
fide trust agreement?
A: The term is not defined by the Act or regulation. Financial
institutions must therefore look to State or other law. The Board and
the staff will not make determinations in individual cases. ( 205.3(f))
3-22 Q: Small institution exemption -- grace period. If the assets
of a previously exempt financial institution exceed $25 million on
December 31, when must the institution begin complying with the
regulation?
A: Such an institution would have a one-year grace period. For
example, if the assets exceed $25 million on December 31, 1983,
compliance is not required until January 1, 1985. On the other hand, a
previously covered institution whose assets fall below $25 million on
December 31, 1983, may take advantage of the exemption beginning on
January 1, 1984. ( 205.3(g))
4-1 Q: Shared system -- scope of disclosures. In a shared system,
must an institution's initial disclosures include EFT charges and
frequency or dollar limitations imposed by other institutions in the
system, to the extent that the institution knows what these are?
A: No, because this information is not within the purview of the
institution's relationship with its customer. ( 205.4(a), 205.7(a))
4-2 Q: Shared system -- disclosures on behalf of another
institution. If institution B is making disclosures on behalf of
institution A, which holds a consumer's account, may B limit the
disclosures to those within its own knowledge?
A: No. The responsibility for making disclosures rests with the
account-holding institution. The disclosures B makes for A (if A's
responsibility is to be met) must include information within A's
knowledge and the purview of A's relationship with A's customers. For
example, B would disclose any electronic fund transfer charges imposed
by A. ( 205.4(a))
4-3 Q: Multiple accounts and account holders. If X and Y open a
joint checking account and a joint savings account at institution A, how
many disclosure statements must A provide?
A: One, provided it covers terms and conditions on both accounts.
The disclosure can be given to either X or Y. ( 205.4(b))
5-1 Q: Renewal or substitution -- one-for-one rule. When an
institution issues a renewal or substitute device, may it send more than
one in place of the existing device?
A: No. For example, only one new card and personal identification
number (PIN) may be issued to replace a card and PIN previously issued.
( 205.5(a)(2))
5-1.5 Q: Issuance -- addition of new accounts. A consumer has been
issued an access device for accessing an asset account. The
account-holding institution wants to make an additional account
accessible to the consumer by means of the same access device. May the
institution do so without a request by the consumer?
A: No. Making an additional account accessible through an existing
access device is equivalent to issuing an access device for that
account, and is subject to the unsolicited issuance provisions.
(Additional disclosures may be required in some circumstances. See
question 7-5.5.) ( 205.5(a)(1))
5-2 Q: Renewal or substitution -- change in services. Must a
renewal or substitute access device permit exactly the same types of
electronic fund transfers as the original?
A: No. The renewal or substitute device may permit the same,
additional, or fewer types. If a new type is added, new disclosures may
be required. (See question 7-6.) If fewer types of transfers are
possible, a change-in-terms notice is required. ( 205.5(a)(2),
205.7(a), 205.8(a))
5-3 Q: Renewal or substitution -- successor institution. Must a
successor financial institution be an entity that replaced the original
financial institution (for example, through a corporate merger or
acquisition)?
A: No. A successor could also include, for example, a party that
acquires accounts or takes over the operation of an EFT system. (
205.5(a)(2))
5-4 Q: Renewal or substitution -- pre-2/8/79 device. If an
institution issued an access device on an unsolicited basis before
February 8, 1979 (the effective date of the act's restrictions on
unsolicited issuance), may the institution now issue a validated renewal
or substitute device? Or may it do so only after receiving a request
from the consumer?
A: If an institution does not know whether the unsolicited device
became accepted, it may issue a validated renewal or substitute device
for a pre-2/8/79 device, provided certain disclosures accompany the
renewal or substitute device. The renewal or substitute device does not
become accepted'' -- and the consumer can incur no liability for
unauthorized use -- until the consumer uses or signs it, or authorizes
someone else to use it. ( 205.5(a)(3))
5-4.5 Q: Unsolicited issuance -- PINs. May a financial institution
issue, without a specific request, validated personal identification
numbers (PINs), thus allowing consumers to use their existing debit
cards at automated teller machines or at merchant locations with POS
terminals that require PINs?
A: Yes. A validated PIN may be issued to an existing debit card
holder without a specific request provided the PIN cannot be used alone
to make an electronic fund transfer. The institution may impose no
liability on the consumer for unauthorized transfers involving use of
the PIN, however, until this new combination of debit card and PIN
becomes an ''accepted access device'' under the regulation. The
card-PIN combination can be treated as an accepted access device, for
example, if the card and PIN have been used and the consumer does not
dispute having used them. ( 205.5(a) and 205.2(a))
5-5 Q: Unsolicited issuance -- functions of PIN. If an institution
issues a personal identification number at the consumer's request, could
this issuance constitute both (1) a way of validating the debit card and
(2) the means to identify the consumer (required as a condition of
imposing liability for unauthorized transfers)?
A: Yes. ( 205.5(b), 205.6(a)(2))
5-6 Q: Unsolicited issuance -- example of non-complying method. An
institution issues an unsolicited debit card and PIN to a consumer, thus
enabling the consumer to initiate electronic fund transfers. The
institution instructs the consumer not to use the card and PIN until the
consumer has come to an office of the institution for verification of
the consumer's identity. Does this procedure comply with the
regulation?
A: No. In this case, the consumer could in fact use the card and PIN
to initiate transfers (even though instructed not to do so); thus, the
institution has not met the requirement that an unsolicited access
device be unvalidated when issued. ( 205.5(b)(1))
5-7 Q: Unsolicited issuance -- example of complying method. Same
facts as in question 5-6, except that the institution's ATM system is
initially programmed not to accept the consumer's card and PIN. After
the consumer has requested validation of the card, the institution
reprograms its computer so that the card and PIN now work in the system.
Does this validation procedure comply with the regulation?
A: Yes, provided the institution verifies the consumer's identity by
some reasonable means before reprogramming. ( 205.5(b)(4))
5-8 Q: Unsolicited issuance -- verification of identity. Must an
institution verify identity by one of the methods listed in the
regulation?
A: No, they are merely examples. Any reasonable means of verifying
identity will comply. Even if an institution uses reasonable means,
however, if it fails to verify identity correctly -- so that an imposter
succeeds in having a device validated -- the consumer is not liable for
any unauthorized transfers from the consumer's account. ( 205.5(b)(4),
205.2(a)(2), 205.6(a)(1))
5-9 Q: Unsolicited issuance -- access device with overdraft feature.
The regulation permits the unsolicited issuance of an access device.
Under this provision, may an institution issue a combined credit
card/access device to a consumer, without a request or application for
the card?
A: Yes, provided that (1) the only credit feature is a preexisting
overdraft credit line attached to the consumer asset account (or a
similar line of credit that maintains a specified minimum balance in the
account), and (2) the institution complies with the regulation's
procedures for an unsolicited issuance. ( 205.5(c)(1)(iii))
5-10 Q: Unsolicited issuance -- other combined credit card/access
devices. Does the answer to question 5-9 mean that an institution is
prohibited from issuing, on an unsolicited basis, any other type of
combined credit card/access device?
A: No. Section 226.12(a)(1) of Regulation Z (Truth in Lending)
permits creditors to issue, on an unsolicited basis, a card that may
become a credit card provided that (1) the card at the time of issuance
has a substantive purpose other than obtaining credit and cannot be used
as a credit card and (2) any credit privilege that subsequently attaches
is attached only upon the consumer's request. (The substantive purpose
could be to initiate electronic fund transfers.) The rules of Regulation
E on unsolicited issuance of access devices will, of course, continue to
apply. ( 205.5(c)(2)(iii) and (b))
6-1 Q: Unauthorized transfers -- access device not involved. If
unauthorized transfers do not involve the use of an access device such
as a debit card, may any liability be imposed on the consumer?
A: If the consumer fails to report an unauthorized electronic fund
transfer within 60 days of transmittal of the periodic statement
reflecting the transfer, the consumer could be subject to liability.
(See questions 2-26 and 7-7.) ( 205.6(a) and (b))
6-2 Q: Failure to disclose business days. If a financial
institution meets other conditions (including disclosure of liability)
but fails to disclose its business days, can it hold the consumer liable
for uanuthorized transfers involving a lost or stolen access device?
A: No, unless applicable state law or an agreement between the
consumer and the financial institution sets a liability limit of $50 or
less. ( 205.6(a)(3)(iii))
6-3 Q: Means of identification -- multiple users. If more than one
access device is issued to access a particular consumer account, must
the financial institution provide a means to identify each separate user
in order to impose liability for unauthorized transfers?
A: No. The financial institution may provide means to identify the
separate ers, but is not required to do so. ( 205.6(a)(2))
6-4 Q: Means of identification -- use of PIN. Does the use of a
personal identification number (PIN) or other alphabetical or numerical
code satisfy the requirement of electronic or mechanical confirmation
for identifying the consumer to whom an access device was issued?
A: Yes. ( 205.6(a)(2))
6-5 Q: Application of liability provisions -- examples. What are
some examples of when and how the following would apply: (1) The $500
liability limit provision, (2) both the $500 limit and the unlimited
liability provisions, and (3) only the $50/unlimited liability
provisions? ( 205.6(b)(1), (2) and (3))
A: Situation 1 -- $500 Limit Applies
June 1 -- C's card is stolen
June 2 -- $100 unauthorized transfer
June 3 -- C learns of theft
June 4 -- $25 unauthorized transfer
June 5 -- Close of 2 business days
June 7-8 -- $600 in unauthorized transfers that could have been
prevented had notice been given by June 5
June 9 -- C notifies bank
Computation of C's liability:
Paragraph (b)(1) will apply to determine C's liability for any
unauthorized transfers that occur before notice is given.
Situation 2 -- Both $500 and unlimited liability provisions apply
June 1 -- C's card is stolen
June 3 -- C learns of theft
June 5 -- Close of 2 business days
June 7 -- $200 unauthorized transfer that could have been prevented
had notice been given by June 5
June 10 -- Periodic statement is transmitted to C (for period from
5/10 to 6/9)
June 15 -- $200 unauthorized transfer that could have been prevented
had notice been given by June 5
July 10 -- Periodic statement of C's account is transmitted to C (for
period from 6/10 to 7/9)
August 4 -- $300 unauthorized transfer that could have been prevented
had notice been given by June 5
August 9 -- Close of 60 days after transmittal of statement showing
unauthorized transfer
August 10 -- Periodic statement of C's account is transmitted to C
(for period 7/10 to 8/9)
August 15 -- $100 unauthorized transfer that could have been
prevented had notice been given by August 9
August 20 -- C notifies bank
Computation of C's liability:
Paragraph (b)(1) will apply to determine C's liability for
unauthorized transfers that appear on the periodic statement and
unauthorized transfers that occur before the close of the 60-day period.
(The transfers need not both appear on the periodic statement and occur
before the close of the 60-day period.) The maximum liability under
(b)(1) is $500.
Paragraph (b)(2)(ii) will apply to determine C's liability for
transfers occurring after the close of the 60-day period. There is no
dollar ceiling on liability under paragraph (b)(2)(ii).
Situation 3 -- $50/unlimited liability provisions apply
Facts same as in Situation 2, except that C does not learn of the
card theft, but questions the account balance and notifies bank on
August 20 of possible unauthorized transfers.
Computation of C's liability
In this situation only paragraph (b)(2) applies.
6-6 Q: Knowledge of loss or theft of access device. May a financial
institution treat the consumer's receipt of a periodic statement that
reflects unauthorized transfers as establishing that the consumer had
knowledge of loss or theft of the access device?
A: Receipt of the periodic statement reflecting unauthorized
transfers may be considered a factor in determining whether the consumer
had knowledge of the loss or theft, but cannot be deemed to represent
conclusive evidence that the consumer had such knowledge. ( 205.6(b))
6-6.5 Q: Consumer negligence. A consumer writes the PIN on the ATM
card or on a piece of paper kept with the card -- actions that may
constitute negligence under state law. Do such actions affect the
liability for unauthorized transfers that may be imposed on the
consumer?
A: No. The extent of the consumer's liability is determined by the
promptness in reporting loss or theft of an access device or
unauthorized transfers appearing on a periodic statement. Negligence on
the consumer's part cannot be taken into account to impose greater
liability than is permissible under the act and Regulation E. (
205.6(b))
6-7 Q: Notice of loss or theft. The consumer gives notice at an
address or telephone number other than that specified by the financial
institution. Is the notice valid for purposes of limiting the
consumer's liability?
A: Yes. The institution has received notice for purposes of limiting
the consumer's liability if notice is given in a reasonable manner at
some other address or telephone number of the institution. ( 205.6(c))
6-8 Q: Notice of loss or theft -- content of notice. The regulation
refers to the consumer's taking such steps as are reasonably necessary
to provide the financial institution with the pertinent information
about the loss or theft of an access device. If a consumer is unable to
furnish the institution with an account number or card number when
reporting a lost or stolen access device, has the consumer given
adequate notice?
A: Yes. In instances where the consumer is unable to provide the
number, the notice is still valid for purposes of limiting the
consumer's liability if the notification otherwise sufficiently
identifies the account in question. Such a situation could arise, for
example, if the consumer's wallet is stolen and the consumer is away
from home. ( 205.6(c))
6-9 Q: Applicable liability provisions -- cash advances from credit
line. A credit card that is also an access device is used to obtain
unauthorized cash advances from a line of credit at an automated teller
machine. Do the consumer liability provisions of Regulation E, or those
of Regulation Z, apply?
A: Regulation Z applies. Since the unauthorized cash advances do
not involve a consumer asset account, an electronic fund transfer has
not occurred that would make the transaction subject to Regulation E. (
205.6(d)(2))
6-10 Q: Applicable liability provisions -- checking account with
overdraft feature. If the unauthorized transfers in question 6-9 were
instead withdrawals from a checking account, and they resulted in cash
advances from an overdraft line of credit, which liability provisions
apply?
A: Regulation E applies, because the transfer was an electronic fund
transfer; there was an extension of credit only as a consequence of the
overdraft protection feature on the checking account. ( 205.6(d)(1))
6-11 Q: Applicable liability provisions -- withdrawals from checking
account/credit line. If a consumer's access device is also a credit
card and the device is used to make unauthorized withdrawals from the
checking account and, separately, to obtain cash advances directly from
the line of credit, which liability provisions apply?
A: Both Regulation E and Regulation Z apply. Regulation E would
apply to the unauthorized transfers involving the checking account,
while Regulation Z would apply to the transfers involving the credit
line. As a result, a consumer might be liable for up to $50 under
Regulation Z and, in addition, for $50, $500 or an unlimited amount
under Regulation E. ( 205.6(d))
7-1 Q: Timing of disclosures -- early disclosure. An institution is
required to give initial disclosure either (1) when the consumer
contracts for an EFT service or (2) before the first electronic fund
transfer to or from the consumer's account. If an institution provides
initial disclosures when a consumer opens a checking account and the
consumer does not sign up for an EFT service until a later time, has the
institution satisfied the disclosure requirements?
A: Yes, if the EFT contract is between the consumer and a third
party for preauthorized electronic transfers to be initiated by the
third party to or from the consumer's account. In this case, the
financial institution need not repeat disclosures previously given
unless the terms and conditions required to be disclosed are different
from those that were given.
If, on the other hand, the EFT contract is directly between the
consumer and the financial institution -- for the issuance of an access
device, or for a telephone bill-payment plan, for example -- the
institution should provide the disclosures at the time of contracting.
Disclosures given before the time of contracting will satisfy the
regulation only if they occurred in close proximity thereto. (
205.7(a))
7-2 Q: Timing of disclosures -- Social Security and other government
direct deposits. In the case of direct deposits by a government agency
-- Social Security payments, for example -- how can the financial
institution comply with the disclosure requirements absent
prenotification, such as in cases where the government agency no longer
uses Form 1199A?
A: Before direct deposit of payments such as Social Security takes
place, usually the consumer and the institution both must complete a
Form 1199A, and the institution can make disclosures at that time.
However, if a Form 1199A (or a comparable form providing notice to the
institution) is not used and there is no prenotification, the
institution should provide the required disclosures as soon as
reasonably possible after the first direct deposit is received, unless
the institution has previously given the disclosures (see question 7-1).
( 205.7(a))
7-3 Q: Form of disclosures. Are there special rules for disclosure
statements concerning such matters as type size, number of pages, or the
relative conspicuousness of various terms?
A: No. The regulation imposes no requirements concerning matters of
form, although it does specify that the disclosures must be given in a
readily understandable written statement that the consumer may retain.
( 205.7(a))
7-4 Q: Spanish language disclosures. In Puerto Rico, where
communications normally are in Spanish, may a financial institution
provide the required disclosures in Spanish?
A: Yes, disclosures in Spanish will satisfy the readily
understandable requirement, provided that disclosures in English are
given to consumers who request them. ( 205.7(a))
7-5 Q: Disclosures covering all EFT services offered. Must the
disclosure statement given to a consumer relate only to the particular
EFT services that the consumer will receive?
A: An institution may provide a disclosure statement covering all
the EFT services that the institution offers, even if some consumers
receiving the disclosures have not arranged to use all the services. (
205.7(a))
7-5.5 Q: Addition of new accounts. A consumer arranges for
electronic fund transfers to and from an account, and receives
disclosures. Later, the consumer arranges for transfers involving an
additional account at the same financial institution. Does the addition
of the new account require further disclosures?
A: The addition of a new account would require the institution to
furnish any of the required disclosures that differ from those
previously given. (See questions 5-1.5 and 7-6.) ( 205.7(a))
7-6 Q: Addition of new EFT services. A consumer signs up for an EFT
service and receives disclosures. If the consumer later arranges for
other EFT services from the same institution, must additional
disclosures be given?
A: Yes, if the new service is subject to terms and conditions
different from those given in the initial disclosures. Only the
disclosures for the additional service need be given. This is also the
case if the institution begins to furnish a new service upon renewal of
an access device. (See question 5-2.) ( 205.7(a))
7-6.5 Q: Addition of service -- in interchange system. A financial
institution operates electronic terminals through which consumers can
access their accounts, and gives the required disclosures regarding the
service. Later, the institution joins an interchange or shared system
of terminals, giving consumers access to terminals operated by other
institutions in the system. Are new disclosures required?
A: The institution must provide any of the required disclosures that
differ from those previously given. ( 205.7(a))
7-7 Q: Disclosures about unauthorized transfers -- preauthorized
transfers. If the only electronic fund transfers from an account are
preauthorized transfers, must the institution make a liability
disclosure regarding unauthorized transfers, and provide a telephone
number and address for reporting possible unauthorized transfers?
A: Yes, unless the institution chooses not to impose any liability.
The disclosure of liability should reflect that liability could exist if
the consumer fails to report unauthorized transfers that are reflected
on a periodic statement. (See question 6-1.) ( 205.7(a) (1) and (2))
7-8 Q: Disclosures about unauthorized transfers -- no liability
imposed. If an institution chooses not to impose any liability for
unauthorized electronic fund transfers, must it make any liability
disclosure?
A: No; the disclosure is inapplicable. If the institution later
decides to impose liability, however, it must make the liability
disclosure before it can do so. ( 205.7(a) (1) and (2))
7-9 Q: Summary disclosure of rights. Several required disclosures
relate to a consumer's rights under the Act and regulation. Must the
disclosures spell out these rights in full, as they are set forth in the
Act and regulation?
A: No. These matters can be disclosed by means of summary
descriptions. (For examples showing the amount of detail that needs to
be provided, see the model disclosure clauses in appendix A.) ( 205.7(a)
(1), (6), (7) and (8))
7-10 Q: Type of transfer -- preauthorized transfers. Must
preauthorized transfers be disclosed as a type of electronic fund
transfer that the consumer may make?
A: No. An institution need not list preauthorized transfers as one
of the types of transfers that a consumer can make, although it is
permissible to do so. ( 205.7(a)(4))
7-11 Q: Limitations on transfers. How much must the consumer be
told about limitations on frequency and dollar amount of transfers?
A: The general rule is that information on these limitations must be
disclosed in detail to consumers. This is so even if the limitations
are related to the security aspects of the electronic fund transfer
system. The regulation provides, however, that to the extent
confidentiality of certain details is determined by the institution to
be essential to the security of the account or the system, the details
may be withheld -- but the fact that there are limitations must be
disclosed. ( 205.7(a)(4))
7-11.5 Q: Restrictions on certain deposit accounts. Regulation D
imposes restrictions on the number of payments to third parties that may
be made from a money market deposit account (whether made by electronic
or nonelectronic means). If an institution chooses to implement the
restrictions by refusing to execute transfers that would exceed the
limit, must it disclose the restrictions under Regulation E as
limitations on the frequency of electronic fund transfers?
A: Yes, limitations on account activity that restrict the consumer's
ability to make electronic fund transfers must be disclosed to the
consumer as part of the Regulation E disclosures. ( 205.7(a)(4))
7-12 Q: Disclosure of charges -- same per-item charge for
EFT/non-EFT. The regulation requires disclosure of charges for
electronic fund transfers or for the right to make transfers. If a
per-transfer charge for electronic fund transfers is the same as the
per-item charge for non-electronic transfers, must the EFT charge be
disclosed?
A: Yes, such charges must be disclosed. If an institution does not
wish to itemize the various charges on the disclosure statement, it may
disclose them in an accompanying document given along with the principal
disclosure statement. If an insert is used, the disclosure statement
must refer to the accompanying document. ( 205.7(a)(5))
7-13 Q: Disclosure of charges -- charge imposed under certain
conditions. If an institution imposes per-item charges only under
certain conditions (when the transactions for the cycle exceed a certain
number, for example), must the institution disclose what those
conditions are?
A: Yes. Again, this information may be provided in a separate
document enclosed with and referenced by the EFT disclosures. (
205.7(a)(5))
7-14 Q: Disclosure of charges -- fixed service charge. If a fixed
service charge is assessed only when the balance in the account falls
below a certain minimum, must it be disclosed?
A: No, since there is no charge attributable to an EFT service. (
205.7(a)(5))
7-15 Q: Disclosure of charges -- stop-payment/dishonor/overdraft.
Does the regulation require disclosure of charges for stop-payment
orders, dishonor, or overdrafts?
A: No. These are not charges for electronic fund transfers or for
the right to make such transfers. Disclosure is permissible, however.
(See model disclosure clause A(9) in Appendix A.) ( 205.7(a)(5))
7-15.5 Q: Charges -- in interchange system. Charges are imposed on
the account-holding institution by the operator of a shared or
interchange ATM system for the use of the system. In addition, charges
may be imposed by other institutions in the system for the use of their
ATMs. Must such charges be disclosed by the account-holding institution
in the initial disclosures?
A: The fact that charges are imposed on the account-holding
institution by the system or terminal-operating institution does not, by
itself, require a disclosure to the consumer. However, the institution
must disclose any charges it imposes on the consumer for EFT services,
including charges for ATM transactions in an interchange or shared ATM
system.
Charges for use of an ATM imposed on the consumer by an institution
other than the account-holding institution are not within the purview of
the account-holding institution's relationship with its customer and
need not be disclosed in the initial disclosures. (See question 4-1.) (
205.7(a)(5) and 205.4(a))
7-16 Q: Disclosure about privacy of account information. The
regulation requires an institution to list the circumstances under
which, in the ordinary course of business, it will disclose information
to third parties about an account. If a consumer holds two accounts in
an institution -- account 1 has EFT service, but account 2 does not --
does the requirement apply to both accounts?
A: The required disclosure relates only to account 1, which has an
EFT service. However, the institution must describe the circumstances
under which any information relating to that account (not just
information concerning electronic fund transfers) will be made available
to third parties. ( 205.7(a)(9))
7-17 Q: Disclosure about privacy -- meaning of third parties. For
purposes of this disclosure requirement, does the term third parties
include other subsidiaries of the same holding company?
A: Yes. ( 205.7(a)(9))
7-18 Q: Error resolution disclosure. The regulation contains an
error resolution notice. Is this notice a model disclosure clause that
the institution may use at its option?
A: The error resolution notice is a required disclosure and must be
given in a form substantially similar to that appearing in the
regulation. An institution may, however, delete inapplicable provisions
(e.g., the requirement of written confirmation of an oral notification);
substitute trade names; substitute substantive state law requirements
that afford greater consumer protection than the regulation; or even
use different wording -- so long as the substance of the notice remains
substantially the same. ( 205.7(a)(10))
7-18.5 Q: Error-resolution disclosure -- extended time periods. The
regulation expands the time periods for resolving errors that involve
transfers initiated outside the United States or transfers resulting
from POS debit card transactions, from 10 to 20 business days and from
45 to 90 calendar days. Must the error-resolution disclosure reflect
the longer time periods with respect to accounts on which these types of
transfers can be made?
A: A financial institution's error-resolution disclosures must
reflect its actual procedures. An institution that takes advantage of
the longer time periods applicable to POS and foreign-initiated
transfers must therefore disclose the longer periods in its
error-resolution disclosures. Similarly, an institution that relies on
the exception from provisional recrediting (for accounts subject to
Regulation T) must phrase its disclosures accordingly. (
205.7(a)(10)), 205.8(b), and 205.11 (c)(3) and (c)(4)).
7-19 Q: Disclosures involving telephone numbers. Several
disclosures involve telephone numbers: numbers for reporting loss or
theft of an access device or possible unauthorized transfers, for
inquiring about receipt of a preauthorized credit, for stopping payment
of a preauthorized debit, and for giving notice of error. May an
institution use a single telephone number for all these purposes?
A: Yes. Conversely, an institution could use different telephone
numbers for one or more of these purposes. ( 205.7(a) (2), (6), (7),
and (10))
7-20 Q: Disclosures involving telephone numbers. Must the telephone
number (or list of numbers) referred to in question 7-19 be incorporated
into the text of the disclosure to which it relates?
A: No. The institution may instead insert a reference to a telephone
number that is readily available to the consumer (for example: ''call
your branch office -- the number is shown on your periodic statement''),
except for the telephone number to be used for reporting a lost or
stolen access device. In the latter case, the institution must disclose
a specific telephone number on or with the disclosure statement. (
205.7(a) (2), (6), (7) and (10))
Notice
8-1 Q: Terms requiring change-in-terms notice. What categories of
initial disclosures are subject to the change-in-terms notice
requirement?
A: Examples of changes that must be disclosed are: an increase in
the consumer's liability for unauthorized electronic fund transfers; a
decrease in available types of electronic fund transfers; an increased
strictness in limitations on frequency or dollar amount of transfers
(with certain exceptions; see question 8-4); an increase in charges
for electronic fund transfers or the right to make transfers, or the
imposition of such charges for the first time. ( 205.8(a))
8-2 Q: Change in telephone number or address. Is an institution
required to disclose a change in the telephone number or address for
reporting possible unauthorized transfers?
A: No, but it must do so if it wishes to impose any liability on the
consumer for such transfers. ( 205.8(a), 205.6(a)(3))
8-3 Q: Closing down of ATMs. If an institution closes down some of
its automated teller machines, must it disclose this change?
A: No; such a change does not relate to an item required to be
given in the initial disclosures. ( 205.8(a), 205.7(a))
8-4 Q: Changes in limitations on transfers. An institution limits
the amount of money that consumers can withdraw daily from its ATMs.
Because secrecy of the limits is essential to maintaining the security
of the accounts or the system against theft, the details of the limits
were not stated in the initial disclosures. The institution disclosed
only that certain limits exist. If the limits are now made stricter,
what must the institution disclose to its customers?
A: No disclosure is required, provided secrecy is still essential.
In contrast, if the institution had no dollar limits when it made the
initial disclosures, and is now imposing limits for the first time, it
must disclose at least the fact that limits have been adopted. (
205.8(a), 205.7(a)(4))
8-5 Q: Termination of EFT service. If an institution terminates a
consumer's ATM or POS service by cancelling the access device, must it
provide a disclosure?
A: No. But if the service involves credit (because the device is a
combined credit card/access device, for example), notification under
202.9(a) of Regulation B (Equal Credit Opportunity) may be required. If
a credit report was involved in the decision to cancel the combined
card, notification under section 615(a) of the Fair Credit Reporting Act
also may be required. ( 205.8(a))
8-6 Q: Form of change-in-terms notice. May an institution give
notice of a change in terms by sending copies of its revised disclosure
statement?
A: Yes, provided attention is directed to the change (for example,
in a cover letter referencing the changed term). No specific form or
wording is required. The notice may appear on a periodic statement. (
205.8(a))
8-7 Q: Error resolution notice -- no periodic statements sent. An
institution must either provide its customers with the full error
resolution notice annually, or include a short-form notice on or with
each periodic statement. If an institution does not send periodic
statements to certain EFT customers, how should it comply with this
requirement?
A: It must send the full error resolution notice annually. (
205.8(b))
8-8 Q: Error resolution notice -- changeover from one form to other.
An institution sends annual long-form error resolution notices. If it
wishes to adopt the short-form alternative, when must the first
short-form notice be sent?
A: No later than 12 months after the last long-form notice was sent.
Conversely, if an institution wants to switch to the long form, the
first long-form notice should be sent no later than 12 months after the
last short-form notice. ( 205.8(b))
Note: Some questions in this section relate to both the receipt and
the periodic statement requirements of 205.9 (a) and (b). These are
identified by a Receipts/periodic statements catchline and appear
together following the questions that deal solely with 205.9(a) or
205.9(b).
9-1 Q: Receipts -- furnished only on request. An institution's
electronic terminals are programmed to provide a receipt only if the
consumer elects to receive one by pressing a key at the time of the
transfer. Does this comply with the regulation?
A: Yes; the regulation merely requires that a receipt be made
available to the consumer at the time of the transfer. (There is a
limited exception to the receipt requirement under 205.9(f) for certain
cash-dispensing machines, but only if the machines were purchased or
ordered before February 6, 1980.) ( 205.9(a))
9-2 Q: Receipts -- available through third parties. What is the
purpose of the footnote in the regulation that permits financial
institutions to make terminal receipts available through third parties?
A: It permits institutions to arrange for operators of terminals in
an EFT system (merchants or other financial institutions, for example)
to make the receipt available. However, the financial institution
holding the consumer's account or providing the EFT service to the
consumer remains responsible for the availability of the receipt. (
205.9(a), footnote 2)
9-3 Q: Receipts -- information displayed on screen. Does a
financial institution comply with the receipt requirement if it simply
prints the receipt information on a display screen?
A: No. The receipt must be in a written form that the consumer can
retain. ( 205.9(a))
9-3.5 Q: Receipts -- inclusion of promotional material. A financial
institution uses receipts on which there is promotional material (such
as discount coupons for food items at restaurants). Is the printing of
such promotional material on receipts prohibited by the regulation?
A: No. The regulation does, however, mandate that the required
receipt information be set forth clearly; this may be achieved, for
example, by separating it from the promotional material. In addition, a
consumer must not be required to surrender the receipt (or that portion
containing the required disclosures) in order to take advantage of a
promotion. ( 205.9(a))
9-4 Q: Receipts -- form. Are there special rules regarding type
size, length of receipt, and so forth?
A: No. The regulation does require, however, that the information on
the receipt be set forth clearly. A series of unlabelled numbers or
codes for various types of information, if not readily understandable on
their face, would not be clearly set forth within the meaning of the
regulation. The institution may document individual transfers on
separate receipts, even though the consumer makes multiple transfers at
the same time, or it may document them on a single receipt. ( 205.9(a))
9-5 Q: Receipts -- transfer not completed. Does the terminal
receipt requirement apply if a transfer is initiated but not completed
(because the ATM is out of currency, for example)?
A: No; however, most terminals generate a receipt even if a
transfer is not completed because of a terminal malfunction or because
the consumer decided not to complete the transfer. ( 205.9(a))
9-6 Q: Receipts -- not furnished; inadvertent error. Does a
violation result if a terminal runs out of paper and a receipt is not
made available to the consumer?
A: No, so long as it is a bona fide unintentional error and the
financial institution maintains procedures reasonably adapted to avoid
such an error. ( 205.9(a), section 915(c))
9-7 Q: Receipts -- date. May a financial institution disclose an
accounting or business date on the terminal receipt?
A: The calendar date on which the consumer uses the electronic
terminal must be disclosed; an accounting or business date may be
disclosed in addition, so long as the dates are clearly distinguished.
If a transfer is initiated late one day and completed on the next day,
the financial institution may disclose either calendar date on the
receipt. ( 205.9(a)(2))
9-8 Q: Receipts -- access to multiple accounts of same type. How
should the type of account be disclosed on the terminal receipt when
more than one account of the same type can be accessed by the consumer's
access device?
A: Some examples: If an access device can be used by the consumer
to make transfers to or from two checking accounts, the terminal receipt
must specify which of the two has been accessed; a financial
institution could disclose a cash withdrawal as ''withdrawal from
checking I'' or ''withdrawal from checking II.'' If only one account
besides the primary checking account can be debited by the access
device, it could be identified as ''withdrawal from other account.'' The
number of the account being accessed could be used both to identify the
type of account and to serve as the unique identifier of the account. (
205.9(a) (3) and (4))
9-9 Q: Receipts -- type of account. A footnote states that the type
of account need not be identified if the access device used to initiate
the transfer can access only one account at a given terminal. When does
this exception apply?
A: The exception applies to point-of-sale terminals, ATMs, and any
other electronic terminals. It is available even if the access device
can access more than one account when used at another terminal. For
example, it is available when, in a shared ATM system, an access device
can access only one account at a terminal operated by an institution
other than the account-holding institution, even though the access
device can access more than one account at terminals operated by the
account-holding institution. Moreover, account refers only to asset
accounts. If a consumer can use an access device at a terminal to debit
an asset account and also to access a credit line, for example, the
exception is still available. ( 205.9(a)(3), footnote 3)
9-10 Q: Receipts -- type of account, off-line ATMs. A financial
institution's ATMs permit access to multiple accounts of the same type
when the ATM is on-line, and receipts uniquely identify the accounts by
use of account numbers. When the ATM is off-line, however, access is
permitted only to a primary account designated by the consumer in
advance. The consumer is informed at the ATM that only the primary
account can be accessed at that time. May the receipt describe the
transfer as a ''withdrawal from checking,'' for example, without a
unique identification of the account?
A: Yes. Because the consumer can access only the primary account at
the time of the off-line transfer, unique identification of the account
is not required. ( 205.9(a)(3), footnote 3)
9-10.5 Q: Receipts -- type of account, interchange system. What
about an interchange system in which consumers can access multiple
accounts of the same type at their account holding institution's
terminals, but only a primary account of each type of other terminals in
the system -- may the receipt at such other terminals describe the
account in terms of ''checking'' or ''savings,'' without unique
identification?
A: Yes. ( 205.9(a)(3), footnote 3)
9-11 Q: Receipts -- unique identifier. Does the financial
institution have flexibility in providing a number or code that uniquely
identifies the consumer, the consumer's account, or the access device
used to initiate a transfer?
A: Yes. Any unique identification that will link the consumer to the
particular transfer is sufficient to comply with this requirement. (
205.9(a)(4))
9-12 Q: Receipts -- terminal location. A financial institution
wants to disclose the location of the terminal on the terminal receipt
by giving a description in one of the three forms prescribed in the
regulation. How may it satisfy the requirement?
A: The institution may, for example, preprint the terminal locations
on its receipts. An institution that owns or operates terminals at only
one location may use its name (such as ''First Nat'l''). An institution
with terminals in several locations must use a street address or a
generally accepted name for a specific location. ( 205.9 (a)(5), and
(b)(1)(iv))
9-13 Q: Receipts -- omission of third-party name. Under what
circumstances may the name of a third party (to or from whom funds are
transferred) be omitted from the terminal receipt?
A: The name may be omitted if the consumer provides the name in a
form that the electronic terminal cannot duplicate on the receipt. For
example, if a consumer initiates a utility payment at an ATM and
provides the name of the payee by inserting a payment stub into the ATM,
the terminal receipt need not name the utility company. (The name would
have to appear on the periodic statement, of course.)
On the other hand, if the consumer keys in the identity of the payee
(by means of a code number, for example) the receipt must name the
payee, or use a code that is explained elsewhere on the receipt. The
institution may, for example, preprint a series of codes and the
specific payees to which they relate on the form -- and print the
correct code at the time of the transfer. ( 205.9(a)(6))
(The regulation does not apply to bill payments made at an ATM by
check or currency. See question 2-10.)
9-14 Q: Receipts -- deposit receipt as proof of payment. Section
906(f) of the act provides that required documentation constitutes prima
facie proof of payment to another person; does this provision apply to
a terminal receipt documenting a deposit?
A: No, because there is no payment to another person. (
205.9(a)(6))
9-15 Q: Periodic statements -- when required. The regulation
requires periodic statements to be sent for any account to or from which
electronic fund transfers can be made. What does this mean?
A: The requirement applies only to those accounts for which an
agreement has been entered into: (1) Between the consumer and the
financial institution for EFT services to or from the account (including
accounts for which an access device has been issued to the consumer);
or (2) between the consumer and a third party (for preauthorized debits
or credits, for example), when the institution has received notice of
the agreement and the fund transfers have begun. (Passbook and
statement accounts should be judged by these same criteria in
determining whether the account is subject to documentation requirements
under the regulation.)
If there is no specific agreement for EFT services, the periodic
statement and other requirements of the regulations do not apply to the
account. The fact that membership in an ACH requires a participating
financial institution to accept electronic fund transfers to accounts at
the institution does not make every account of that institution subject
to the regulation. ( 205.9 (b), (c), and (d))
9-16 Q: Periodic statements -- frequency. How often must periodic
statements be sent for accounts that are subject to the regulation?
A: A monthly statement is required for any account to or from which
an EFT has occurred during the month, if the account is one that can be
debited electronically (by use of an access device, telephone
bill-payment service, or preauthorized transfers from the consumer's
account, for example) or if the account can be credited electronically
by other than preauthorized deposits. If no transfers occur during some
months, the statement must be provided at least quarterly.
There are certain exceptions for accounts on which the only EFT
service relates to preauthorized credits. The institution may send
quarterly statements or, if the account is a passbook account, the
institution may simply update the passbook when it is presented for
updating (with the amount and date of each EFT since the last update).
Also, to eliminate duplicative statements, the regulation provides an
exception from the periodic statement requirement for certain
intra-institutional transfers between a consumer's accounts. This
exception does not alter the statement provisions, however, with respect
to accounts that receive preauthorized credits; such accounts continue
to acquire quarterly statements or passbook updates. ( 205.9(b), (c),
(d), and (h))
9-17 Q: Periodic statements -- inactive accounts. Must quarterly
statements be sent to all accounts that have had an EFT service
associated with them, even though the accounts are considered inactive
by the financial institution?
A: An institution need not send statements to accounts it considers
inactive. The determination that certain accounts are inactive must be
made by the institution. ( 205.9 (b) and (d))
9-18 Q: Periodic statements -- customer pick-up. May a financial
institution permit consumers to call for their periodic statements?
A: Yes, but the institution may not require it. ( 205.9 (b) and
(d))
9-19 Q: Periodic statements -- periodic cycles. May financial
institutions send out a periodic statement each time an electronic fund
transfer occurs?
A: No. Although statements may be sent on a cycle that is shorter
than monthly, the statements must correspond to an actual periodic
cycle. ( 205.9(b))
9-20 Q: Periodic statements -- variance in cycle. Must a cycle for
a periodic statement be exactly a month, quarter, or other regular
period?
A. No. Cycles will be considered equal if the number of days in the
cycle does not vary by more than 4 days from the regular day or date of
the periodic statement. It is also permissible to stagger the statement
cycle for different accounts for operational or other reasons. ( 205.9
(b) and (d))
9-21 Q: Periodic statements -- summary limited to EFT activity.
Certain consumer passbook accounts can be debited electronically and
thus do not qualify for the exception from the periodic statement
requirement. The financial institution continues to use the passbook as
the primary means for displaying all transfers (electronic and
nonelectronic) on the account. May the institution comply with the
regulation by providing a summary periodic statement covering only the
electronic activity?
A: Yes. Other required disclosures (such as charges, account
balances, and address and telephone number for inquiries) must, of
course, also be included. ( 205.9(b))
9-22 Q: (Reserved)
9-23 Q: Periodic statements -- accompanying documents. A footnote
in the regulation permits details about each transfer to be given on
documents accompanying the periodic statement; it also permits codes to
be used, so long as they are explained on the statement or accompanying
documents. How can a financial institution take advantage of this
provision?
A: This provision gives financial institutions that do not use
descriptive statements an alternative means for meeting the
documentation requirements. Some examples: An institution could
include copies of terminal receipts to reflect transfers initiated by
the consumer at electronic terminals. It could enclose posting memos,
deposit slips, and other documents that, together with the statement,
disclose all the required information. It could use codes (for names of
third parties, terminal locations, etc.) and explain the information to
which they relate on an accompanying document. ( 205.9(b)(1), footnote
4)
9-24 Q: Periodic statements -- accompanying documents. May required
information other than information about each electronic transfer appear
on accompanying documents?
A: Yes. The regulation imposes no page requirements for periodic
statements; thus, the required information need not all appear on a
single page. (See question 9-34.) ( 205.9(b))
9-25 Q: Periodic statements -- information obtained from others.
For purposes of periodic statement disclosures, may a financial
institution unconditionally rely on data transmitted to it by another
financial institution or other party (such as a merchant)?
A: Independent verification of the data for each transfer is not
required. Financial institutions must, however, generally maintain
reasonable procedures to avoid violations of the regulation, whether as
a result of faulty data transmission or errors of third parties. (See
the exception to liability under section 915 of the Act for bona fide
unintentional errors.) ( 205.9(b)(1))
9-26 Q: Periodic statements -- terminal location omitted. When a
consumer makes a deposit at an ATM, the institution need not identify
the ATM location on the periodic statement. Does the consumer's request
for the terminal location (or any other information about the deposit)
trigger the error resolution procedures under the regulation?
A: Yes, if the request for the location is made in accordance with
the requirements of the error resolution section. However, in
responding the institution need only provide the consumer with the ATM
location if it has captured that information with regard to deposits.
If the consumer merely calls to ascertain whether or not a deposit (ATM,
preauthorized, or any other type of electronic transfer) was credited to
the account, the error resolution procedures do not apply. (
205.9(b)(1)(iv), footnote 4a, and 205.11(a)(7))
9-27 Q: Periodic statements -- type of POS transfer. How should the
periodic statement identify a transfer that takes place at a merchant's
POS terminal -- as a purchase or sale of goods or services, or as a
payment to a third party?
A: There is no prescribed terminology. ( 205.9(b)(1)(iii))
9-28 Q: Periodic statements -- transferor/Federal recurring
payments. How should the name of the third party be disclosed on the
periodic statement for Federal recurring payments?
A: For any Federal recurring payment (such as Social Security,
military or civil service pensions/payrolls) the third-party name may be
disclosed as ''U.S. gov't,'' ''fed sal,'' or any other designation
indicating that the payor is the United States government. (
205.9(b)(1)(v) and (e))
9-29 Q: Periodic statements -- multiple transferees. A financial
institution permits consumers to make multiple payments at an ATM by
keying in a composite dollar amount and inserting payment stubs into the
ATM to indicate who the individual payees are. If a consumer keys in an
amount and directs the institution to pay three utility bills from that
sum, must the three companies be named on the periodic statement?
A: Yes. The names of all three utilities must be provided on the
periodic statement so that the documentation can serve as proof of
payment for the consumer. ( 205.9(b)(1)(v))
9-30 Q: Periodic statements -- consumer as third-party payee. If a
consumer makes an electronic fund transfer to another consumer, may the
financial institution identify the recipient on the periodic statement
by giving the person's account number?
A: No. The institution must disclose the recipient by name. (
205.9(b)(1)(v))
9-31 Q: Periodic statements -- charges. What charges must be
disclosed on the periodic statement?
A: Financial institutions should disclose the charges assessed
against the account during the statement period for electronic fund
transfers or the right to make transfers, or for account maintenance
(including both EFT and non-EFT and both fixed fees and per-item
charges). The charges may be disclosed as a total or may be itemized in
part or in full, at the institution's option. ( 205.9(b)(3))
9-31.5 Q: Periodic statements -- charges in interchange system.
Charges are imposed on the account-holding institution by the operator
of a shared or interchange ATM system for the use of the system. In
addition, charges may be imposed by other institutions in the system for
the use of their ATMs. Must such charges be disclosed by the
account-holding institution on the periodic statement?
A: The fact that charges are imposed on the account-holding
institution by the system or terminal-operating institution does not, by
itself, require a disclosure to the consumer. However, the institution
must disclose any charges it imposes on the consumer for EFT services,
including charges for ATM transactions in an interchange or shared ATM
system.
Charges for use of an ATM imposed on the consumer by an institution
other than the account-holding institution and included in the amount of
the transfer by the terminal-operating institution need not be
separately disclosed on the periodic statement. ( 205.9 (a)(1),
(b)(1)(i), and (b)(3))
9-32 Q: Periodic statements -- opening and closing balances. The
financial institution is required to disclose an opening and a closing
balance in the consumer's account. May these balances be based solely
on the electronic activity?
A: No. The balances must take into account both electronic and
non-electronic activity. ( 205.9(b)(4))
9-33 Q: Periodic statements -- telephone numbers. A financial
institution is required to disclose a telephone number for error
resolution and (if it is using the telephone alternative for
preauthorized credits) a number for the consumer to call to ascertain
whether a preauthorized credit has occurred. Would disclosure of a
single telephone number for both purposes, preceded by the ''direct
inquiries to'' language, satisfy both requirements?
A: Yes. ( 205.9(b)(5) and (6))
9-34 Q: Periodic statements -- telephone numbers. May the
institution disclose the telephone number for inquiring about
preauthorized transfers to the consumer's account on a credit advice or
other document enclosed with the periodic statement?
A: Yes. (See question 9-24.) ( 205.9(b)(6))
9-35 Q: Receipts/periodic statements -- incorrect deposit amount.
What does the regulation require if the amount of a deposit, as verified
by the institution, turns out to be different from the amount entered by
the consumer into the terminal?
A: An institution need not notify the consumer about the discrepancy
per se. The next periodic statement should reflect the proper amount of
the deposit or, depending on the institution's bookkeeping system, a
correction of the erroneous amount. The institution must of course
comply with the error resolution procedures if the consumer alleges an
error in the deposit. ( 205.9(a)(1) and (b)(1)(i))
9-36 Q: Receipts/periodic statements -- type of transfer. What
degree of specificity is required on terminal receipts and periodic
statements for the type of transfer?
A: Common descriptions are sufficient. There is no prescribed
terminology, although some examples are contained in the regulation. On
periodic statements, it is enough simply to show the amount of the
transfer in the debit or the credit column if other information on the
statement (such as a terminal location or third-party name) enables the
consumer to identify the type of transfer. When a consumer obtains cash
from a merchant at a POS terminal in addition to purchasing goods, or
obtains cash only, it is not necessary to differentiate the transaction
from one involving only the purchase of goods. (See question 9-27.)
(Section 205.9(a)(3) and (b)(1)(iii))
9-37 Q: Receipts/periodic statements -- type of account; generic
descriptions. The regulation permits a withdrawal from a consumer's
share draft account at a credit union to be identified as a ''withdrawal
from checking.'' What is this provision intended to accomplish?
A: The regulation permits generic descriptions of the type of
account to facilitate operations in a shared EFT network. For example,
in a shared system, a credit union member may be able to initiate
transfers to or from a share draft account at a terminal owned or
operated by a bank, which may describe accounts only as ''checking'' or
''savings'' accounts (and be unable to generate a receipt describing the
transfers as to or from a ''share draft'' account). ( 205.9 (a)(3) and
(b)(1)(iii))
9-38 Q: Receipts/periodic statements -- location code. May a
transaction code be used to comply with the terminal location
requirement?
A: Yes, if the transaction code (or the portion that relates to the
terminal location) is clearly set forth on the receipt. It must, of
course, be reproduced on the periodic statement. ( 205.9 (a)(5) and
(b)(1)(iv))
9-39 Q: Receipts/periodic statements -- shared system; unique
codes. In a shared or interchange environment, must the various codes
used on terminal receipts and periodic statements be unique?
A: In shared or interchange systems, identical numbers may well
appear on the consumer's periodic statement for terminals operated by
different institutions or merchants; this is permissible. ( 205.9 (a)
and (b))
9-40 Q: Receipts/periodic statements -- omission of city name. In
disclosing the terminal location on a terminal receipt and on the
periodic statement, a financial institution uses a generally accepted
name (such as a branch name) for a specific location. May the city be
omitted when the branch name and the city are the same?
A: Yes. ( 205.9 (a)(5) and (b)(1)(iv))
9-40.5 Q: Receipts/periodic statements -- interchange system;
terminal location. In a shared or interchange system, a consumer uses
terminals operated by institutions other than the account-holding
institution. The terminal operators have terminals at more than one
location, and the terminal receipts include a street address, city, and
state in addition to the name of the terminal operator. In contrast,
the periodic statement provided by the account-holding institution
identifies the terminal location for these transfers by listing the name
of the terminal operator and the city and state. Does this
identification comply with the regulation?
A: Yes. For transfers initiated at non-proprietary terminals, the
account-holding institution may describe the location on the periodic
statement by naming the entity at whose place of business the terminal
is located (or which owns or operates the terminal), plus the city and
state. It need not repeat on the periodic statement the street address
given on the terminal receipt; similarly, it need not include
identification codes or terminal numbers shown on the receipt by the
terminal operator. ( 205.9 (a)(5) and (b)(1)(iv))
9-41 Q: Receipts/periodic statements -- terminal location/third
party. May a single listing be used to identify both the terminal
location and the name of the third party to or from whom funds are
transferred?
A: Yes. For example, if a consumer purchases goods from a merchant,
the name of the party to whom funds are transferred (the merchant) and
the location of the terminal where the transfer is initiated will be
satisfied by a disclosure such as ''XYZ Store, Anytown, Ohio.'' ( 205.9
(a) (5) and (6), and (b)(1) (iv) and (v))
9-42 Q: Receipts/periodic statements -- intermediate party. If a
party (a merchant or another financial institution, for example)
processes an electronic fund transfer but is not the ultimate transferee
or transferor, must it be identified on terminal receipts or periodic
statements?
A: No. Such parties need not be named either on the receipt or on
the periodic statement. ( 205.9 (a)(6) and (b)(1)(v))
9-43 Q: Receipts/periodic statements -- account-holding institution
as third party. The regulation requires identification of the third
party to or from whom a transfer is made, on the terminal receipt and
periodic statement. Is an account-holding financial institution
considered a third party for purposes of this requirement?
A: Yes. A third party is generally someone other than the consumer
and the financial institution. However, section 906(f) of the act
requires that any documentation provided to the consumer shall
constitute prima facie proof of a transfer to another person, and
applies to documentation of payments made to the account-holding
institution.
The institution need not be named on the receipt and periodic
statement as the payee if the fact that payment was made to the
institution is sufficiently indicated by other information (for example,
''loan payment from checking,'' if this can be taken to mean that the
payment was to the account-holding institution). ( 205.9 (a)(6) and
(b)(1)(v))
9-44 Q: Receipts/periodic statements -- consistency in third-party
identity. May a financial institution disclose, on the periodic
statement, a third-party name other than the one that appeared on the
receipt?
A: No. If the d.b.a. (doing business as) name of the third party
appeared on a terminal receipt, that name must also appear on the
periodic statement. Similarly, if a parent corporation's name appeared
on the terminal receipt, it must also be used on the periodic statement.
( 205.9 (a)(6) and (b)(1)(v))
9-45 Q: Passbook updates -- when required. Is a financial
institution required to update a passbook every time the consumer
presents it (for example, when the consumer uses the passbook to make a
deposit or withdrawal)?
A: No. The institution need only update the passbook (by entering
the amount and date of preauthorized credits since the preceding update)
when the consumer presents it for updating. ( 205.9(c))
9-46 Q: Passbook accounts -- telephone notice alternative. May an
institution utilize the telephone notice alternative for passbook
accounts that do not receive periodic statements?
A: Yes. (See question 10-12.) ( 205.9(c), 205.10(a)(1)(iii))
9-47 Q: Passbook updates -- discarding of data. May a financial
institution set a cut-off period for retention of information awaiting
entry in the consumer's passbook?
A: No. However, the financial institution need not update a passbook
immediately upon presentation if the information is not readily
available. It may retain the passbook, add the information, and return
the updated passbook promptly to the consumer. Or, it can mail separate
documentation to the consumer. ( 205.9(c))
9-48 Q: Passbook updates -- periodic transmittals. May a financial
institution, in lieu of retaining the information between presentations
of the passbook, send a consumer updates of preauthorized credits on a
periodic basis?
A: Yes. ( 205.9(c))
9-49 Q: Quarterly statements -- compliance with regular
requirements. The regulation requires quarterly periodic statements for
non-passbook accounts that cannot be accessed electronically except by
preauthorized credits. Must these statements meet the periodic
statement requirements of the regulation?
A: Yes. The statements must comply with all requirements for
periodic statements. The only difference is that they may be sent
quarterly. ( 205.9(d))
9-50 Q: Periodic statements -- transfers between accounts. The
regulation provides that an account is excepted from the periodic
statement requirements for transfers to or from another account of the
consumer within the institution, if these transfers are described on a
complying statement for the other account. What effect does this have
on the periodic statement requirements for accounts that also are
accessed by other electronic transfer activity?
A: The exception applies only to the transfers between accounts.
The financial institution must comply with the applicable periodic
statement requirements for any other electronic transfers to or from the
account. For example, a quarterly Regulation E statement must be sent
for an account that also receives payroll deposits electronically; and
a Regulation E statement must be sent for any month in which an account
is also accessed by a withdrawal at an ATM. However, a financial
institution need not comply with the Regulation E requirements on such
statements for transfers that are otherwise exempt, such as the
transfers between accounts discussed above. ( 205.9(c), (d), and (h))
9-51 Q: Periodic statements -- foreign-initiated transfers. Failure
to provide terminal receipts and periodic statements for transfers
initiated outside the United States is deemed not to be a failure to
comply with the regulation if an inquiry or request for documentation is
treated as a notice of an error. What does this mean?
A: The relaxation in documentation requirements takes account of the
fact that some foreign-based terminals do not caputure all of the
information required by the regulation. However, it is expected that
the institution would make a good faith attempt to provide on the
periodic statements the information required by the regulation to
identify the transfer. For example, even though the institution may not
be able to provide the location of the specific terminal, it should, if
possible, identify the country and city in which the transfer was
initiated. ( 205.9(i))
10-1 Q: Notice of credit -- choice of type. Must consumers be given
a choice of the type of notice to be provided regarding receipt of
preauthorized credits?
A: No. It is up to the financial institution to decide which method
of notice the institution wants to use. The institution may use
different methods for different types or series of preauthorized
transfers. ( 205.10(a)(1))
10-2 Q: Notice of credit -- when receipt guaranteed. A financial
institution guarantees its customers that scheduled Social Security
transfers will be credited to their accounts whether or not the
institution actually receives the funds on time. Does the notice
requirement apply?
A: Yes -- unless the institution has adopted the negative notice
option, in which case sending the notice might confuse the consumer. (
205.10(a)(1))
10-3 Q: Notice provided by payor. Are there instances in which the
financial institution does not have to provide notice?
A: Yes. If the payor provides notice to the consumer that a transfer
has been initiated, the financial institution is not required to provide
notice of receipt. ( 205.10(a)(1))
10-4 Q: Notice provided by payor -- form. If the payor-employer
provides notice to a consumer that a transfer has been initiated, what
type of notice must it give?
A: There is no required form or terminology. A pay stub that shows
the net deposit is sufficient. ( 205.10(a)(1))
10-5 Q: Content of notice. Is there suggested language for the
notice regarding receipt of a preauthorized transfer?
A: No. Identification of the deposit is sufficient. ( 205.10(a)(1))
10-6 Q: Current account balance. May an institution give notice by
informing the consumer of the current balance in the account?
A: Such a notice will not satisfy the notice requirement. (
205.10(a)(1))
10-7 Q: Periodic statement as notice. If a periodic statement sent
within two business days reflects the transfer, can it serve as positive
notice of receipt?
A: Yes. Similarly, the absence of the deposit entry (on a periodic
statement sent within 2 business days of the scheduled transfer date)
will serve as negative notice. ( 205.10(a)(1))
10-8 Q: Negative notice -- timing. If an institution uses a
negative notice system and a preauthorized credit fails to arrive on the
scheduled date, but does arrive within two business days, must a notice
be sent?
A: No. If the deposit did not arrive by the close of the second
business day, however, a notice would have to be sent at that time. (
205.10(a)(1)(ii))
10-9 Q: Negative notice -- cessation of transfers. An institution
uses a negative notice system. If preauthorized transfers to a
consumer's account cease to occur, must the institution send notices of
nonreceipt indefinitely?
A: No. In the absence of information from the consumer or the payor
that the transfers have been terminated, the institution should send the
notices at least 3 times. Or, it may notify the consumer that the
institution believes the transfers have stopped, and that therefore no
further negative notices will be sent ( 205.10(a)(1)(ii))
10-10 Q: Telephone notice -- timing. How quickly must a financial
institution respond to a consumer's telephone inquiry about whether a
llpreauthorized transfer has been received?
A: In most instances, an institution should be able to provide
verification during the same telephone call. However, if the
information is not immediately available -- because of a time lapse
between the scheduled transfer date and the consumer's call, for example
-- the institution should respond within 2 business days. (
205.10(a)(1)(iii))
10-11 Q: Telephone notice -- availability. The regulation requires
that the telephone line for inquiries about preauthorized credits be
readily available. What does this mean? Also, must the institution
provide a toll-free number, or accept collect calls?
A: To satisfy the readily available standard, the financial
institution should provide enough lines so that consumers get a
reasonably prompt answer, using any answering system it wants.
As to toll-free calls, an institution should provide -- within its
primary service area -- a telephone number to which calls can be made
without charge to the customer. In some cases, a financial institution
will have customers who reside away from the city or state where the
financial institution normally conducts business; the financial
institution need not provide a toll-free number or accept collect
long-distance calls from these customers.
The financial institution need not provide 24-hour telephone lines to
respond to consumers' inquiries. Telephone service during normal
business hours will suffice. ( 205.10(a)(1)(iii))
10-12 Q: Telephone notice -- passbook accounts. An institution that
uses the telephone alternative for preauthorized credits is required to
give the telephone number in the initial disclosures and on each
periodic statement. Customers whose passbook accounts can only be
accessed by preauthorized credits do not receive periodic statements.
How might the financial institution comply with the second condition?
A: The institution may take any reasonable measure to provide the
number to consumers. It may stamp the telephone number in the passbook,
for example, or include the telephone number with the annual error
resolution notice. ( 205.10(a)(1)(iii))
10-13 Q: Preauthorized credits -- availability of funds. When must
funds deposited to an account via preauthorized transfers be available
to the consumer?
A: The regulation requires that preauthorized transfers be credited
as of the day the funds for the transfer are received. The
determination of when these funds are available to the consumer for
withdrawal will depend on applicable state law, if any, and on other
Federal regulations, if any. ( 205.10(a)(2))
10-14 Q: Preauthorized credits -- posting schedule. If a financial
institution normally posts credits to customers' accounts in the
morning, and it receives an ACH tape in the afternoon, may the
institution delay the posting until the next morning?
A: Yes. An institution need not alter its established posting
schedule. However, the funds must be credited to the consumers'
accounts as of the date the funds are received. ( 205.10(a)(2))
10-15 Q: Preauthorized credits -- funds received prior to agreed
crediting date. Is a financial institution ever permitted to credit a
consumer's account later than the date the funds are received from the
payor?
A: Yes. If the financial institution and the payor have agreed that
the payor will transmit funds to the institution in advance of the date
on which the institution is to credit consumers' accounts (for example,
two days in advance of pay day), the institution may credit the accounts
as of the date agreed upon with the payor (that is, pay day) (
205.10(a)(2))
10-16 Q: Preauthorized debits -- pre-existing authorizations. If an
agreement for preauthorized electronic fund transfers from an account
was entered into before May 10, 1980, must a new authorization be
obtained by the designated payee or by the financial institution?
A: No. ( 205.10(b))
10-17 Q: Preauthorized debits -- pre-existing authorizations. If a
consumer's existing authorization, which authorizes the institution or
the designated payee to debit the consumer's account, does not specify
that the debiting is to occur electronically (or specifies that debiting
is to occur by paper means), must a new authorization be obtained in
order to debit the account electronically?
A: The regulation does not require that new authorizations be
obtained. ( 205.10(b))
10-18 Q: Preauthorized debits -- authorization obtained by third
party. If a consumer authorizes a third party (for example, an
insurance company) to initiate preauthorized electronic fund transfers
from the consumer's account, and the third party fails to obtain the
authorization in writing or to give a copy to the consumer, is the
account-holding financial institution in violation of the regulation?
A: No. The party that obtains the authorization -- in this instance,
the third party -- is the person that is subject to these requirements.
( 205.10(b))
10-18.5 Q: Preauthorized debits -- authorization. A consumer
telephones the financial institution or designated payee to arrange for
preauthorized electronic fund transfers from the consumer's account, and
subsequently receives a form for authorizing the fund transfers. The
consumer signs and returns one copy of the form, and retains a copy.
Does this procedure comply with the regulation?
A: Yes; the confirmation form serves as the required written
authorization. The regulation does not require that a prescribed format
be used. ( 205.10(b))
10-18.6 Q: Preauthorized debits -- authorization by agent. A
telemarketing company (directly or through an agent) asks consumers to
make the monthly payments for their purchases by preauthorized
electronic fund transfers. If a consumer agrees, the company obtains
the consumer's bank account number and completes a written authorization
based on the telephone conversation (which the company records). The
company signs the authorization as the consumer's agent and sends the
consumer a written confirmation of the transaction. Does this procedure
satisfy the requirement of the act and regulation that preauthorized
EFTs may be authorized by the consumer only in writing?
A: No. The requirement that preauthorized EFTs may be authorized by
the consumer only in writing cannot be met by a payee signing a written
authorization on the consumer's behalf, with only an oral authorization
from the consumer. The tape recording of the telephone conversation
does not constitute an authorization by the consumer ''in writing'' for
purposes of the requirement. ( 205.10(b))
10-19 Q: Preauthorized debits -- stop-payment order. On October 10,
a consumer orally orders the financial institution to stop payment on a
$30 utility bill that is scheduled to be paid on October 15. The
payment is stopped. The consumer properly confirms the order in writing
on October 17. On October 30 the utility company resubmits the $30
debit. Must the financial institution stop payment on the resubmitted
item?
A: Yes. The institution may accomplish this, for example, by
suspending all subsequent payments to the designated payee until the
consumer notifies the institution that payments should resume. (
205.10(c))
10-19.5 Q: Preauthorized Debits -- Revocation of Authorization. A
consumer authorizes a designated payee to originate electronic fund
transfers from the consumer's account. The consumer later revokes that
authorization, and instructs the account-holding financial institution
to block all subsequent debits initiated by that payee-originator. Must
the financial institution comply with the consumer's instructions, or
may it wait for the originator to cease the initiation of automatic
debits?
A: Since the financial institution has been notified that the
consumer's authorization is not longer valid, the institution must block
all future debits transmitted by that payee-originator. The financial
institution may confirm that the consmer has informed the
payee-originator of the revocation. The institution may also require a
copy of the consumer's revocation.
10-20 Q: Ten-day notice of varying debits -- pre-existing
authorizations. If the consumer agreed to varying preauthorized
transfers from the consumer's account prior to May 10, 1980, must the
financial institution (or the designated payee) give the consumer the
10-day advance notice of transfers that vary in amount?
A: Yes, unless the consumer has been informed of the right to
receive notice of such varying payments and the consumer has authorized
payment within a specified range of amounts. ( 205.10(d))
10-21 Q: Ten-day notice -- payee's failure to provide. Does the
financial institution holding the consumer's account have any liability
for the designated payee's failure to provide notice of varying amounts?
A: No. ( 205.10(d))
11-1 Q: Transfers -- initiated by institution. If a transfer is
initiated by a financial institution or its employee without the
consumer's authorization, does it constitute an error?
A: Yes. It constitutes an incorrect electronic fund transfer unless
the transfer was authorized, for example, by a court order. (
205.11(a))
11-2 Q: Loss or theft of access device. If a consumer reports the
loss or theft of an access device, is the institution required to comply
with the error resolution procedures?
A: No, unless the consumer also alleges possible unauthorized use as
a consequence of the loss or theft. ( 205.11(a))
11-3 Q: Error asserted after account closed. Must an institution
comply with the error resolution procedures if a consumer asserts an
error after closing the account relationship with the institution?
A: Yes, assuming that the error allegation is properly made. (
205.11)
11-4 Q: Request for documentation or information. May a financial
institution assume, absent a statement to the contrary by the consumer,
that a request for duplicate copies of documentation or other
information is for tax or other record-keeping purposes and therefore
not an alleged error?
A: No. Requests for duplicate copies of documentation or other
information should be treated as errors unless it is clear that the
request by the consumer is only for tax or other record-keeping
purposes. ( 205.11(a)(7))
11-5 Q: Statement held for consumer -- timing of error rights. A
consumer has arranged for periodic statements to be made available at
the financial institution and held until called for. For purposes of
the 60-day time limits for alleging an error, when is the statement for
a particular cycle deemed to have been transmitted?
A: When it is first made available to the consumer. (See question
9-18.) ( 205.11(b)(1)(i)(A))
11-6 Q: Failure to provide statement -- timing of error rights. How
quickly must a consumer give notice that the financial institution
failed to provide a periodic statement?
A: The notice of error must be received by the institution within 60
days from the date on which the statement should have been transmitted.
( 205.11(a)(7) and (b)(1)(i))
11-7 Q: Discovery of error by institution. Does discovery of an
error by the financial institution require that the institution comply
with the error resolution procedures?
A: No. The procedures need be followed only when a notice of error
is received from the consumer or an agent of the consumer. (
205.11(b)(1))
11-8 Q: Content of error notice. Must the notice of error given to
the financial institution contain the consumer account number?
A: No, so long as the notice enables the institution to identify the
account in question. ( 205.11(b)(1)(ii))
11-9 Q: Written confirmation of error notice. Must a financial
institution have referral procedures for forwarding a written
confirmation of error that is sent to the wrong address?
A: No. The referral requirement does not apply to a written
confirmation that is sent to an address other than the one specified to
the consumer at the time oral notice was given. ( 205.11(b)(1)(i),
footnote 10 and (b)(2))
11-10 Q: Written confirmation -- timing of investigation. May a
financial institution delay its investigation until it has received a
written confirmation?
A: No. The investigation must begin promptly upon receipt of the
oral notice. This requirement is not affected by the institution's
request for written confirmation. ( 205.11(c) (1), (2), and (3))
11-11 Q: Deadlines for investigation of error. May a financial
institution take the full 10 business days or 45 days to investigate?
A: The requirement is to investigate promptly; the stated time
periods are maximums. ( 205.11(c) (1) and (2))
11-11.5 Q: POS debit-card transactions. The deadlines for
investigating errors are extended for all transfers resulting from POS
debit-card transactions, regardless of whether an electronic terminal is
involved. For purposes of these deadlines, what types of transactions
can be viewed as POS debit-card transactions?
A: POS debit-card transactions include all debit card transactions
at merchants' point-of-sale terminals, including those for cash only.
(Transactions at ATMs, however, are not POS transactions even though the
ATM may be in a merchant location.) POS debit-card transactions
generally take place at merchant locations but also include mail and
telephone orders of goods or services involving a debit card. (
205.11(c)(4))
11-12 Q: Request for documentation -- facsimile or photocopy. When
a consumer requests documentation, may the institution provide a
facsimile or a photocopy?
A: Yes, so long as the photocopy or facsimile is legible. ( 205.11
(d)(1) and (f)(3))
11-13 Q: Request for documentation -- third parties. A consumer
requests information or documentation that is not in the institution's
possession, but in the possession of a third party with whom the
financial institution has no agreement. How does an institution comply
with the error resolution requirements?
A: By a timely response to the effect that the institution does not
have the requested material. ( 205.11(d)(2))
11-14 Q: Scope of investigation -- bill payment to third party. A
consumer alleges an error involving a payment to a third party via a
financial institution's telephone bill-payment plan. Is a review of the
institution's own records a sufficient investigation?
A: Yes, assuming there is no agreement between the financial
institution and the third party concerning the telephone bill-payment
service. ( 205.11(d)(2))
11-15 Q: Scope of investigation -- preauthorized credits. A
consumer alleges an error regarding an EFT direct deposit of payroll.
The financial institution and the payor have an agreement with respect
to honoring an access device at point-of-sale terminals, but there is no
agreement with the payor regarding the direct deposit of payroll. May
the financial institution limit its investigation of the direct deposit
error to a review of its own records?
A: Yes. The institution would be required to investigate beyond its
own records only if the alleged error involved a POS transfer or if the
financial institution and the payor did have an agreement regarding the
direct deposit of payroll. ( 205.11(d)(2))
11-16 Q: Scope of investigation -- POS transfers. A merchant agrees
to honor a financial institution's access devices at the merchant's POS
terminals. What is the institution's duty to investigate when a
consumer alleges an error involving a transfer to the merchant via the
POS terminal?
A: The financial institution must contact the merchant directly or,
in systems like the national credit card networks, indirectly by
contacting the merchant's bank. It may not rely on information
previously transmitted by the merchant without verifying it. For
example, the financial institution may have to request a copy of the
sales slip signed by the consumer in order to verify that the amount of
the transfer corresponds to the amount of the consumer's purchase. A
financial institution is not required, however, to take such steps as
sending an employee to the merchant's place of business to ascertain the
correct cost of the merchandise purchased in the transaction. (
205.11(d)(2))
11-17 Q: Error found -- different from that alleged. When a
financial institution determines that an error occurred in a manner or
amount different from that described by the consumer, must the
institution comply with both (1) the procedures applicable when the
institution determines that no error occurred and (2) the procedures
applicable when it determines that an error did occur?
A: Yes, to the extent that the procedures are relevant. In such a
case, the institution may give notice of correction and the explanation
either separately or in a combined form. ( 205.11 (e) and (f))
11-18 Q: Crediting of interest. Does the requirement to credit
interest apply to all error corrections?
A: No, it applies only to those involving interest-bearing accounts.
( 205.11(e)(1))
11-19 Q: Refunding of fees and charges. Is the financial
institution required, when it corrects an error, to refund all fees or
charges imposed on the account?
A: The financial institution is required to refund those fees or
charges that were imposed as a consequence of the error. In a combined
credit/EFT transaction, for example, the financial institution must
refund any finance charges incurred as a result of the error. Fees or
charges that would have been imposed even if the error had not occurred
need not be refunded. ( 205.11(e)(1))
11-20 Q: Notice of correction -- timing. The regulation requires
notice of a correction to be given promptly. Is this requirement
satisfied if the institution includes the notice on a periodic statement
mailed within the 10 business days or 45 calendar days?
A: Whether such a mailing will be prompt enough to satisfy the
requirement must be determined by the financial institution, taking into
account the specific facts involved. ( 205.11(e), footnote 12)
11-21 Q: Written explanation -- timing. If an institution completes
its investigation on day 45 and determines that no error occurred, must
it send the written explanation that same day?
A: Under the 45-day limit, the financial institution has an
additional 3 business days to send the explanation. If, however, the
financial institution is proceeding under the 10-business-day provision
and determines on day 10 that no error occurred, the institution does
not have an additional 3 business days; it must send the explanation on
day 10. ( 205.11(f)(1))
11-22 Q: Debiting of recredited funds -- items to be honored. If a
financial institution debits a consumer's account for provisionally
recredited funds, must it honor all items presented during the
succeeding 5 business days?
A: No. The financial institution need honor only those items that
would have been paid, under the bank's normal operating procedures, if
the account had not been debited. For example: if an account with a
balance of $155 is debited in an amount of $100 for provisionally
recredited funds (leaving a balance of $55) and checks for $150 and $200
are presented by third parties, the financial institution need honor
only the $150 item. Moreover, the institution need honor only items
(including preauthorized transfers) payable to third parties. It need
not permit ATM or other cash withdrawals by the consumer. (
205.11(f)(2)(ii))
11-23 Q: Debiting of recredited funds -- an alternative procedure.
If the institution instead establishes a procedure under which it
notifies the consumer that the consumer's account will be debited 5
business days from the transmittal of the notification -- and specifies
the calendar date on which this debiting will occur -- does this
procedure satisfy the requirement?
A: Yes. ( 205.11(f)(2)(ii))
11-24 Q: Debiting of recredited funds -- charges for overdrafts.
May a financial institution charge the consumer for overdrafts which
occur as a consequence of the facts described in question 11-22?
A: The financial institution may not charge the consumer for
overdraft items that are honored as a consequence of the 5-business-day
requirement. It may, however, impose any normal transaction or item
charges that are unrelated to an overdraft resulting from the debiting.
The institution may, for example, impose a return-item charge relative
to the $200 returned item referred to in question 11-22.
After the 5 business days, if the account is still overdrawn the
institution may impose finance charges to which it is entitled (if any)
under an overdraft credit plan. ( 205.11(f)(2)(ii))
11-25 Q: Documents relied on -- request from consumer. When a
consumer requests copies of documents that the financial institution
relied on in determining that no error occurred, what is required?
A: The institution should provide copies of the documentation in a
readily understandable form. An institution that relies on magnetic
tape in making its determination should translate the data into readable
form -- by printing out the applicable data and explaining the codes,
for example. ( 205.11(f)(3))
11-26 Q: Documents relied on -- privacy issue. If a document
contains information on several consumers, should a copy of the entire
document be given to the consumer?
A: No. To protect the privacy of the other consumers, the
institution should provide only the information relating to the consumer
alleging the error. ( 205.11(f)(3))
11-27 Q: Documents relied on -- no information on relevant tapes.
If a financial institution's investigation shows that there is no
information relating to the consumer on the magnetic tape or other
documentation in question, what does the institution have to provide?
A: The financial institution may comply with the requirement to
provide copies of documentation by informing the consumer that the
relevant documents were searched and were found to contain no
information about transfers relating to the consumer. ( 205.11(f) (1)
and (3))
11-28 Q: Withdrawal of error notice. A consumer withdraws an
allegation of error after the institution has investigated and has
determined that no error occurred, but before the institution provided
the written explanation. May the institution treat the error as
voluntarily withdrawn?
A: Yes. ( 205.11(g))
11-29 Q: Withdrawal of error notice. A consumer calls the financial
institution to question the amount of a Social Security deposit, and the
institution suggests the difference may be due to a general decrease in
benefits. Is the consumer's acceptance of the explanation a voluntary
withdrawal of an error allegation?
A: Yes. ( 205.11(g))
11-30 Q: Reassertion of error. Does a consumer who has withdrawn an
allegation of error have the right to reassert the allegation?
A: Yes, unless the financial institution had complied with all of
the error resolution requirements before the allegation was withdrawn.
The consumer must, however, reassert the error by giving proper notice
within the original 60-day period. ( 205.11 (b) and (h))
11-31 Charges for error resolution. May a financial institution
charge consumers for the institution's compliance with the error
resolution procedures?
A: Although the regulation is silent on this point, the Board has
expressed concern about any chilling effect on the good faith assertion
of errors that might result from the imposition of charges. Financial
institutions should be aware of the prohibition against agreements that
constitute a waiver of rights conferred by the act. ( 205.11, section
914)
11-32 Q: Applicable error resolution provisions -- overdraft credit
line. A consumer withdraws funds from a checking account by use of an
ATM and the withdrawal overdraws the account, thereby resulting in a
transfer of funds from the credit line to the checking account. If an
error is alleged, which error resolution procedures apply to the
overdraft portion, Regulation E or Regulation Z?
A: Regulation E applies because there has been an electronic fund
transfer. The financial institution must follow the requirements of the
error resolution provisions of Regulation E that deal with the
definition of error, requirements for notice, and procedures for
correction of errors.
Section 226.13 (d) and (g) of Regulation Z continue to apply to the
credit extension portion. These include the temporary prohibition on
collection actions; the consumer's right to withhold disputed amounts;
the limitation on adverse credit reports; and the right to prevent an
automatic debit of disputed amounts. ( 205.11(i))
11-33 Q: Applicable error resolution procedures -- credit
card/access device. If a consumer uses a combined credit card/access
device to withdraw funds at an ATM directly from a non-overdraft credit
line and later alleges an error, which error resolution procedures apply
-- Regulation E or Regulation Z?
A: Regulation Z applies because the credit line is not a consumer
asset account. The transaction thus does not involve an electronic fund
transfer. ( 205.11(i))
12-1 Q: Preemption of state EFT laws -- specific determinations.
The regulation prescribes standards for determining whether state laws
that govern electronic fund transfers are preempted by the act and the
regulation. If, under these standards, a state law is inconsistent with
the Federal law, and is not more protective, is it automatically
preempted by operation of law, absent a Board determination of
preemption?
A: State law may be preempted even if the Board has not issued a
determination. Interested parties may seek a Board determination by
following the procedures set forth in the regulation. ( 205.12 (a) and
(b))
13-1 Q: Disclosure forms -- compliance. Will the Board or its staff
review or approve disclosure forms or statements for financial
institutions?
A: No. However, the Board has issued model clauses that financial
institutions may use, if they wish, when designing their forms or
statements. If a financial institution uses these clauses accurately to
reflect its services, the financial institution is protected from
liability for failure to make disclosures in proper form. (Appendix A,
section 915(d))
13-2 Q: Record retention -- evidence of compliance. Must a
financial institution retain records that it has given disclosures and
documentation to each consumer?
A: No, it need only retain evidence demonstrating that its
procedures reasonably insure the consumer's receipt of the required
disclosures and documentation. ( 205.13(c)(1))
14-1 Q: Applicability to preauthorized credits. Does this section
apply to an institution which initiates preauthorized electronic payroll
deposits on behalf of the consumer's employer to the consumer's account
at another financial institution?
A: No. This section applies only when the service-providing
institution, issues an access device to a consumer (a debit card or a
code, for example) with which the consumer can initiate transfers to or
from the consumer's account at another institution, and the two
institutions have no agreement with regard to this service. Because a
code used to initiate telephone transfers is an access device, the
section applies, for example, when a financial institution which holds a
consumer's account periodically transfers funds to or from the
consumer's account at another financial institution upon receiving
instructions from the consumer on the telephone. ( 205.14 (a) and (c))
14-2 Q: Applicability of account at both institutions. Does the
fact that the consumer holds an account at both financial institutions
involved in the transfer negate the application of this section?
A: No, assuming the institutions have no agreements with each other
as to the EFT service. ( 205.14(a))
14-3 Q: Agreement. If an ACH establishes arrangements in which its
members agree to honor each other's EFT cards, is there an ''agreement''
for purposes of this section?
A: Yes ( 205.14(c))
Q 14-4: Periodic statement -- service-providing institution. Does
the service-providing institution have to provide to the consumer a
periodic statement showing transfers other than electronic fund
transfers made with the service provider's access device?
A: No. Moreover, if the service provider complies with the
conditions set forth in the regulation, it need not provide any periodic
statement. ( 205.14(a)(2)(i)-(v))
Q 14-5: Periodic statement -- issuance of card. If a service
provider issues its own card but then allows the consumer to use another
card (such as a bank-issued debit or credit card) to initiate transfers
through the POS/ACH system, must it send periodic statements?
A: Yes. To qualify for the periodic statement exception, the service
provider must issue the debit card that will actually be used to
initiate transfers. Similarly, a service provider that does not issue
any debit card remains subject to the requirement to send periodic
statements. ( 205.14(a)(2)(i))
Q 14-6: Error resolution -- responsibility of service-providing
institution. In a POS/ACH transaction, the consumer properly notifies
the service-providing institution of an alleged error. What is the
service provider's responsibility?
A: The service provider must investigate and resolve the error as
set forth in the regulation. If an error in fact occurred, any fees or
charges imposed as a result of the error, either by the service provider
or by the account-holding institution (for example, overdraft or
dishonor fees) must be reimbursed to the consumer by the service
provider. ( 205.11 and 205.14(a)(3) through (a)(6))
Q 14-7: Content of periodic statement -- account-holding
institution. For POS/ACH transactions initiated by the service
provider, is the account-holding institution required to disclose all
the items specified in 205.9(b) on its periodic statement?
A: No. Its periodic statement need contain only the information as
specified in 205.9(b)(1). ( 205.14(b)(1))
Access Device (see also Insurance of Access Devices)
Cancellation, 8-5
Examples, 2-1
Identification card, remote disbursement, 2-13
Identification of consumer, 6-3, 6-4
Inter-institutional transfers, 14-1
Issued by non-account-holding institution, 14-1
Liability for unauthorized use, 5-4, 5-8, 6-2, 6-5, 6-6
Teller-operated terminals, 2-25
Account
Accessible by EFT, meaning, 2-11, 9-15,
9-17
ATM deposits to, 2-11
Christmas club, vacation club, 2-5
Credit accounts, 212
Escrow accounts, 2-3
Pension accounts, 2-2
Profit sharing accounts, 2-2
U.S. Savings Bond fund, 2-4
Business Day
Business functions, 2-6, 2-7
Business hours, 2-8, 2-9
Failure to disclose, 6-2
Reporting lost/stolen access device, 2-6, 2-7, 2-8
Resolving errors, 2-6
Saturday/Sunday, 2-6, 2-7
Telephone line availability, 2-7
Change in Terms
Changes that need not be disclosed, 8-2, 8-3, 8-4, 8-5
Changes to the disclosed, 5-2, 8-1, 8-4
Change in terms, new initial disclosures, 8-6
Termination of service, 8-5
Check Guarantee or Authorization, 3-1
Credit Repayments
Compulsory use, 3-5, 3-7
Payroll allotments, 2-12
Deposits
At ATM, 2-11, 9-14, 9-25, 9-34
Disclosure of Terms and Conditions
Additional services, 7-6
Blanket disclosures, 7-5
Change in terms, 8-1, 8-2, 8-6
Closing of account, 8-3
Contents:
Charges, 7-12, 7-13, 7-14, 7-15, 8-1
Liability disclosures, 7-7, 7-8, 8-1
Limitations on use, 7-11, 8-1, 8-3, 8-4
Summary of rights, 7-9
Telephone numbers, 7-19, 7-20, 8-2
Types of EFT services, 7-6, 7-10, 8-1
Error resolution notice, 7-18, 8-7, 8-8
Form, detail, 7-3
Joint account disclosures, 4-3
Model clauses, 7-9, 7-18
Multiple accounts, disclosures for, 4-3
Preauthorized transfer services, disclosures for, 7-2, 7-7, 7-10
Privacy disclosure, 7-16, 7-17
Shared system, 4-1, 4-2
Social Security deposits, 7-2
Spanish language, 7-4
Stop-payment orders, charges for, 7-15
Telephone numbers, 7-19, 7-20
Timing of, 7-1, 7-2, 7-6
Third parties, privacy disclosure, 7-17
Electronic Fund Transfer
ACH transfers, 2-17, 2-18, 2-20, 3-3
ATM deposits, 2-11
Cash payments at ATM, 2-10
Check, draft, or similar paper instrument, 2-13, 2-14, 2-20, 2-21
Check truncation system, 2-14
Composite checks, 2-16, 2-18, 2-19
Compulsory use, 3-5, 3-6, 3-7
Computer generated checks, 2-21
Fund disbursement by remote financial institution, 2-13
Loan payments from payroll, 2-12
Magnetic tape, 2-16, 2-19, 3-2
Paper drafts, 2-20
Payee information in paper form, 2-15, 2-18
Social Security transfers, 2-18
Teller-operated terminals, 2-25
Electronic Terminal
Home banking, 2-23
Point-of-sale terminals, 2-24
Telephone-initiated transfers, 2-22
Teller-operated terminals, 2-25
Enforcement
Approval of forms, 13-1
Record retention, 13-2
Error Resolution
Allegation withdrawn, 11-28, 11-29, 11-30
Application of Regulation Z, 11-32, 11-33
Charges, 11-19, 11-24, 11-31
Correction of error, 11-17, 11-18, 11-19, 11-20
Documents relied on, 11-25, 11-26, 11-27
Errors subject to procedures, 11-1, 11-2, 11-3, 11-4, 11-7
Explanation to consumer, 11-21
Failure to provide statement, 11-6
Loss/theft of access device, 11-2
Notice of error from consumer, 11-5, 11-6, 11-8
Prompt investigation, 11-10, 11-11
Provisional recrediting/redebiting, 11-22, 11-23, 11-24
Request for documents, 11-4, 11-12, 11-13, 11-25, 11-26, 11-27
Request for duplicate copies, 11-4
Third party involved, 11-13, 11-14, 11-15, 11-16
Transfer initiated by institution, 2-26, 11-1
Use of ''will call'' statements, 11-5
Written confirmation, 11-9, 11-10
Error Resolution Notice
Change to long/short form, 8-8
Required disclosure, 7-18, 8-7
Timing of notice, 8-8
Fedwire Transfers, 3-2, 3-3
Financial Institution
Non-account-holding issuer of access device, 14-1, 14-2, 14-3, 14-4
Intra-institutional Transfers
Affiliated institutions, 3-12, 3-13
Automatic repayments, 3-5, 3-7
Between consumer's accounts, 3-4, 3-8
Check order, other account charges, 3-9, 3-11
Compulsory use of EFT, 3-5, 3-6
Group insurance, 3-10
Institution as employer, 3-6
Paired institutions, Rhode Island, 3-12
Issuance of Access Devices
Disclosures required, 5-2, 5-4, 7-20
Relation to Truth in Lending, credit cards, 5-9, 5-10
Renewal or substitute devices:
For other than accepted device, 5-4
Generally, 5-1, 5-2, 5-4
Successor financial institution, 5-3
Unsolicited access device:
Pre-2/8/79 issuance, 5-4
Validation procedure, 5-5, 5-6, 5-7
Verification of identity, 5-8
Issuance of Receipts (see Receipts at Electronic Terminals)
Liability for Unauthorized Transfers
Conditions of imposing liability:
Accepted access device, 5-4
Access device, 6-2
Disclosures required, 6-2, 7-7, 7-8, 8-2
Identification, means of, 5-5, 6-3, 6-4
Multiple users, one account, 6-3
Use of personal identification number (PIN), 5-5, 6-4
Limitations, 6-5
Loss or theft of an access device, 6-5, 6-6
Notice to financial institution, 6-7, 6-8
Periodic statement reflecting unauthorized transfers, 6-6
Relation to Truth in Lending, 6-9, 6-10, 6-11
Passbook accounts, 9-15, 9-21, 9-45, 9-46, 9-47, 9-48, 10-12
Periodic statements
Accompanying documents, 9-23, 9-24
Accounts requiring, 9-15, 9-17
Codes, 9-23, 9-38, 9-39
Contents:
Balance, 9-32
Charges, 9-31
Information from third parties, 9-25
Telephone number, 9-33, 9-34
Terminal location, 9-26, 9-38, 9-39, 9-40, 9-41
Third parties, 9-25, 9-28, 9-29, 9-30, 9-41, 9-42, 9-43, 9-44
Type and identification of account, 9-37
Type of transfer, 9-27, 9-36, 9-37
Customer pick-up, 9-18, 11-5
Cycles, 9-19, 9-20
Documentation accompanying, 9-23, 9-24
Error resolution, 9-33, 9-35, 9-44, 11-5, 11-6
Form, 9-24
Financial institution as third party, 9-43
Frequency required, 9-16, 9-17, 9-19, 9-45
Manner of transmittal, 9-18, 11-5
Non-passbook accounts, 9-49
Passbook accounts:
Preauthorized credits, 9-46, 9-47
Updating of passbook, 9-45, 9-47, 9-48
Preauthorized Transfers
Authorizations, 10-16, 10-17, 10-18
Crediting consumer's account, timing, 10-13, 10-14, 10-15
Disclosures, 7-1, 7-7, 7-10
From consumer's account, written authorization, 10-16, 10-17, 10-18
Inter-institutional transfers, 14-1
Notice of receipt:
Content, 10-5, 10-6
From payor, 10-3, 10-4
General, 10-1, 10-2, 10-3, 10-5, 10-6
Negative/positive notice, 10-2, 10-7, 10-8, 10-9
Passbook accounts, 9-54, 10-12
Periodic statement, 10-7
Telephone notice, 10-10, 10-11, 10-12, 10-15
Pre-existing authorizations, 10-16, 10-17
Stop-payment order, 10-22
Unauthorized transfers, 2-26, 6-1, 7-7
Varying-payment notice, 10-20, 10-21
Receipts at Electronic Terminals
As proof of payment, 9-14
Availability, 9-1, 9-2, 9-3
Contents:
Codes, 9-4
Date, 9-7
Identification of consumer, 9-11
Multiple accounts, 9-8
Multiple transfers, 9-4
Terminal location, 9-12, 9-37, 9-38, 9-39, 9-40, 9-41
Third parties, 9-13, 9-41, 9-42, 9-43, 9-44
Type/identification of account, 9-8, 9-9, 9-10, 9-11, 9-37
Type of transfer, 9-36, 9-37
Failure to provide, 9-6
Form, 9-3, 9-4
Hard Copy, 9-3
Issued through third parties, 9-2
Payments, authorized by phone, 2-22
Point of sale, 2-24, 9-9
Teller-operated terminals, 2-25
Transfer not completed, 9-5
Readily understandable, 9-4
Use of codes, 9-11, 9-37, 9-38
Shared Systems
Disclosures, 4-1, 4-2
State Law, preemption of, 12-1
Telephone Alternative
Deposit verification, 9-45, 10-1, 10-10, 10-11, 10-12
Telephone Transfers
Covered transfers, 3-4, 3-17, 3-18, 3-19
Electronic terminal, 2-22
Offered by non-account-holding institution, 14-1, 14-2
Regulation D limitations, 3-16
Written plan, 3-14, 3-15, 3-16
Trust exemption, 3-20, 3-21
Unauthorized Transfers (See Liability for Unauthorized Transfers)
(46 FR 46877, Sept. 23, 1981, as amended at 46 FR 60190, Dec. 9,
1981; 48 FR 14881, Apr. 6, 1983; 49 FR 40798, Oct. 18, 1984; 50 FR
13181, Apr. 3, 1985; 51 FR 13485, Apr. 21, 1986; 52 FR 10734, Apr. 3,
1987; 53 FR 11046, Apr. 5, 1988, 54 FR 9417, Mar. 7, 1989; 55 FR
12635, Apr. 5, 1990)
12 CFR 205.14 PART 206 -- (RESERVED)
12 CFR 205.14 PART 207 -- SECURITIES CREDIT BY PERSONS OTHER THAN
BANKS, BROKERS, OR DEALERS
Sec.
207.1 Authority, purpose, and scope.
207.2 Definitions.
207.3 General requirements.
207.4 Credit to broker-dealers.
207.5 Employee stock option, purchase and ownership plans.
207.6 Requirements for the List of OTC Margin Stocks.
207.7 Supplement: Maximum loan value of margin stock and other
collateral.
207.101 Application to credit committed before February 1, 1968,
where funds are disbursed thereafter.
207.102 When bank in ''good faith'' has not relied on stock as
collateral.
207.103 Corporate guaranty of bank loan as extension of credit in the
ordinary course of business.
207.104 Contribution to joint venture as extension of credit when the
contribution is disproportionate to the contributor's share in the
venture's profits or losses.
207.105 Applicability of plan-lender provisions to financing of stock
options and stock purchase rights qualified or restricted under Internal
Revenue Code.
207.106 ''Deep in the money put and call options'' as extensions of
credit.
207.107 Status after July 8, 1969, of credit extended prior to that
date to purchase or carry mutual fund shares.
207.108 Applicability of margin requirements to credit in connection
with insurance premium funding programs.
207.109 Extension of credit in certain stock option and stock
purchase plans.
207.110 Accepting a purpose statement through the mail without
benefit of face-to-face interview.
207.111 Combined credit for exercising employee stock options and
paying income taxes incurred as a result of such exercise.
207.112 Purchase of debt securities to finance corporate takeovers.
207.113 Application of the single-credit rule to loan participations.
Authority: Secs. 3, 7, 8, 17 and 23 of the Securities Exchange Act
of 1934, as amended (15 U.S.C. 78c, 78g, 78h, 78q and 78w).
Source: Sections 207.1 through 207.7 appear at Reg. G, 48 FR 35071,
Aug. 3, 1983, unless otherwise noted.
Editorial Note: For FR citations to changes to the List of OTC
Margin Stocks, see the List of CFR Sections Affected in the Finding Aids
section of this volume.
12 CFR 207.1 Authority, purpose, and scope.
(a) Authority. Regulation G (this part) is issued by the Board of
Governors of the Federal Reserve System (the Board) pursuant to the
Securities Exchange Act of 1934 (the Act) (15 U.S.C. 78a et seq.).
(b) Purpose and scope. (1) This part applies to persons other than
banks, brokers or dealers, who extend or maintain credit secured
directly or indirectly by margin stock and who are required to register
with the Board under 207.3(a) of this part. Credit extended by such
persons is regulated by limiting the loan value of the collateral
securing the credit, if the purpose of the credit is to buy or carry
margin stock.
(2) This part does not apply to clearing agencies regulated by the
Securities and Exchange Commission or the Commodity Futures Trading
Commission that accept deposits of margin stock in connection with:
(i) The issuance of, or guarantee of, or the clearance of
transactions in, any security (including options on any security,
certificate of deposit, securities index or foreign currency); or
(ii) The guarantee of contracts for the purchase or sale of a
commodity for future delivery or options on such contracts.
(Reg. G, 48 FR 35071, Aug. 3, 1983, as amended at 56 FR 46110, Sept.
10, 1991)
12 CFR 207.2 Definitions.
The terms used in this part have the meanings given them in section
3(a) of the Act or as defined in this section.
(a) Affiliate means any person who, directly or indirectly, through
one or more intermediaries, controls, or is controlled by, or is under
common control with the lender.
(b) Carrying credit is credit that enables a customer to maintain,
reduce, or retire indebtedness originally incurred to purchase a stock
that is currently a margin stock.
(c) Current market value of (1) a security means:
(i) If quotations are available, the closing sale price of the
security on the preceding business day, as appearing in any regularly
published reporting or quotation service; or
(ii) If there is no closing sale price, the lender may use any
reasonable estimate of the market value of the security as of the close
of business on the preceding business day; or
(iii) If the credit is used to finance the purchase of the security,
the total cost of purchase, which may include any commissions charged.
(2) Any other collateral means a value determined by any reasonable
method.
(d) Customer includes any person or persons acting jointly, to or for
whom a lender extends or maintains credit.
(e) Good faith with respect to: (1) The loan value of collateral
means that amount (not exceeding 100 percent of the current market value
of the collateral) which a lender, exercising sound credit judgment,
would lend without regard to the customer's other assets held as
collateral in connection with unrelated transactions.
(2) Accepting a statement or notice from or on behalf of a customer
means that the lender or its duly authorized representative is alert to
the circumstances surrounding the credit, and if in possession of
information that would cause a prudent person not to accept the notice
or certification without inquiry, investigates and is satisfied that it
is truthful.
(f) Indirectly secured (1) includes any arrangement with the customer
under which:
(i) The customer's right or ability to sell, pledge, or otherwise
dispose of margin stock owned by the customer is in any way restricted
while the credit remains outstanding; or
(ii) The exercise of such right is or may be cause for accelerating
the maturity of the credit.
(2) Does not include such an arrangement if:
(i) After applying the proceeds of the credit, not more than 25
percent of the value of the assets subject to the arrangement, as
determined by any reasonable method, are margin securities;
(ii) It is a lending arrangement that permits accelerating the
maturity of the credit as a result of a default or renegotiation of
another credit to the customer by another creditor that is not an
affiliate of the lender;
(iii) The lender holds the margin stock only in the capacity of
custodian, depositary, or trustee, or under similar circumstances, and,
in good faith, has not relied upon the margin stock as collateral; or
(iv) If the lender, in good faith, has not relied upon the margin
stock as collateral in extending or maintaining the credit.
(g) In the ordinary course of business means occurring or reasonably
expected to occur in carrying out or furthering any business purpose, or
in the case of an individual, in the course of any activity for profit
or the management or preservation of property.
(h) Lender means any person subject to the registration requirements
of this part.
(i) Margin stock means:
(1) Any equity security registered or having unlisted trading
privileges on a national securities exchange;
(2) Any OTC margin stock;
(3) Any OTC security designated as qualified for trading in the
National Market System under a designation plan approved by the
Securities and Exchange Commission (NMS Security);
(4) Any debt security convertible into a margin stock or carrying a
warrant or right to subscribe to or purchase a margin stock;
(5) Any warrant or right to subscribe to or purchase a margin stock;
or
(6) Any security issued by an investment company registered under
section 8 of the Investment Company Act of 1940 (15 U.S.C. 80a-8), other
than:
(i) A company licensed under the Small Business Investment Company
Act of 1958, as amended (15 U.S.C. 661); or
(ii) A company which has at least 95 percent of its assets
continuously invested in exempted securities (as defined in 15 U.S.C.
78c(a)(12)); or
(iii) A company which issues face-amount certificates as defined in
15 U.S.C. 80a-2(a)(15), but only with respect of such securities.
(j) Maximum loan value is the percentage of current market value
assigned by the Board under 207.7 of this part to specified types of
collateral. The maximum loan value of margin stock is stated as a
percentage of current market value. All other collateral has good faith
loan value except that puts, calls and combinations thereof have no loan
value.
(k) OTC margin stock means any equity security not traded on a
national securities exchange that the Board has determined has the
degree of national investor interest, the depth and breadth of market,
the availability of information respecting the security and its issuer,
and the character and permanence of the issuer to warrant being treated
like an equity security traded on a national securities exchange. An
OTC stock is not considered to be an OTC margin stock unless it appears
on the Board's periodically published list of OTC Margin Stocks.
(l) Purpose credit is credit for the purpose, whether immediate,
incidental, or ultimate, of buying or carrying a margin stock.
(48 FR 35071, Aug. 3, 1983, as amended at 50 FR 10934, Mar. 19, 1985)
12 CFR 207.3 General requirements.
(a) Registration; termination of registration. (1) Every person
who, in the ordinary course of business, extends or maintains credit
secured, directly or indirectly, by any margin stock shall register on
Federal Reserve Form FR G-1 (OMB control number 7100-0011) within 30
days after the end of any calendar quarter during which (i) the amount
of credit extended equals $200,000 or more, or (ii) the amount of credit
outstanding at any time during that calendar quarter equals $500,000 or
more.
(2) A registered lender may apply to terminate its registration, by
filing Federal Reserve Form FR G-2 (OMB control number 7100-0011), if
the lender has not, during the preceding six calendar months, had more
than $200,000 of such credit outstanding. Registration shall be deemed
terminated when the application is approved by the Board.
(b) Limitation on extending purpose credit. No lender, except a
plan-lender, as defined in 207.5(a)(1) of this part, shall extend any
purpose credit, secured directly or indirectly by margin stock in an
amount that exceeds the maximum loan value of the collateral securing
the credit, as set forth in 207.7 of this part.
(c) Maintaining credit. A lender may continue to maintain any credit
initially in compliance with this part, regardless of:
(1) Reduction in the customer's equity resulting from change in
market prices;
(2) Change in the maximum loan value prescribed by this part; or
(3) Change in the status of the security (from nonmargin to margin)
securing an existing purpose credit.
(d) Arranging credit. No lender may arrange for the extension or
maintenance of any credit, except upon the same terms and conditions
under which the lender itself may extend or maintain credit under this
part except this limitation shall not apply with respect to the
arranging by a lender for a bank to extend or maintain credit on margin
stock or exempted securities.
(e) Purpose statement. Except for credit extended under 207.5 of
this part, whenever a lender extends credit secured directly or
indirectly by any margin stock, the lender shall require its customer to
execute Form FR G-3 (OMB control number 7100-0018), which shall be
signed and accepted by a duly authorized representative of the lender
acting in good faith.
(f) Purpose statement for revolving credit or multiple draw
agreements. (1) If a lender extends credit, secured directly or
indirectly by any margin stock, under a revolving credit or other
multiple draw agreement, Form FR G-3 can either be executed each time a
disbursement is made under the agreement, or at the time the credit
arrangement is originally established.
(2) If a purpose statement executed at the time the credit
arrangement is initially made indicates that the purpose is to purchase
or carry margin stock, the credit will be deemed in compliance with this
part if the maximum loan value of the collateral at least equals the
aggregate amount of funds actually disbursed. For any purpose credit
disbursed under the agreement, the lender shall obtain and attach to the
executed Form FR G-3 a current list of collateral which adequately
supports all credit extended under the agreement.
(g) Single credit rule. (1) All purpose credit extended to a
customer shall be treated as a single credit, and all the collateral
securing such credit shall be considered in determining whether or not
the credit complies with this part.
(2) A lender that has extended purpose credit secured by margin stock
may not subsequently extend unsecured purpose credit to the same
customer unless the combined credit does not exceed the maximum loan
value of the margin stock securing the prior credit.
(3) If a lender extended unsecured purpose credit to a customer prior
to the extension of purpose credit secured by margin securities, the
credits shall be combined and treated as a single credit solely for the
purposes of the withdrawal and substitution provision of paragraph (i)
of this section.
(4) If a lender extends purpose credit secured by any margin stock
and nonpurpose credit to the same customer, the lender shall treat the
credits as two separate loans and may not rely upon the required
collateral securing the purpose credit for the nonpurpose credit.
(h) Mixed collateral loans. A purpose credit secured in part by
margin stock, and in part by other collateral shall be treated as two
separate loans, one secured by the margin stock and one by all other
collateral. A lender may use a single credit agreement, if it maintains
records identifying each portion of the credit and its collateral.
(i) Withdrawals and substitutions. (1) A lender may permit any
withdrawal or substitution of cash or collateral by the customer if the
withdrawal or substitution would not:
(i) Cause the credit to exceed the maximum loan value of the
collateral; or
(ii) Increase the amount by which the credit exceeds the maximum loan
value of the collateral.
(2) For purposes of this section, the maximum loan value of the
collateral on the day of the withdrawal or substitution shall be used.
(j) Exchange offers. To enable a customer to participate in a
reorganization, recapitalization, or exchange offer that is made to
holders of an issue of margin stock a lender may permit substitution of
the securities received. A nonmargin nonexempted security acquired in
exchange for a margin stock shall be treated as if it is margin stock
for a period of 60 days following the exchange.
(k) Renewals and extensions of maturity. A renewal or extension of
the maturity of a credit need not be considered a new extension of
credit if the amount of the credit is increased only by the addition of
interest, service charges, or taxes with respect to the credit.
(l) Transfers of credit. (1) A transfer of a credit between
customers or lenders or between a lender and a bank shall not be
considered a new extension of credit if:
(i) The original credit was extended by a lender in compliance with
this part or was extended by a bank in a manner that would have complied
with this part;
(ii) The transfer is not made to evade this part or part 221 of this
chapter;
(iii) The amount of credit is not increased; and
(iv) The collateral for the credit is not changed.
(2) Any transfer between customers at the same lender shall be
accompanied by a statement by the transferor customer describing the
circumstances giving rise to the transfer and shall be accepted and
signed by a duly authorized representative of the lender acting in good
faith. The lender shall keep such statement with its records of the
transferee account.
(3) When a transfer is made between lenders or between a lender and a
bank, the transferee shall obtain a copy of the Form FR G-3 or Form FR
U-1 originally filed with the transferor lender and retain the copy with
its records of the transferee account. If no form was originally filed
with the transferor, the transferee may accept in good faith a statement
from the transferor describing the purpose of the loan and the
collateral securing it.
(m) Action for lender's protection. Nothing in this part shall
require a lender to waive or forego any lien, or prevent a lender from
taking any action it deems necessary for its protection.
(n) Mistakes in good faith. A mistake in good faith in connection
with the extension or maintenance of credit shall not be a violation of
this part.
(o) Annual Report. Every registered lender shall, within 30 days
following June 30 of every year, file Form FR G-4 (OMB control number
7100-0011).
(p) Where to register and file applications and reports.
Registration statements, applications to terminate registration, and
annual reports shall be filed with the Federal Reserve Bank of the
district in which the principal office of the lender is located.
(q) Lack of notice of NMS security designation. Failure to treat an
NMS security as a margin stock in connection with an extension of credit
shall not be deemed a violation of this part if the designation is made
between quarterly publications of the Board's List of OTC Margin Stocks
and the lender does not have actual notice of the designation.
(48 FR 35071, Aug. 3, 1983, as amended at 49 FR 35758, Sept. 12,
1984; 56 FR 46111, Sept. 10, 1991)
12 CFR 207.4 Credit to broker-dealers.
No lender shall extend or maintain credit secured, directly or
indirectly, by any margin stock to a creditor who is subject to part 220
of this chapter except in the following circumstances:
(a) Emergency Loans. Credit extended in good faith reliance upon a
certification from the customer that the credit is essential to meet
emergency needs arising from exceptional circumstances. Any collateral
for such credit shall have good faith loan value.
(b) Capital Contribution Loans. Credit that the Board has exempted
by order upon a finding that the exemption is necessary or appropriate
in the public interest or for the protection of investors, provided the
Securities Investor Protection Corporation certifies to the Board that
the exemption is appropriate.
12 CFR 207.5 Employee stock option, purchase and ownership plans.
(a) Plan-lender; eligible plan. (1) Plan-lender means any
corporation, (including a wholly-owned subsidiary, or a lender that is a
thrift organization whose membership is limited to employees and former
employees of the corporation, its subsidiaries or affiliates) that
extends or maintains credit to finance the acquisition of margin stock
of the corporation, its subsidiaries or affiliates under an eligible
plan.
(2) Eligible Plan. An eligible plan means any employee stock option,
purchase, or ownership plan adopted by a corporation and approved by its
stockholders that provides for the purchase of margin stock of the
corporation, its subsidiaries, or affiliates.
(b) Credit to exercise rights under or finance an eligible plan. (1)
If a plan-lender extends or maintains credit under an eligible plan, any
margin security that directly or indirectly secures that credit shall
have good faith loan value.
(2) Credit extended under this section shall be treated separately
from credit extended under any other section of this part except 207.3
(a) and (o) of this part.
(c) Credit to ESOPs. A lender may extend and maintain purpose credit
without regard to the provisions of this part, except for 207.3(a) and
207.3(o), if such credit is extended to an employee stock ownership plan
(ESOP) qualified under section 401 of the Internal Revenue Code, as
amended (26 U.S.C. 401).
(48 FR 35071, Aug. 3, 1983, as amended at 50 FR 26355, June 26, 1985)
12 CFR 207.6 Requirements for the List of OTC Margin Stocks.
(a) Requirements for inclusion on the list. Except as provided in
paragraph (d) of this section, an OTC margin stock shall meet the
following requirements:
(1) Four or more dealers stand willing to, and do in fact, make a
market in such stock and regularly submit bona fide bids and offers to
an automated quotations system for their own accounts;
(2) The minimum average bid price of such stock, as determined by the
Board, is at least $5 per share;
(3) The stock is registered under section 12 of the Act, is issued by
an insurance company subject to section 12(g)(2)(G) of the Act, is
issued by a closed end investment management company subject to
registration pursuant to section 8 of the Investment Company Act of 1940
(15 U.S.C. 80a-8), is an American Depository Receipt (ADR) of a foreign
issuer whose securities are registered under section 12 of the Act, or
is a stock of an issuer required to file reports under section 15(d) of
the Act;
(4) Daily quotations for both bid and asked prices for the stock are
continuously available to the general public;
(5) The stock has been publicly traded for at least six months;
(6) The issuer has at least $4 million of capital, surplus, and
undivided profits;
(7) There are 400,000 or more shares of such security outstanding in
addition to shares held beneficially by officers, directors or
beneficial owners of more than 10 percent of the stock;
(8) There are 1,200 or more holders of record, as defined in SEC Rule
12g5-1 (17 CFR 240.12g5-1), of the stock who are not officers, directors
or beneficial owners of 10 percent or more of the stock, or the average
daily trading volume of such a stock, as determined by the Board, is at
least 500 shares; and
(9) The issuer or a predecessor in interest has been in existence for
at least three years.
(b) Requirements for continued inclusion on the list. Except as
provided in paragraph (d) of this section, an OTC margin stock shall
meet the following requirements:
(1) Three or more dealers stand willing to, and do in fact, make a
market in such stock and regularly submit bona fide bids and offers to
an automated quotations system for their own accounts;
(2) The minimum average bid price of such security, as determined by
the Board, is at least $2 per share;
(3) The security is registered as specified in paragraph (a)(3) of
this section;
(4) Daily quotations for both bid and asked prices for the stock are
continuously available to the general public;
(5) The issuer has at least $1 million of capital, surplus, and
undivided profits;
(6) There are 300,000 or more shares of such stock outstanding in
addition to shares held beneficially by officers, directors, or
beneficial owners of more than 10 percent of the stock; and
(7) There continue to be 800 or more holders of record, as defined in
SEC Rule 12g5-1 (17 CFR 240.12g5-1), of the stock who are not officers,
directors, or beneficial owners of 10 percent or more of the stock, or
the average daily trading volume of such stock, as determined by the
Board, is at least 300 shares.
(c) Removal from the list of OTC margin stocks. The Board shall
periodically remove from the list any stock that:
(1) Ceases to exist or of which the issuer ceases to exist, or
(2) No longer substantially meet the provisions of paragraph (b) of
this section or 207.2(k).
(d) Discretionary authority of Board. Without regard to the other
paragraphs of this section, the Board may add to, or omit or remove
from, the OTC margin stock list any equity security, if in the judgment
of the Board, such action is necessary or appropriate in the public
interest.
(e) Unlawful representations. It shall be unlawful for any lender to
make, or cause to be made, any representation to the effect that the
inclusion of a security on the list OTC margin stocks is evidence that
the Board or the SEC has in any way passed upon the merits of, or given
approval to, such security or any transactions therein. Any statement
in an advertisement or other communication containing a reference to the
Board in connection with the list or securities on that list shall be an
unlawful representation.
12 CFR 207.7 Supplement: Maximum loan value of margin stock and other
collateral.
(a) Maximum loan value of a margin stock. The maximum loan value of
any margin stock, except options, is fifty per cent of its current
market value.
(b) Maximum loan value of nonmargin stock and all other collateral.
The maximum loan value of a nonmargin stock and all other collateral
except puts, calls, or combinations thereof is their good faith loan
value.
(c) Maximum loan value of options. Whether they are margin stock or
not, puts, calls, and combinations thereof have no loan value.
12 CFR 207.7 Interpretations
12 CFR 207.101 Application to credit committed before February 1, 1968,
where funds are disbursed thereafter.
(a) The Board has been presented with the question whether this part
applies to an extension of credit to a corporation under a contract
entered into on May 31, 1967, whereby the creditor agreed to purchase
notes of the corporation totaling $150 million in three ''closings'' to
be completed by December 2, 1968. Prior to February 1, 1968,
$132,500,000 was disbursed. The remaining $16,500,000 was scheduled to
be paid on February 21, 1968. It was assumed that the purpose of the
credit was to carry stock that is registered on a national securities
exchange, and that the credit may become secured by such stock.
(b) This part, which becomes effective March 11, 1968, will apply to
credit extended, since (1) on that date the ordinary course of business,
to purchase or carry registered equity securities, if the credit is
secured by such securities. The above-described credit was the subject
of an agreement executed prior to February 1, 1968, that bound the
parties as to the amount, interest rate, term, and principal conditions
of the credit, although some of the funds remained to be disbursed.
(c) The Board concluded that the funds described above, to be
extended after February 1, 1968, will be extended pursuant to a firm
commitment executed prior to that date. The Board was of the opinion
that the date a commitment to extend credit becomes binding should be
regarded as the date when the credit is extended, since (1) on that date
the parties should be aware of law and facts surrounding the transaction
and (2) generally, the date of contract is controlling for purposes of
margin regulations and Federal securities law, regardless of the
delivery of cash or securities. Accordingly, the Board concluded that
this part did not apply to this extension of credit.
(33 FR 4248, Mar. 7, 1968)
12 CFR 207.102 When bank in ''good faith'' has not relied on stock as
collateral.
For text of this interpretation, see 221.117 of this subchapter.
(33 FR 7485, May 21, 1968)
12 CFR 207.103 Corporate guaranty of bank loan as extension of credit
in the ordinary course of business.
(a) The Board recently considered the questions whether (1) the
guaranty by a corporation of an ''unsecured'' bank loan to exercise an
option to purchase stock of the corporation is an ''extension of
credit'' for the purpose of this part (Regulation G), (2) such a
guaranty is given ''in the ordinary course of business'' of the
corporation, as defined in 207.2(b), and (3) the bank involved took
part in arranging for such credit on better terms than it could extend
under the provisions of Part 221 (Regulation U) of this subchapter.
(b) The Board understood that any officer or employee included under
the corporation's stock option plan who wished to exercise his option
could obtain a loan for the purchase price of the stock by executing an
unsecured note to the bank. The corporation would issue to the bank a
guaranty of the loan and hold the purchased shares as collateral to
secure it against loss on the guaranty. Stock of the corporation is
registered on a national securities exchange.
(c) A lender is subject to the registration and other requirements of
this part if, in the ordinary course of his business, he extends credit
on collateral that includes any registered equity securities in the
amount of $50,000 or more in any calendar quarter, or has such credit
outstanding in any calendar quarter in the amount of $100,000 or more.
The Board understood that the corporation in question had $100,000 in
guaranties outstanding during the applicable calendar quarter.
(d) In the Board's judgment a person who guarantees a loan, and
thereby becomes liable for the amount of the loan in the event the
borrower should default, is lending his credit to the borrower. In the
circumstances described, such a lending of credit must be considered an
''extension of credit'' under this part in order to prevent
circumvention of the regulation's limitation on the amount of credit
that can be extended on the security of registered stock.
(e) Under 207.2(b), the term in the ordinary course of his business
means
* * * in the case of a person other than an individual, carrying out
or in furtherance of any business purpose.
In general, stock option plans are designed to provide a company's
employees with a proprietary interest in the company in the form of
ownership of the company's stock. Such plans increase the company's
ability to attract and retain able personnel and, accordingly, promote
the interest of the company and its stockholders, while at the same time
providing the company's employees with additional incentive to work
toward the company's future success. An arrangement whereby
participating employees may finance the exercise of their options
through an unsecured bank loan guaranteed by the company, thereby
facilitating the employees' acquisition of company stock, is likewise
designed to promote the company's interest and is, therefore, in
furtherance of a business purpose.
(f) For the reasons indicated, the Board concluded that under the
circumstances described a guaranty by the corporation constitutes credit
extended in the ordinary course of business under this part, that the
corporation is required to register pursuant to 207.1(a), and that such
guaranties may not be given in excess of the maximum loan value of the
collateral pledged to secure the guaranty, which is 20 percent under the
current supplement to this part.
(g) Section 221.3(u) of this subchapter provides that ''no bank shall
arrange for the extension or maintenance of any credit for the purpose
of purchasing or carrying any stock registered on a national securities
exchange, except upon the same terms and conditions on which the bank
itself could extend or maintain this credit'' under the provisions of
part 221. Since the Board concluded that the giving of a guaranty by
the corporation to secure the loan described above constitutes an
extension of credit, and since the use of a guaranty in the manner
described could not be effectuated without the concurrence of the bank
involved, the Board further concluded that the bank took part in
''arranging'' for the extension of credit in excess of the maximum loan
value of the stock pledged to secure the guaranties.
(34 FR 7005, Apr. 29, 1969; 34 FR 8351, May 30, 1969)
12 CFR 207.104 Contribution to joint venture as extension of credit
when the contribution is disproportionate to the contributor's share in
the venture's profits or losses.
(a) The Board recently considered the question whether a joint
venture, structured so that the amount of capital contribution to the
venture would be disproportionate to the right of participation in
profits or losses, constitutes an ''extension of credit'' for the
purpose of Regulation G.
(b) An individual and a corporation plan to establish a joint venture
to engage in the business of buying and selling securities, including
registered equity securities. The individual would contribute 20
percent of the capital and receive 80 percent of the profits or losses;
the corporate share would be the reverse. In computing profits or
losses, each participant would first receive interest at the rate of 8
percent on his respective capital contribution. Although purchases and
sales would be mutually agreed upon, the corporation could liquidate the
joint portfolio if the individual's share of the losses equaled or
exceeded his 20 percent contribution to the venture. The corporation
would hold the securities, and upon termination of the venture, the
assets would first be applied to repayment of capital contributions.
(c) In general, the relationship of joint venture is created when two
or more persons combine their money, property, or time in the conduct of
some particular line of trade or some particular business and agree to
share jointly, or in proportion to capital contributed, the profits and
losses of the undertaking.
(d) The incidents of the joint venture described above, however,
closely parallel those of an extension of margin credit, with the
corporation as lender and the individual as borrower. The corporation
supplies 80 percent of the purchase price of securities in exchange for
a net return of 8 percent of the amount advanced plus 20 percent of any
gain. Like a lender of securities credit, the corporation is insulated
against loss by retaining the right to liquidate the collateral before
the securities decline in price below the amount of its contribution.
Conversely, the individual -- like a customer who borrows to purchase
securities -- puts up only 20 percent of their cost, is entitled to the
principal portion of any appreciation in their value, bears the
principal risk of loss should that value decline, and does not stand to
gain or lose except through a change in value of the securities
purchased.
(e) The Board is of the opinion that where the right of an individual
to share in profits and losses of such a joint venture is
disproportionate to his contribution to the venture:
(1) The joint venture involves an extension of credit by the
corporation to the individual;
(2) The extension of credit is to purchase or carry registered equity
securities, and is collateralized by such securities; and
(3) If the corporation is neither a bank subject to Regulation U nor
a broker or dealer subject to Regulation T, the credit is of the kind
described by 207.1(a) of Regulation G.
(34 FR 9121, June 10, 1969)
12 CFR 207.105 Applicability of plan-lender provisions to financing of
stock options and stock purchase rights qualified or restricted under
Internal Revenue Code.
(a) The Board has recently been asked whether the plan-lender
provisions of 207.4(a) of Regulation G, ''Securities Credit by Persons
other than Banks, Brokers, or Dealers,'' were intended to apply to the
financing of stock options restricted or qualified under the Internal
Revenue Code where such options or the option plan do not provide for
such financing.
(b) Section 207.4(a) of Regulation G permits a corporation or its
plan-lender to extend credit to its employees without regard to the
normal credit limitations of the regulation for the purpose of
exercising stock options or stock purchase rights if the plan or
agreement under which the credit is extended complies with certain
requirements. Paragraph (1) of 207.4(a) is in effect a ''grandfather
clause,'' exempting from most of the credit limitations of Regulation G
any such credit extended in connection with options or rights meeting
certain specified ''pre-existing'' conditions. Generally, these
conditions recognize inequities that would result from application of
the regulation's restrictions to credit extended in connection with
options or rights granted, or contractual commitments made prior to
February 1, 1968, the date the adoption of Regulation G was announced.
Paragraph (2) of 207.4(a) provides a more limited exemption for credit
extended in connection with options or rights granted after February 1,
1968, and establishes requirements for plans seeking to qualify for this
exemption.
(c) Paragraph (iii) of 207.4(a)(1), which was added effective July
8, 1969, was designed to provide exemption, from all but certain
reporting provisions, for credit extended pursuant to the exercise of
stock options or rights that are qualified or restricted under sections
422 through 424 of the Internal Revenue Code, if the options or rights
were granted prior to February 1, 1968. This exemption applies only to
those plans that provided for credit. This is because (1)
employer-lenders who intended to supply credit when granting such
options could not have anticipated the requirements of Regulation G and
(2) the position of the Commissioner of Internal Revenue that such plans
cannot be modified, would frustrate that intention. If a particular
plan did not provide for credit, no expectations would be defeated by
the fact that it could not be modified to add such provisions.
(d) The recent amendment to paragraph (2) of 207.4(a), which applies
to stock purchase as well as option plans, was to clarify that to be
treated as subject to the more limited exemption in that subparagraph,
an otherwise appropriate credit arrangement need not be part of the
plan. It is the Board's experience that in some nonqualified plans,
particularly stock purchase plans, the credit arrangement is distinct
from the plan. So long as the credit extended, and particularly, in the
present context, the character of the plan-lender, conforms with the
requirements of the regulation, the fact that option and credit are
provided for in separate documents is immaterial. It should be
emphasized that the Board does not express any view on the preferability
of qualified as opposed to nonqualified options; its role is merely to
prevent excessive credit in this area.
(e) The amendments promulgated on February 10, 1969, made one other
change in 207.4(a). This was the addition of the provision that the
plan-lender must be wholly owned as well as controlled by the issuer of
the collateral (taking as a whole, corporate groups including
subsidiaries and affiliates). This insertion was made to clarify the
Board's intent that, to qualify for special treatment under that
section, the lender must stand in a special employer-employee
relationship with the borrower, and a special relationship of issuer
with regard to the collateral. The fact that the Board, for convenience
and practical reasons, permitted the employing corporation to act
through a subsidiary or other entity should not be interpreted to mean
the Board intended the lender to be other than an entity whose
overriding interests were coextensive with the issuer. An independent
corporation, with independent interests was never intended, regardless
of form, to be at the base of exempt stock-plan lending.
(34 FR 18242, Nov. 14, 1969)
12 CFR 207.106 ''Deep in the money put and call options'' as extensions
of credit.
For text of the interpretation on this subject, see 220.122 of this
subchapter.
(35 FR 3280, Feb. 21, 1970)
12 CFR 207.107 Status after July 8, 1969, of credit extended prior to
that date to purchase or carry mutual fund shares.
For the text of interpretation, see 221.119 of this subchapter.
(35 FR 6959, May 1, 1970)
12 CFR 207.108 Applicability of margin requirements to credit in
connection with insurance premium funding programs.
(a) The Board has been asked numerous questions regarding purpose
credit in connection with insurance premium funding programs. The
inquiries are included in a set of guidelines in the format of questions
and answers which follow. A glossary of terms customarily used in
connection with insurance premium funding credit activities is included
in the guidelines. Under a typical insurance premium funding program, a
borrower acquires mutual fund shares for cash, or takes fund shares
which he already owns, and then uses the loan value (currently 40
percent as set by the Board) to buy insurance. Usually, a funding
company (the issuer) will sell both the fund shares and the insurance
through either independent broker/dealers or subsidiaries or affiliates
of the issuer. A typical plan may run for 10 or 15 years with annual
insurance premiums due. To illustrate, assuming an annual insurance
premium of $300, the participant is required to put up mutual fund
shares equivalent to 250 percent of the premium or $750 ($750 40 percent
loan value equals $300 the amount of the insurance premium which is also
the amount of the credit extended).
(b) These guidelines also (1) clarify an earlier 1969 Board
interpretation to show that the public offering price of mutual fund
shares (which includes the front load, or sales commission) may be used
as a measure of their current market value when the shares serve as
collateral on a purpose credit throughout the day of the purchase of the
fund shares, and (2) relax a 1965 Board position in connection with
accepting purpose statements by mail. It is the Board's view that when
it is clearly established that a purpose statement supports a purpose
credit then such statement executed by the borrower may be accepted by
mail, provided it is received and also executed by the lender before the
credit is extended.
(39 FR 9425, Mar. 11, 1974)
12 CFR 207.109 Extension of credit in certain stock option and stock
purchase plans.
Questions have been raised as to whether certain stock option and
stock purchase plans involve extensions of credit subject to Regulation
G when the participant is free to cancel his participation at any time
prior to full payment, but in the event of cancellation the participant
remains liable for damages. It thus appears that the participant has
the opportunity to gain and bears the risk of loss from the time the
transaction is executed and payment is deferred. In some cases brought
to the Board's attention damages are related to the market price of the
stock, but in others, there may be no such relationship. In either of
these circumstances, it is the Board's view that such plans involve
extensions of credit. Accordingly, where the security being purchased
is a margin security and the credit is secured, directly or indirectly,
by any margin security, the creditor must register and the credit must
conform with either the regular margin requirements of 207.1(c) or the
special ''plan-lender'' provisions set forth in 207.4(a) of the
regulation, whichever is applicable. This assumes, of course, that the
amount of credit extended is such that the creditor is subject to the
registration requirements of 207.1(a) of the regulation.
(39 FR 43815, Dec. 19, 1974)
12 CFR 207.110 Accepting a purpose statement through the mail without
benefit of face-to-face interview.
(a) The Board has been asked whether the acceptance of a purpose
statement submitted through the mail by a lender subject to the
provisions of Regulation G will meet the good faith requirement of
207.1(e). Section 207.1(e) states that in connection with any credit
secured by collateral which includes any margin security, a lender must
obtain a purpose statement executed by the borrower and accepted by the
lender in good faith. Such acceptance requires that the lender be alert
to the circumstances surrounding the credit and if further information
suggests inquiry, he must investigate and be satisfied that the
statement is truthful.
(b) The lender is a subsidiary of a holding company which also has
another subsidiary which serves as underwriter and investment advisor to
various mutual funds. The sole business of the lender will be to make
''non-purpose'' consumer loans to shareholders of the mutual funds, such
loans to be collateralized by the fund shares. Mutual funds shares are
margin securities for purposes of Regulation G. Solicitation and
acceptance of these consumer loans will be done principally through the
mail and the lender wishes to obtain the required purpose statement by
mail rather than by a face-to-face interview. Personal interviews are
not practicable for the lender because shareholders of the funds are
scattered throughout the country. In order to provide the same
safeguards inherent in face-to-face interviews, the lender has developed
certain procedures designed to satisfy the good faith acceptance
requirement of the regulation.
(c) The purpose statement will be supplemented with several
additional questions relevant to the prospective borrower's investment
activities such as purchases of any security within the last 6 months,
dollar amount, and obligations to purchase or pay for previous
purchases; present plans to purchase securities in the near future,
participations in securities purchase plans, list of unpaid debts, and
present income level. Some questions have been modified to facilitate
understanding but no questions have been deleted. If additional inquiry
is indicated by the answers on the form, a loan officer of the lender
will interview the borrower by telephone to make sure the loan is
''non-purpose''. Whenever the loan exceeds the ''maximum loan value''
of the collateral for a regulated loan, a telephone interview will be
done as a matter of course.
(d) Although the Board has expressed no views as to the necessity for
face-to-face meetings between borrower and lending officer under
Regulation G, an interpretation under Regulation U published in 1965 (12
CFR 221.115) on the subject has usually been considered applicable.
That view, however, was expressed before the adoption by the Board of
Regulation X (12 CFR part 224) in 1971. One of the stated purposes of
Regulation X was to prevent the infusion of unregulated credit into the
securities markets by borrowers falsely certifying the purpose of a
loan. The Board is of the view that the existence of Regulation X,
which makes the borrower liable for willful violations of the margin
regulations, will allow a lender subject to Regulation G or U to meet
the good faith acceptance requirement of 207.1(e) and 221.3(a),
respectively, without a face-to-face interview if the lender adopts a
program, such as the one described above, which requires additional
detailed information from the borrower and proper procedures are
instituted to verify the truth of the information received. The 1965
interpretation has therefore been withdrawn. Lenders intending to
embark on a similar program should discuss proposed plans with their
district Federal Reserve Bank. Lenders may have existing or future
loans with the prospective customers which could complicate the efforts
to determine the true purpose of the loan. In addition, Regulation U
differs from Regulation G in many important respects.
(e) Section 220.7(a) of Regulation T, in general, prohibits a
broker/dealer from arranging any credit which he himself cannot extend.
Therefore, the Board cautions that any prospectus of sales information
for the mutual fund shares may not offer the services of the lending
company, as any broker/dealer selling the fund shares would thereby be
deemed to have ''arranged'' a loan in violation of Regulation T.
(43 FR 30038, July 13, 1978)
12 CFR 207.111 Combined credit for exercising employee stock options
and paying income taxes incurred as a result of such exercise.
(a) The Board of Governors has been asked whether 207.1(h) of
Regulation G prevents a lender under an employee stock option plan that
meets the requirements of 207.4(a) from extending credit to an employee
to pay the income taxes incurred as a result of the exercise of the
stock option, in addition to the credit to cover the purchase price of
the stock.
(b) Section 207.1(h) prohibits a lender governed by Regulation G from
extending purpose credit if it is secured by collateral including margin
securities, which also secures any other credit to the same person in
excess of $5,000. Unless credit to pay income taxes is also treated as
purpose credit, it could not be extended in an amount in excess of
$5,000 when the borrower also has a purpose loan outstanding with the
lender, secured by margin securities, since such collateral would be
deemed to be also securing the income tax loan. Purpose credit is
defined in 207.2(c) of the regulation as credit which is for the
purpose, whether immediate, incidental, or ultimate, of purchasing or
carrying a margin security.''
(c) Section 207.4(a), which provides special treatment for credit
extended under employee stock option plans, was designed to encourage
their use in recognition of their value in giving an employee a
proprietary interest in the business. Taking a position that might
discourage the exercise of options because of tax complications would
conflict with the purpose of 207.4(a).
(d) Accordingly, the Board has concluded that the combined loans for
the exercise of the option and the payment of the taxes in connection
therewith under plans complying with 207.4(a) may be regarded as credit
which is for the purpose of purchasing or carrying a margin security
within the meaning of 207.2(c). Since the combined loans are treated as
purpose credit, 207.1(h) does not prohibit the transaction,
irrespective of amount.
(45 FR 44256, July 1, 1980)
12 CFR 207.112 Purchase of debt securities to finance corporate
takeovers.
(a) Petitions have been filed with the Board raising questions as to
whether the margin requirements in Regulation G apply to two types of
corporate acquisitions in which debt securities are issued to finance
the acquisition of margin stock of a target company.
(b) In the first situation, the acquiring company, Company A,
controls a shell corporation that would make a tender offer for the
stock of Company B, which is margin stock (as defined in 207.2(i)).
The shell corporation has virtually no operations, has no significant
business function other than to acquire and hold the stock of Company B,
and has substantially no assets other than the margin stock to be
acquired. To finance the tender offer, the shell corporation would
issue debt securities which, by their terms, would be unsecured. If the
tender offer is successful, the shell corporation would seek to merge
with Company B. However, the tender offer seeks to acquire fewer shares
of Company B than is necessary under state law to effect a short form
merger with Company B, which could be consummated without the approval
of shareholders or the board of directors of Company B.
(c) The purchase of the debt securities issued by the shell
corporation to finance the acquisition clearly involves purpose credit
(as defined in 207.2(l)). In addition, such debt securities would be
purchased only by sophisticated investors in very large minimum
denominations, so that the purchasers may be lenders for purposes of
Regulation G. See 12 CFR 207.2(h). Since the debt securities contain no
direct security agreement involving the margin stock, applicability of
the lending restrictions of the Regulation turns on whether the
arrangement constitutes an extension of credit that is secured
indirectly by margin stock.
(d) As the Board has recognized, indirect security can encompass a
wide variety of arrangements between lenders and borrowers with respect
to margin stock collateral that serve to protect the lenders' interest
in assuring that a credit is repaid where the lenders do not have a
conventional direct security interest in the collateral. See 12 CFR
211.113. However, credit is not indirectly secured by margin stock if
the lender in good faith has not relied on the margin stock as
collateral extending or maintaining credit. See 12 CFR 207.2(f)(2)(iv).
(e) The Board is of the view that, in the situation described in
paragraph (b) of this section, the debt securities would be presumed to
be indirectly secured by the margin stock to be acquired by the shell
acquisition vehicle. The staff has previously expressed the view that
nominally unsecured credit extended to an investment company, a
substantial portion of whose assets consist of margin stock, is
indirectly secured by the margin stock. See Federal Reserve Regulatory
Service 5-917.12. This opinion notes that the investment company has
substantially no assets other than margin stock to support indebtedness
and thus credit could not be extended to such a company in good faith
without reliance on the margin stock as collateral.
(f) The Board believes that this rationale applies to the debt
securities issued by the shell corporation described above. At the time
the debt securities are issued, the shell corporation has substantially
no assets to support the credit other than the margin stock that it has
acquired or intends to acquire and has no significant business function
other than to hold the stock of the target company in order to
facilitate the acquisition. Moreover, it is possible that the shell may
hold the margin stock for a significant and indefinite period of time,
if defensive measures by the target prevent consummation of the
acquisition. Because of the difficulty in predicting the outcome of a
contested takeover at the time that credit is committed to the shell
corporation, the Board believes that the purchasers of the debt
securities could not, in good faith, lend without reliance on the margin
stock as collateral. The presumption that the debt securities are
indirectly secured by margin stock would not apply if there is specific
evidence that lenders could in good faith rely on assets other than
margin stock as collateral, such as a guaranty of the debt securities by
the shell corporation's parent company or another company that has
substantial non-margin stock assets or cash flow. This presumption
would also not apply if there is a merger agreement between the
acquiring and target companies entered into at the time the commitment
is made to purchase the debt securities or in any event before loan
funds are advanced. In addition, the presumption would not apply if the
obligation of the purchasers of the debt securities to advance funds to
the shell corporation is contingent on the shell's acquisition of the
minimum number of shares necessary under applicable state law to effect
a merger between the acquiring and target companies without the approval
of either the shareholders or directors of the target company. In these
two situations where the merger will take place promptly, the Board
believes the lenders could reasonably be presumed to be relying on the
assets of the target for repayment.
(g) In addition, the Board is of the view that the debt securities
described in paragraph (b) of this section are indirectly secured by
margin stock because there is a practical restriction on the ability of
the shell corporation to dispose of the margin stock of the target
company. Indirectly secured is defined in 207.2(f) of the regulation
to include any arrangement under which the customer's right or ability
to sell, pledge, or otherwise dispose of margin stock owned by the
customer is in any way restricted while the credit remains outstanding.
The purchasers of the debt securities issued by a shell corporation to
finance a takeover attempt clearly understand that the shell corporation
intends to acquire the margin stock of the target company in order to
effect the acquisition of that company. This understanding represents a
practical restriction on the ability of the shell corporation to dispose
of the target's margin stock and to acquire other assets with the
proceeds of the credit.
(h) In the second situation, Company C, an operating company with
substantial assets or cash flow, seeks to acquire Company D, which is
significantly larger than Company C. Company C establishes a shell
corporation that together with Company C makes a tender offer for the
shares of Company D, which is margin stock. To finance the tender
offer, the shell corporation would obtain a bank loan that complies with
the margin lending restrictions of Regulation U and Company C would
issue debt securities that would not be directly secured by any margin
stock. The Board is of the opinion that these debt securities should
not be presumed to be indirectly secured by the margin stock of Company
D, since, as an operating business, Company C has substantial assets or
cash flow without regard to the margin stock of Company D. Any
presumption would not be appropriate because the purchasers of the debt
securities may be relying on assets other than margin stock of Company D
for repayment of the credit.
(51 FR 1781, Jan. 15, 1986)
12 CFR 207.113 Application of the single-credit rule to loan
participations.
(a) Amendments to parts 207 and 220, effective October 11, 1991,
amended 207.3(l) of Regulation G and 221.3(i) of Regulation U of this
chapter to permit transfers of loans between different types of lenders.
In connection with that rulemaking, comments were received asking the
Board to consider the application of the single-credit rule to the
purchase of loan participations by lenders and banks who have other
outstanding purpose credit with the same borrower.
(b) The single-credit rule ( 207.3(g) of Regulation G and 221.3(d)
of Regulation U of this chapter), provides in part that ''(a)ll purpose
credit extended to a customer shall be treated as a single credit, and
all the collateral securing such credit shall be considered in
determining whether or not the credit complies with this part.'' If a
lender or bank extends purpose credit to a borrower and then purchases a
participation in a loan to the same borrower that represents purpose
credit secured by margin stock, the single-credit rule requires the
aggregation of the two credits. If the borrower pays off one of the two
loans, the participating lender or bank is prohibited under the
withdrawal and substitutions provision ( 207.3(i) of Regulation G and
221.3(f) of Regulation U of this chapter) from allowing the lead lender
or bank to release the pro rata share of the collateral pledged for that
participation unless the other loan is secured by collateral with
sufficient maximum loan value. In addition, the lead lender or bank
cannot allow any withdrawals of collateral during the course of the loan
without contacting each participant to check on the status of any
unrelated purpose credit to that borrower. These administrative burdens
discourage the syndication and transfer of purpose loans.
(c) A version of the single-credit rule was incorporated in
Regulation U when it was first issued in 1936. The rule assumed a
direct relationship between the borrower and the bank. The modern
practice of syndication or subsequent resale of participations severs
the direct relationship between the borrower and the lender and presents
difficulties, as described above, in the further administration of the
loans for compliance with the margin regulations.
(d) The Board is of the view that as long as the lead lender or bank
has control of the collateral, monitors the entire syndicated loan on a
stand-alone basis, and does not allow withdrawals or substitutions
unless sufficient collateral remains, participating lenders and banks
need not aggregate participations with other unrelated purpose credit
they have with the borrower under the single-credit rule.
(56 FR 46228, Sept. 11, 1991)
12 CFR 207.113 PART 208 -- MEMBERSHIP OF STATE BANKING INSTITUTIONS IN
THE FEDERAL RESERVE SYSTEM
Sec.
208.1 Definitions.
208.2 Eligibility requirements.
208.3 Insurance of deposits.
208.4 Application for membership.
208.5 Approval of application.
208.6 Privileges and requirements of membership.
208.7 Conditions of membership.
208.8 Banking practices.
208.9 Establishment or maintenance of branches.
208.10 Publication of reports of member banks and their affiliates.
208.11 Voluntary withdrawal from Federal Reserve System.
208.12 Board forms.
208.13 Capital adequacy.
208.14 Procedures for monitoring Bank Secrecy Act compliance.
208.15 Agricultural loan loss amortization.
208.16 Reporting requirements for State member banks subject to the
Securities Exchange Act of 1934.
208.17 Disclosure of financial information by state member banks.
208.18 Appraisal standards for federally related transactions.
208.19 Payment of dividends.
208.110 ''Messenger service'' provided by State member banks.
208.116 Sale of bank's money orders off premises as establishment of
branch office.
208.117 Mobile branches.
208.122 Loan ''Production Offices'' as branches.
208.124 Purchase of investment company stock by a state member bank.
208.125 Necessity for Board approval of stock dividend by State
member bank.
208.126 Payment of dividends; effect of net losses.
208.127 Payment of dividends exceeding net profits to date of
declaration.
208.128 Commodity- or equity-linked transactions.
Appendix A to Part 208 -- Capital Adequacy Guidelines for State
Member Banks: Risk-Based Measure
Appendix B to Part 208 -- Capital Adequacy Guidelines for State
Member Banks: Tier 1 Leverage Measure
Authority: Secs. 9, 11(a), 11(c), 19, 21, 25, and 25(a) of the
Federal Reserve Act, as amended (12 U.S.C. 321-338, 248(a), 248(c), 461,
481-486, 601, and 611, respectively); secs. 4 and 13(j) of the Federal
Deposit Insurance Act, as amended (12 U.S.C. 1814 and 1823(j),
respectively); sec. 7(a) of the International Banking Act of 1978 (12
U.S.C. 3105); secs. 907-910 of the International Lending Supervision
Act of 1983 (12 U.S.C. 3906-3909); secs. 2, 12(b), 12(g), 12(i),
15B(c)(5), 17, 17A, and 23 of the Securities Exchange Act of 1934 (15
U.S.C. 78b, 781(b), 781(g), 781(i), 78o-4(c)(5), 78q, 78q-1, and 78w,
respectively); sec. 5155 of the Revised Statutes (12 U.S.C. 36) as
amended by the McFadden Act of 1927; and secs. 1101-1122 of the
Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (12
U.S.C. 3310 and 3331-3351).
Source: Reg. H, 17 FR 8006, Sept. 4, 1952, unless otherwise noted.
12 CFR 207.113 Regulations
12 CFR 208.1 Definitions.
For the purposes of this part:
(a) The term State bank means any bank or trust company incorporated
under a special or general law of a State or under a general law for the
District of Columbia, any mutual savings bank (unless otherwise
indicated), and any Morris Plan bank or other incorporated banking
institution engaged in similar business. 1067
(b) The term mutual savings bank means a bank without capital stock
transacting a savings bank business, the net earnings of which inure
wholly to the benefit of its depositors after payment of obligations for
any advances by its organizers, and in addition thereto includes any
other banking institution the capital of which consists of weekly or
other time deposits which are segregated from all other deposits and are
regarded as capital stock for the purposes of taxation and the
declaration of dividends.
(c) The term Board means the Board of Governors of the Federal
Reserve System.
(d) The term board of directors means the governing board of any
institution performing the usual functions of a board of directors.
(e) The term Federal Reserve Bank stock includes the deposit which
may be made with a Federal Reserve Bank in lieu of a subscription for
stock by a mutual savings bank which is not permitted to purchase stock
in a Federal Reserve Bank, unless otherwise indicated.
(f) The terms capital and capital stock means common stock, preferred
stock and legally issued capital notes and debentures purchased by the
Reconstruction Finance Corporation which may be considered capital and
capital stock for purposes of membership in the Federal Reserve System
under the provisions of section 9 of the Federal Reserve Act.
(Reg. H, 17 FR 8006, Sept. 4, 1952, as amended at 24 FR 7029, Aug.
29, 1959)
0671Under the provisions of section 19 of the Federal Reserve Act,
national banks and banks organized under local laws, located in a
dependency or insular possession or any part of the United States
outside of the States of the United States and the District of Columbia
are not required to become members of the Federal Reserve System but
may, with the consent of the board, become members of the System.
However, this Part 208 is applicable only to the admission of banks
eligible for admission to membership under section 9 of the Federal
Reserve Act and does not cover the admission of banks eligible under
section 19 of the Act. Any bank desiring to be admitted to the System
under the provisions of section 19 should communicate with the Federal
Reserve Bank with which it desires to do business.
12 CFR 208.2 Eligibility requirements.
(a) Under the terms of section 9 of the Federal Reserve Act, as
amended, to be eligible for admission to membership in the Federal
Reserve System:
(1) A State bank, other than a mutual savings bank, must possess
capital stock and surplus which, in the judgment of the Board, are
adequate in relation to the character and condition of its assets and to
its existing and prospective deposit liabilities and other corporate
responsibilities: Provided, That no bank engaged in the business of
receiving deposits other than trust funds, which does not possess
capital stock and surplus in an amount equal to that which would be
required for the establishment of a national banking association in the
place in which it is located, shall be admitted to membership unless it
is, or has been, approved for deposit insurance under the Federal
Deposit Insurance Act.
(2) A mutual savings bank must possess surplus and undivided profits
not less than the amount of capital required for the organization of a
national bank in the place where it is situated.
(b) The minimum capital required for the organization of a national
bank, referred to hereinbefore in connection with the capital required
for admission to membership in the Federal Reserve System, is as
follows:
With certain exceptions not here applicable, a national bank must
have surplus equal to 20 percent of its capital in order to commence
business.
12 CFR 208.3 Insurance of deposits.
Any State bank becoming a member of the Federal Reserve System which
is engaged in the business of receiving deposits other than trust funds
and which is not at the time an insured bank under the provisions of the
Federal Deposit Insurance Act, will become an insured bank under the
provisions of that Act on the date upon which it becomes a member of the
Federal Reserve System. 2068 In the case of an insured bank which is
admitted to membership in the Federal Reserve System, the bank will
continue to be an insured bank.
0682In the case of a State bank which is engaged in the business of
receiving deposits other than trust funds and which at the time of its
admission to membership in the Federal Reserve System is not an insured
bank, the Board is required under the provisions of sections 4 and 6 of
the Federal Deposit Insurance Act to issue a certificate to the Federal
Deposit Insurance Corporation to the effect that the bank is a member of
the Federal Reserve System and that consideration has been given to the
financial history and condition of the bank, the adequacy of its capital
structure, its future earnings prospects, the general character of its
management, the convenience and needs of the community to be served by
the bank, and whether or not its corporate powers are consistent with
the purposes of the Federal Deposit Insurance Act.
12 CFR 208.4 Application for membership.
(a) State bank, other than a mutual savings bank. A state bank,
other than a mutual savings bank, applying for membership, shall make
application on Form FR 83A to the Board for an amount of capital stock
in the Federal Reserve Bank of its district equal to six percent of the
paid-up capital stock and surplus of the applying institution.
(b) Mutual savings bank. A mutual savings bank applying for
membership shall make application on Form FR 83B to the Board for an
amount of capital stock in the Federal Reserve Bank of its district
equal to six-tenths of one percent of its total deposit liabilities as
shown by the most recent report of examination of such institution
preceding its admission to membership, or, if such institution be not
permitted by the laws under which it was organized to purchase stock in
a Federal Reserve Bank, on Form FR 83C, for permission to deposit with
the Federal Reserve Bank an amount equal to the amount which it would
have been required to pay in on account of a subscription to capital
stock.
(c) Mutual savings bank which is not authorized to purchase stock of
Federal Reserve Bank at time of admission. If a mutual savings bank be
admitted to membership on the basis of a deposit of the required amount
with the Federal Reserve Bank in lieu of payment upon capital stock
because the laws under which such bank was organized do not at that time
authorize it to purchase stock in the Federal Reserve Bank, it shall
subscribe on Form F.R. 83D for the appropriate amount of stock in the
Federal Reserve Bank whenever such laws are amended so as to authorize
it to purchase stock in a Federal Reserve Bank. 3069
(d) Execution and filing of application. Each application made under
the provisions of this section and the exhibits referred to in the
application blank shall be executed and filed, in duplicate, with the
Federal Reserve Bank of the district in which the applying bank is
located.
0693The Federal Reserve Act provides that, if the laws under which
any such savings bank was organized be not amended at the first session
of the legislature following the admission of the savings bank to
membership so as to authorize mutual savings banks to purchase Federal
Reserve Bank stock, or if such laws be so amended and the bank fail
within six months thereafter to purchase such stock, all of its rights
and privileges as a member bank shall be forfeited and its membership in
the Federal Reserve System shall be terminated in the manner prescribed
in section 9 of the Federal Reserve Act.
12 CFR 208.5 Approval of application.
(a) Matters given special consideration by Board. In passing upon an
application, the following matters will be given special consideration:
(1) The financial history and condition of the applying bank and the
general character of its management;
(2) The adequacy of its capital structure in relation to the
character and condition of its assets and to its existing and
prospective deposit liabilities and other corporate responsibilities;
and its future earnings prospects;
(3) The convenience and needs of the community to be served by the
bank; and
(4) Whether its corporate powers are consistent with the purposes of
the Federal Reserve Act.
(b) Procedure for admission to membership after approval of
application. If an applying bank conforms to all the requirements of
the Federal Reserve Act and this part and is otherwise qualified for
membership, its application will be approved subject to such conditions
as may be prescribed pursuant to the provisions of the Federal Reserve
Act. When the conditions prescribed have been accepted by the applying
bank, it should pay to the Federal Reserve Bank of its district one-half
of the amount of its subscription and, upon receipt of advice from the
Federal Reserve Bank as to the required amount, one-half of one percent
of its paid-up subscription for each month from the period of the last
dividend. 4070 The remaining half of the bank's subscription shall be
subject to call when deemed necessary by the Board. The bank's
membership in the Federal Reserve System shall become effective on the
date as of which a certificate of stock of the Federal Reserve Bank is
issued to it pursuant to its application for membership or, in the case
of a mutual savings bank which is not authorized to subscribe for stock,
on the date as of which a certificate representing the acceptance of a
deposit with the Federal Reserve Bank in place of a payment on account
of a subscription to stock is issued to it pursuant to its application
for membership.
0704In the case of a mutual savings bank which is not permitted by
the laws under which it was organized to purchase stock in a Federal
Reserve Bank, it shall deposit with the Federal Reserve Bank an amount
equal to the amount which it would have been required to pay in on
account of a subscription to capital stock.
12 CFR 208.6 Privileges and requirements of membership.
Every State bank while a member of the Federal Reserve System --
(a) Shall retain its full charter and statutory rights subject to the
provisions of the Federal Reserve Act and other acts of Congress
applicable to member State banks, to the regulations of the Board made
pursuant to law, and to the conditions prescribed by the Board and
agreed to by such bank prior to its admission;
(b) Shall enjoy all the privileges and observe all the requirements
of the Federal Reserve Act and other acts of Congress applicable to
member State banks and of the regulations of the Board made pursuant to
law which are applicable to member State banks;
(c) Shall comply at all times with any and all conditions of
membership prescribed by the Board in connection with the admission of
such bank to membership in the Federal Reserve System; and
(d) Shall not reduce its capital stock except with the prior consent
of the Board. 5071
0715This applies to capital stock of all classes and to capital notes
and debentures legally issued and purchased by the Reconstruction
Finance Corporation which, under the Federal Reserve Act, are considered
as capital stock for purposes of membership.
12 CFR 208.7 Conditions of membership.
(a) Pursuant to the authority contained in the first paragraph of
section 9 of the Federal Reserve Act, which authorizes the Board to
permit applying State banks to become members of the Federal Reserve
System ''subject to the provisions of this act and to such conditions as
it may prescribe pursuant thereto,'' the Board, except as hereinafter
stated, will prescribe the following conditions of membership for each
State bank hereafter applying for admission to the Federal Reserve
System, and, in addition, such other conditions as may be considered
necessary or advisable in the particular case:
(1) Such bank at all times shall conduct its business and exercise
its powers with due regard to the safety of its depositors, and, except
with the permission of the Board of Governors of the Federal Reserve
System, such bank shall not cause or permit any change to be made in the
general character of its business or in the scope of the corporate
powers exercised by it at the time of admission to membership. 6072
(2) The net capital and surplus funds of such bank shall be adequate
in relation to the character and condition of its assets and to its
deposit liabilities and other corporate responsibilities.
(b) The acquisition by a member State bank of the assets of another
institution through merger, consolidation, or purchase may result in a
change in the general character of its business or in the scope of its
corporate powers within the meaning of the condition set forth in
paragraph (a)(1) of this section, and if at any time a bank subject to
such condition anticipates making any such acquisition a detailed report
setting forth all the facts in connection with the transaction shall be
made promptly to the Federal Reserve Bank of the district in which such
bank is located.
(c) If at any time, in the light of all the circumstances, the
aggregate amount of a member State bank's net capital and surplus funds
appears to be inadequate, the bank, within such period as shall be
deemed by the Board to be reasonable for this purpose, shall increase
the amount thereof to an amount which in the judgment of the Board shall
be adequate in relation to the character and condition of its assets and
to its deposit liabilities and other corporate responsibilities.
0726For many years, the Board prescribed, as standard conditions of
membership, a condition which, in general, prohibited banks from
engaging as a business in the sale of real estate loans to the public
and certain conditions relating to the exercise of trust powers,
including one which prohibited self-dealing in the investment of trust
funds. The elimination of these conditions as standard conditions of
membership does not reflect any change in the Board's position as to the
undesirability of the practices formerly prohibited by such conditions;
and attention is called to the fact that engaging as a business in the
sale of real estate loans to the public or failing to conduct trust
business in accordance with the applicable State laws and sound
principles of trust administration may constitute unsafe or unsound
practices and violate the condition set forth in this paragraph.
12 CFR 208.8 Banking practices.
(a) Scope. No State member bank shall engage in practices which are
unsafe or unsound or which result in a violation of law, rule, or
regulation, or which violate any condition imposed by or agreements
entered into with the Board. This section outlines certain of the
practices in which State member banks should not engage.
(b) Waiver. A State member bank has the right to petition the Board
to waive the conditions of this 208.8. A waiver may be granted upon a
showing of good cause. The Board in its discretion may choose to limit,
among other items, the scope, duration, and timing of the waiver.
(c) Effect on other banking practices. Nothing in this section shall
be construed as restricting in any manner the Board's authority to deal
with any banking practice which is deemed to be unsafe or unsound or
otherwise not in accordance with law, rule, or regulation or which
violates any condition imposed in writing by the Board in connection
with the granting of any application or other request by a State member
bank, or any written agreement entered into by such bank with the Board.
Compliance with the provisions of this section shall neither relieve a
State member bank of its duty to conduct all operations in a safe and
sound manner nor prevent the Board from taking whatever action it deems
necessary and desirable to deal with general or specific acts or
practices which, although perhaps not violating the provisions of this
section, are considered nevertheless to be an unsafe or unsound banking
practice.
(d) Letters of credit and acceptances -- (1) Definitions. For the
purpose of this paragraph, standby letters of credit include every
letter of credit (or similar arrangement however named or designated)
which represents an obligation to the beneficiary on the part of the
issuer (i) to repay money borrowed by or advanced to or for the account
of the account party or (ii) to make payment on account of any evidence
of indebtedness undertaken by the account party, or (iii) to make
payment on account of any default by the account party in the
performance of an obligation. 6a073 An ineligible acceptance is a time
draft accepted by a bank, which does not meet the requirements for
discount with a Federal Reserve Bank.
(2) Restrictions. (i) A State member bank shall not issue, extend,
or amend a standby letter of credit (or other similar arrangement,
however named or described) or make an ineligible acceptance or grant
any other extension of credit if, in the aggregate, the amount of all
standby letters of credit and ineligible acceptances issued, renewed,
extended, or amended on or after the effective date of this amendment,
when combined with other extensions of credit issued by the bank would
exceed the legal limitations on loans imposed by the State (including
limitations to any one customer or on aggregate extensions of credit) or
exceed legal limits pertaining to loans to affiliates under Federal law
(12 U.S.C. 371(c)): Provided, That, if any State has a separate
limitation on the issuance of letters of credit or acceptances which
apply to a standby letter of credit or to ineligible acceptances
respectively, then the separate limitation shall apply in lieu of the
standard loan limitation.
(ii) No State member bank shall issue a standby letter of credit or
ineligible acceptance unless the credit standing of the account party
under any letter of credit, and the customer of an ineligible
acceptance, is the subject of credit analysis equivalent to that
applicable to a potential borrower in an ordinary loan situation.
(iii) If several banks participate in the issuance of a standby
letter of credit or ineligible acceptance under a bona fide binding
agreement which provides that, regardless of any event, each participant
shall be liable only up to a certain percentage or certain amount of the
total amount of the standby letter of credit or ineligible acceptance
issued, a State member bank need only include the amount of its
participation for purposes of this section; otherwise, the entire
amount of the letter of credit or acceptance must be included.
(3) Disclosure; recordkeeping. The amount of all outstanding standby
letters of credit and ineligible acceptances, regardless of when issued,
shall be adequately disclosed in the bank's published financial
statements.
Each State member bank shall maintain adequate control and subsidiary
records of its standby letters of credit comparable to the records
maintained in connection with the bank's direct loans so that at all
times the bank's potential liability thereunder and the bank's
compliance with this paragraph (d) may be readily determined.
(4) Exceptions. A standby letter of credit is not subject to the
restrictions set forth above in the following situations:
(i) Prior to or at the time of issuance of the credit, the issuing
bank is paid an amount equal to the bank's maximum liability under the
standby letter of credit; or
(ii) Prior to or at the time of issuance, the bank has set aside
sufficient funds in a segregated, clearly earmarked deposit account to
cover the bank's maximum liability under the standby letter of credit.
(e) Loans by State member banks in identified flood hazard areas --
(1) Property securing loan must be insured against flood. No State
member bank shall make, increase, extend or renew any loan secured by
improved real estate or a mobile home located or to be located in an
area that has been identified by the Secretary of Housing and Urban
Development as an area having special flood hazards and in which flood
insurance has been made available under the National Flood Insurance Act
of 1968, unless the building or mobile home and any personal property
securing such loan is covered for the term of the loan by flood
insurance in an amount at least equal to the outstanding principal
balance of the loan or to the maximum limit of coverage made available
with respect to the particular type of property under the Act, whichever
is less. Notwithstanding the foregoing provision, flood insurance shall
not be required on any State-owned property that is covered under an
adequate policy of self-insurance satisfactory to the Secretary of
Housing and Urban Development who shall publish and periodically revise
the list of states falling within the exemption provided in this
paragraph.
(2) Records of compliance. Each State member bank shall maintain, in
connection with all loans secured by improved real estate or a mobile
home, sufficient records to indicate the method used by the bank to
determine whether or not such loans fall within the provisions of this
paragraph (e) of this section.
(3)(i) Notice of special flood hazards and availability of Federal
disaster relief assistance. Each State member bank shall, as a
condition of making, increasing, extending or renewing any loan secured
by improved real estate or a mobile home located or to be located in an
area that has been identified by the Secretary of Housing and Urban
Development as an area having special flood hazards, mail or deliver as
soon as feasible but not less than 10 days in advance of closing of the
transaction (or not later than the bank's commitment, if any, if the
period between commitment and closing is less than 10 days) a written
notice to the borrower stating: (a) That the property securing the loan
is or will be located in an area so identified, or in lieu of such
notification a State member bank may obtain satisfactory written
assurances from a seller or lessor stating that such seller or lessor
has notified the borrower, prior to the execution of any agreement for
sale or lease, that the property securing the loan is or will be located
in an area so identified; and (b) whether, in the event of damage to
the property caused by flooding in a federally-declared disaster,
Federal disaster relief assistance will be available for such property.
Each State member bank shall require the borrower, prior to closing, to
provide the bank with a written acknowledgment that the property
securing the loan is or will be located in an area so identified and
that the borrower has received the above-required notice regarding
Federal disaster relief assistance.
(ii) Sample notices. A State member bank providing written notice
containing the language presented in appendix A within the time limits
prescribed in paragraph (a) of this section will be considered to be in
compliance with the notice requirements of paragraph (a) of this
section.
(f) State member banks as transfer agents. (1) On or after December
1, 1975, no State member bank or any of its subsidiaries shall act as
transfer agent, as defined in section 3(a)(25) of the Securities
Exchange Act of 1934, (Act) with respect to any security registered
under section 12 of the Act or which would be required to be registered
except for the exemption from registration provided by subsection
(g)(2)(B) or (g)(2)(G) of that section, unless it shall have filed a
registration statement with the Board in conformity with the
requirements of Form TA-1, which registration statement shall have
become effective as hereinafter provided. Any registration statement
filed by a State member bank or its subsidiary shall become effective on
the thirtieth day after filing with the Board unless the Board takes
affirmative action to accelerate, deny or postpone such registration in
accordance with the provisions of section 17A(c) of the Act. Such
filings with the Board will constitute filings with the Securities and
Exchange Commission for purposes of section 17(c)(1) of the Act.
(2) If the information contained in Form TA-1 becomes inaccurate,
misleading or incomplete for any reason, the bank or its subsidiary
shall, within sixty calendar days thereafter, file an amendment to Form
TA-1 correcting the inaccurate, misleading or incomplete information.
(3) Each registration statement on Form TA-1 or amendment thereto
shall constitute a report or application within the meaning of sections
17, 17A(c) and 32(a) of the Act.
(g) State member banks as registered clearing agencies -- (1)
Requirement of notice. Any State, member bank or any of its
subsidiaries that is a registered clearing agency pursuant to section
17A(b) of the Securities Exchange Act of 1934 (the Act), which imposes
any final disciplinary sanction on any participant therein, denies
participation to any applicant or prohibits or limits any person in
respect to access to services offered by such registered clearing
agency, shall file with the Board and the appropriate regulatory agency
(if other than the Board) for a participant or applicant notice thereof
in the manner prescribed herein.
(2) Notice of final disciplinary action. Any registered clearing
agency for which the Board is the appropriate regulatory agency that
takes any final disciplinary action with respect to any participant
shall promptly file a notice thereof with the Board in accordance with
paragraph (g)(3) of this section. For the purposes of this paragraph
final disciplinary action shall mean the imposition of any disciplinary
sanction pursuant to section 17A(b)(3)(G) of the Act or other action of
a registered clearing agency which, after notice and opportunity for
hearing, results in any final disposition of charges of:
(i) One or more violations of the rules of such registered clearing
agency; or
(ii) Acts or practices constituting a statutory disqualification of a
type defined in paragraph (iv) or (v) (except prior convictions) of
section 3(a)(39) of the Act.
However, if a registered clearing agency fee schedule specifies
certain charges for errors made by its participants in giving
instructions to the registered clearing agency which are de minimis on a
per error basis and whose purpose is in part to provide revenues to the
registered clearing agency to compensate it for effort expended in
beginning to process an erroneous instruction, such error charges shall
not be considered a final disciplinary action for purposes of this
paragraph.
(3) Content of notice required by paragraph (g)(2). Any notice filed
pursuant to paragraph (g)(2) of this section shall consist of the
following, as appropriate;
(i) The name of the respondent concerned together with the
respondent's last known address as reflected on the records of the
registered clearing agency and the name of the person, committee, or
other organizational unit that brought the charges involved; except
that, as to any respondent who has been found not to have violated a
provision covered by a charge, identifying information with respect to
such person may be deleted insofar as the notice reports the disposition
of that charge and, prior to the filing of the notice, the respondent
does not request that identifying information be included in the notice.
(ii) A statement describing the investigative or other origin of the
action;
(iii) As charged in the proceeding, the specific provision or
provisions of the rules of the registered clearing agency violated by
such person or the statutory disqualification referred to in paragraph
(g)(2)(ii) of this section and a statement describing the answer of the
respondent to the charges;
(iv) A statement setting forth findings of fact with respect to any
act or practice in which such respondent was charged with having engaged
in or omitted; the conclusion of the registered clearing agency as to
whether such respondent violated any rule or was subject to a statutory
disqualification as charged; and a statement of the registered clearing
agency in support of its resolution of the principal issues raised in
the proceedings;
(v) A statement describing any sanction imposed, the reasons
therefor, and the date upon which such sanction has or will become
effective; and
(vi) Such other matters as the registered clearing agency may deem
relevant.
(4) Notice of final denial, prohibition, termination or limitation
based on qualification or administrative rules. Any registered clearing
agency for which the Board is the appropriate regulatory agency that
takes any final action which denies participation to, or conditions the
participation of, any person or prohibits or limits any person with
respect to access to services offered by the clearing agency based on an
alleged failure of such person to:
(i) Comply with the qualification standards prescribed by the rules
of such registered clearing agency pursuant to section 17A(b)(4)(B) of
the Act; or
(ii) Comply with any administrative requirements of such registered
clearing agency (including failure to pay entry or other dues or fees or
to file prescribed forms or reports) not involving charges of violations
which may lead to a disciplinary sanction shall not considered a final
disciplinary action for purposes of paragraph (g)(2) of this section,
but notice thereof shall be promptly filed with the Board and the
appropriate regulatory agency (if other than the Board) for the affected
person in accordance with paragraph (g)(5) of this section; provided
however, that no such action shall be considered final pursuant to this
subparagraph that results merely from, a notice of such failure to the
person affected, if such person has not sought an adjudication of the
matter, including a hearing, or otherwise exhausted his administrative
remedies within the registered clearing agency with respect to such a
matter.
(5) Content of notice required by paragraph (g)(4). Any notice filed
pursuant to paragraph (g)(4) of this section shall consist of the
following, as appropriate:
(i) The name of each person concerned together with each such
person's last known address as reflected in the records of the
registered clearing agency;
(ii) The specific grounds upon which the action of the registered
clearing agency was based, and a statement describing the answer of the
person concerned;
(iii) A statement setting forth findings of fact and conclusions as
to each alleged failure of the person to comply with qualification
standards, or comply with administrative obligations, and a statement of
the registered clearing agncy in support of the resolution of the
principal issues raised in the proceeding;
(iv) The date upon which such action has or will become effective;
and
(v) Such other matters as the registered clearing agency deems
relevant.
(6) Notice of final action based upon prior adjudicated statutory
disqualifications. Any registered clearing agency for which the Board
is the appropriate regulatory agency that takes any final action with
respect to any person that:
(i) Denies or conditions participation to any person or prohibits or
limits access to service offered by such registered clearing agency;
and
(ii) Is based upon a statutory disqualification of a type defined in
paragraph (A), (B) or (C) of section 3(a)(39) of the Act of consisting
of a prior conviction as described in subparagraph (E) of said section
3(a)(39) shall promptly file notice thereof with the Board and the
appropriate regulatory agency (if other than the Board) for the affected
person in accordance with paragraph (g)(7) of this section; provided,
however, that no such action shall be considered final pursuant to this
paragraph which results merely from a notice of such failure to the
person affected, if such person has not sought an adjudication of the
matter, including a hearing, or otherwise exhausted his administrative
remedies within the registered clearing agency with respect to such a
matter.
(7) Content of notice required by paragraph (g)(6) of this section.
Any notice filed pursuant to paragraph (g)(6) of this section shall
consist of the following, as appropriate:
(i) The name of the person concerned, together with each such
person's last known address as reflected in the records of the
registered clearing agency;
(ii) A statement setting forth the principal issues raised, the
answer of any person concerned, and a statement of the registered
clearing agency in support of its resolution of the principal issues
raised in the proceeding;
(iii) Any description furnished by or on behalf of the person
concerned of the activities engaged in by the person since the
adjudication upon which the disqualification is based;
(iv) A copy of the order or decision of the court, the appropriate
regulatory agency or the self-regulatory organization which adjudicated
the matter giving rise to such statutory disqualification;
(v) The nature of the action taken and the date upon which such
action is to be made effective; and
(vi) Such other matters as the registered clearing agency deems
relevant.
(8) Notice of summary suspension of participation. Any registered
clearing agency for which the Board is the appropriate regulatory agency
that summarily suspends or closes the accounts of a participant pursuant
to the provisions of section 17A(b)(5)(C) of the Act shall within one
business day after the effectiveness of such action file notice thereof
with the Board and the appropriate regulatory agency for the participant
(if other than the Board) of such action in accordance with paragraph
(g)(9) of this section.
(9) Content of notice of summary suspension of participation. Any
notice pursuant to paragraph (g)(8) of this section shall contain at
least the following information, as appropriate:
(i) The name of the participant concerned together with the
participant's last known address as reflected in the records of the
registered clearing agency;
(ii) The date upon which such summary action has or will become
effective;
(iii) If such summary action is based upon the provisions of section
17A(b)(5)(C)(i) of the Act, a copy of the relevant order or decision of
the self-regulatory organization if available to the registered clearing
agency;
(iv) If such summary action is based upon the provisions of section
17A(b)(5)(C)(ii) of the Act, a statement describing the default of any
delivery of funds or securities to the registered clearing agency;
(v) If such summary action is based upon the provisions of section
17A(b)(5)(C)(iii) of the Act, a statement describing the financial or
operating difficulty of the participant based upon which the registered
clearing agency determined that such suspension and closing of accounts
was necessary for the protection of the clearing agency, its
participants, creditors or investors;
(vi) The nature and effective date of the suspension; and
(vii) Such other matters as the registered clearing agency deems
relevant.
(h) Applications for stays of disciplinary sanctions or summary
suspensions by a registered clearing agency. If a registered clearing
agency for which the Securities and Exchange Commission is not the
appropriate regulatory agency imposes any final disciplinary sanction
pursuant to section 17A(b)(3)(G) of the Act, or summarily suspends or
limits or prohibits access pursuant to section 17A(b)(5)(C) of the Act,
any participant aggrieved thereby for which the Board is the appropriate
regulatory agency may file with the Board, by telegram or otherwise, a
request for a stay of imposition of such action. Such request shall be
in writing and shall include a statement as to why such stay should be
granted.
(i) Application for review of final disciplinary sanctions, denials
of participation or prohibitions or limitations of access to services
imposed by registered clearing agencies -- (1) Scope. Proceedings on an
application to the Board under section 19(d)(2) of the Act by a person
that is subject to the Board's jurisdiction for review of any action by
a registered clearing agency for which the Securities and Exchange
Commission is not the appropriate regulatory agency shall be governed by
this paragraph.
(2) Procedure. (i) An application for review pursuant to section
19(d)(2) of the Act shall be filed with the Board within 30 days after
notice is filed by the registered clearing agency pursuant to section
19(d)(1) of the Act and received by the aggrieved person applying for
review, or within such longer period as the Board may determine. The
Secretary of the Board shall serve a copy of the application on the
registered clearing agency, which shall, within ten days after receipt
of the application, certify and file with the Board one copy of the
record upon which the action complained was taken, together with three
copies of an index to such record. The Secretary shall serve upon the
parties copies of such index and any papers subsequently filed.
(ii) Within 20 days after receipt of a copy of the index, the
applicant shall file a brief or other statement in support of his
application which shall state the specific grounds on which the
application is based, the particular findings of the registered clearing
agency to which objection is taken, and the relief sought. Any
application not perfected by such timely brief or statement may be
dismissed as abandoned.
(iii) Within 20 days after receipt of the applicant's brief or
statement the registered clearing agency may file an answer thereto, and
within 10 days of receipt of any such answer the applicant may file a
reply. Any such papers not filed within the time provided by items (i),
(ii), or (iii) will not be received except upon special permission of
the Board.
(iv) On its own motion, the Board may direct that the record under
review be supplemented with such additional evidence as it may deem
relevant. Nevertheless, the registered clearing agency and persons who
may be aggrieved by such clearing agency's action shall not be entitled
to adduce evidence not presented in the proceedings before the
registered clearing agency unless it is shown to the satisfaction of the
Board that such additional evidence is material and that there were
reasonable grounds for failure to present such evidence in the
proceedings before the registered clearing agency. Any request for
leave to adduce additional evidence shall be filed promptly so as not to
delay the disposition of the proceeding.
(v) Oral argument before the Board may be requested by the applicant
or the registered clearing agency as follows:
(A) By the applicant with his brief or statement or within 10 days
after receipt of the registered clearing agency's answer; or
(B) By the registered clearing agency with its answer.
The Board, in its discretion, may grant or deny any request for oral
argument and, where it deems it appropriate to do so, the Board will
consider an application on the basis of the papers filed by the parties,
without oral argument.
(vi) The Board's Rule of Practice for Formal Hearings shall apply to
review proceedings under this rule to the extent that they are not
inconsistent with this rule. Attention is directed particularly to
263.21 of the Rules of Practice relating to formal requirements to the
papers filed.
(j) State member banks, and subsidiaries, departments, and divisions
thereof, which are municipal securities dealers. (1) For purposes of
this paragraph, the terms herein have the meanings given them in section
3(a) of the Securities Exchange Act of 1934 (15 U.S.C. 78c(a)) and the
rules of the Municipal Securities Rulemaking Board. The term Act shall
mean the Securities Exchange Act of 1934 (15 U.S.C. 78a et seq.).
(2) On and after October 31, 1977, a State member bank of the Federal
Reserve System, or a subsidiary or a department or a division thereof,
that is a municipal securities dealer shall not permit a person to be
associated with it as a municipal securities principal or municipal
securities representative unless it has filed with the Board an original
and two copies of Form MSD-4, ''Uniform Application for Municipal
Securities Principal or Municipal Securities Representative Associated
with a Bank Municipal Securities Dealer.'' completed in accordance with
the instructions contained therein, for that person. Form MSD-4 is
prescribed by the Board for purposes of paragraph (b) of Municipal
Securities Rulemaking Board Rule G-7, ''Information Concerning
Associated Persons.''
(3) Whenever a municipal securities dealer receives a statement
pursuant to paragraph (c) of Municipal Securities Rulemaking Board Rule
G-7, ''Information Concerning Associated Persons,'' from a person for
whom it has filed a Form MSD-4 with the Board pursuant to paragraph
(j)(2) of this section, such dealer shall within ten days thereafter,
file three copies of that statement with the Board accompanied by an
original and two copies of a transmittal letter which includes the name
of the dealer and a reference to the material transmitted identifying
the person involved and is signed by a municipal securities principal
associated with the dealer.
(4) Within thirty days after the termination of the association of a
municipal securities principal or municipal securities representative
with a municipal securities dealer that has filed a Form MSD-4 with the
Board for that person pursuant to paragraph (j)(2) of this section, such
dealer shall file an original and two copies of a notification of
termination with the Board on Form MSD-5, ''Uniform Termination Notice
for Municipal Securities Principal or Municipal Securities
Representative Associated With a Bank Municipal Securities Dealer,''
completed in accordance with instructions contained therein.
(5) A municipal securities dealer that files a Form MSD-4, Form
MSD-5, or statement with the Board under this paragraph shall retain a
copy of each such Form MSD-4, Form MSD-5, or statement until at least
three years after the termination of the employment or other association
with such dealer of the municipal securities principal or municipal
securities representative to whom the form or statement relates.
(6) The date that the Board receives a Form MSD-4, Form MSD-5, or
statement filed with the Board under this paragraph shall be the date of
filing. Such a form MSD-4, Form MSD-5, or statement which is not
prepared and executed in accordance with the applicable requirements may
be returned as unacceptable for filing. Acceptance for filing shall not
constitute any finding that a Form MSD-4, Form MSD-5 or statement has
been completed in accordance with the applicable requirements or that
any information reported therein is true, current, complete, or not
misleading. Every Form MSD-4, Form MSD-5, or statement filed with the
Board under this paragraph shall constitute a filing with the Securities
and Exchange Commission for purposes of section 17(c)(1) of the Act (15
U.S.C. 78q(c)(1)) and a report, application, or document within the
meaning of section 32(a) of the Act (15 U.S.C. 78ff(a)).
(k) Recordkeeping and confirmation of certain securities transactions
effected by State member banks -- (1) Definitions: For purposes of this
paragraph (k):
(i) Customer shall mean any person or account, including any agency,
trust, estate, guardianship, committee or other fiduciary account, for
which a State member bank effects or participates in effecting the
purchase or sale of securities, but shall not include a broker, dealer,
dealer bank or issuer of the securities which are the subject of the
transactions;
(ii) Collective investment fund means funds held by a State member
bank as fiduciary and, consistent with local law, invested collectively
(A) in a common trust fund maintained by such bank exclusively for the
collective investment and reinvestment of monies contributed thereto by
the bank in its capacity as trustee, executor, administrator, guardian,
or custodian under the Uniform Gifts to Minors Act, or (B) in a fund
consisting solely of assets of retirement, pension, profit sharing,
stock bonus or similar trusts which are exempt from Federal income
taxation under the Internal Revenue Code;
(iii) A bank shall be deemed to exercise investment discretion with
respect to an account if, directly or indirectly, the bank (A) is
authorized to determine what securities or other property shall be
purchased or sold by or for the account, or (B) makes decisions as to
what securities or other property shall be purchased or sold by or for
the account even though some other person may have responsibility for
such investment decisions;
(iv) Periodic plan (including dividend reinvestment plans, automatic
investment plans and employee stock purchase plans) means any written
authorization for a State member bank acting as agent to purchase or
sell for a customer a specific security or securities, in specific
amounts (calculated in security units or dollars) or to the extent of
dividends and funds available, at specific time intervals and setting
forth the commission or charges to be paid by the customer in connection
therewith or the manner of calculating them;
(v) Security means any interest or instrument commonly known as a
security, whether in the nature of debt or equity, including any stock,
bond, note, debenture, evidence of indebtedness or any participation in
or right to subscribe to or purchase any of the foregoing. The term
security does not include (A) a deposit or share account in a federally
or state insured depository institution, (B) a loan participation, (C) a
letter of credit or other form of bank indebtedness incurred in the
ordinary course of business, (D) currency, (E) any note, draft, bill of
exchange, or bankers acceptance which has a maturity at the time of
issuance of not exceeding nine months, exclusive of days of grace, or
any renewal thereof the maturity of which is likewise limited, (F) units
of a collective investment fund, (G) interests in a variable amount
(master) note of a borrower of prime credit, or (H) U.S. Savings Bonds.
(2) Recordkeeping: Every State member bank effecting securities
transactions for customers shall maintain the following records with
respect to such transactions for at least three years:
(i) Chronological records of original entry containing an itemized
daily record of all purchases and sales of securities. The records of
original entry shall show the account or customer for which each such
transaction was effected, the description of the securities, the unit
and aggregate purchase or sale price (if any), the trade date and the
name or other designation of the broker/dealer or other person from whom
purchased or to whom sold;
(ii) Account records for each customer which shall reflect all
purchases and sales of securities, all receipts and deliveries of
securities, and all receipts and disbursements of cash with respect to
transactions in securities for such account and all other debits and
credits pertaining to transactions in securities;
(iii) A separate memorandum (order ticket) of each order to purchase
or sell securities (whether executed or cancelled), which shall include:
(A) The account(s) for which the transaction was effected;
(B) Whether the transaction was a market order, limit order, or
subject to special instructions;
(C) The time the order was received by the trader or other bank
employee responsible for effecting the transaction;
(D) The time the order was placed with the broker/dealer, or if there
was no broker/dealer, the time the order was executed or canceled;
(E) The price at which the order was executed; and
(F) The broker/dealer utilized;
(iv) A record of all broker/dealers selected by the bank to effect
securities transactions and the amount of commissions paid or allocated
to each such broker during the calendar year.
Nothing contained in this subparagraph shall require a bank to
maintain the records required by this rule in any given manner, provided
that the information required to be shown is clearly and accurately
reflected and provides an adequate basis for the audit of such
information.
(3) Form of notification: Every State member bank effecting a
securities transaction for a customer shall maintain for at least three
years and, except as provided in paragraph (k)(4) of this section, shall
mail or otherwise furnish to such customer either of the following types
of notifications:
(i)(A) A copy of the confirmation of a broker/dealer relating to the
securities transaction; and (B) if the bank is to receive remuneration
from the customer or any other source in connection with the
transaction, and the remuneration is not determined pursuant to a prior
written agreement between the bank and the customer, a statement of the
source and the amount of any remuneration to be received; or
(ii) A written notification disclosing;
(A) The name of the bank;
(B) The name of the customer;
(C) Whether the bank is acting as agent for such customer, as agent
for both such customer and some other person, as principal for its own
account, or in any other capacity;
(D) The date of execution and a statement that the time of execution
will be furnished within a reasonable time upon written request of such
customer, and the identity, price and number of shares or units (or
principal amount in the case of debt securities) of such security
purchased or sold by such a customer;
(E) The amount of any remuneration received or to be received,
directly or indirectly, by any broker/dealer from such customer in
connection with the transaction;
(F) The amount of any remuneration received or to be received by the
bank from the customer and the source and amount of any other
remuneration to be received by the bank in connection with the
transaction, unless remuneration is determined pursuant to a written
agreement between the bank and the customer, provided, however, in the
case of U.S. Government securities, Federal agency obligations and
municipal obligations, this paragraph (F) shall apply only with respect
to remuneration received by the bank in an agency transaction; and
(G) The name of the broker/dealer utilized; or, where there is no
broker/dealer, the name of the person from whom the security was
purchased or to whom it was sold, or the fact that such information will
be furnished within a reasonable time upon written request.
(4) Time of notification: The time for mailing or otherwise
furnishing the written notification described in paragraph (k)(3) of
this section shall be 5 business days from the date of the transaction,
or if a broker/dealer is utilized, within 5 business days from the
receipt by the bank of the broker/dealer's confirmation, but the bank
may elect to use the following alternative procedures if the transaction
is effected for:
(i) Accounts (except periodic plans) where the bank does not exercise
investment discretion and the bank and the customer agree in writing to
a different arrangement as to the time and content of the notification;
provided, however, that such agreement makes clear the customer's right
to receive the written notification within the above prescribed time
period at no additional cost to the customer;
(ii) Accounts (except collective investment funds) where the bank
exercises investment discretion in other than an agency capacity, in
which instance the bank shall, upon request of the person having the
power to terminate the account or, if there is no such person, upon the
request of any person holding a vested beneficial interest in such
account, mail or otherwise furnish to such person the written
notification within a reasonable time. The bank may charge such person
a reasonable fee for providing this information.
(iii) Accounts, where the bank exercises investment discretion in an
agency capacity, in which instance (A) the bank shall mail or otherwise
furnish to each customer not less frequently than once every three
months an itemized statement which shall specify the funds and
securities in the custody or possession of the bank at the end of such
period and all debits, credits and transactions in the customer's
accounts during such period, and (B) if requested by the customer, the
bank shall mail or otherwise furnish to each such customer within a
reasonable time the written notification described in paragraph (k)(3)
of this section. The bank may charge a reasonable fee for providing the
information described in paragraph (k)(3) of this section.
(iv) A collective investment fund, in which instance the bank shall
at least annually furnish a copy of a financial report of the fund, or
provide notice that a copy of such report is available and will be
funished upon request, to each person to whom a regular periodic
accounting would ordinarily be rendered with respect to each
particpating account. This report shall be based upon an audit made by
independent public accountants or internal auditors responsible only to
the board of directors of the bank.
(v) A periodic plan, in which instance the bank shall mail or
otherwise furnish to the customer as promptly as possible after each
transaction a written statement showing the funds and securities in the
custody or possession of the bank, all service charges and commissions
paid by the customer in connection with the transaction, and all other
debits and credits of the customer's account involved in the
transaction; provided that upon the written request of the customer the
bank shall furnish the information described in paragraph (k)(3) of this
section, except that any such information relating to remuneration paid
in connection with the transaction need not be provided to the customer
when paid by a source other than the customer. The bank may charge a
reasonable fee for providing the information described in paragraph
(k)(3) of this section.
(5) Securities trading policies and procedures: Every State member
bank effecting securities transactions for customers shall establish
written policies and procedures providing:
(i) Assignment of responsibility for supervision of all officers or
employees who (A) transmit orders to or place orders with
broker/dealers, or (B) execute transactions in securities for customers;
(ii) For the fair and equitable allocation of securities and prices
to accounts when orders for the same security are recieved at
approximately the same time and are placed for execution either
individually or in combination;
(iii) Where applicable and where permissible under local law, for the
crossing of buy and sell orders on a fair and equitable basis to the
parties to the transaction; and
(iv) That bank officers and employees who make investment
recommendations or decisions for the accounts of customers, who
participate in the determination of such recommendations or decisions,
or who, in connection with their duties, obtain information concerning
which securities are being purchased or sold or recommended for such
action, must report to the bank, within ten days after the end of the
calendar quarter, all transactions in securities made by them or on
their behalf, either at the bank or elsewhere in which they have a
beneficial interest. The report shall identify the securities purchased
or sold and indicate the dates of the transactions and whether the
transactions were purchases or sales. Excluded from this requirement
are transactions for the benefit of the officer or employee over which
the officer or employee has no direct or indirect influence or control,
transactions in mutual fund shares, and all transactions involving in
the aggregate $10,000 or less during the calendar quarter. For purposes
of this paragraph (k)(iv) of this section, the term securities does not
include U.S. Government or Federal agency obligations.
(6) Exceptions: The following exceptions to paragraph (k) shall
apply:
(i) The requirements of paragraphs (k)(2)(ii) through (k)(2)(iv) and
paragraphs (k)(5)(i) through (k)(5)(iii) of this section shall not apply
to banks having an average of less than 200 securities transactions per
year for customers over the prior three calendar year period, exclusive
of transactions in U.S. government and federal agency obligations;
(ii) Activities of a State member bank that are subject to
regulations promulgated by the Municipal Securities Rulemaking Board
shall not be subject to the requirements of this paragraph (k); and
(iii) Activities of foreign branches of a State member bank shall not
be subject to the requirements of this paragraph (k).
(1) Notice to Borrower of Special Flood-Hazards -- Notice is hereby
given to -- - ------ that the improved real estate or mobile home
described in the attached instrument is or will be located in an area
designated by the Secretary of the Department of Housing and Urban
Development as an area having special flood hazards. This area is
delineated on ---------- 's Flood Insurance Rate Map (FIRM) or, if the
FIRM is unavailable, on the community's Flood Hazard Boundary Map
(FHBM). This area has a 1 percent chance of being flooded within any
given year. The risk of exceeding the 1 percent chance increases with
time periods longer than 1 year. For example, during the life of a
30-year mortgage, a structure located in a special flood-hazardous area
has a 26 percent chance of being flooded.
(2) Notice to Borrower about Federal Disaster Relief Assistance --
(a) Notice in participating communities. The improved real estate or
mobile home securing your loan is or will be located in a community that
is now participating in the National Flood Insurance program. In the
event such property is damaged by flooding in a federally-declared
disaster, Federal disaster relief assistance may be available. However,
such assistance will be unavailable if your community has been
identified as a special flood-hazardous area for one year or longer and
is not participating in the National Flood Insurance Program at the time
assistance would be approved. This assistance, usually in the form of a
loan with a favorable interest rate, may be available for damages
incurred in excess of your flood insurance.
(b) Notice in non-participating communities. The improved real
estate or mobile home securing your loan is or will be located in a
community that is not participating in the National Flood Insurance
program. This means that such property is not eligible for Federal
flood insurance. In the event such property is damaged by flooding in a
federally-declared disaster, Federal disaster relief assistance will be
unavailable if your community has been identified as a special
flood-hazardous area for 1 year or longer. Such assistance may be
available only if at the time assistance would be approved your
community is participating in the National Flood Insurance program or
has been identified as a special flood-hazardous area for less than 1
year.
(39 FR 5482, Feb. 13, 1974)
Editorial Note: For Federal Register citations affecting 208.8, see
the List of CFR Sections Affected in the Finding Aids section of this
volume.
6aAs defined, standby letter of credit would not include (1)
commercial letters of credit and similar instruments where the issuing
bank expects the beneficiary to draw upon the issuer and which do not
guaranty payment of a money obligation or (2) a guaranty or similar
obligation issued by a foreign branch in accordance with and subject to
the limitations of Regulation K.
12 CFR 208.9 Establishment or maintenance of branches.
(a) In general. Every State bank which is or hereafter becomes a
member of the Federal Reserve System is subject to the provisions of
section 9 of the Federal Reserve Act relating to the establishment and
maintenance of branches7074 in the United States or in a dependency or
insular possession thereof or in a foreign country. Under the
provisions of section 9, member State banks establishing and operating
branches in the United States beyond the corporate limits of the city,
town, or village in which the parent bank is situated must conform to
the same terms, conditions, limitations, and restrictions as are
applicable to the establishment of branches by national banks under the
provisions of section 5155 of the Revised Statutes of the United States
relating to the establishment of branches in the United States, except
that the approval of any such branches must be obtained from the Board
rather than from the Comptroller of the Currency. The approval of the
Board must likewise be obtained before any member State bank establishes
any branch after July 15, 1952, within the corporate limits of the city,
town, or village in which the parent bank is situated (except within the
District of Columbia). Under the provisions of section 9, member State
banks establishing and operating branches in a dependency or insular
possession of the United States or in a foreign country must conform to
the terms, conditions, limitations, and restrictions contained in
section 25 of the Federal Reserve Act relating to the establishment by
national banks of branches in such places.
(b) Branches in the United States. (1) Before a member State bank
establishes a branch (except within the District of Columbia), it must
obtain the approval of the Board.
(2) Before any nonmember State bank having a branch or branches
established after February 25, 1927, beyond the corporate limits of the
city, town, or village in which the bank is situated is admitted to
membership in the Federal Reserve System, it must obtain the approval of
the Board for the retention of such branches.
(3) A member State bank located in a State which by statute law
permits the maintenance of branches within county or greater limits may,
with the approval of the Board, establish and operate, without regard to
the capital requirements of section 5155 of the Revised Statutes, a
seasonal agency in any resort community within the limits of the county
in which the main office of such bank is located for the purpose of
receiving and paying out deposits, issuing and cashing checks and
drafts, and doing business incident thereto, if no bank is located and
doing business in the place where the proposed agency is to be located;
and any permit issued for the establishment of such an agency shall be
revoked upon the opening of a State or national bank in the community
where the agency is located.
(4) Except as stated in paragraph (b)(3) of this section, in order
for a member State bank to establish a branch beyond the corporate
limits of the city, town, or village in which it is situated, the
aggregate capital stock of the member State bank and its branches shall
at no time be less than the aggregate minimum capital stock required by
law for the establishment of an equal number of national banking
associations situated in the various places where such member State bank
and its branches are situated. 8075
(5) A member State bank may not establish a branch beyond the
corporate limits of the city, town, or village in which it is situated
unless such establishment and operation are at the time authorized to
State banks by the statute law of the State in question by language
specifically granting such authority affirmatively and not merely by
implication or recognition.
(6) Any member State bank which, on February 25, 1927, had
established and was actually operating a branch or branches in
conformity with the State law is permitted to retain and operate the
same while remaining a member of the Federal Reserve System, regardless
of the location of such branch or branches.
(7) The removal of a branch of a member State bank from one town to
another town constitutes the establishment of a branch in such other
town and, accordingly, requires the approval of the Board. The removal
of a branch of a member State bank from one location in a town to
another location in the same town will require the approval of the Board
if the circumstances of the removal are such that the effect thereof is
to constitute the establishment of a new branch as distinguished from
the mere relocation of an existing branch in the immediate neighborhood
without affecting the nature of its business or customers served.
(c) Application for approval of branches in United States. Any
member State bank desiring to establish a branch should submit a request
for the approval by the Board of any such branch to the Federal Reserve
Bank of the district in which the bank is located. Any nonmember State
bank applying for membership and desiring to retain any branch
established after February 25, 1927, beyond the corporate limits of the
city, town, or village in which the bank is situated should submit a
similar request. Any such request should be accompanied by advice as to
the scope of the functions and the character of the business which are
or will be performed by the branch and detailed information regarding
the policy followed or proposed to be followed with reference to
supervision of the branch by the head office; and the bank may be
required in any case to furnish additional information which will be
helpful to the Board in determining whether to approve such request.
(d) Foreign branches. With prior Board approval, a member state bank
having capital and surplus of $1,000,000 or more may establish branches
in foreign countries, as defined in 211.2(f) of Regulation K (12 CFR
211.2(f)). If a member State bank has established a branch in such a
country, it may, unless otherwise advised by the Board, establish other
branches therein after 30 days' notice to the Board with respect to each
such branch.
(Reg. H, 17 FR 8006, Sept. 4, 1952, as amended at 28 FR 8361, Aug.
15, 1963. Redesignated at 39 FR 5482, Feb. 13, 1974 and amended at 47 FR
19321, May 5, 1982)
0747Section 5155 of the Revised Statutes of the United States
provides that: (f) The term branch as used in this section shall be
held to include any branch bank, branch office, branch agency,
additional office, or any branch place of business located in any State
or territory of the United States or in the District of Columbia at
which deposits are received, or checks paid, or money lent.''
0758The requirement of this paragraph is met if the aggregate capital
stock of a member State bank having branches is not less than the total
amount of capital stock which would be required for the establishment of
one national bank in each of the places in which the head office and
branches of the member State banks are located, irrespective of the
number of offices which the bank may have in any such place. There are
no additional capital requirements for additional branches within the
city, town, or village in which the head office is located.
12 CFR 208.10 Publication of reports of member banks and their
affiliates. 9077
(a) Reports of member banks. (1) Each report of condition made by a
member State bank to its Federal Reserve Bank pursuant to a call
therefor by the Board shall be published by such member bank within 20
days from the date the call is issued, unless such time is extended by
the Reserve Bank as provided in 265.2(f)(16) of this chapter (Rules
Regarding Delegation of Authority).
(2) The report shall be printed in a newspaper published in the place
where the bank is located or, if there be no newspaper published in the
place where the bank is located, then in a newspaper published in the
same or in an adjoining country and in general circulation in the place
where the bank is located. The term newspaper, for the purpose of this
part, means a publication with a general circulation published not less
frequently than once a week, one of the primary functions of which is
the dissemination of news of general interest.
(3) The copy of the report for the use of the printer for publication
should be prepared on the form supplied or authorized for the purpose by
the Federal Reserve Bank. Except as permitted in the instructions for
preparation of reports of condition (Forms FFIEC 031-034), the published
information shall agree in every respect with that shown on the face of
the report of condition submitted to the Federal Reserve Bank. All
signatures shall be the same in the published statement (although they
may be typed or otherwise copied on the report for publication):
(i) As in the original report submitted to the Federal Reserve Bank
if the bank does not submit its report of condition electronically, or
(ii) As retained in the bank's files in hard copy if the bank has
filed its report of condition electronically. The hard copy retained in
the bank's file must be made available to examiners upon request.
(4) A copy of the printed report shall be retained in the bank's
files and made available to examiners upon request.
(b) Reports of affiliates. 10078 (1) If reports of affiliates are
requested by the Board of Governors of the Federal Reserve System, each
report of an affiliate of a member State bank, including a holding
company affiliate, shall be published at the same time and in the same
newspaper as the affiliated bank's own condition report submitted to the
Federal Reserve Bank, unless an extension of time for submission of the
report of the affiliate has been granted under authority of the Board of
Governors of the Federal Reserve System. When such extension of time
has been granted, the report of the affiliate must be submitted and
published before the expiration of such extended period in the same
newspaper as the condition report of the bank was published.
(2) The published information shall agree in every respect with that
shown on the face of the report of the affiliate furnished to the
Federal Reserve Bank by the affiliated member bank, except that any item
appearing under the caption Financial relations with bank against which
the word none appears on the report furnished to the Federal Reserve
Bank may be omitted in the published statement of the affiliate:
Provided, That if the word none is shown against all of the items
appearing under such caption in the report furnished to the Federal
Reserve Bank the caption Financial relations with bank shall appear in
the published statement followed by the word none.
(3) A copy of the printed report shall be submitted to the Federal
Reserve Bank.
(c) Waiver of reports of affiliates. Pursuant to section 21 of the
Federal Reserve Act (12 U.S.C. 486), the Board of Governors of the
Federal Reserve System waives the requirement for the submission of
reports of affiliates of State bank members of the Federal Reserve
System, unless such reports are specifically requested by the Board of
Governors. The Board of Governors of the Federal Reserve System may
require the submission of reports which are necessary to disclose fully
relations between member banks and their affiliates and the effect
thereof upon the affairs of member banks.
(Reg. H, 17 FR 8006, Sept. 4, 1952, as amended at 34 FR 5928, Mar.
29, 1969; 39 FR 788, Jan. 3, 1974; 39 FR 1974, Jan. 16, 1974.
Redesignated at 39 FR 5482, Feb. 13, 1974; 54 FR 7183, Feb. 17, 1989)
0779Under the provisions of section 9 of the Federal Reserve Act,
reports of condition of member State banks which, under that section,
must be made to the respective Federal Reserve Banks on call dates fixed
by the Board of Governors of the Federal Reserve System ''shall be
published by the reporting banks in such manner and in accordance with
such regulations as the said Board may prescribe.''
Section 9 also provides that the reports of affiliates of a member
State bank which are required by that section to be furnished to the
respective Federal Reserve Banks ''shall be published by the Bank under
the same conditions as govern its own condition reports''. The term
affiliates, as used in this provision of section 9, under the express
terms of that section, includes ''holding company affiliates as well as
other affiliates'', but a member State bank is not required to furnish
to a Federal Reserve Bank the report of an affiliated member bank.
07810Section 21 of the Federal Reserve Act, among other things,
provides as follows: ''Whenever member banks are required to obtain
reports from affiliates, or whenever affiliates of member banks are
required to submit to examination, the Board of Governors of the Federal
Reserve System or the Comptroller of the Currency, as the case may be,
may waive such requirements with respect to any such report or
examination of any affiliate if in the judgment of the said Board or
Comptroller, respectively, such report or examination is not necessary
to disclose fully the relations between such affiliate and such bank and
the effect thereof upon the affairs of such bank.'' In any case where
the Board has waived the filing of a report of an affiliate, no
publication of a report of an affiliate is required.
12 CFR 208.11 Voluntary withdrawal from Federal Reserve System.
(a) General. Any State bank desiring to withdraw from membership in
a Federal Reserve Bank may do so after six months' written notice has
been filed with the Board; 11079 and the Board, in its discretion, may
waive such six months' notice in any individual case and may permit such
bank to withdraw from membership in a Federal Reserve Bank, subject to
such conditions as the Board may prescribe, prior to the expiration of
six months from the date of the written notice of its intention to
withdraw.
(b) Notice of intention of withdrawal. (1) Any State bank desiring
to withdraw from membership in a Federal Reserve Bank should signify its
intention to do so, with the reasons therefor, in a letter addressed to
the Board and mailed to the Federal Reserve Bank of which such bank is a
member. Any such bank desiring to withdraw from membership prior to the
expiration of six months from the date of written notice of its
intention to withdraw should so state in the letter signifying its
intention to withdraw and should state the reason for its desire to
withdraw prior to the expiration of six months.
(2) Every notice of intention of a bank to withdraw from membership
in the Federal Reserve System and every application for the waiver of
such notice should be accompanied by a certified copy of a resolution
duly adopted by the board of directors of such bank authorizing the
withdrawal of such bank from membership in the Federal Reserve System
and authorizing a certain officer or certain officers of such bank to
file such notice or application, to surrender for cancellation the
Federal Reserve Bank stock held by such bank, to receive and receipt for
any moneys or other property due to such bank from the Federal Reserve
Bank and to do such other things as may be necessary to effect the
withdrawal of such bank from membership in the Federal Reserve System.
(3) Notice of intention to withdraw or application for waiver of six
months' notice of intention to withdraw by any bank which is in the
hands of a conservator or other State official acting in a capacity
similar to that of a conservator should be accompanied by advice from
the conservator or other such State official that he joins in such
notice or application.
(c) Time and method of effecting actual withdrawal. Upon the
expiration of six months after notice of intention to withdraw or upon
the waiving of such six months' notice by the Board, such bank may
surrender its stock and its certificate of membership to the Federal
Reserve Bank and request that same be canceled and that all amounts due
to it from the Federal Reserve Bank be refunded. 12080 Unless withdrawal
is thus effected within eight months after notice of intention to
withdraw is first given, or unless the bank requests and the Board
grants an extension of time, such bank will be presumed to have
abandoned its intention of withdrawing from membership and will not be
permitted to withdraw without again giving six months' written notice or
obtaining the waiver of such notice.
(d) Withdrawal of notice. Any bank which has given notice of its
intention to withdraw from membership in a Federal Reserve Bank may
withdraw such notice at any time before its stock has been canceled and
upon doing so may remain a member of the Federal Reserve System. The
notice rescinding the former notice should be accompanied by a certified
copy of an appropriate resolution duly adopted by the board of directors
of the bank.
(Reg. H, 17 FR 8006, Sept. 4, 1952. Redesignated at 39 FR 5482, Feb.
13, 1974)
07911Under specific provisions of section 9 of the Federal Reserve
Act, however, no Federal Reserve Bank shall, except upon express
authority of the Board, cancel within the same calendar year more than
twenty-five percent of its capital stock for the purpose of effecting
voluntary withdrawals during that year. All applications for voluntary
withdrawals are required by the law to be dealt with in the order in
which they are filed with the Board.
08012A bank's withdrawal from membership in the Federal Reserve
System is effective on the date on which the Federal Reserve Bank stock
held by it is duly canceled. Until such stock has been canceled, such
bank remains a member of the Federal Reserve System, is entitled to all
the privileges of membership, and is required to comply with all
provisions of law and all regulations of the Board pertaining to member
banks and with all conditions of membership applicable to it. Upon the
cancellation of such stock, all rights and privileges of such bank as a
member bank shall terminate.
Upon the cancellation of such stock, and after due provision has been
made for any indebtedness due or to become due to the Federal Reserve
Bank, such bank shall be entitled to a refund of its cash paid
subscription with interest at the rate of one-half of one percent per
month from the date of last dividend, the amount refunded in no event to
exceed the book value of the stock at that time, and shall likewise be
entitled to the repayment of deposits and of any other balance due from
the Federal Reserve Bank.
12 CFR 208.12 Board forms.
All forms referred to in this part and all such forms as they may be
amended from time to time shall be a part of the regulations in this
part.
(Reg. H, 17 FR 8006, Sept. 4, 1952. Redesignated at 39 FR 5482, Feb.
13, 1974)
12 CFR 208.13 Capital adequacy.
The standards and guidelines by which the capital adequacy of state
member banks will be evaluated by the Board are set forth in appendix A
to part 208 for risk-based capital purposes, and, with respect to the
ratios relating capital to total assets, in appendix B to part 208 and
in appendix B to the Board's Regulation Y, 12 CFR part 225.
(55 FR 32831, Aug. 10, 1990)
12 CFR 208.14 Procedures for monitoring Bank Secrecy Act compliance.
(a) Purpose. This section is issued to assure that all state member
banks establish and maintain procedures reasonably designed to assure
and monitor their compliance with the provisions of subchapter II of
chapter 53 of title 31, United States Code, the Bank Secrecy Act, and
the implementing regulations promulgated thereunder by the Department of
Treasury at 31 CFR part 103, requiring recordkeeping and reporting of
currency transactions.
(b) Establishment of compliance program. On or before April 27,
1987, each bank shall develop and provide for the continued
administration of a program reasonably designed to assure and monitor
compliance with the recordkeeping and reporting requirements set forth
in subchapter II of chapter 53 of title 31, United States Code, the Bank
Secrecy Act, and the implementing regulations promulgated thereunder by
the Department of Treasury at 31 CFR part 103. The compliance program
shall be reduced to writing, approved by the board of directors, and
noted in the minutes.
(c) Contents of compliance program. The compliance program shall, at
a minimum:
(1) Provide for a system of internal controls to assure ongoing
compliance;
(2) Provide for independent testing for compliance to be conducted by
bank personnel or by an outside party;
(3) Designate an individual or individuals responsible for
coordinating and monitoring day-to-day compliance; and
(4) Provide training for appropriate personnel.
(Approved by the Office of Management and Budget under control number
7100-0196)
(Reg. H, 52 FR 2860, Jan. 27, 1987)
12 CFR 208.15 Agricultural loan loss amortization.
(a) Definitions. For purposes of this section:
(1) Agricultural Bank means a bank:
(i) The deposits of which are insured by the Federal Deposit
Insurance Corporation;
(ii) Which is located in an area of the country the economy of which
is dependent on agriculture;
(iii) Which has total assets of $100,000,000 or less as of the most
recent Report of Condition; and
(iv) Which has:
(A) At least 25 percent of its total loans in qualified agricultural
loans and agriculturally-related other property; or
(B) Less than 25 percent of its total loans in qualified agricultural
loans and agriculturally-related other property but which bank the Board
or the Reserve Bank in whose District the bank is located or its primary
state regulator has recommended to the Federal Deposit Insurance
Corporation for eligibility under this part.
(2) Qualified agricultural loan means:
(i) Loans qualifying as loans to finance agricultural production and
other loans to farmers or as loans secured by farm land for purposes of
Schedule RC-C of the FFIEC Consolidated Report of Condition or such
other comparable schedule;
(ii) Loans secured by farm machinery,
(iii) Other loans that a bank proves to be sufficiently related to
agriculture for classification as an agricultural loan by the Federal
Reserve; and
(iv) The remaining unpaid balance of any loans, described in
paragraphs (a)(2) (i), (ii) and (iii) of this section, that have been
charged off since January 1, 1984, and that qualify for deferral under
this section.
(3) Accepting Official means:
(i) The Reserve Bank in whose District the bank is located; or
(ii) The Director of the Division of Banking Supervision and
Regulation in cases in which the Reserve Bank cannot determine that the
bank qualifies under the regulation.
(4) Agriculturally-related other property means any property, real or
personal, that the bank owned on January 1, 1983, and any such
additional property that it acquires prior to January 1, 1992, in
connection with a qualified agricultural loan. For the purposes of
208.15(a)(1)(iv) and 205.15(e), the value of such property shall include
the amount previously charged off as loss.
(b) Loss amortization and reappraisal. (1) Provided That there is no
evidence that the loss resulted from fraud or criminal abuse on the part
of the bank, its officers, directors, or principal shareholders, a bank
that has been accepted under this section may, in the manner described
below, amortize in its Reports of Condition and Income:
(i) Any loss that the bank would be required to reflect in its
financial statements for any period between and including 1984 and 1991.
(ii) Any loss that the bank would be required to reflect in its
financial statements for any period between and including 1983 and 1991
resulting from a reappraisal or sale of agriculturally-related other
property.
(2) Amortization under this section shall be computed over a period
not to exceed seven years on a quarterly straight-line basis commencing
in the first quarter after the loan was or is charged off so as to be
fully amortized not later than December 31, 1998.
(c) Accounting for amortization. Any bank which is permitted to
amortize losses in accordance with paragraph (b) of this section, may
restate its capital and other relevant accounts and account for future
authorized deferrals and amortizations in accordance with the
instructions to the FFIEC Consolidated Reports of Condition and Income.
Any resulting increase in the capital account shall be included in
primary capital as per 208.13 of this part.
(d) Eligibility. A proposal submitted in accord with paragraph (f)
of this section shall be accepted, subject to the conditions described
in paragraph (e) of this section, if the Accepting Official finds:
(1) The proposing bank is an agricultural bank;
(2) The proposing bank's current capital is in need of restoration,
but the bank remains an economically viable, fundamentally sound
institution;
(3) There is no evidence that fraud or criminal abuse by the bank or
its officers, directors, or principal shareholders led to significant
losses on qualified agricultural loans or from a reappraisal or sale of
agriculturally-related other property; and
(4) The proposing bank has submitted a capital plan approved by the
Accepting Official that will restore its capital to an acceptable level.
(e) Conditions on acceptance. All acceptances of proposals shall be
subject to the following conditions:
(1) The bank shall fully adhere to the approved capital plan and
shall obtain the prior approval of the Accepting Official for any
modifications to the plan;
(2) With respect to each asset subject to loss deferral under the
program, the bank shall maintain accounting records adequate to document
the amount and timing of the deferrals, repayments and amortizations;
(3) The financial condition of the bank shall not deteriorate to the
point where it is no longer a vaible, fundamentally sound institution;
(4) The bank agrees to make a reasonable effort, consistent with safe
and sound banking practices, to maintain in its loan portfolio a
percentage of agricultural loans, including agriculturally-related other
property, not lower than the percentage of such loans in its loan
portfolio on January 1, 1986; and
(5) The bank shall agree to provide the Accepting Official, upon
request, with such information as the Accepting Official deems necessary
to monitor the bank's amortization, its compliance with conditions, and
its continued eligibility.
(f) Submission of proposals. (1) A bank wishing to amortize losses
on qualified agricultural loans or from reappraisal or sale of
agriculturally-related other property shall submit a proposal to the
appropriate Accepting Official.
(2) The proposal shall contain the following information:
(i) Name and address of the bank;
(ii) Information establishing that the bank is located in an area the
economy of which is dependent on agriculture; the information could
consist of a description of the bank's location, dominant lines of
commerce in its service area, and any other information the bank
believes will support the contention that it is located in such an area.
(iii) A copy of the bank's most recent Report of Condition and
Income;
(iv) If the Report of Condition and Income fails to show that at
least 25 percent of the bank's total loans are qualified agricultural
loans, the basis upon which the bank believes that it should be declared
eligible to amortize losses;
(v) A capital plan demonstrating that the bank will achieve an
acceptable capital level not later than the end of the bank's
amortization period. The plan should provide for a realistic
improvement in the bank's capital, over the course of the amortization
period, from earnings retention, capital injections, or other sources;
and include specific information regarding dividend levels, compensation
to directors, executive officers and individuals who have a controlling
interest and in turn to their related interests, and payments for
services or products furnished by affiliated companies.
(vi) A list of the loans and agriculturally-related other property
upon which the bank proposes to defer loss including for each such loan
or property, the following information:
(A) The name of the borrower, the amount of the loan that resulted in
the loss, and the amount of the loss;
(B) The date on which the loss was declared;
(C) The basis upon which the loss resulted from a qualified
agricultural loan;
(vii) A certification by the bank's chief executive officer that
there is no evidence that the losses resulted from fraud or criminal
abuse by the bank, its officers, directors, or principal shareholders;
(viii) A copy of a resolution by the bank's Board of Directors
authorizing submission of the proposal; and
(ix) Such other information as the Accepting Official may require.
(g) Revocation of eligibility. The failure to comply with any
condition in an acceptance or with the capital restoration plan is
grounds for revocation of acceptance for loss amortization and for an
administrative action against the bank under 12 U.S.C. 1818(b).
Additionally, acceptance of a bank for loss amortization will not
foreclose any administrative action against the bank that the Board may
deem appropriate.
(Reg. H, 52 FR 42090, Nov. 3, 1987, as amended at 53 FR 20812, June
7, 1988)
12 CFR 208.16 Reporting requirements for State member banks subject to
the Securities Exchange Act of 1934.
(a) Filing requirements. Except as otherwise provided in this
section, a State member bank the securities of which are subject to
registration pursuant to section 12(b) or section 12(g) of the
Securities Exchange Act of 1934 (the 1934 Act) (15 U.S.C. 78l (b) and
(g)) shall comply with the rules, regulations and forms adopted by the
Securities and Exchange Commission (Commission) pursuant to sections 12,
13, 14(a), 14(c), 14(d), 14(f) and 16 of the 1934 Act (15 U.S.C. 78l,
78m, 78n(a), (c), (d), (f) and 78p). The term Commission as used in
those rules and regulations shall with respect to securities issued by
State member banks be deemed to refer to the Board unless the context
otherwise requires.
(b) Elections permitted of State member banks with total assets of
$150 million or less. (1) Notwithstanding paragraph (a) of this section
or the rules and regulations promulgated by the Commission pursuant to
the 1934 Act, a State member bank that has total assets of $150 million
or less as of the end of its most recent fiscal year and no foreign
offices may elect to substitute for the financial statements required by
the Commission's Form 10-Q the balance sheet and income statement from
the quarterly report of condition required to be filed by such bank with
the Board under section 9 of the Federal Reserve Act (12 U.S.C. 324)
(Federal Financial Institutions Examination Council Form 033 or 034).
(2) A State member bank may not elect to file financial statements
from its quarterly report of condition pursuant to paragraph (b)(1) of
this section if the amounts reported for net income, total assets or
total equity capital in those statements, which are prepared on the
basis of Federal bank regulatory reporting standards, would differ
materially from such amounts reported in financial statements prepared
in accordance with generally accepted accounting principles (GAAP).
(3) A State member bank qualifying for and electing to file financial
statements from its quarterly report of condition pursuant to paragraph
(b)(1) of this section in its form 10-Q shall include earnings per share
or net loss per share data prepared in accordance with GAAP and disclose
any material contingencies as required by Article 10 of the Commission's
Regulation S-X (15 CFR 210.10-01), in the Management's Discussion and
Analysis of Financial Condition and Results of Operations section of
Form 10-Q.
(c) Filing instructions, inspection of documents, and nondisclosure
of certain information filed. (1) All papers required to be filed with
the Board pursuant to the 1934 Act or regulations thereunder shall be
submitted to the Division of Banking Supervision and Regulation, Board
of Governors of the Federal Reserve System, 20th Street and Constitution
Avenue, NW., Washington, DC 20551. Material may be filed by delivery to
the Board, through the mails, or otherwise. The date on which papers
are actually received by the Board shall be the date of filing thereof
if all of the requirements with respect to the filing have been complied
with.
(2) No filing fees specified by the Commission's rules shall be paid
to the Board.
(3) Copies of the registration statement, definitive proxy
solicitation materials, reports and annual reports to shareholders
required by this section (exclusive of exhibits) will be available for
public inspection at the Board's offices in Washington, DC, as well as
at the Federal Reserve Banks of New York, Chicago, and San Francisco and
at the Reserve Bank in the district in which the reporting bank is
located.
(4) Any person filing any statement, report, or document under the
1934 Act may make written objection to the public disclosure of any
information contained therein in accordance with the procedure set forth
below:
(i) The person shall omit from the statement, report, or document,
when it is filed, the portion thereof that the person desires to keep
undisclosed (hereinafter called the confidential portion). The person
shall indicate at the appropriate place in the statement, report, or
document that the confidential portion has been so omitted and filed
separately with the Board.
(ii) The person shall file with the copies of the statement, report,
or document filed with the Board:
(A) As many copies of the confidential portion, each clearly marked
''CONFIDENTIAL TREATMENT'', as there are copies of the statement,
report, or document filed with the Board. Each copy of the confidential
portion shall contain the complete text of the item and, notwithstanding
that the confidential portion does not constitute the whole of the
answer, the entire answer thereto; except that in case the confidential
portion is part of a financial statement or schedule, only the
particular financial statement or schedule need be included. All copies
of the confidential portion shall be in the same form as the remainder
of the statement, report, or document; and
(B) An application making objection to the disclosure of the
confidential portion. Such application shall be on a sheet or sheets
separate from the confidential portion, and shall (1) identify the
portion of the statement, report, or document that has been omitted, (2)
include a statement of the grounds of objection, and (3) include the
name of each exchange, if any, with which the statement, report, or
document is filed. The copies of the confidential portion and the
application filed in accordance with this paragraph shall be enclosed in
a separate envelope marked ''CONFIDENTIAL TREATMENT'' and addressed to
Secretary, Board of Governors of the Federal Reserve System, Washington,
DC 20551.
(iii) Pending the determination by the Board on the objection filed
in accordance with this paragraph, the confidential portion will not be
disclosed by the Board.
(iv) If the Board determines that the objection shall be sustained, a
notation to that effect will be made at the appropriate place in the
statement, report, or document.
(v) If the Board determines that the objection shall not be sustained
because disclosure of the confidential portion is in the public
interest, a finding and determination to that effect will be entered and
notice of the finding and determination will be sent by registered or
certified mail to the person.
(vi) If the Board determines that the objection shall not be
sustained pursuant to paragraph (c)(4)(v) of this section, the
confidential portion shall be made available to the public:
(A) 15 days after notice of the Board's determination not to sustain
the objection has been given as required by paragraph (c)(4)(v) of this
section, provided that the person filing the objection has not
previously filed with the Board a written statement that he intends in
good faith to seek judicial review of the finding and determination;
(B) 60 days after notice of the Board's determination not to sustain
the objection has been given as required by paragraph (c)(4)(v) of this
section and the person filing the objection has filed with the Board a
written statement that he intends to seek judicial review of the finding
and determination but has failed to file a petition for judicial review
of the Board's determination; or
(C) Upon final judicial determination, if adverse to the party filing
the objection.
(vii) If the confidential portion is made available to the public, a
copy thereof shall be attached to each copy of the statement, report, or
document filed with the Board.
(Reg. H, 52 FR 49376, Dec. 31, 1987)
12 CFR 208.17 Disclosure of financial information by state member
banks.
(a) Purpose and scope. The purpose of this section is to facilitate
the dissemination of publicly available information regarding the
financial condition of state member banks, state licensed agencies of
foreign banks, and state licensed branches of foreign banks that are not
insured by the Federal Deposit Insurance Corporation. This section
requires all state-chartered banks that are members of the Federal
Reserve System and all other covered institutions:
(1) To make year-end Call Reports or Reports of Assets and
Liabilities of U.S. Branches and Agencies of Foreign Banks or, in the
case of state member banks, other alternative financial information,
available to shareholders, customers, and the general public upon
request; and
(2) To advise shareholders and the public of the availability of this
information.
This section does not amend or modify the publication requirements of
208.10, or any other section of this regulation.
(b) Definitions. For purposes of this section, the following
definitions apply:
(1) Call Report means the Consolidated Reports of Condition and
Income (OMB No. 7100-0036) filed pursuant to 12 U.S.C. 324 and 208.10
of this regulation (12 CFR 208.10).
(2) State member bank means a bank that is chartered by a State and
is a member of the Federal Reserve System.
(3) Other covered institutions means state licensed agencies of
foreign banks, or state licensed branches of foreign banks that are not
insured by the Federal Deposit Insurance Corporation.
(c) Availability of financial information -- (1) Shareholders. Each
state member bank shall advise its shareholders, by a written
announcement, which may be included in the notice of the annual
shareholders' meeting, that one copy of certain financial information is
available free of charge upon request. The announcement shall include,
at a minimum, an address or telephone number to which requests may be
directed.
(2) General public. State member banks and other covered
institutions shall use reasonable means at their disposal to advise the
public of the availability of information pursuant to this section.
Bankers' banks, as defined by the Federal Reserve Act, as amended by the
Monetary Control Act of 1980 (title I of Pub. L. 96-221), and 12 CFR
204.121, are exempt from this requirement. The notification to the
public shall state that one copy of the information is available free of
charge upon request and state an address or telephone number to which
requests may be directed.
(d) Financial information to be provided by state member banks. The
bank shall have discretion to determine which type of information,
identified in this subsection, to release. The bank shall make the
information it chooses to release available as soon as is reasonably
possible but not later than April 1 of the year immediately following
the end of the year to which the most recently available information
pertains. State member banks shall fulfill the requirements of this
section by providing, upon request, at least one free copy to each
requestor of the following information:
(1) Copies of their entire Call Report for the most recent year end
and the prior year end, excluding any information for which confidential
treatment is permitted pursuant to the Call Report instructions; or
(2) Copies of only the following schedules from their Call Reports
for the most recent year end and the prior year end, excluding any
information for which confidential treatment is permitted pursuant to
the Call Report instructions:
(i) Schedule RC (Balance Sheet);
(ii) Schedule RC-N (Past Due and Nonaccrual Loans and Leases);
(iii) Schedule RI (Income Statement);
(iv) Schedule RI-A (Changes in Equity Capital); and
(v) Schedule RI-B (Charge-offs and Recoveries and Changes in
Allowance for Loan and Lease Losses) -- Part I may be omitted; or
(3) In the case of a bank required to file statements and reports
pursuant to the Board's Regulation H, a copy of the bank's annual report
to shareholders for meetings at which directors are to be elected or the
bank's annual report; or
(4) In the case of a bank with independently audited financial
statements, copies of the audited financial statements and the
certificate or report of the independent accountant if such statements
contain information for the two most recent year ends comparable to that
specified in paragraph (d)(2) of this section; or
(5) In the case of a bank that is the only bank subsidiary of a bank
holding company, that is majority owned by that bank holding company,
and that has assets equal to 95 percent or more of the bank holding
company's consolidated total assets, a copy of either:
(i) The annual report of the bank holding company prepared in
conformity with the regulations of the Securities and Exchange
Commission; or
(ii) If the holding company has consolidated assets of $150 million
or more, the sections in the bank holding company's consolidated
financial statements for the most recent year end and the prior year end
on Form FR-Y-9C (''Consolidated Financial Statements for Bank Holding
Companies With Total Consolidated Assets of $150 Million or More, or
With More Than One Subsidiary Bank'' (OMB control number 7100-0128))
prepared pursuant to the Board's Regulation Y, and comparable to the
Call Report schedules enumerated in paragraph (d)(2) of this section.
(e) Financial information to be provided by other covered
institutions. Other covered institutions shall fulfill the requirements
of this section by providing, upon request, at least one free copy to
each requestor of the following schedules from the Report of Assets and
Liabilities of U.S. Branches and Agencies of Foreign Banks (OMB control
number 7100-0032) for the most recent year end and the prior year end:
(1) Schedule RAL (Assets and Liabilities);
(2) Schedule E (Deposit Liabilities and Credit Balances);
(3) Schedule P (Other Borrowed Money).
The institution shall make the information available as soon as is
reasonably possible but not later than April 1 of the year immediately
following the end of the year to which the most recently available
information pertains.
(f) Disclaimer. The following legend shall be included with any
financial information provided pursuant to this section:
This financial information has not been reviewed, or confirmed for
accuracy or relevancy, by the Federal Reserve System.
(g) This section is not intended to create a private right of action
against any institution disclosing documents pursuant to this section.
(54 FR 6117, Feb. 8, 1989)
12 CFR 208.18 Appraisal standards for federally related transactions.
The standards applicable to appraisals rendered in connection with
federally related transactions entered into by state member banks are
set forth in subpart G of the Board's Regulation Y, 12 CFR part 225.
(55 FR 27771, July 5, 1990)
12 CFR 208.19 Payment of dividends.
(a) Capital limitations on payment of dividends. No state member
bank shall, during the time it continues its banking operations,
withdraw, or permit to be withdrawn, either in the form of dividends or
otherwise, any portion of its capital. If losses have at any time been
sustained by a state member bank that equal or exceed its undivided
profits then on hand, no dividend shall be paid. No dividend shall be
paid by a state member bank while it continues its banking operations,
to an amount greater than its net profits then on hand, deducting
therefrom its losses and bad debts.
(1) Exceptions. Exceptions to the limitations contained in this
paragraph (a) may be made only with the prior approval of the Board and
of at least two-thirds of the shares of each class of stock outstanding.
(2) Dividends on common and preferred stock. The provisions of this
paragraph (a) shall apply to the payment of dividends on both common and
preferred stock.
(3) Bad debt. Under this paragraph (a), bad debts must be deducted
from the net profits then on hand in computing funds available for the
payment of dividends. The term bad debt includes matured obligations
due a bank on which the interest is past due and unpaid for six months
unless the debts are well secured and in the process of collection.
Obligations include every type of indebtedness owed to the bank,
including, for example, loans, investment securities, time deposits in
other depository institutions, and leases. The six-month period of
default may begin at any time, regardless of when the debt matures.
(i) Matured debt. Whether a debt has matured for the purposes of
this subsection usually will be determined by applicable contract law.
Generally, a debt is matured when all or a part of the principal is due
and payable as a result of demand, arrival of the stated maturity date,
or acceleration by contract or by operation of law. Nevertheless, any
demand debt on which the payment of interest is six months past due will
be considered matured even though payment on the debt has not been
demanded. Installment loans on which any payment is six months past due
will be considered matured even though acceleration of the total debt
may not have occurred.
(ii) Well-secured debt. A debt is well secured if it is secured by
collateral in the form of liens on, or pledges of, real or personal
property, including securities, having realizable value sufficient to
discharge the debt in full, or by the guaranty of a financially
responsible party. If a loan that would otherwise be considered a bad
debt is partially secured, that portion not properly secured will be
considered a bad debt.
(iii) Debt in process of collection. A debt is in the process of
collection if collection of the debt is proceeding in due course, either
through legal action, including judgment enforcement procedures, or, in
appropriate circumstances, through collection efforts not involving
legal action which are reasonably expected to result in repayment of the
debt or in its restoration to current status. In any case, the bank
should have a plan of collection setting forth the reasons for the
selected method of collection, the responsibilities of the bank and the
borrower, and the expected date of repayment of the debt or its
restoration to current status.
(iv) Debts of bankrupt or deceased debtors. A claim duly filed
against the estate of a bankrupt or deceased debtor is considered as
being in the process of collection. The obligation is well secured if
it meets the criteria set forth in paragraph (a)(3)(ii) of this section
or if the claim of the bank against the estate has been duly filed and
the statutory period for filing has expired and the assets of the estate
are adequate to discharge all obligations in full.
(v) Documentation. The bank must maintain in its files documentation
to support its evaluation of the obligation. In addition, the bank must
retain, at a minimum, monthly progress reports on its collection
efforts, noting and explaining any deviation from the collection plan.
(4) Undivided profits then on hand. For the purpose of this section,
the terms undivided profits then on hand and net profits then on hand
shall have the same meaning, and shall be referred to herein as
undivided profits then on hand.
(i) Allowance for loan and lease losses. When calculating the amount
of dividends a bank can pay under 12 U.S.C. 56 and this paragraph, the
bank may not add the balance in its allowance for loan and lease losses
to its undivided profits for the purpose of determining undivided
profits then on hand. The terms allowance for loan and lease losses and
undivided profits shall have the same meaning as set forth in the
instructions for the Reports of Condition and Income.
(ii) Bad debts. When deducting its bad debts from its undivided
profits then on hand, a bank shall first subtract the sum of its bad
debts from the balance of its allowance for loan and lease losses
account. If the sum of a bank's bad debts is greater than its allowance
for loan and lease losses, the excess bad debt shall then be deducted
from the bank's undivided profits then on hand.
(iii) Surplus surplus. State member banks are required to comply
with state law provisions concerning the maintenance of surplus funds in
addition to common capital. To the extent a bank has capital surplus in
excess of that required under applicable state law, the bank has surplus
surplus. Only that portion of the surplus surplus that meets the
following conditions may be transferred to the undivided profits account
and be available for the payment of dividends:
(A) The bank's board of directors approves the transfer of funds from
capital surplus to undivided profits; and
(B) The transfer has been approved by the Board. The bank must be
able to demonstrate to the Board that the portion of the surplus surplus
to be transferred came from the earnings of prior periods, excluding
earnings transferred as a result of stock dividends. Requests for Board
approval shall be submitted to the appropriate Federal Reserve Bank.
The bank may consider the transfer to be approved if the Board or the
Reserve Bank does not notify the bank within thirty days after the
Reserve Bank's receipt of the notice that the transfer has been
disapproved or that it is subject to continuing consideration.
(b) Earnings limitations on payment of dividends. A state member
bank may not pay a dividend if the total of all dividends declared by
the bank in any calendar year exceeds the total of its net profits for
that year combined with its retained net profits of the preceding two
calendar years, less any required transfers to surplus or to a fund for
the retirement of any preferred stock, unless the bank has received the
prior approval of the Board for the dividend under paragraph (b)(3) of
this section.
(1) Dividends on common and preferred stock. The provisions of this
paragraph (b) apply to the payment of dividends on both preferred and
common stock.
(2) Net profits. Net profits shall be equal to the net income or
loss as reported by a state member bank in its Reports of Condition and
Income. When computing its net profits under this section, a bank
should not add its provisions for loan and lease losses to, nor deduct
net charge offs from, its reported net income.
(3) Retained net profits. Retained net profits of any period shall
be equal to the net income or loss as reported in the Reports of
Condition and Income less any common or preferred stock dividends
declared or otherwise charged to the undivided profits of the period for
which retained net profits are computed.
(4) Approval of dividends. A bank must request and receive the
approval of the Board before declaring a dividend if the amount of all
dividends (common and preferred), including the proposed dividend,
declared by the bank in any calendar year exceeds the total of the
bank's net profits of that year to date combined with its retained net
profits of the preceding two calendar years, less any required transfers
to surplus or a fund for the retirement of any preferred stock.
Requests for the Board's approval shall be submitted to the appropriate
Federal Reserve Bank.
(5) Effective date and transition provisions. (i) For the purpose of
computing net profits pursuant to 12 U.S.C. 60, a state member bank must
apply paragraph (b)(2) of this section no later than January 1, 1991. A
bank may elect to use this paragraph (b)(2) of this section to calculate
net profits for 1990, if it applies this provision on a full calendar
year to date basis.
(ii) Whether a bank chooses to use paragraph (b)(2) of this section
beginning as of January 1, 1990 or 1991, it may elect to apply the
paragraph (b)(2) of this section to recalculate retained net profits for
one or both of the prior two years.
(iii) Once a bank has elected to calculate net profits or retained
net profits for a particular year applying the provisions of paragraph
(b)(2) of this section, retained net profits and net profits for all
subsequent periods in the calculation must also be calculated using
paragraph (b)(2) of this section. If a state member bank has elected to
use paragraph (b)(2) of this section for a particular year, the bank may
not change the method of calculation used for that year during
subsequent periods.
(55 FR 52986, Dec. 26, 1990)
12 CFR 208.19 Interpretations
12 CFR 208.110 ''Messenger service'' provided by State member banks.
(a) The Board of Governors has been asked whether an arrangement
under which a State member bank provides messenger service for a
customer, subject to an agreement that the messenger acts as agent for
the customer, would involve the operation of a branch by the bank.
(b) Section 9 of the Federal Reserve Act (12 U.S.C. 321) provides, in
effect, that a State member bank, if permitted to do so by State law,
may establish branches on the same terms and conditions and subject to
the same limitations and restrictions as are applicable to the
establishment of branches by national banks, except that the approval of
the Board of Governors, instead of the Comptroller of the Currency,
shall be obtained before a branch may be established by a State member
bank. It is apparent that it was the intent of Congress that national
banks and State member banks should have substantially equal opportunity
to establish branches.
(c) Section 5155 of the Revised Statutes (12 U.S.C. 36), relating to
branches of national banks, provides that the term branch shall be held
to
include any branch bank, branch office, branch agency, additional
office, or any branch place of business * * * at which deposits are
received, or checks paid, or money lent.
(d) Whether any of the banking transactions described in the law, or
other banking transactions, are conducted at an ''additional office'' or
other ''place of business'' can be determined only on the basis of
particular factual situations. The question here presented refers only
to ''messenger service'' provided by the Bank, without any indication of
the purpose of the service or the exact circumstances in which it would
be provided.
(e) It is assumed, however, that the service in question would
involve picking up deposits at the respective addresses of particular
customers and the payment of checks drawn by such customers on the bank;
that the messenger normally would be an armored car owned by the bank
or by an independent contractor; that the cost of the service would be
borne by the bank; that, in the case of deposits, there would be a
written agreement between the bank and the customer under which the
messenger would act as agent of the customer and the bank would assume
no liability for the funds collected until they were received by it from
the messenger at the bank's premises; and that, in the case of payment
of checks, the checks would be presented at the bank's premises by the
messenger acting as agent of the customer and the proceeds received by
the messenger for transmittal to the customer, with no liability on the
part of the bank for such proceeds after their delivery to the
messenger.
(f) Assuming the facts to be as stated above, the Board does not
regard such arrangements as involving the establishment and operation of
branches by State member banks. Whether the use of messenger service in
other circumstances would constitute branch banking would, of course,
have to be determined on the basis of the facts involved.
(29 FR 7816, June 19, 1964)
12 CFR 208.116 Sale of bank's money orders off premises as
establishment of branch office.
(a) The Board of Governors has been asked to consider whether the
appointment by a State member bank of an agent to sell the bank's money
orders, at a location other than the premises of the bank, constitutes
the establishment of a branch office.
(b) Section 5155 of the Revised Statutes (12 U.S.C. 36), which is
also applicable to State member banks, defines the term branch as
including ''any branch bank, branch office, branch agency, additional
office, or any branch place of business * * * at which deposits are
received, or checks paid, or money lent.'' The basic question is whether
the sale of a bank's money orders by an agent amounts to the receipt of
deposits at a branch place of business within the meaning of this
statute.
(c) Money orders are classified as deposits for certain purposes.
However, they bear a strong resemblance to traveler's checks that are
issued by banks and sold off premises. In both cases, the purchaser
does not intend to establish a deposit account in the bank, although a
liability on the bank's part is created. Even though they result in a
deposit liability, the Board is of the opinion that the issuance of a
bank's money orders by an authorized agent does not involve the receipt
of deposits at a ''branch place of business'' and accordingly does not
require the Board's permission to establish a branch.
(d) Banks engaging in this practice should, of course, exercise the
utmost discretion in choosing agents to sell the bank's money orders.
It has been suggested that the agents be bonded, their authority be
limited, and proceeds of the sales be remitted daily. Also the bank's
blanket bond might be amended to provide protection if the present
provisions are inadequate.
(30 FR 3525, Mar. 17, 1965)
12 CFR 208.117 Mobile branches.
The Board of Governors was recently requested by a State member bank
to approve the operation of mobile offices at designated out-of-town
locations. These offices would be stationed at such locations on
certain days and hours each week. Section 5155 of the Revised Statutes
(12 U.S.C. 36), which is made applicable by section 9 of the Federal
Reserve Act to the establishment of branches by State member banks,
defines the term branch as any ''place of business * * * at which
deposits are received or checks paid, or money lent.'' Accordingly, the
Board concluded that as each location would be a place of business at
which some or all of such activities would be conducted, permission to
establish branches was required. Such offices may only be approved by
the Board when State statute permits branch banking at such locations.
The approval of the State authorities had been obtained and the Board
approved the establishment of branches at these locations.
(30 FR 14552, Nov. 23, 1965)
12 CFR 208.122 Loan ''Production Offices'' as branches.
For text of interpretation relating to this subject, see 250.141 of
this chapter.
(33 FR 11812, Aug. 21, 1968)
12 CFR 208.124 Purchase of investment company stock by a state member
bank.
(a) Scope. The Board of Governors has been asked whether a state
member bank may purchase and hold for its own account stock of
investment companies (mutual funds) whose portfolios consist entirely of
securities that state member banks may purchase directly, and futures,
forwards, options, repurchase agreements and securities lending
contracts relating to those securities.
(b) Investment authority. The National Bank Act, 12 U.S.C. 24(7),
provides that a national bank may purchase for its own account
investment securities under such limits and restrictions as the
Comptroller of the Currency may prescribe. The statute defines
investment securities to mean marketable obligations evidencing
indebtedness of any person, partnership, association, or corporation in
the form of bonds, notes, and debentures. The Act further limits the
holdings of securities of any one issuer to an amount equal to ten
percent of the capital stock and surplus of the bank. These limits,
however, do not apply to obligations issued by the United States,
general obligations of any state or any political subdivision of any
state, and to certain obligations of federal agencies. The restrictions
of 12 U.S.C. 24(7) also apply to state member banks under 12 U.S.C. 335.
(c) Authorization. The Board has determined that a state member bank
may purchase and hold for its own account stock of any investment
company (including a money market mutual fund), subject to the following
conditions:
(1) Investment authority of the investment company. The investment
company may have authority, as stated in the investment objectives of
its current prospectus, to invest in the following securities and no
others: United States Treasury and agency obligations, general
obligations of states and municipalities, corporate debt securities, and
any other securities designated in 12 U.S.C. 24(7) as eligible for
purchase by national banks that state member banks are authorized to
purchase directly. The investment company may have authority, as stated
in the investment objectives of its current prospectus, to enter into
futures, forwards and option contracts relating to the above securities
when those futures, forwards and option contracts are to be used solely
to reduce interest rate risk and not for speculation. The investment
company may also have authority, as stated in the investment objectives
of its current prospectus, to enter into repurchase agreements and
securities lending contracts relating to the securities designated above
if those contracts comply with policy statements adopted by the Federal
Financial Institutions Examination Council. See 45 FR 18120 (Mar. 20,
1980) and Fed. Res. Reg. Svc. 3-1535, 3-1579.1, and 3-1579.5.
(2) Limits on investment. (i) If the portfolio of the investment
company in which a state member bank may invest consists solely of
obligations that the bank could purchase without restriction as to
amount, or solely of those obligations and futures, forwards, options,
repurchase agreements and securities lending contracts relating solely
to those obligations, no express limit is placed on investment.
(ii) If the portfolio of the investment company in which a state
member bank may invest includes any securities that the bank could
purchase subject to a restriction as to amount, the pro-rata share of
holdings of such securities of an issuer indirectly held by a state
member bank through its holdings of investment company stock (including
money market mutual funds), when aggregated with the direct investment
in securities of that issuer by the bank, must not exceed the investment
limit.
(3) Registration of publicly offered investment company stock.
Except as provided in section (c)(4), investment company stock purchased
by a state member bank must be of an investment company registered with
the Securities and Exchange Commission under the Investment Company Act
of 1940 and the Securities Act of 1933.
(4) Privately offered fund. The stock purchased may be of a
privately offered fund if the sponsor of the fund is a subsidiary of a
bank holding company, and if the stock of the fund is held solely by
subsidiaries of the bank holding company.
(5) Proportionate and undivided interest. The stock purchased must
represent an equitable, equal, and proportionate undivided interest in
the underlying assets of the investment company.
(6) Stockholders shielded from liability. The stockholders must be
shielded from personal liability for acts and obligations of the
investment company.
(7) Bank investment policy and procedures. (i) The investment policy
of the bank, as formally approved by its board of directors, must
specifically provide for investment in investment company stock. The
investment policy must establish procedures, standards, and controls
that relate specifically to investments in investment company stock.
(ii) Prior approval of the board of directors of the bank must be
obtained for investment in a specific investment company and recorded in
the official board minutes.
(iii) Unless the investment objectives of the investment companies,
as stated in their current prospectuses, restrict investments to those
obligations that the state member bank could purchase without
restriction as to amount, the bank must review its holdings of
investment company stock at least quarterly to ensure that investments
have been made in accordance with established bank policies and legal
requirements.
(8) Reporting and accounting. Reporting of holdings of investment
company stock must be consistent with established standards for
''marketable equity securities.'' Accordingly, the instructions for the
quarterly Reports of Condition and Income and the requirements of the
Financial Accounting Standards Board Statement No. 12 must be followed.
(i) Holdings of investment campany stock must be reported as ''All
other'' securities on Schedule RC-B, Item 4(b) on the quarterly Reports
of Condition, unless otherwise directed.
(ii) In no case may the carrying value of investment stock be
increased above aggregate cost as a result of net unrealized gains.
Holdings of investment company stock must be reported in the Reports of
Condition at the lower of their aggregate cost or aggregate market
value, determined as of the report date.
(iii) Sales fees, both ''front end load'' and ''deferred
contingency,'' must be deducted in calculating market value.
(iv) Any net unrealized loss or increase in a previously recorded net
unrealized loss must be charged directly against ''undivided profits and
capital reserves.'' Subsequent reductions of any net unrealized loss
must be credited directly to ''undivided profits and capital reserves.''
(v) A loss on an individual investment that is other than temporary,
as that term is used for purposes of FASB Statement No. 12, must be
charged to ''noninterest expense'' on Schedule RI of the Income
Statement.
(d) Evaluation of investment risk. Investments in stock of
investment companies and direct investments in debt securities are not
treated the same for accounting, tax, and other purposes. Consequently,
state member banks should evaluate investments in investment company
stock in light of these differences and give special attention to the
risks these differences impose. /1/
(e) No effect on state law. This interpretation shall not be
construed as exempting a state member bank from any provision of state
law.
(54 FR 7181 Feb 17, 1989; 54 FR 10482, Mar. 13, 1989)
/1/ The Board has issued a cautionary letter in conjunction with this
interpretation. This letter recommends that a state member bank avoid
undue concentration of investments in the stock of any fund or family of
funds and apprises state member banks of the accounting and tax
treatment of holding investment company stock. See Fed. Res. Reg.
Svc. 3-416.16.
12 CFR 208.125 Necessity for Board approval of stock dividend by State
member bank.
(a) The opinion of the Board of Governors has been requested as to
whether section 5199(b) of the Revised Statutes of the United States, as
amended September 8, 1959 (12 U.S.C. 60), requires the Board's approval
for the declaration of a stock dividend by a State member bank in an
amount which would exceed the total of net profits for the present year
combined with the retained net profits of the preceding 2 years. This
statute is made applicable to State member banks by the sixth paragraph
of section 9 of the Federal Reserve Act (12 U.S.C. 324).
(b) The purpose of this provision is to prevent the depletion of the
capital structure of a bank by the payment of excessive dividends.
Since a stock dividend does not result in the distribution of cash or
assets, the Board does not consider the term dividend in this statute as
including stock dividends. Consequently, the Board's approval for the
declaration of a stock dividend is not required.
(12 U.S.C. 60)
(33 FR 9866, July 10, 1968. Redesignated at 55 FR 52987, Dec. 26,
1990)
12 CFR 208.126 Payment of dividends; effect of net losses.
(a) Section 5199(b) of the Revised Statutes (12 U.S.C. 60), as
amended in 1959: Provides, That:
The approval of the Comptroller of the Currency shall be required if
the total of all dividends declared by (a national bank) in any calendar
year shall exceed the total of its net profits of that year combined
with its retained net profits of the preceding 2 years * * *
Under the sixth paragraph of section 9 of the Federal Reserve Act (12
U.S.C. 324), member State banks are required ''to conform to the
provisions of section 5199(b) * * * with respect to the payment of
dividends'', except that the approval of the Board of Governors is
required in lieu of the approval of the Comptroller.
(b) The question has arisen whether it is necessary in determining
whether a bank's dividends in a particular year ''exceed the total of
its net profits of that year combined with its retained net profits of
the preceding two years'', to take into consideration the amount of a
net loss in the current year or in one or both of the preceding 2 years.
(c) The purpose of the 1959 amendment of section 5199(b) was to
prevent a bank from paying a dividend (except with supervisory approval)
unless it has on hand, from operations during the 3 latest years,
sufficient net profits to cover the proposed dividend. If a net loss
for one or more of those 3 years was disregarded in making the
calculation called for by section 5199(b), a member State bank could pay
dividends, without the approval of the Board of Governors, even though
the aggregate results of the 3 latest years' operations was a net
deficit. This was precisely the sort of situation in which Congress
intended to prevent the payment of a dividend unless the supervisory
authority was satisfied that special circumstances justified the
proposed dividend.
(d) Accordingly, it is the position of the Board that, in making the
calculation required by section 5199(b), it is necessary to take into
consideration the actual results of operations during the current year
and the 2 preceding years, whether the figures for those years are plus
or minus figures. For example, if a bank had
(1) Retained net profits of $30,000 from 1959;
(2) A net loss of $40,000 in 1960 (and dividends of $10,000 were paid
in that year, with the Board's approval); and
(3) Net profits of $20,000 in 1961,
It could not pay any dividend in 1961 without the Board's approval,
since the calculation required by section 5199(b) would result in a zero
figure ($30,000 minus $50,000 plus $20,000). It will be noted that, for
the purposes of section 5199, any dividends paid in a loss year must be
included in the ''net loss'' for that year, just as dividends paid in a
profitable year must be deducted from ''net profits'' in calculating
''retained net profits''.
(12 U.S.C. 60)
(33 FR 9866, July 10, 1968. Redesignated at 55 FR 52987, Dec. 26,
1990)
12 CFR 208.127 Payment of dividends exceeding net profits to date of
declaration.
(a) Section 5199(b) of the Revised Statutes of the United States (12
U.S.C. 60) and the sixth paragraph of section 9 of the Federal Reserve
Act (12 U.S.C. 324), provide in effect that ''the approval of the
Comptroller of the Currency (or the Board of Governors) shall be
required if the total of all dividends declared by such association (a
national bank or a member State bank) in any calendar year shall exceed
the total of its net profits of that year combined with its retained net
profits of the preceding two years.''
(b) The question has been presented whether the Board's approval must
be obtained when the amount of a dividend proposed to be declared by a
member State bank, prior to the end of the calendar year, would exceed
the total of the bank's net profits up to the date of the declaration,
combined with its retained net profits of the preceding 2 years.
(c) If the question related only to the literal meaning of words,
divorced from the statute's underlying purpose and from the factual
situations to which it relates, it might be contended that since the
statute refers to ''all dividends declared * * * in any calendar year''
and ''the total of its net profits of that year'', its applicability
cannot be determined until the calendar year is completed. As explained
below, however, such an interpretation is not required by the language
of the statute and would substantially defeat its purpose, as revealed
by the legislative history; and consequently it is believed that the
statute should be construed as relating to dividends declared, and to
net profits, in the calendar year up to the date of such declaration.
(d) The purpose of the statute was described as follows by the Senate
Banking Committee:
This provision is designed to restrict the payment of dividends * * *
where such payments would result in dissipating needed capital funds.
This provision strengthens the regulatory authority of the Comptroller
(and the Board of Governors). Under it, he will be able to prevent the
declaration of dividends which are not justified by current and recent
accumulated earnings, and which would result in a weakened and
undercapitalized bank and violate safe and sound banking practice.
(S. Rep. No. 730, 86th Cong. (Aug. 19, 1959), pp. 6-7)
(1) It seems that Congress had in mind the following test: At the
time the dividend is declared, does the bank have available, from
profits of the current calendar year and the 2 preceding calendar years,
enough profits to cover the dividend? If not, the dividend may not be
declared and paid unless the Comptroller or the Board of Governors
specifically approves, in view of the circumstances of the particular
case.
(2) Bearing in mind the Senate Committee's reference to ''dissipating
needed capital funds,'' it is obvious that the danger that a proposed
dividend would unduly weaken a bank's capital structure is just as great
if the dividend is declared in June as if it is declared in December.
If a bank does not have profits on hand sufficient to cover a proposed
dividend, the fact that the declaration is made in 1 month rather than
in another has little or no bearing on the extent to which payment of
the dividend may unduly diminish the capital ''cushion'' on which depend
the bank's continued existence and the safety of its depositors.
(e) An illustration may be helpful. For simplicity, let us assume
that a member State bank opened for business on January 1, 1959, with a
capital structure of $300,000, as required by the supervisory
authorities. The bank had no net profit in 1959 or 1960. Up to June
30, 1961, it still has no net profits, but nevertheless the directors
declare a dividend of $20,000 on that date. The bank's capital
structure is thereby reduced from $300,000 to $280,000. It seems that
this was precisely what Congress intended should not happen unless the
Board of Governors approved the dividend, for adequate reasons. An
undesirable situation would exist, and the Congressional purpose would
be defeated, if such a weakening of the bank's capital structure were
permissible if the dividend was declared and paid (without supervisory
approval) in June, whereas the same action would involve a violation of
the statute if the dividend was declared and paid, instead, in December.
This might actually mean that no violation of section 5199(b) could
occur except with respect to end-of-year dividends -- unless, perhaps,
it could be established that the bank's directors, when they declared
the dividend earlier in the year, knew (or had reason to believe) that
the bank's net profits for the entire year would not be sufficient.
(f) The statutory reference to ''all dividends declared * * * in any
calendar year'' can be interpreted, even from the viewpoint of literal
meaning, as referring to dividends declared in a calendar year up to the
date of declaration. Particularly because the clear Congressional
purpose would otherwise be largely defeated, it is concluded that this
is the correct interpretation and that, consequently, the declaration by
the member State bank, without the Board's approval, of a dividend in
the amount of $20,000 would be in violation of the applicable statutes,
since the amount of that dividend would exceed ''the total of (the
bank's) net profits of that year combined with its retained net profits
of the preceding two years.''
(12 U.S.C. 60)
(33 FR 9866, July 10, 1968. Redesignated at 55 FR 52987, Dec. 26,
1990)
12 CFR 208.128 Commodity- or equity-linked transactions.
(a) State-chartered banks that are members of the Federal Reserve
System are required to obtain the approval of the Board under Regulation
H (Membership of State Banking Institutions in the Federal Reserve
System) before permitting any change to be made in the general character
of their business or in the scope of the corporate powers they exercised
at the time of admission to membership. The Board has considered
whether engaging in transactions linked to commodity or equity security
prices or indices would represent a change in the general character of
the business of a state member bank.
(b) Banking organizations have developed a number of commodity- or
equity-linked transactions in which a portion of the return is linked to
the price of a particular commodity or equity security or to an index of
such prices. These transactions have been offered in a variety of
forms, including commodity-indexed deposits, loans, debt issues, and
derivative products, such as forwards, options, and swaps. In these
transactions, the interest, principal, or both, or payment streams in
the case of swaps, are linked to the price of a commodity. In addition,
banks are also entering into exchange-traded commodity or stock-index
futures and options in order to hedge the exposure inherent in these
transactions. These types of transactions have been linked to a variety
of commodities, including gold, oil, aluminum, and copper, as well as
individual securities and stock indices.
(c) With the exception of gold, silver, and, in some cases, platinum,
banks are not empowered to purchase or hold the commodities or equity
securities that underlie these transactions. Although commodity-linked
transactions settle only in cash, they effectively expose banks to
commodity or equity market price risks. Thus, linking payments to
commodities or equities may present risks with which banks generally are
not familiar, and the inability of the bank to purchase the commodity or
equity security to which a transaction is linked may increase the
difficulty of hedging the exposure created by such transactions.
(d) The Board has determined that engaging in transactions linked to
commodities or securities that a state member bank does not have the
authority to purchase and hold directly should generally be considered a
change in the character of the bank's business unless the transactions
are entered into on a perfectly matched basis. /1/ State member banks
that wish to engage in commodity- or equity-linked transactions that are
considered to be a change in the general character of their business
should obtain Board approval before initiating these transactions or, in
the case of activities commenced prior to the adoption of this
interpretation, to continue such activities. Applications to continue
such activities should be submitted on or before February 3, 1992.
(e) Transactions linked to securities or monetary metals that a state
member bank is authorized to purchase and hold directly will not be
considered to be a change in the general nature of the bank's business,
and approval will not be required. /2/ Additionally, approval will not
be required for a state member bank to offer loan or deposit contracts
in which only the interest portion of the return is linked to a
commodity or security even if the bank is not authorized to hold the
commodity or security.
(f) Applications to engage in commodity-related activities should
outline the types of transactions and scope of activities that the bank
plans to undertake. The application also should demonstrate that the
bank has the expertise to engage in such transactions and has developed
adequate policies and controls to govern the conduct of these activities
and to monitor the associated risks.
(g) Recent revisions to Regulation K (International Banking
Operations) permit bank holding company subsidiaries, Edge and agreement
corporations, and member banks to act as principal or agent outside of
the United States in swap transactions, subject to any limitations
applicable to state member banks under Regulation H. Banking
organizations that wish to engage in swap transactions based on
commodities that the organizations do not have the authority to purchase
directly, therefore, must submit applications under Regulation K in
order to engage in such transactions. Because Regulation K provides
separate authority to engage outside of the United States in swap
transactions based on equity securities or indices, approval of these
transactions is not required.
(56 FR 63407, Dec. 4, 1991)
/1/ The term perfectly matched, as used in this interpretation refers
to transactions that are entered into on a matched basis, that is,
offsetting transactions where the counterparties for both transactions
have been found before the bank enters into either transaction and the
transactions are consummated on the same day. Offsetting transactions
include transactions that have a price differential to provide the bank
with its usual and customary fee or commission for its services. The
exemption from prior approval for perfectly matched transactions would
include mirror image equity swaps executed by a state member bank with
any affiliate that is authorized under Regulation K to engage in equity
swaps.
/2/ Gold and silver are the only commodities that banks generally
have authority to purchase. In states where banks have authority to
deal in platinum, transactions linked to platinum will not be considered
a change in the general nature of the business of a bank.
12 CFR 208.128 Pt. 208, App. A
12 CFR 208.128 Appendix A to Part 208 -- Capital Adequacy Guidelines
for State Member Banks: Risk-Based Measure
The Board of Governors of the Federal Reserve System has adopted a
risk-based capital measure to assist in the assessment of the capital
adequacy of state member banks. /1/ The principal objectives of this
measure are to: (i) Make regulatory capital requirements more sensitive
to differences in risk profiles among banks; (ii) factor off-balance
sheet exposures into the assessment of capital adequacy; (iii) minimize
disincentives to holding liquid, low-risk assets; and (iv) achieve
greater consistency in the evaluation of the capital adequacy of major
banks throughout the world. /2/
The risk-based capital guidelines include both a definition of
capital and a framework for calculating weighted risk assets by
assigning assets and off-balance sheet items to broad risk categories.
A bank's risk-based capital ratio is calculated by dividing its
qualifying capital (the numerator of the ratio) by its weighted risk
assets (the denominator). /3/ The definition of qualifying capital is
outlined below in section II, and the procedures for calculating
weighted risk assets are discussed in Section III. Attachment I
illustrates a sample calculation of weighted risk assets and the
risk-based capital ratio.
The risk-based capital guidelines also establish a schedule for
achieving a minimum supervisory standard for the ratio of qualifying
capital to weighted risk assets and provide for transitional
arrangements during a phase-in period to facilitate adoption and
implementation of the measure at the end of 1992. These interim
standards and transitional arrangements are set forth in section IV.
The risk-based guidelines apply to all state member banks on a
consolidated basis. They are to be used in the examination and
supervisory process as well as in the analysis of applications acted
upon by the Federal Reserve. Thus, in considering an application filed
by a state member bank, the Federal Reserve will take into account the
bank's risk-based capital ratio, the reasonableness of its capital
plans, and the degree of progress it has demonstrated toward meeting the
interim and final risk-based capital standards.
The risk-based capital ratio focuses principally on broad categories
of credit risk, although the framework for assigning assets and
off-balance sheet items to risk categories does incorporate elements of
transfer risk, as well as limited instances of interest rate and market
risk. The risk-based ratio does not, however, incorporate other factors
that can affect a bank's financial condition. These factors include
overall interest rate exposure; liquidity, funding and market risks;
the quality and level of earnings; investment or loan portfolio
concentrations; the quality of loans and investments; the
effectiveness of loan and investment policies; and management's ability
to monitor and control financial and operating risks.
In addition to evaluating capital ratios, an overall assessment of
capital adequacy must take account of these other factors, including, in
particular, the level and severity of problem and classified assets.
For this reason, the final supervisory judgment on a bank's capital
adequacy may differ significantly from conclusions that might be drawn
solely from the level of its risk-based capital ratio.
The risk-based capital guidelines establish minimum ratios of capital
to weighted risk assets. In light of the considerations just discussed,
banks generally are expected to operate well above the minimum
risk-based ratios. In particular, banks contemplating significant
expansion proposals are expected to maintain strong capital levels
substantially above the minimum ratios and should not allow significant
diminution of financial strength below these strong levels to fund their
expansion plans. Institutions with high or inordinate levels of risk
are also expected to operate well above minimum capital standards. In
all cases, institutions should hold capital commensurate with the level
and nature of the risks to which they are exposed. Banks that do not
meet the minimum risk-based standard, or that are otherwise considered
to be inadequately capitalized, are expected to develop and implement
plans acceptable to the Federal Reserve for achieving adequate levels of
capital within a reasonable period of time.
The Board will monitor the implementation and effect of these
guidelines in relation to domestic and international developments in the
banking industry. When necessary and appropriate, the Board will
consider the need to modify the guidelines in light of any significant
changes in the economy, financial markets, banking practices, or other
relevant factors.
A bank's qualifying total capital consists of two types of capital
components: ''core capital elements'' (comprising Tier 1 capital) and
''supplementary capital elements'' (comprising Tier 2 capital). These
capital elements and the various limits, restrictions, and deductions to
which they are subject, are discussed below and are set forth in
Attachment II.
To qualify as an element of Tier 1 or Tier 2 capital, a capital
instrument may not contain or be covered by any covenants, terms, or
restrictions that are inconsistent with safe and sound banking
practices.
Redemptions of permanent equity or other capital instruments before
stated maturity could have a significant impact on a bank's overall
capital structure. Consequently, a bank considering such a step should
consult with the Federal Reserve before redeeming any equity or debt
capital instrument (prior to maturity) if such redemption could have a
material effect on the level or composition of the institution's capital
base. /4/
1. Core capital elements (Tier 1 capital). The Tier 1 component of a
bank's qualifying capital must represent at least 50 percent of
qualifying total capital and may consist of the following items that are
defined as core capital elements:
(i) Common stockholders' equity.
(ii) Qualifying noncumulative perpetual preferred stock (including
related surplus).
(iii) Minority interest in the equity accounts of consolidated
subsidiaries.
Tier 1 capital is generally defined as the sum of the core capital
elements less goodwill. /5/ (See section II (B) below for a more
detailed discussion of the treatment of goodwill, including an
explanation of certain limited grandfathering arrangements.)
a. Common stockholders' equity. Common stockholders' equity
includes: common stock; related surplus; and retained earnings,
including capital reserves and adjustments for the cumulative effect of
foreign currency translation, net of any treasury stock.
b. Perpetual preferred stock. Perpetual preferred stock is defined
as preferred stock that does not have a maturity date, that cannot be
redeemed at the option of the holder of the instrument, and that has no
other provisions that will require future redemption of the issue.
Consistent with these provisions, any perpetual preferred stock with a
feature permitting redemption at the option of the issuer may qualify as
capital only if the redemption is subject to prior approval of the
Federal Reserve. In general, preferred stock will qualify for inclusion
in capital only if it can absorb losses while the issuer operates as a
going concern (a fundamental characteristic of equity capital) and only
if the issuer has the ability and legal right to defer or eliminate
preferred dividends.
The only form of perpetual preferred stock that state member banks
may consider as an element of Tier 1 capital is noncumulative perpetual
preferred. While the guidelines allow for the inclusion of
noncumulative perpetual preferred stock in Tier 1, it is desirable from
a supervisory standpoint that voting common stockholders' equity remain
the dominant form of Tier 1 capital. Thus, state member banks should
avoid overreliance on preferred stock or non-voting equity elements
within Tier 1. /6/
Perpetual preferred stock in which the dividend is reset periodically
based, in whole or in part, upon the bank's current credit standing
(that is, auction rate perpetual preferred stock, including so-called
Dutch auction, money market, and remarketable preferred) will not
qualify for inclusion in Tier 1 capital. /7/ Such instruments, however,
qualify for inclusion in Tier 2 capital.
c. Minority interest in equity accounts of consolidated subsidiaries.
This element is included in Tier 1 because, as a general rule, it
represents equity that is freely available to absorb losses in operating
subsidiaries. While not subject to an explicit sublimit within Tier 1,
banks are expected to avoid using minority interest in the equity
accounts of consolidated subsidiaries as an avenue for introducing into
their capital structures elements that might not otherwise qualify as
Tier 1 capital or that would, in effect, result in an excessive reliance
on preferred stock within Tier 1.
2. Supplementary capital elements (Tier 2 capital). The Tier 2
component of a bank's qualifying total capital may consist of the
following items that are defined as supplementary capital elements:
(i) Allowance for loan and lease losses (subject to limitations
discussed below).
(ii) Perpetual preferred stock and related surplus (subject to
conditions discussed below).
(iii) Hybrid capital instruments (as defined below) and mandatory
convertible debt securities.
(iv) Term subordinated debt and intermediate-term preferred stock,
including related surplus (subject to limitations discussed below).
The maximum amount of Tier 2 capital that may be included in a bank's
qualifying total capital is limited to 100 percent of Tier 1 capital
(net of goodwill).
The elements of supplementary capital are discussed in greater detail
below. /8/
a. Allowance for loan and lease losses. Allowances for loan and
lease losses are reserves that have been established through a charge
against earnings to absorb future losses on loans or lease financing
receivables. Allowances for loan and lease losses exclude ''allocated
transfer risk reserves,'' /9/ and reserves created against identified
losses.
During the transition period, the risk-based capital guidelines
provide for reducing the amount of this allowance that may be included
in an institution's total capital. Initially, it is unlimited.
However, by year-end 1990, the amount of the allowance for loan and
lease losses that will qualify as capital will be limited to 1.5 percent
of an institution's weighted risk assets. By the end of the transition
period, the amount of the allowance qualifying for inclusion in Tier 2
capital may not exceed 1.25 percent of weighted risk assets. /10/
b. Perpetual preferred stock. Perpetual preferred stock, as noted
above, is defined as preferred stock that has no maturity date, that
cannot be redeemed at the option of the holder, and that has no other
provisions that will require future redemption of the issue. Such
instruments are eligible for inclusion in Tier 2 capital without limit.
/11/
c. Hybrid capital instruments and mandatory convertible debt
securities. Hybrid capital instruments include instruments that are
essentially permanent in nature and that have certain characteristics of
both equity and debt. Such instruments may be included in Tier 2
without limit. The general criteria hybrid capital instruments must
meet in order to qualify for inclusion in Tier 2 capital are listed
below:
(1) The instrument must be unsecured; fully paid-up; and
subordinated to general creditors and must also be subordinated to
claims of depositors.
(2) The instrument must not be redeemable at the option of the holder
prior to maturity, except with the prior approval of the Federal
Reserve. (Consistent with the Board's criteria for perpetual debt and
mandatory convertible securities, this requirement implies that holders
of such instruments may not accelerate the payment of principal except
in the event of bankruptcy, insolvency, or reorganization.)
(3) The instrument must be available to participate in losses while
the issuer is operating as a going concern. (Term subordinated debt
would not meet this requirement.) To satisfy this requirement, the
instrument must convert to common or perpetual preferred stock in the
event that the accumulated losses exceed the sum of the retained
earnings and capital surplus accounts of the issuer.
(4) The instrument must provide the option for the issuer to defer
interest payments if: (a) The issuer does not report a profit in the
preceding annual period (defined as combined profits for the most recent
four quarters), and (b) the issuer eliminates cash dividends on common
and preferred stock.
Mandatory convertible debt securities in the form of equity contract
notes that meet the criteria set forth in 12 CFR part 225, appendix B,
also qualify as unlimited elements of Tier 2 capital. In accordance
with that appendix, equity commitment notes issued prior to May 15, 1985
also qualify for inclusion in Tier 2.
d. Subordinated debt and intermediate-term preferred stock. The
aggregate amount of term subordinated debt (excluding mandatory
convertible debt) and intermediate-term preferred stock that may be
treated as supplementary captial is limited to 50 percent of Tier 1
capital (net of goodwill). Amounts in excess of these limits may be
issued and, while not included in the ratio calculation, will be taken
into account in the overall assessment of a bank's funding and financial
condition.
Subordinated debt and intermediate-term preferred stock must have an
original weighted average maturity of at least five years to qualify as
supplementary capital. (If the holder has the option to require the
issuer to redeem, repay, or repurchase the instrument prior to the
original stated maturity, maturity would be defined, for risk-based
capital purposes, as the earliest possible date on which the holder can
put the instrument back to the issuing bank.)
In the case of subordinated debt, the instrument must be unsecured
and must clearly state on its face that it is not a deposit and is not
insured by a Federal agency. To qualify as capital in banks, debt must
be subordinated to general creditors and claims of depositors.
Consistent with current regulatory requirements, if a state member bank
wishes to redeem subordinated debt before the stated maturity, it must
receive prior approval of the Federal Reserve.
e. Discount of supplementary capital instruments. As a limited-life
capital instrument approaches maturity it begins to take on
characteristics of a short-term obligation. For this reason, the
outstanding amount of term subordinated debt and any long- or
intermediate-life, or term, preferred stock eligible for inclusion in
Tier 2 is reduced, or discounted, as these instruments approach
maturity: one-fifth of the original amount, less any redemptions, is
excluded each year during the instrument's last five years before
maturity. /12/
f. Revaluation reserves. Such reserves reflect the formal balance
sheet restatement or revaluation for capital purposes of asset carrying
values to reflect current market values. In the United States, banks
for the most part, follow GAAP when preparing their financial
statements, and GAAP generally does not permit the use of market-value
accounting. For this and other reasons, the Federal banking agencies
generally have not included unrealized asset values in capital ratio
calculations, although they have long taken such values into account as
a separate factor in assessing the overall financial strength of a bank.
Consistent with long-standing supervisory practice, the excess of
market values over book values for assets held by state member banks
will generally not be recognized in supplementary capital or in the
calculation of the risk-based capital ratio. However, all banks are
encouraged to disclose their equivalent or premises (building) and
equity revaluation reserves. Such values will be taken into account as
additional considerations in assessing overall capital strength and
financial condition.
Certain assets are deducted from a bank's capital for the purpose of
calculating the risk-based capital ratio. /13/ These assets include:
(i) Goodwill -- deducted from the sum of core capital elements.
(ii) Investments in banking and finance subsidiaries that are not
consolidated for accounting or supervisory purposes and, on a
case-by-case basis, investments in other designated subsidiaries or
associated companies at the discretion of the Federal Reserve --
deducted from total capital components.
(iii) Reciprocal holdings of capital instruments of banking
organizations -- deducted from total capital components.
1. Goodwill and other intangible assets. -- a. Goodwill. Goodwill
in an intangible asset that represents the excess of the purchase price
over the fair market value of identifiable assets acquired less
liabilities assumed in acquisitions accounted for under the purchase
method of accounting. State member banks generally have not been
allowed to include goodwill in regulatory capital under current
supervisory policies. Consistent with this policy, all goodwill in
state member banks will be deducted from Tier 1 capital.
b. Other intangible assets. The Federal Reserve is not proposing, as
a matter of general policy, to deduct automatically any other intangible
assets from the capital of state member banks. The Federal Reserve,
however, will continue to monitor closely the level and quality of other
intangible assets -- including purchased mortgage servicing rights,
leaseholds, and core deposit value -- and take them into account in
assessing the capital adequacy and overall asset quality of banks.
Generally, banks should review all intangible assets at least
quarterly and, if necessary, make appropriate reductions in their
carrying values. In addition, in order to conform with prudent banking
practice, an institution should reassess such values during its annual
audit. Banks should use appropriate amortization methods and assign
prudent amortization periods for intangible assets. Examiners will
review the carrying value of these assets, together with supporting
documentation, as well as the appropriateness of including particular
intangible assets in a bank's capital calculation. In making such
evaluations, examiners will consider a number of factors, including:
(1) The reliability and predictability of any cash flows associated
with the asset and the degree of certainty that can be achieved in
periodically determining the asset's useful life and value;
(2) The existence of an active and liquid market for the asset; and
(3) The feasibility of selling the asset apart from the bank or from
the bulk of its assets.
While all intangible assets will be monitored, intangible assets
(other than goodwill) in excess of 25 percent of Tier 1 capital (which
is defined net of goodwill) will be subject to particularly close
scrutiny, both through the examination process and by other appropriate
means. Whenever necessary -- in particular, when assessing applications
to expand or to engage in other activities that could entail unusual or
higher-than-normal risks -- the Board will, on a case-by-case basis,
continue to consider the level of an individual bank's tangible capital
ratios (after deducting all intangible assets), together with the
quality and value of the bank's tangible and intangible assets, in
making an overall assessment of capital adequacy.
Consistent with long-standing Board policy, banks experiencing
substantial growth, whether internally or by acquisition, are expected
to maintain strong capital positions substantially above minimum
supervisory levels, without significant reliance on intangible assets.
2. Investments in certain subsidiaries. The aggregate amount of
investments in banking or finance subsidiaries /15/ whose financial
statements are not consolidated for accounting or bank regulatory
reporting purposes will be deducted from a bank's total capital
components. /16/ Generally, investments for this purpose are defined as
equity and debt capital investments and any other instruments that are
deemed to be capital in the particular subsidiary.
Advances (that is, loans, extensions of credit, guarantees,
commitments, or any other forms of credit exposure) to the subsidiary
that are not deemed to be capital will generally not be deducted from a
bank's capital. Rather, such advances generally will be included in the
bank's consolidated assets and be assigned to the 100 percent risk
category, unless such obligations are backed by recognized collateral or
guarantees, in which case they will be assigned to the risk category
appropriate to such collateral or guarantees. These advances may,
however, also be deducted from the bank's capital if, in the judgment of
the Federal Reserve, the risks stemming from such advances are
comparable to the risks associated with capital investments or if the
advances involve other risk factors that warrant such an adjustment to
capital for supervisory purposes. These other factors could include,
for example, the absence of collateral support.
Inasmuch as the assets of unconsolidated banking and finance
subsidiaries are not fully reflected in a bank's consolidated total
assets, such assets may be viewed as the equivalent of off-balance sheet
exposures since the operations of an unconsolidated subsidiary could
expose the bank to considerable risk. For this reason, it is generally
appropriate to view the capital resources invested in these
unconsolidated entities as primarily supporting the risks inherent in
these off-balance sheet assets, and not generally available to support
risks or absorb losses elsewhere in the bank.
The Federal Reserve may, on a case-by-case basis, also deduct from a
bank's capital, investments in certain other subsidiaries in order to
determine if the consolidated bank meets minimum supervisory capital
requirements without reliance on the resources invested in such
subsidiaries.
The Federal Reserve will not automatically deduct investments in
other consolidated subsidiaries or investments in joint ventures and
associated companies. /17/ Nonetheless, the resources invested in these
entities, like investments in unconsolidated banking and finance
subsidiaries, support assets not consolidated with the rest of the
bank's activities and, therefore, may not be generally available to
support additional leverage or absorb losses elsewhere in the bank.
Moreover, experience has shown that banks stand behind the losses of
affiliated institutions, such as joint ventures and associated
companies, in order to protect the reputation of the organization as a
whole. In some cases, this has led to losses that have exceeded the
investments in such organizations.
For this reason, the Federal Reserve will monitor the level and
nature of such investments for individual banks and, on a case-by-case
basis may, for risk-based capital purposes, deduct such investments from
total capital components, apply an appropriate risk-weighted capital
charge against the bank's proportionate share of the assets of its
associated companies, require a line-by-line consolidation of the entity
(in the event that the bank's control over the entity makes it the
functional equivalent of a subsidiary), or otherwise require the bank to
operate with a risk-based capital ratio above the minimum.
In considering the appropriateness of such adjustments or actions,
the Federal Reserve will generally take into account whether:
(1) The bank has significant influence over the financial or
managerial policies or operations of the subsidiary, joint venture, or
associated company;
(2) The bank is the largest investor in the affiliated company; or
(3) Other circumstances prevail that appear to closely tie the
activities of the affiliated company to the bank.
3. Reciprocal holdings of banking organizations' capital instruments.
Reciprocal holdings of banking organizations' capital instruments (that
is, instruments that qualify as Tier 1 or Tier 2 capital) /18/ will be
deducted from a bank's total capital components for the purpose of
determining the numerator of the risk-based capital ratio.
Reciprocal holdings are cross-holdings resulting from formal or
informal arrangements in which two or more banking organizations swap,
exchange, or otherwise agree to hold each other's capital instruments.
Generally, deductions will be limited to intentional cross-holdings. At
present, the Board does not intend to require banks to deduct
non-reciprocal holdings of such capital instruments. /19/ /20/
Assets and credit equivalent amounts of off-balance sheet items of
state member banks are assigned to one of several broad risk categories,
according to the obligor, or, if relevant, the guarantor or the nature
of the collateral. The aggregate dollar value of the amount in each
category is then multiplied by the risk weight associated with that
category. The resulting weighted values from each of the risk
categories are added together, and this sum is the bank's total weighted
risk assets that comprise the denominator of the risk-based capital
ratio. Attachment I provides a sample calculation.
Risk weights for all off-balance sheet items are determined by a
two-step process. First, the ''credit equivalent amount'' of
off-balance sheet items is determined, in most cases by multiplying the
off-balance sheet item by a credit conversion factor. Second, the
credit equivalent amount is treated like any balance sheet asset and
generally is assigned to the appropriate risk category according to the
obligor, or, if relevant, the guarantor or the nature of the collateral.
In general, if a particular item qualifies for placement in more than
one risk category, it is assigned to the category that has the lowest
risk weight. A holding of a U.S. municipal revenue bond that is fully
guaranteed by a U.S. bank, for example, would be assigned the 20 percent
risk weight appropriate to claims guaranteed by U.S. banks, rather than
the 50 percent risk weight appropriate to U.S. municipal revenue bonds.
/21/
The terms claims and securities used in the context of the discussion
of risk weights, unless otherwise specified, refer to loans or debt
obligations of the entity on whom the claim is held. Assets in the form
of stock or equity holdings in commercial or financial firms are
assigned to the 100 percent risk category, unless some other treatment
is explicitly permitted.
1. Collateral. The only forms of collateral that are formally
recognized by the risk-based capital framework are: Cash on deposit in
the bank; securities issued or guaranteed by the central governments of
the OECD-based group of countries /22/ , U.S. Government agencies, or
U.S. Government-sponsored agencies; and securities issued by
multilateral lending institutions or regional development banks. Claims
fully secured by such collateral are assigned to the 20 percent risk
weight category.
The extent to which qualifying securities are recognized as
collateral is determined by their current market value. If a claim is
only partially secured, that is, the market value of the pledged
securities is less than the face amount of a balance sheet asset or an
off-balance sheet item, the portion that is covered by the market value
of the qualifying collateral is assigned to the 20 percent risk
category, and the portion of the claim that is not covered by collateral
in the form of cash or a qualifying security is assigned to the risk
category appropriate to the obligor or, if relevant, the guarantor. For
example, to the extent that a claim on a private sector obligor is
collateralized by the current market value of U.S. Government
securities, it would be placed in the 20 percent risk category, and the
balance would be assigned to the 100 percent risk category.
2. Guarantees. Guarantees of the OECD and non-OECD central
governments, U.S. Government agencies, U.S. Government-sponsored
agencies, state and local governments of the OECD-based group of
countries, multilateral lending institutions and regional development
banks, U.S. depository institutions, and foreign banks are also
recognized. If a claim is partially guaranteed, that is, coverage of
the guarantee is less than the face amount of a balance sheet asset or
an off-balance sheet item, the portion that is not fully covered by the
guarantee is assigned to the risk category appropriate to the obligor
or, if relevant, to any collateral. The face amount of a claim covered
by two types of guarantees that have different risk weights, such as a
U.S. Government guarantee and a state guarantee, is to be apportioned
between the two risk categories appropriate to the guarantors.
The existence of other forms of collateral or guarantees that the
risk-based capital framework does not formally recognize may be taken
into consideration in evaluating the risks inherent in a bank's loan
portfolio -- which, in turn, would affect the overall supervisory
assessment of the bank's capital adequacy.
3. Mortgage-backed securities. Mortgage-backed securities, including
pass-throughs and collateralized mortgage obligations (but not stripped
mortgage-backed securities), that are issued or guaranteed by a U.S.
Government agency or U.S. Government-sponsored agency are assigned to
the risk weight category appropriate to the issuer or guarantor.
Generally, a privately-issued mortgage-backed security meeting certain
criteria set forth in the accompanying footnote, /23/ is treated as
essentially an indirect holding of the underlying assets, and assigned
to the same risk category as the underlying assets, but in no case to
the zero percent risk category. Privately-issued mortgage-backed
securities whose structures do not qualify them to be regarded as
indirect holdings of the underlying assets are assigned to the 100
percent risk category. During the examination process, privately-issued
mortgage-backed securities that are assigned to a lower risk weight
category will be subject to examiner review to ensure that they meet the
appropriate criteria.
While the risk category to which mortgage-backed securities is
assigned will generally be based upon the issuer or guarantor or, in the
case of privately-issued mortgage-backed securities, the assets
underlying the security, any class of a mortgage-backed security that
can absorb more than its pro rata share of loss without the whole issue
being in default (for example, a so-called subordinate class or residual
interest), is assigned to the 100 percent risk category. Furthermore,
all stripped mortgage-backed securities, including interest-only strips
(IOs), principal-only strips (POs), and similar instruments are also
assigned to the 100 percent risk weight category, regardless of the
issuer or guarantor.
4. Maturity. Maturity is generally not a factor in assigning items to
risk categories with the exception of claims on non-OECD banks,
commitments, and interest rate and foreign exchange rate contracts.
Except for commitments, short-term is defined as one year or less
remaining maturity and long-term is defined as over one year remaining
maturity. In the case of commitments, short-term is defined as one year
or less original maturity and long-term is defined as over one year
original maturity. /24/
Attachment III contains a listing of the risk categories, a summary
of the types of assets assigned to each category and the weight
associated with each category, that is, 0 percent, 20 percent, 50
percent, and 100 percent. A brief explanation of the components of each
category follows.
1. Category 1: zero percent. This category includes cash (domestic
and foreign) owned and held in all offices of the bank or in transit and
gold bullion held in the bank's own vaults or in another bank's vaults
on an allocated basis, to the extent it is offset by gold bullion
liabilities. /25/ The category also includes all direct claims
(including securities, loans, and leases) on, and the portions of claims
that are directly and unconditionally guaranteed by, the central
governments /26/ of the OECD countries and U.S. Government agencies,
/27/ as well as all direct local currency claims on, and the portions of
local currency claims that are directly and unconditionally guaranteed
by, the central governments of non-OECD countries, to the extent that
the bank has liabilities booked in that currency. A claim is not
considered to be unconditionally guaranteed by a central government if
the validity of the guarantee is dependent upon some affirmative action
by the holder or a third party. Generally, securities guaranteed by the
U.S. Government or its agencies that are actively traded in financial
markets, such as GNMA securities, are considered to be unconditionally
guaranteed.
2. Category 2: 20 percent. This category includes cash items in the
process of collection, both foreign and domestic; short-term claims
(including demand deposits) on, and the portions of short-term claims
that are guaranteed /2/ /8/ by, U.S. depository institutions /2/ /9/ and
foreign banks /3/ /0/ ; and long-term claims on, and the portions of
long-term claims that are guaranteed by, U.S. depository institutions
and OECD banks. /3/ /1/
This category also includes the portions of claims that are
conditionally guaranteed by OECD central governments and U.S.
Government agencies, as well as the portions of local currency claims
that are conditionally guaranteed by non-OECD central governments, to
the extent that the bank has liabilities booked in that currency. In
addition, this category includes claims on, and the portions of claims
that are guaranteed by, U.S. Government-sponsored /3/ /2/ agencies and
claims on, and the portions of claims guaranteed by, the International
Bank for Reconstruction and Development (World Bank), the Interamerican
Development Bank, the Asian Development Bank, the African Development
Bank, the European Investment Bank, and other multilateral lending
institutions or regional development banks in which the U.S. Government
is a shareholder or contributing member. General obligation claims on,
or portions of claims guaranteed by the full faith and credit of, states
or other political subdivisions of the U.S. or other countries of the
OECD-based group are also assigned to this category. /3/ /3/
This category also includes the portions of claims (including
repurchase agreements) collateralized by cash on deposit in the bank;
by securities issued or guaranteed by OECD central governments, U.S.
Government agencies, or U.S. Government-sponsored agencies; or by
securities issued by multilateral lending institutions or regional
development banks in which the U.S. Government is a shareholder or
contributing member.
3. Category 3: 50 percent. This category includes loans fully
secured by first liens34 on 1-4 family residential properties35, either
owner-occupied or rented, provided that such loans have been made in
accordance with prudent underwriting standards, including a conservative
loan-to-value ratio;36 are performing in accordance with their original
terms; and are not 90 days or more past due or carried in nonaccrual
status. 37 Also included in this category are privately-issued
mortgage-backed securities provided that: (1) The structure of the
security meets the criteria described in section III (B)(3) above; (2)
if the security is backed by a pool of conventional mortgages, each
underlying mortgage meets the criteria described above in this section
for eligibility for the 50 percent risk weight category at the time the
pool is originated; and (3) if the security is backed by
privately-issued mortgage-backed securities, each underlying security
qualifies for the 50 percent risk category. Privately-issued
mortgage-backed securities that do not meet these criteria or that do
not qualify for a lower risk weight are generally assigned to the 100
percent risk weight category.
Also assigned to this category are revenue (non-general obligation)
bonds or similar obligations, including loans and leases, that are
obligations of states or other political subdivisions of the U.S. (for
example, municipal revenue bonds) or other countries of the OECD-based
group, but for which the government entity is committed to repay the
debt with revenues from the specific projects financed, rather than from
general tax funds.
Credit equivalent amounts of interest rate and foreign exchange rate
contracts involving standard risk obligors (that is, obligors whose
loans or debt securities would be assigned to the 100 percent risk
category) are included in the 50 percent category, unless they are
backed by collateral or guarantees that allow them to be placed in a
lower risk category.
4. Category 4: 100 percent. All assets not included in the
categories above are assigned to this category, which comprises standard
risk assets. The bulk of the assets typically found in a loan portfolio
would be assigned to the 100 percent category.
This category includes long-term claims on, or guaranteed by,
non-OECD banks, and all claims on non-OECD central governments that
entail some degree of transfer risk. 38 This category also includes all
claims on foreign and domestic private sector obligors not included in
the categories above (including loans to nondepository financial
institutions and bank holding companies); claims on commercial firms
owned by the public sector; customer liabilities to the bank on
acceptances outstanding involving standard risk claims39; investments
in fixed assets, premises, and other real estate owned; common and
preferred stock of corporations, including stock acquired for debts
previously contracted; commercial and consumer loans (except those
assigned to lower risk categories due to recognized guarantees or
collateral and loans for residential property that qualify for a lower
risk weight); mortgage-backed securities that do not meet criteria for
assignment to a lower risk weight (including any classes of
mortgage-backed securities that can absorb more than their pro rata
share of loss without the whole issue being in default); and all
stripped mortgage-backed and similar securities.
Also included in this category are industrial development bonds and
similar obligations issued under the auspices of states or political
subdivisions of the OECD-based group of countries for the benefit of a
private party or enterprise where that party or enterprise, not the
government entity, is obligated to pay the principal and interest, and
all obligations of states or political subdivisions of countries that do
not belong to the OECD-based group.
The following assets also are assigned a risk weight of 100 percent
if they have not been deducted from capital: investments in
unconsolidated companies, joint ventures or associated companies;
instruments that qualify as capital issued by other banking
organizations; and any intangibles, including grandfathered goodwill.
The face amount of an off-balance sheet item is incorporated into the
risk-based capital ratio by multiplying it by a credit conversion
factor. The resultant credit equivalent amount is assigned to the
appropriate risk category according to the obligor, or, if relevant, the
guarantor or the nature of the collateral. 40 Attachment IV sets forth
the conversion factors for various types of off-balance sheet items.
1. Items with a 100 percent conversion factor. A 100 percent
conversion factor applies to direct credit substitutes, which include
guarantees, or equivalent instruments, backing financial claims, such as
outstanding securities, loans, and other financial liabilities, or that
back off-balance sheet items that require capital under the risk-based
capital framework. Direct credit substitutes include, for example,
financial standby letters of credit, or other equivalent irrevocable
undertakings or surety arrangements, that guarantee repayment of
financial obligations such as: commercial paper, tax-exempt securities,
commercial or individual loans or debt obligations, or standby or
commercial letters of credit. Direct credit substitutes also include
the acquisition of risk participations in bankers acceptances and
standby letters of credit, since both of these transactions, in effect,
constitute a guarantee by the acquiring bank that the underlying account
party (obligor) will repay its obligation to the originating, or
issuing, institution. /41/ (Standby letters of credit that are
performance-related are discussed below and have a credit conversion
factor of 50 percent.)
The full amount of a direct credit substitute is converted at 100
percent and the resulting credit equivalent amount is assigned to the
risk category appropriate to the obligor or, if relevant, the guarantor
or the nature of the collateral. In the case of a direct credit
substitute in which a risk participation /42/ has been conveyed, the
full amount is still converted at 100 percent. However, the credit
equivalent amount that has been conveyed is assigned to whichever risk
category is lower: the risk category appropriate to the obligor, after
giving effect to any relevant guarantees or collateral, or the risk
category appropriate to the institution acquiring the participation.
Any remainder is assigned to the risk category appropriate to the
obligor, guarantor, or collateral. For example, the portion of a direct
credit substitute conveyed as a risk participation to a U.S. domestic
depository institution or foreign bank is assigned to the risk category
appropriate to claims guaranteed by those institutions, that is, the 20
percent risk category. /43/ This approach recognizes that such
conveyances replace the originating bank's exposure to the obligor with
an exposure to the institutions acquiring the risk participations. /44/
In the case of direct credit substitutes that take the form of a
syndication as defined in the instructions to the commercial bank Call
Report, that is, where each bank is obligated only for its pro rata
share of the risk and there is no recourse to the originating bank, each
bank will only include its pro rata share of the direct credit
substitute in its risk-based capital calculation.
Financial standby letters of credit are distinguished from loan
commitments (discussed below) in that standbys are irrevocable
obligations of the bank to pay a third-party beneficiary when a customer
(account party) fails to repay an outstanding loan or debt instrument
(direct credit substitute). Performance standby letters of credit
(performance bonds) are irrevocable obligations of the bank to pay a
third-party beneficiary when a customer (account party) fails to perform
some other contractual non-financial obligation.
The distinguishing characteristic of a standby letter of credit for
risk-based capital purposes is the combination of irrevocability with
the fact that funding is triggered by some failure to repay or perform
an obligation. Thus, any commitment (by whatever name) that involves an
irrevocable obligation to make a payment to the customer or to a third
party in the event the customer fails to repay an outstanding debt
obligation or fails to perform a contractual obligation is treated, for
risk-based capital purposes, as respectively, a financial guarantee
standby letter of credit or a performance standby.
A loan commitment, on the other hand, involves an obligation (with or
without a material adverse change or similar clause) of the bank to fund
its customer in the normal course of business should the customer seek
to draw down the commitment.
Sale and repurchase agreements and asset sales with recourse (to the
extent not included on the balance sheet) and forward agreements also
are converted at 100 percent. The risk-based capital definition of the
sale of assets with recourse, including the sale of 1-4 family
residential mortgages, is the same as the definition contained in the
instructions to the commercial bank Call Report. Accordingly, the
entire amount of any assets transferred with recourse that are not
already included on the balance sheet, including pools of one-to-four
family residential mortgages, are to be converted at 100 percent and
assigned to the risk weight appropriate to the obligor, or if relevant,
the nature of any collateral or guarantees. The only exception involves
transfers of pools of residential mortgages that have been made with
insignificant recourse for which a liability or specific non-capital
reserve has been established and is maintained for the maximum amount of
possible loss under the recourse provision. So-called ''loan strips''
(that is, short-term advances sold under long-term commitments without
direct recourse) are defined in the instructions to the commercial bank
Call Report and for risk-based capital purposes as assets sold with
recourse.
Forward agreements are legally binding contractual obligations to
purchase assets with certain drawdown at a specified future date. Such
obligations include forward purchases, forward forward deposits placed,
/45/ and partly-paid shares and securities; they do not include
commitments to make residential mortgage loans or forward foreign
exchange contracts.
Securities lent by a bank are treated in one of two ways, depending
upon whether the lender is at risk of loss. If a bank, as agent for a
customer, lends the customer's securities and does not indemnify the
customer against loss, then the transaction is excluded from the
risk-based capital calculation. If, alternatively, a bank lends its own
securities or, acting as agent for a customer, lends the customer's
securities and indemnifies the customer against loss, the transaction is
converted at 100 percent and assigned to the risk weight category
appropriate to the obligor, to any collateral delivered to the lending
bank, or, if applicable, to the independent custodian acting on the
lender's behalf.
2. Items with a 50 percent conversion factor. Transaction-related
contingencies are converted at 50 percent. Such contingencies include
bid bonds, performance bonds, warranties, standby letters of credit
related to particular transactions, and performance standby letters of
credit, as well as acquisitions of risk participations in performance
standby letters of credit. Performance standby letters of credit
represent obligations backing the performance of nonfinancial or
commercial contracts or undertakings. To the extent permitted by law or
regulation, performance standby letters of credit include arrangements
backing, among other things, subcontractors' and suppliers' performance,
labor and materials contracts, and construction bids.
The unused portion of commitments with an original maturity exceeding
one year, /46/ including underwriting commitments, and commercial and
consumer credit commitments also are converted at 50 percent. Original
maturity is defined as the length of time between the date the
commitment is issued and the earliest date on which: (1) The bank can,
at its option, unconditionally (without cause) cancel the commitment,
/47/ and (2) the bank is scheduled to (and as a normal practice actually
does) review the facility to determine whether or not it should be
extended. Such reviews must continue to be conducted at least annually
for such a facility to qualify as a short-term commitment.
Commitments are defined as any legally binding arrangements that
obligate a bank to extend credit in the form of loans or leases; to
purchase loans, securities, or other assets; or to participate in loans
and leases. They also include overdraft facilities, revolving credit,
home equity and mortgage lines of credit, and similar transactions.
Normally, commitments involve a written contract or agreement and a
commitment fee, or some other form of consideration. Commitments are
included in weighted risk assets regardless of whether they contain
''material adverse change'' clauses or other provisions that are
intended to relieve the issuer of its funding obligation under certain
conditions. In the case of commitments structured as syndications,
where the bank is obligated solely for its pro rata share, only the
bank's proportional share of the syndicated commitment is taken into
account in calculating the risk-based capital ratio.
Facilities that are unconditionally cancellable (without cause) at
any time by the bank are not deemed to be commitments, provided the bank
makes a separate credit decision before each drawing under the facility.
Commitments with an original maturity of one year or less are deemed to
involve low risk and, therefore, are not assessed a capital charge.
Such short-term commitments are defined to include the unused portion of
lines of credit on retail credit cards and related plans (as defined in
the instructions to the commercial bank Call Report) if the bank has the
unconditional right to cancel the line of credit at any time, in
accordance with applicable law.
Once a commitment has been converted at 50 percent, any portion that
has been conveyed to other U.S. depository institutions or OECD banks as
participations in which the originating bank retains the full obligation
to the borrower if the participating bank fails to pay when the
instrument is drawn, is assigned to the 20 percent risk category. This
treatment is analogous to that accorded to conveyances of risk
participations in standby letters of credit. The acquisition of a
participation in a commitment by a bank is converted at 50 percent and
assigned to the risk category appropriate to the account party obligor
or, if relevant, the nature of the collateral or guarantees.
Revolving underwriting facilities (RUFs), note issuance facilities
(NIFs), and other similar arrangements also are converted at 50 percent
regardless of maturity. These are facilities under which a borrower can
issue on a revolving basis short-term paper in its own name, but for
which the underwriting banks have a legally binding commitment either to
purchase any notes the borrower is unable to sell by the roll-over date
or to advance funds to the borrower.
3. Items with a 20 percent conversion factor. Short-term,
self-liquidating trade-related contingencies which arise from the
movement of goods are converted at 20 percent. Such contingencies
generally include commercial letters of credit and other documentary
letters of credit collateralized by the underlying shipments.
4. Items with a zero percent conversion factor. These include unused
portions of commitments with an original maturity of one year or less,
/4/ /8/ or which are unconditionally cancellable at any time, provided a
separate credit decision is made before each drawing under the facility.
Unused portions of lines of credit on retail credit cards and related
plans are deemed to be short-term commitments if the bank has the
unconditional right to cancel the line of credit at any time, in
accordance with applicable law.
1. Scope. Credit equivalent amounts are computed for each of the
following off-balance sheet interest rate and foreign exchange rate
instruments:
I. Interest Rate Contracts
A. Single currency interest rate swaps.
B. Basis swaps.
C. Forward rate agreements.
D. Interest rate options purchased (including caps, collars, and
floors purchased).
E. Any other instrument that gives rise to similar credit risks
(including when-issued securities and forward forward deposits
accepted).
II. Exchange Rate Contracts
A. Cross-currency interest rate swaps.
B. Forward foreign exchange contracts.
C. Currency options purchased.
D. Any other instrument that gives rise to similar credit risks.
Exchange rate contracts with an original maturity of fourteen
calendar days or less and instruments traded on exchanges that require
daily payment of variation margin are excluded from the risk-based ratio
calculation. Over-the-counter options purchased, however, are included
and treated in the same way as the other interest rate and exchange rate
contracts.
2. Calculation of credit equivalent amounts. Credit equivalent
amounts are calculated for each individual contract of the types listed
above. To calculate the credit equivalent amount of its off-balance
sheet interest rate and exchange rate instruments, a bank sums these
amounts:
(1) The mark-to-market value /4/ /9/ (positive values only) of each
contract (that is, the current exposure); and
(2) An estimate of the potential future credit exposure over the
remaining life of each contract.
The potential future credit exposure on a contract, including
contracts with negative mark-to-market values, is estimated by
multiplying the notional principal amount by one of the following credit
conversion factors, as appropriate:
Examples of the calculation of credit equivalent amounts for these
instruments are contained in Attachment V.
Because exchange rate contracts involve an exchange of principal upon
maturity, and exchange rates are generally more volatile than interest
rates, higher conversion factors have been established for foreign
exchange contracts than for interest rate contracts.
No potential future credit exposure is calculated for single currency
interest rate swaps in which payments are made based upon two floating
rate indices, so-called floating/floating or basis swaps; the credit
exposure on these contracts is evaluated solely on the basis of their
mark-to-market values.
3. Risk weights. Once the credit equivalent amount for interest rate
and exchange rate instruments has been determined, that amount is
assigned to the risk weight category appropriate to the counterparty,
or, if relevant, the nature of any collateral or guarantees. /5/ /0/
However, the maximum weight that will be applied to the credit
equivalent amount of such instruments is 50 percent.
4. Avoidance of double counting. In certain cases, credit exposures
arising from the interest rate and exchange instruments covered by these
guidelines may already be reflected, in part, on the balance sheet. To
avoid double counting such exposures in the assessment of capital
adequacy and, perhaps, assigning inappropriate risk weights,
counterparty credit exposures arising from the types of instruments
covered by these guidelines may need to be excluded from balance sheet
assets in calculating banks' risk-based capital ratios.
5. Netting. Netting of swaps and similar contracts is recognized for
purposes of calculating the risk-based capital ratio only when
accomplished through netting by novation. /5/ /1/ While the Federal
Reserve encourages any reasonable arrangements designed to reduce the
risks inherent in these transactions, other types of netting
arrangements are not recognized for purposes of calculating the
risk-based ratio at this time.
The interim and final supervisory standards set forth below specify
minimum supervisory ratios based primarily on broad credit risk
considerations. As noted above, the risk-based ratio does not take
explicit account of the quality of individual asset portfolios or the
range of other types of risks to which banks may be exposed, such as
interest rate, liquidity, market or operational risks. For this reason,
banks are generally expected to operate with capital positions above the
minimum ratios.
Institutions with high or inordinate levels of risk are expected to
operate well above minimum capital standards. Banks experiencing or
anticipating significant growth are also expected to maintain capital,
including tangible capital positions, well above the minimum levels.
For example, most such institutions generally have operated at capital
levels ranging from 100 to 200 basis points above the stated minimums.
Higher capital ratios could be required if warranted by the particular
circumstances or risk profiles of individual banks. In all cases, banks
should hold capital commensurate with the level and nature of all of the
risks, including the volume and severity of problem loans, to which they
are exposed.
Upon adoption of the risk-based framework, any bank that does not
meet the interim or final supervisory ratios, or whose capital is
otherwise considered inadequate, is expected to develop and implement a
plan acceptable to the Federal Reserve for achieving an adequate level
of capital consistent with the provisions of these guidelines or with
the special circumstances affecting the individual institution. In
addition, such banks should avoid any actions, including increased
risk-taking or unwarranted expansion, that would lower or further erode
their capital positions.
As reflected in Attachment VI, by year-end 1992, all state member
banks should meet a minimum ratio of qualifying total capital to
weighted risk assets of 8 percent, of which at least 4.0 percentage
points should be in the form of Tier 1 capital net of goodwill.
(Section II above contains detailed definitions of capital and related
terms used in this section.) The maximum amount of supplementary capital
elements that qualifies as Tier 2 capital is limited to 100 percent of
Tier 1 capital net of goodwill. In addition, the combined maximum
amount of subordinated debt and intermediate-term preferred stock that
qualifies as Tier 2 capital is limited to 50 percent of Tier 1 capital.
The maximum amount of the allowance for loan and lease losses that
qualifies as Tier 2 capital is limited to 1.25 percent of gross weighted
risk assets. Allowances for loan and lease losses in excess of this
limit may, of course, be maintained, but would not be included in a
bank's total capital. The Federal Reserve will continue to require
banks to maintain reserves at levels fully sufficient to cover losses
inherent in their loan portfolios.
Qualifying total capital is calculated by adding Tier 1 capital and
Tier 2 capital (limited to 100 percent of Tier 1 capital) and then
deducting from this sum certain investments in banking or finance
subsidiaries that are not consolidated for accounting or supervisory
purposes, reciprocal holdings of banking organization capital
securities, or other items at the direction of the Federal Reserve.
These deductions are discussed above in section II(B).
The transition period for implementing the risk-based capital
standard ends on December 31, 1992. /5/ /2/ Initially, the risk-based
capital guidelines do not establish a minimum level of capital.
However, by year-end 1990, banks are expected to meet a minimum interim
target ratio for qualifying total capital to weighted risk assets of
7.25 percent, at least one-half of which should be in the form of Tier 1
capital. For purposes of meeting the 1990 interim target, the amount of
loan loss reserves that may be included in capital is limited to 1.5
percent of weighted risk assets and up to 10 percent of a bank's Tier 1
capital may consist of supplementary capital elements. Thus, the 7.25
percent interim target ratio implies a minimum ratio of Tier 1 capital
to weighted risk assets of 3.6 percent (one-half of 7.25) and a minimum
ratio of core capital elements to weighted risk assets ratio of 3.25
percent (nine-tenths of the Tier 1 capital ratio).
Through year-end 1990, banks have the option of complying with the
minimum 7.25 percent year-end 1990 risk-based capital standard, in lieu
of the minimum 5.5 percent primary and 6 percent total capital to total
assets capital ratios set forth in appendix B to part 225 of the Federal
Reserve's Regulation Y. In addition, as more fully set forth in
appendix B to this part, banks are expected to maintain a minimum ratio
of Tier 1 capital total assets during this transition period.
To compute the bank's weighted risk assets:
1. Compute the credit equivalent amount of each off-balance sheet
(''OBS'') item
1. Cash (domestic and foreign) held in the bank or in transit.
2. Balances due from Federal Reserve Banks (including Federal Reserve
Bank stock) and central banks in other OECD countries.
3. Direct claims on, and the portions of claims that are
unconditionally guaranteed by, the U.S. Treasury and U.S. Government
agencies /1/ and the central governments of other OECD countries, and
local currency claims on, and the portions of local currency claims that
are unconditionally guaranteed by, the central governments of non-OECD
countries including the central banks of non-OECD countries), to the
extent that the bank has liabilities booked in that currency.
4. Gold bullion held in the bank's vaults or in another's vaults on
an allocated basis, to the extent offset by gold bullion liabilities.
1. Cash items in the process of collection.
2. All claims (long- or short-term) on, and the portions of claims
(long- or short-term) that are guaranteed by, U.S. depository
institutions and OCED banks.
3. Short-term claims (remaining maturity of one year or less) on, and
the portions of short-term claims that are guaranteed by, non-OECD
banks.
4. The portions of claims that are conditionally guaranteed by the
central governments of OECD countries and U.S. Government agencies, and
the portions of local currency claims that are conditionally guaranteed
by the central governments of non-OECD countries, to the extent that the
bank has liabilities booked in that currency.
5. Claims on, and the portions of claims that are guaranteed by, U.S.
Government-sponsored agencies. /2/
6. General obligation claims on, and the portions of claims that are
guaranteed by the full faith and credit of, local governments and
political subdivisions of the U.S. and other OECD local governments.
7. Claims on, and the portions of claims that are guaranteed by,
official multilateral lending institutions or regional development
banks.
8. The portions of claims that are collateralized /3/ by securities
issued or guaranteed by the U.S. Treasury, the central governments of
other OECD countries, U.S. Government agencies, U.S.
Government-sponsored agencies, or by cash on deposit in the bank.
9. The portions of claims that are collateralized /3/ by securities
issued by official multilateral lending institutions or regional
development banks.
10. Certain privately-issued securities representing indirect
ownership of mortgage-backed U.S. Government agency or U.S.
Government-sponsored agency securities.
11. Investment in shares of a fund whose portfolio is permitted to
hold only securities that would qualify for the zero or 20 percent risk
categories.
1. Loans fully secured by first liens on 1-4 family residential
properties that have been made in accordance with prudent underwriting
standards, that are performing in accordance with their original terms,
and are not past due or in nonaccrual status, and certain
privately-issued mortgage-backed securities representing indirect
ownership of such loans. (Loans made for speculative purposes are
excluded.)
2. Revenue bonds or similar claims that are obligations of U.S.
state or local governments, or other OECD local governments, but for
which the government entity is committed to repay the debt only out of
revenues from the facilities financed.
3. Credit equivalent amounts of interest rate and foreign exchange
rate related contracts, except for those assigned to a lower risk
category.
1. All other claims on private obligors.
2. Claims on, or guaranteed by, non-OECD foreign banks with a
remaining maturity exceeding one year.
3. Claims on, or guaranteed by, non-OECD central governments that are
not included in item 3 of Category 1 or item 4 of Category 2; all
claims on non-OECD state or local governments.
4. Obligations issued by U.S. state or local governments, or other
OECD local governments (including industrial development authorities and
similar entities), repayable solely by a private party or enterprise.
5. Premises, plant, and equipment; other fixed assets; and other
real estate owned.
6. Investments in any unconsolidated subsidiaries, joint ventures, or
associated companies -- if not deducted from capital.
7. Instruments issued by other banking organizations that qualify as
capital -- if not deducted from capital.
8. Claims on commercial firms owned by a government.
9. All other assets, including any intangible assets that are not
deducted from capital.
1. Direct credit substitutes. (These include general guarantees of
indebtedness and all guarantee-type instruments, including standby
letters of credit backing the financial obligations of other parties.)
2. Risk participations in bankers acceptances and direct credit
substitutes, such as standby letters of credit.
3. Sale and repurchase agreements and assets sold with recourse that
are not included on the balance sheet.
4. Forward agreements to purchase assets, including financing
facilities, on which drawdown is certain.
5. Securities lent for which the bank is at risk.
1. Transaction-related contingencies. (These include bid bonds,
performance bonds, warranties, and standby letters of credit backing the
nonfinancial performance of other parties.)
2. Unused portions of commitments with an original maturity /1/
exceeding one year, including underwriting commitments and commercial
credit lines.
3. Revolving underwriting facilities (RUFs), note issuance facilities
(NIFs), and similar arrangements.
1. Short-term, self-liquidating trade-related contingencies,
including commercial letters of credit.
1. Short-term self-liquidating trade-related contingences, including
commercial letters of credit.
1. Unused portions of commitments with an original maturity /1/ of
one year or less, or which are unconditionally cancellable at any time,
provided a separate credit decision is made before each drawing.
The total replacement cost of contracts (obtained by summing the
positive mark-to-market values of contracts) is added to a measure of
future potential increases in credit exposure. This future potential
exposure measure is calculated by multiplying the total notional value
of contracts by one of the following credit conversion factors, as
appropriate:
No potential exposure is calculated for single currency interest rate
swaps in which payments are made based upon two floating rate indices,
that is, so called floating/floating or basis swaps. The credit
exposure on these contracts is evaluated solely on the basis of their
mark-to-market value. Exchange rate contracts with an original maturity
of fourteen days or less are excluded. Instruments traded on exchanges
that require daily payment of variation margin are also excluded. The
only form of netting recognized is netting by novation.
/1/ Supervisory ratios that relate capital to total assets for state
member banks are outlined in appendix B of this part and in appendix B
to part 225 of the Federal Reserve's Regulation Y, 12 CFR part 225.
/2/ The risk-based capital measure is based upon a framework
developed jointly by supervisory authorities from the countries
represented on the Basle Committee on Banking Regulations and
Supervisory Practices (Basle Supervisors' Committee) and endorsed by the
Group of Ten Central Bank Governors. The framework is described in a
paper prepared by the BSC entitled ''International Convergence of
Capital Measurement,'' July 1988.
/3/ Banks will initially be expected to utilize period-end amounts in
calculating their risk-based capital ratios. When necessary and
appropriate, ratios based on average balances may also be calculated on
a case-by-case basis. Moreover, to the extent banks have data on
average balances that can be used to calculate risk-based ratios, the
Federal Reserve will take such data into account.
/4/ Consultation would not ordinarily be necessary if an instrument
were redeemed with the proceeds of, or replaced by, a like amount of a
similar or higher quality capital instrument and the organization's
capital position is considered fully adequate by the Federal Reserve.
/5/ During the transition period and subject to certain limitations
set forth in section IV below, Tier 1 capital may also include items
defined as supplementary capital elements.
/6/ The Federal Reserve's capital guidelines for bank holding
companies limit the amount of perpetual preferred stock that may be
included in Tier 1 to 25 percent of Tier 1. (See 12 CFR part 225,
appendix A.)
/7/ Adjustable rate noncumulative perpetual preferred stock (that is,
perpetual preferred stock in which the dividend rate is not affected by
the issuer's credit standing or financial condition but is adjusted
periodically according to a formula based solely on general market
interest rates) may be included in Tier 1.
/8/ The Basle capital framework also provides for the inclusion of
''undisclosed reserves'' in Tier 2. As defined in the framework,
undisclosed reserves represent accumulated after-tax retained earnings
that are not disclosed on the balance sheet of a bank. Apart from the
fact that these reserves are not disclosed publicly, they are
essentially of the same quality and character as retained earnings, and,
to be included in capital, such reserves must be accepted by the bank's
home supervisor. Although such undisclosed reserves are common in some
countries, under generally accepted accounting principles (GAAP) and
long-standing supervisory practice, these types of reserves are not
recognized for state member banks.
/9/ Allocated transfer risk reserves are reserves that have been
established in accordance with Section 905(a) of the International
Lending Supervision Act of 1983, 12 U.S.C. 3904(a), against certain
assets whose value U.S. supervisory authorities have found to be
significantly impaired by protracted transfer risk problems.
/10/ The amount of the allowance for loan and lease losses that may
be included in Tier 2 capital is based on a percentage of gross weighted
risk assets. A bank may deduct reserves for loan and lease losses in
excess of the amount permitted to be included in Tier 2 capital, as well
as allocated transfer risk reserves, from the sum of gross weighted risk
assets and use the resulting net sum of weighted risk assets in
computing the denominator of the risk-based capital ratio.
/11/ Long-term preferred stock with an original maturity of 20 years
or more (including related surplus) will also qualify in this category
as an element of Tier 2. If the holder of such an instrument has a
right to require the issuer to redeem, repay, or repurchase the
instrument prior to the original stated maturity, maturity would be
defined, for risk-based capital purposes, as the earliest possible date
on which the holder can put the instrument back to the issuing bank.
/12/ For example, outstanding amounts of these instruments that count
as supplementary capital include: 100 percent of the outstanding
amounts with remaining maturities of more than five years; 80 percent
of outstanding amounts with remaining maturities of four to five years;
60 percent of outstanding amounts with remaining maturities of three to
four years; 40 percent of outstanding amounts with remaining maturities
of two to three years; 20 percent of outstanding amounts with remaining
maturities of one to two years; and 0 percent of outstanding amounts
with remaining maturities of less than one year. Such instruments with
a remaining maturity of less than one year are excluded from Tier 2
capital.
/13/ Any assets deducted from capital in computing the numerator of
the ratio are not included in weighted risk assets in computing the
denominator of the ratio.
/14/ (Reserved)
/15/ For this purpose, a banking and finance subsidiary generally is
defined as any company engaged in banking or finance in which the parent
institution holds directly or indirectly more than 50 percent of the
outstanding voting stock, or which is otherwise controlled or capable of
being controlled by the parent institution.
/16/ An exception to this deduction would be made in the case of
shares acquired in the regular course of securing or collecting a debt
previously contracted in good faith. The requirements for consolidation
are spelled out in the instructions to the commercial bank Consolidated
Reports of Condition and Income (Call Report).
/17/ The definition of such entities is contained in the instructions
to the commercial bank Call Report. Under regulatory reporting
procedures, associated companies and joint ventures generally are
defined as companies in which the bank owns 20 to 50 percent of the
voting stock.
/18/ See 12 CFR part 225, appendix A for instruments that qualify as
Tier 1 and Tier 2 capital for bank holding companies.
/19/ Deductions of holdings of capital securities also would not be
made in the case of interstate ''stake out'' investments that comply
with the Board's Policy Statement on Nonvoting Equity Investments, 12
CFR 225.143. In addition, holdings of capital instruments issued by
other banking organizations but taken in satisfaction of debts
previously contracted would be exempt from any deduction from capital.
/20/ The Board intends to monitor non-reciprocal holdings of other
banking organizations' capital instruments and to provide information on
such holdings to the Basle Supervisors' Committee as called for under
the Basle capital framework.
/21/ An investment in shares of a fund whose portfolio consists
solely of various securities or money market instruments that, if held
separately, would be assigned to different risk categories, is generally
assigned to the risk category appropriate to the highest risk-weighted
security or instrument that the fund is permitted to hold in accordance
with its stated investment objectives. However, in no case will
indirect holdings through shares in such funds be assigned to the zero
percent risk category. For example, if a fund is permitted to hold U.S.
Treasuries and commercial paper, shares in that fund would generally be
assigned the 100 percent risk weight appropriate to commercial paper,
regardless of the actual composition of the fund's investments at any
particular time. Shares in a fund that may invest only in U.S. Treasury
securities would generally be assigned to the 20 percent risk category.
If, in order to maintain a necessary degree of short-term liquidity, a
fund is permitted to hold an insignificant amount of its assets in
short-term, highly liquid securities of superior credit quality that do
not qualify for a preferential risk weight, such securities will
generally not be taken into account in determining the risk category
into which the bank's holding in the overall fund should be assigned.
Regardless of the composition of the fund's securities, if the fund
engages in any activities that appear speculative in nature (for
example, use of futures, forwards, or option contracts for purposes
other than to reduce interest rate risk) or has any other
characteristics that are inconsistent with the preferential risk
weighting assigned to the fund's investments, holdings in the fund will
be assigned to the 100 percent risk category. During the examination
process, the treatment of shares in such funds that are assigned to a
lower risk weight will be subject to examiner review to ensure that they
have been assigned an appropriate risk weight.
/22/ The OECD-based group of countries comprises all full members of
the Organization for Economic Cooperation and Development (OECD), as
well as countries that have concluded special lending arrangements with
the International Monetary Fund (IMF) associated with the Fund's General
Arrangements to Borrow. The OECD includes the following countries:
Australia, Austria, Belgium, Canada, Denmark, the Federal Republic of
Germany, Finland, France, Greece, Iceland, Ireland, Italy, Japan,
Luxembourg, Netherlands, New Zealand, Norway, Portugal, Spain, Sweden,
Switzerland, Turkey, the United Kingdom, and the United States. Saudi
Arabia has concluded special lending arrangements with the IMF
associated with the Fund's General Arrangements to Borrow.
/23/ A privately-issued mortgage-backed security may be treated as an
indirect holding of the underlying assets provided that: (1) The
underlying assets are held by an independent trustee and the trustee has
a first priority, perfected security interest in the underlying assets
on behalf of the holders of the security; (2) either the holder of the
security has an undivided pro rata ownership interest in the underlying
mortgage assets or the trust or single purpose entity (or conduit) that
issues the security has no liabilities unrelated to the issued
securities; (3) the security is structured such that the cash flow from
the underlying assets in all cases fully meets the cash flow
requirements of the security without undue reliance on any reinvestment
income; and (4) there is no material reinvestment risk associated with
any funds awaiting distribution to the holders of the security. In
addition, if the underlying assets of a mortgage-backed security are
composed of more than one type of asset, for example, U.S.
Government-sponsored agency securities and privately-issued pass-through
securities that qualify for the 50 percent risk category, the entire
mortgage-backed security is generally assigned to the category
appropriate to the highest risk-weighted asset underlying the issue.
Thus, in this example, the security would receive the 50 percent risk
weight appropriate to the privately-issued pass-through securities.
/24/ Through year-end 1992, remaining, rather than original, maturity
may be used for determining the maturity of commitments.
/25/ All other holdings of bullion are assigned to the 100 percent
risk category.
/26/ A central government is defined to include departments and
ministries, including the central bank, of the central government. The
U.S. central bank includes the 12 Federal Reserve Banks, and the stock
held in these banks as a condition of membership is assigned to the zero
percent risk category. The definition of central government does not
include state, provincial, or local governments; or commercial
enterprises owned by the central government. In addition, it does not
include local government entities or commercial enterprises whose
obligations are guaranteed by the central government, although any
claims on such entities guaranteed by central governments are placed in
the same general risk category as other claims guaranteed by central
governments. OECD central governments are defined as central
governments of the OECD-based group of countries; non-OECD central
governments are defined as central governments that do not belong to the
OECD-based group countries.
/27/ A U.S. Government agency is defined as an instrumentality of the
U.S. Government whose obligations are fully and explicitly guaranteed as
to the timely payment of principal and interest by the full faith and
credit of the U.S. Government. Such agencies include the Government
National Mortgage Association (GNMA), the Veterans Administration (VA),
the Federal Housing Administration (FHA), the Export-Import Bank (Exim
Bank), the Overseas Private Investment Corporation (OPIC), the Commodity
Credit Corporation (CCC), and the Small Business Administration (SBA).
/28/ Claims guaranteed by U.S. depository institutions and foreign
banks include risk participations in both bankers acceptances and
standby letters of credit, as well as participations in commitments,
that are conveyed to other U.S. depository institutions or foreign
banks.
/29/ U.S. depository institutions are defined to include branches
(foreign and domestic) of federally-insured banks and depository
institutions chartered and headquartered in the 50 states of the United
States, the District of Columbia, Puerto Rico, and U.S. territories and
possessions. The definition encompasses banks, mutual or stock savings
banks, savings or building and loan associations, cooperative banks,
credit unions, and international banking facilities of domestic banks.
U.S.-chartered depository institutions owned by foreigners are also
included in the definition. However, branches and agencies of foreign
banks located in the U.S., as well as all bank holding companies, are
excluded.
/30/ Foreign banks are distinguished as either OECD banks or non-OECD
banks. OECD banks include banks and their branches (foreign and
domestic) organized under the laws of countries (other than the U.S.)
that belong to the OECD-based group of countries. Non-OECD banks
include banks and their branches (foreign and domestic) organized under
the laws of countries that do not belong to the OECD-based group of
countries. For this purpose, a bank is defined as an institution that
engages in the business of banking; is recognized as a bank by the bank
supervisory or monetary authorities of the country of its organization
or principal banking operations; receives deposits to a substantial
extent in the regular course of business; and has the power to accept
demand deposits.
/3/ /1/ Long-term claims on, or guaranteed by, non-OECD banks and all
claims on bank holding companies are assigned to the 100 percent risk
category, as are holdings of bank-issued securities that qualify as
capital of the issuing banks.
/3/ /2/ For this purpose, U.S. Government-sponsored agencies are
defined as agencies originally established or chartered by the Federal
government to serve public purposes specified by the U.S. Congress but
whose obligations are not explicitly guaranteed by the full faith and
credit of the U.S. Government. These agencies include the Federal Home
Loan Mortgage Corporation (FHLMC), the Federal National Mortgage
Association (FNMA), the Farm Credit System, the Federal Home Loan Bank
System, and the Student Loan Marketing Association (SLMA). Claims on
U.S. Government-sponsored agencies include capital stock in a Federal
Home Loan Bank that is held as a condition of membership in that bank.
/3/ /3/ Claims on, or guaranteed by, states or other political
subdivisions of countries that do not belong to the OECD-based group of
countries are placed in the 100 percent risk category.
34If a bank holds the first and junior lien(s) on a residential
property and no other party holds an intervening lien, the transaction
is treated as a single loan secured by a first lien for the purpose of
determining the loan-to-value ratio.
35The types of properties that qualify as 1-4 family residences are
listed in the instructions to the commercial bank Call Report.
36The loan-to-value ratio is based upon the most current appraised
value of the property. All appraisals must be made in a manner
consistent with the Federal banking agencies' real estate appraisal
guidelines and with the bank's own appraisal guidelines.
37Residential property loans that do not meet all the specified
criteria or that are made for the purpose of speculative property
development are placed in the 100 percent risk category.
38Such assets include all non-local currency claims on, or guaranteed
by, non-OECD central governments and those portions of local currency
claims on, or guaranteed by, non-OECD central governments that exceed
the local currency liabilities held by the bank.
39Customer liabilities on acceptances outstanding involving
non-standard risk claims, such as claims on U.S. depository
institutions, are assigned to the risk category appropriate to the
identity of the obligor or, if relevant, the nature of the collateral or
guarantees backing the claims. Portions of acceptances conveyed as risk
participations to U.S. depository institutions or foreign banks are
assigned to the 20 percent risk category appropriate to short-term
claims guaranteed by U.S. depository institutions and foreign banks.
40The sufficiency of collateral and guarantees for off-balance sheet
items is determined by the market value of the collateral or the amount
of the guarantee in relation to the face amount of the item, except for
interest and foreign exchange rate contracts, for which this
determination is made in relation to the credit equivalent amount.
Collateral and guarantees are subject to the same provisions noted under
Section III (B).
/41/ Credit equivalent amounts of acquisitions of risk participations
are assigned to the risk category appropriate to the account party
obligor, or, if relevant, the nature of the collateral or guarantees.
/42/ That is, a participation in which the originating bank remains
liable to the beneficiary for the full amount of the direct credit
substitute if the party that has acquired the participation fails to pay
when the instrument is drawn.
/43/ Risk participations with a remaining maturity of over one year
that are conveyed to non-OECD banks are to be assigned to the 100
percent risk category, unless a lower risk category is appropriate to
the obligor, guarantor, or collateral.
/44/ A risk participation in bankers acceptances conveyed to other
institutions is also assigned to the risk category appropriate to the
institution acquiring the participation or, if relevant, the guarantor
or nature of the collateral.
/45/ Forward forward deposits accepted are treated as interest rate
contracts.
/46/ Through year-end 1992, remaining maturity may be used for
determining the maturity of off-balance sheet loan commitments;
thereafter, original maturity must be used.
/47/ In the case of consumer home equity or mortgage lines of credit
secured by liens on 1-4 family residential properties, the bank is
deemed able to unconditionally cancel the commitment for the purpose of
this criterion if, at its option, it can prohibit additional extensions
of credit, reduce the credit line, and terminate the commitment to the
full extent permitted by relevant Federal law.
/4/ /8/ Through year-end 1992, remaining maturity may be used for
determining term to maturity for off-balance sheet loan commitments;
thereafter, original maturity must be used.
/4/ /9/ Mark-to-market values are measured in dollars, regardless of
the currency or currencies specified in the contract, and should reflect
changes in both interest rates and counterparty credit quality.
/5/ /0/ For interest and exchange rate contracts, sufficiency of
collateral or guarantees is determined by the market value of the
collateral or the amount of the guarantee in relation to the credit
equivalent amount. Collateral and guarantees are subject to the same
provisions noted under section III(B).
/5/ /1/ Netting by novation, for this purpose, is a written bilateral
contract between two counterparties under which any obligation to each
other to deliver a given currency on a given date is automatically
amalgamated with all other obligations for the same currency and value
date, legally substituting one single net amount for the previous gross
obligations.
/5/ /2/ The Basle capital framework does not establish an initial
minimum standard for the risk-based capital ratio before the end of
1990. However, for the purpose of calculating a risk-based capital
ratio prior to year-end 1990, no sublimit is placed on the amount of the
allowance for loan and lease losses includable in Tier 2. In addition,
this framework permits, under temporary transition arrangements, a
certain percentage of a bank's Tier 1 capital to be made up of
supplementary capital elements. In particular, supplementary elements
may constitute 25 percent of a bank's Tier 1 capital (before the
deduction of goodwill) up to the end of 1990; from year-end 1990 up to
the end of 1992, this allowable percentage of supplementary elements in
Tier 1 declines to 10 percent of Tier 1 (before the deduction of
goodwill). Beginning on December 31, 1992, supplementary elements may
not be included in Tier 1. The amount of subordinated debt and
intermediate-term preferred stock temporarily included in Tier 1 under
these arrangements will not be subject to the sublimit on the amount of
such instruments includable in Tier 2 capital. Goodwill must be
deducted from the sum of a bank's permanent core capital elements (that
is, common equity, noncumulative perpetual preferred stock, and minority
interest in the equity of unconsolidated subsidiaries) plus
supplementary items that may temporarily qualify as Tier 1 elements for
the purpose of calculating Tier 1 (net of goodwill), Tier 2, and total
capital.
/1/ For the purpose of calculating the risk-based capital ratio, a
U.S. Government agency is defined as an instrumentality of the U.S.
Government whose obligations are fully and explicitly guaranteed as to
the timely payment of principal and interest by the full faith and
credit of the U.S. Government.
/2/ For the purpose of calculating the risk-based capital ratio, a
U.S. Government-sponsored agency is defined as an agency originally
established or chartered to serve public purposes specified by the U.S.
Congress but whose obligations are not explicitly guaranteed by the full
faith and credit of the U.S. Government.
/3/ The extent of collateralization is determined by current market
value.
/1/ Remaining maturity may be used until year-end 1992.
12 CFR 208.128 Pt. 208, App. B
12 CFR 208.128 Appendix B To Part 208 -- Capital Adequacy Guidelines
for State Member Banks: Tier 1 Leverage Measure
The Board of Governors of the Federal Reserve System has adopted a
minimum ratio to Tier 1 capital to total assets to assist in the
assessment of the capital adequacy of state member banks. /1/ The
principal objective of this measure is to place a constraint on the
maximum degree to which a state member bank can leverage its equity
capital base. It is intended to be used as a supplement to the
risk-based capital measure.
The guidelines apply to all state member banks on a consolidated
basis and are to be used in the examination and supervisory process as
well as in the analysis of applications acted upon by the Federal
Reserve. The Board will review the guidelines from time to time and
will consider the need for possible adjustments in light of any
significant changes in the economy, financial markets, and banking
practices.
The Board has established a minimum level of Tier 1 capital to total
assets of 3 percent. An institution operating at or near these levels
is expected to have well-diversified risk, including no undue interest
rate risk exposure; excellent asset quality; high liquidity; good
earnings; and in general be considered a strong banking organization,
rated composite 1 under the CAMEL rating system of banks. Institutions
not meeting these characteristics, as well as institutions with
supervisory, financial, or operational weaknesses, are expected to
operate well above minimum capital standards. Institutions experiencing
or anticipating significant growth also are expected to maintain capital
ratios, including tangible capital positions, well above the minimum
levels. For example, most such banks generally have operated at capital
levels ranging from 100 to 200 basis points above the stated minimums.
Higher capital ratios could be required if warranted by the particular
circumstances or risk profiles of individual banks. Thus, for all but
the most highly-rated banks meeting the conditions set forth above, the
minimum Tier 1 leverage ratio is to be 3 percent plus an additional
cushion of at least 100 to 200 basis points. In all cases, banking
institutions should hold capital commensurate with the level and nature
of all risks, including the volume and severity of problem loans, to
which they are exposed.
A bank's Tier 1 leverage ratio is calculated by dividing its Tier 1
capital (the numerator of the ratio) by its average total consolidated
assets (the denominator of the ratio). The ratio will also be
calculated using period-end assets whenever necessary, on a case-by-case
basis. For the purpose of this leverage ratio, the definition of Tier 1
capital for year-end 1992 as set forth in the risk-based capital
guidelines contained in appendix A of this part will be used. /2/
Average total consolidated assets are defined as the quarterly average
total assets (defined net of the allowance for loan and lease losses)
reported on the bank's Reports of Condition and Income (''Call
Report''), less goodwill and any other intangible assets and investments
in subsidiaries that the Federal Reserve determines should be deducted
from Tier 1 capital. /3/
Whenever appropriate, including when a bank is undertaking expansion,
seeking to engage in new activities or otherwise facing unusual or
abnormal risks, the Board will continue to consider the level of an
individual bank's tangible Tier 1 leverage ratio (after deducting all
intangibles) in making an overall assessment of capital adequacy. This
is consistent with the Federal Reserve's risk-based capital guidelines
and long-standing Board policy and practice with regard to leverage
guidelines. Banks experiencing growth, whether internally or by
acquisition, are expected to maintain strong capital positions
substantially above minimum supervisory levels, without significant
reliance on intangible assets.
(55 FR 32831, Aug. 10, 1990)
/1/ Supervisory risk-based capital ratios that relate capital to
weighted risk assets for state member banks are outlined in appendix A
to this part.
/2/ At the end of 1992, Tier 1 capital for state member banks
includes common equity, minority interests in equity accounts of
consolidated subsidiaries, and qualifying noncumulative perpetual
preferred stock, less goodwill. The Federal Reserve may exclude certain
other intangibles and investments in subsidiaries as appropriate.
/3/ Deductions from Tier 1 capital and other adjustments are
discussed more fully in section II.B. of appendix A to this part.
12 CFR 208.128 PART 209 -- ISSUE AND CANCELLATION OF CAPITAL STOCK OF
FEDERAL RESERVE BANKS
Sec.
209.1 National bank in process of organization.
209.2 State bank becoming member.
209.3 Increase or decrease of capital or surplus.
209.4 Increase or decrease of deposits by mutual savings bank.
209.5 Merger or consolidation.
209.6 Conversion of national bank.
209.7 Insolvency.
209.8 Voluntary liquidation.
209.9 Other closed national banks.
209.10 Other closed State member banks.
209.11 Voluntary withdrawal from membership.
209.12 Involuntary termination of membership.
209.13 Cancellation of old and issue of new stock certificate.
209.14 Forms.
Authority: 12 U.S.C. 248, 321-338, 486, 1814, 1816.
Source: Reg. I, 27 FR 12915, Dec. 29, 1962, unless otherwise noted.
12 CFR 209.1 National bank in process of organization.
Each national bank,1081 while in process of organization,2082 shall
file with the Federal Reserve Bank of its district an application on
Form FR 30, and each nonmember State bank converting into a national
bank,3083 shall file an application on Form FR 30a, for an amount of
capital stock of the Federal Reserve Bank of its district equal to six
percent of the paid-up4084 capital and surplus of such national bank.
If the application is found to be in proper form it will be approved by
the Federal Reserve Bank effective if and when the Comptroller of the
Currency issues to such bank his certificate of authority to commence
business. Upon approval, the applying bank shall thereupon5085 pay the
Federal Reserve Bank of its district one-half of the amount of its
subscription and, upon receipt of advice from the Federal Reserve Bank
as to the required amount, one-half of one per cent of its paid-up
subscription for each month from the period of the last dividend, and
upon receipt of the payment for Federal Reserve Bank stock the Federal
Reserve Bank will issue a receipt therefor, place the amount in a
suspense account, and notify the Comptroller of the Currency that it has
been received. When the Comptroller of the Currency issues his
certificate of authority to commence business the Federal Reserve Bank
will issue a stock certificate as of the date upon which the bank opens
for business. The remaining half of the subscription of the applying
bank will be subject to call when deemed necessary by the Board of
Governors of the Federal Reserve System.
0811Under the provisions of section 19 of the Federal Reserve Act (12
U.S.C. 466), national banks located in a dependency or insular
possession or any part of the United States outside the States of the
United States and the District of Columbia are not required to become
members of the Federal Reserve System but may, with the consent of the
Board, become members of the System. Any such bank desiring to be
admitted to the System under the provisions of section 19 should
communicate with the Federal Reserve Bank with which it desires to do
business.
0822A new national bank with no capital or board of directors which
is organized by the Federal Deposit Insurance Corporation pursuant to
the provisions of section 11(h) of the Federal Deposit Insurance Act (12
U.S.C. 1821(h)), should not apply for stock of the Federal Reserve Bank
of its district until it is in process of organization as a national
bank with capital pursuant to the provisions of section 11(k) of the
Federal Deposit Insurance Act (12 U.S.C. 1821(k)).
0833Whenever a State member bank is converted into a national bank
under section 5154 of the Revised Statutes (12 U.S.C. 35), it may
continue to hold as a national bank its shares of Federal Reserve Bank
stock previously held as a State member bank. If the aggregate amount
of its capital and surplus is increased or decreased, the national bank
shall file an application on Form FR 56, as provided in 209.3, for
additional shares of Federal Reserve Bank stock or for cancellation of
Federal Reserve Bank stock. The certificate of stock issued in the name
of the State member bank shall be surrendered and canceled, and a new
certificate will be issued in lieu thereof in the name of the national
bank, as provided in 209.13.
0844Subscriptions to the capital stock of the Federal Reserve Bank
must be made in an amount at least equal to six per cent of the amount
of the capital and surplus of the applying bank which is to be paid in
at the time the Comptroller of the Currency authorizes it to commence
business. In order to avoid the necessity of making applications for
additional stock in the Federal Reserve Bank, as additional installments
of the capital and surplus of the applying bank are paid in, application
may be made for stock in the Federal Reserve Bank in an amount equal to
six percent of the authorized capital of the applying bank, plus six per
cent of the amount of surplus, if any, which the subscribers to the
capital of the applying bank have agreed to pay in.
0855Payment may be made, if desired, at any time prior to approval of
the application.
12 CFR 209.2 State bank becoming member.
Any State bank, Morris Plan bank, or mutual savings bank, desiring to
become a member of the Federal Reserve System shall make application as
provided in part 208 of this chapter (Regulation H) and, when such
application has been approved by the Board of Governors of the Federal
Reserve System and all applicable requirements have been complied with,
the Federal Reserve Bank will issue an appropriate certificate of
Federal Reserve Bank stock as provided in 208.5(b) of this chapter.
12 CFR 209.3 Increase or decrease of capital or surplus.
Whenever any member bank increases or decreases the aggregate amount
of its paid-up capital and surplus,6086 it shall file with the Federal
Reserve Bank of its district an application on Form FR 56 for such
additional amount or for the cancellation of such amount, as the case
may be, of the capital stock of the Federal Reserve Bank of its district
as may be necessary to make its total subscription to Federal Reserve
Bank stock equal to six percent of its combined capital and surplus.
After an application for additional Federal Reserve Bank stock has been
approved by the Federal Reserve Bank, the applying member bank shall pay
to the Federal Reserve Bank of its district one-half of its additional
subscription, plus one-half of one percent a month from the period of
the last dividend on such Federal Reserve Bank stock, whereupon the
appropriate certificate of stock will be issued by the Federal Reserve
Bank. The remaining half of such additional subscription will be
subject to call when deemed necessary by the Board of Governors of the
Federal Reserve System. After an application for cancellation of
Federal Reserve Bank stock has been approved, the Federal Reserve Bank
will accept and cancel the stock which the applying bank is required to
surrender, and will pay to the member bank a sum equal to all cash paid
subscriptions made on the stock canceled plus one-half of one percent a
month from the period of the last dividend, not to exceed the book value
thereof.
0866If a member bank sets up a reserve for dividends payable in
common stock, such reserve will be regarded as surplus for the purpose
of determining the amount of Federal Reserve Bank stock which the bank
is required to hold, provided such reserve is established pursuant to a
resolution of the board of directors, will become a part of the
permanent capital of the bank, and will not be used for any other
purpose than the payment of dividends in common stock.
12 CFR 209.4 Increase or decrease of deposits by mutual savings bank.
Whenever, as shown by the last report of condition as of a date
preceding January 1 or July 1 of each year, the total deposit
liabilities of a mutual savings bank which is a member of the Federal
Reserve System have increased or decreased since the last adjustment of
its holdings of Federal Reserve Bank stock, the bank shall file with the
Federal Reserve Bank of its district an application on Form FR 56a for
such additional amount or for the cancellation of such amount, as the
case may be, of Federal Reserve Bank stock of its district as may be
necessary to make its total subscription to Federal Reserve Bank stock
equal to six-tenths of one percent of its total deposit liabilities as
shown by such last report of condition, and Federal Reserve Bank stock
will be issued or canceled in the manner described in 209.3. In the
case of any mutual savings bank which is not permitted by the laws under
which it was organized to purchase stock in the Federal Reserve Bank and
has a deposit with the Federal Reserve Bank in lieu of such
subscription, such deposit will be adjusted in the same manner as
subscriptions for stock.
12 CFR 209.5 Merger or consolidation.
(a) Whenever two or more member banks merge or consolidate and such
action results in the merged or consolidated bank acquiring by operation
of law7087 the Federal Reserve Bank stock owned by the other bank or
banks, and which also results in the merged or consolidated bank having
an aggregate capital and surplus in excess of, or less than, the
aggregate capital and surplus of the merging or consolidating member
banks, such merged or consolidated bank shall, as provided in 209.3,
file with the Federal Reserve Bank of its district an application on
Form FR 56 for such additional amount, or for the cancellation of such
amount, as the case may be, of Federal Reserve Bank stock of its
district as may be necessary to make its total subscription to Federal
Reserve Bank stock equal to six percent of its combined capital and
surplus. In any such case, the merged or consolidated bank shall
surrender to the Federal Reserve Bank the certificates of Federal
Reserve Bank stock held by the merged or consolidated bank and a new
certificate will be issued as provided in 209.13(b).
(b) Whenever a member bank merges or consolidates with a nonmember
bank, under the charter of the latter bank, an application on Form FR
86a shall be filed with the Federal Reserve Bank for cancellation of
Federal Reserve Bank stock held by the member bank. Upon approval of
such application, the Federal Reserve Bank will cancel such stock as of
the date the merger or consolidation takes effect, and will adjust
accounts by applying to any indebtedness of the merging or consolidating
bank to such Federal Reserve Bank all cash paid subscriptions made on
the stock canceled plus one-half of one percent a month from the period
of the last dividend, not to exceed the book value thereof, and the
remainder, if any, will be paid to the merged or consolidated bank.
0877Section 5 of the Federal Reserve Act provides that ''Shares of
the capital stock of Federal Reserve Banks owned by member banks shall
not be transferred or hypothecated.'' This provision prevents a transfer
of Federal Reserve Bank stock by purchase, but does not prevent a
transfer by operation of law. Where one member bank purchases all or a
substantial portion of the assets of another member bank, the latter
being placed in liquidation, it is necessary for the liquidating bank to
surrender its Federal Reserve Bank stock, as provided in 209.8, and for
the purchasing bank, if its capital and surplus is increased or
decreased, to adjust its holdings of Federal Reserve Bank stock as
provided in 209.3.
If the assets and obligations of a merging or consolidating member
bank are transferred to a merged or consolidated member bank by
operation of law, no bank being placed in liquidation, the merged or
consolidated bank becomes the owner of the Federal Reserve Bank stock of
the merging or consolidating bank as soon as the merger or consolidation
takes effect, and a new certificate representing Federal Reserve Bank
stock will be issued as provided in 209.13(b). Mergers or
consolidations under the acts of Congress providing for the merger or
consolidation of national banking associations (12 U.S.C. 215, 215a)
meet all of these conditions.
12 CFR 209.6 Conversion of national bank.
Whenever a national bank converts into a nonmember State bank, an
application on Form FR 86b shall be filed with the Federal Reserve Bank
for cancellation of Federal Reserve Bank stock held by the national
bank. Upon approval of such application, the Federal Reserve Bank will
cancel such stock as of the date the conversion takes effect, and will
adjust accounts in the manner described in 209.5(b).
12 CFR 209.7 Insolvency.
Whenever a member bank is declared insolvent and a receiver8
appointed, the receiver shall, within three months from the date of his
appointment, file with the Federal Reserve Bank of the district an
application on Form FR 87 for cancellation of Federal Reserve Bank stock
held by the insolvent member bank. If the receiver fails to make
application within the time specified, the board of directors of the
Federal Reserve Bank will either issue an order to cancel such stock,
or, if the circumstances warrant it, grant the receiver additional time
in which to file an application. Upon approval of such application or
upon issuance of such order, the Federal Reserve Bank will cancel such
stock as of the date of such approval or order and will adjust accounts
in the manner described in 209.5(b).
8The term receiver includes any person, commission, or other agency
charged by law with the duty of winding up the affairs of the bank.
12 CFR 209.8 Voluntary liquidation.
Whenever a member bank goes into voluntary liquidation, as, for
example, upon sale of assets to another bank, the liquidating agent or
some other person or persons duly authorized by the stockholders or
board of directors to act on behalf of the bank shall, within three
months from the date of the vote to place the bank in voluntary
liquidation, file with the Federal Reserve Bank of the district an
application on Form FR 86 for cancellation of Federal Reserve Bank stock
held by the liquidating member bank. If such application is not filed
within the time specified, the board of directors of the Federal Reserve
Bank will either issue an order to cancel such stock, or, if the
circumstances warrant it, grant additional time in which to file an
application. Upon approval of such application, or upon issuance of
such order, the Federal Reserve Bank will cancel such stock as of the
date of such approval or order and will adjust accounts between the
liquidating member bank and the Federal Reserve Bank in the manner
described in 209.5(b).
12 CFR 209.9 Other closed national banks.
(a) Whenever a national bank which has not gone into liquidation as
provided in section 5220 of the Revised Statutes of the United States
(12 U.S.C. 181), and for which a receiver has not been appointed,
discontinues its banking operations for a period of sixty days, the
Federal Reserve Bank will report the facts to the Comptroller of the
Currency with a statement of reasons why a receiver should be appointed
for the national bank. If such receiver is appointed, the procedure
prescribed in 209.7 for cancellation of Federal Reserve Bank stock held
by the national bank shall be followed.
(b) Whenever a national bank has been placed in the hands of a
conservator, the procedure prescribed in 209.7 for cancellation of
Federal Reserve Bank stock held by such bank shall be followed;
provided a certificate is furnished by the Comptroller of the Currency
to the effect that the conservator has been authorized to apply for
cancellation of Federal Reserve Bank stock, and that the bank is to be
liquidated and is not to be permitted to resume business or to
reorganize.
12 CFR 209.10 Other closed State member banks.
Whenever a State member bank ceases to exercise banking functions
without being placed in liquidation in accordance with the laws of the
State in which it is located and without a receiver9089 appointed for
it, and such bank has not within sixty days of the cessation of banking
functions applied for withdrawal from membership in the Federal Reserve
System as provided in part 208 of this chapter (Regulation H), the
Federal Reserve Bank of the district in which such State member bank is
located will furnish the Board of Governors of the Federal Reserve
System with full information with reference to the facts involved in the
case and with a definite recommendation as to whether the Board should
require the State member bank to surrender its Federal Reserve Bank
stock and terminate all rights and privileges of membership in the
Federal Reserve System. Upon receipt of this advice, if termination of
membership of the State member bank appears desirable, the Board will
give the member bank notice of the date upon which a hearing will be
held to determine whether its membership should be terminated. If,
after such hearing, the membership of a State bank is terminated, the
Board will direct the Federal Reserve Bank of the Federal Reserve
district in which the member bank is located to cancel the Federal
Reserve Bank stock as of the date of termination of membership and
adjust accounts in the manner described in 209.5(b).
0899The term receiver includes any person, commission, or other
agency charged by law with the duty of winding up the affairs of the
bank.
12 CFR 209.11 Voluntary withdrawal from membership.
Any State member bank desiring to withdraw from membership in the
Federal Reserve System shall follow the procedure set forth in part 208
of this chapter (Regulation H), and when all applicable requirements of
208.10 of this chapter have been complied with the Federal Reserve Bank
will cancel the Federal Reserve Bank stock held by the member bank as of
the date of withdrawal from membership and will adjust accounts in the
manner described in 209.5(b).
12 CFR 209.12 Involuntary termination of membership.
Any State member bank whose membership has been terminated for
failure to comply with the provisions of the Federal Reserve Act or
regulations of the Board of Governors of the Federal Reserve System
shall surrender its Federal Reserve Bank stock as of the date membership
is terminated and accounts will be adjusted in the manner described in
209.5(b).
12 CFR 209.13 Cancellation of old and issue of new stock certificate.
(a) Whenever a member bank changes its name it shall surrender to the
Federal Reserve Bank the certificate of Federal Reserve Bank stock which
was issued to it under its old name. If the Federal Reserve Bank has or
is furnished with proof of the change of name, it will cancel the
certificate so surrendered and will issue in lieu thereof to and in the
name of the member bank surrendering it a new certificate for the number
of shares represented by the certificate so surrendered.
(b) If a member bank has filed application for an increase or
decrease in its holdings of Federal Reserve Bank stock pursuant to the
provisions of 209.3, or has acquired the Federal Reserve Bank stock
from another Bank by virtue of a merger or consolidation of the kind
described in 209.5(a), it shall surrender the stock certificate
previously issued to it and the certificate representing any stock so
acquired, and the Federal Reserve Bank will issue a new certificate for
the number of shares represented by the surrendered certificate or
certificates decreased by the number of shares canceled or increased by
the number of additional shares to be issued.
(c) In order to provide a convenient means for identifying shares of
Federal Reserve Bank stock purchased and paid for prior to March 28,
1942, as to which dividends are not subject to Federal taxation, the
Federal Reserve Bank will endorse on the back of the stock certificate
an appropriate notation setting forth the number of shares represented
which were purchased and paid for prior to March 28, 1942, and the
number of shares purchased and paid for on or after that date. In lieu
of issuing a single certificate, the Federal Reserve Bank may issue two
certificates to each member bank holding both classes of stock, one
representing stock purchased and paid for prior to March 28, 1942, and
the other representing stock purchased and paid for on or after that
date, in which case the former will be endorsed to read: ''This
certificate represents shares of Federal Reserve Bank stock which were
purchased and paid for prior to March 28, 1942.'' No endorsement will be
necessary on the latter certificate.
12 CFR 209.14 Forms.
All forms referred to in this part and all such forms as they may be
amended from time to time shall be a part of the regulation contained in
this part.
12 CFR 209.14 PART 210 -- REGULATION J (COLLECTION OF CHECKS AND OTHER ITEMS BY FEDERAL RESERVE BANKS AND FUNDS TRANSFERS THROUGH FEDWIRE)
12 CFR 209.14 Subpart A -- Collection of Checks and Other Items By
Federal Reserve Banks
Sec.
210.1 Authority, purpose, and scope.
210.2 Definitions.
210.3 General provisions.
210.4 Sending items to Reserve banks.
210.5 Sender's agreement; recovery by Reserve Bank.
210.6 Status, warranties, and liability of Reserve Bank.
210.7 Presenting items for payment.
210.8 Presenting noncash items for acceptance.
210.9 Payment.
210.10 Time schedule and availability of credits for cash items.
210.11 Availability of proceeds of noncash items; time schedule
210.12 Return of cash items and handling of returned checks.
210.13 Unpaid items.
210.14 Extension of time limits.
210.15 Direct presentment of certain warrants.
12 CFR 209.14 Subpart B -- Funds Transfers Through Fedwire
210.25 Authority, purpose, and scope.
210.26 Definitions.
210.27 Reliance on identifying number.
210.28 Agreement of sender.
210.29 Agreement of receiving bank.
210.30 Payment orders.
210.31 Payment by a Federal Reserve Bank to a receiving bank or
beneficiary.
210.32 Federal Reserve Bank liability; payment of interest.
Appendix A to Subpart B -- Commentary
Appendix B to Subpart B -- Article 4A, Funds Transfers
Authority: Federal Reserve Act, sec. 13 (12 U.S.C. 342), sec.
11(i) and (j) (12 U.S.C. 248 (i) and (j)), sec. 16 (12 U.S.C. 248(o)
and 360), and sec. 19(f) (12 U.S.C. 464); and the Expedited Funds
Availability Act (12 U.S.C. 4001 et seq.)
Source: 45 FR 68634, Oct. 16, 1980, unless otherwise noted.
12 CFR 209.14 Subpart A -- Collection of Checks and Other Items By Federal Reserve Banks
12 CFR 210.1 Authority, purpose, and scope.
The Board of Governors of the Federal Reserve System (''Board'') has
issued this subpart pursuant to the Federal Reserve Act, section 13 (12
U.S.C. 342), section 11(i) (12 U.S.C. 248(i)), section 16 (12 U.S.C.
248(o) and 360), and section 19(f) (12 U.S.C. 464); the Expedited Funds
Availability Act (12 U.S.C. 4001 et seq.); and other laws. This
subpart governs the collection of checks and other cash and noncash
items and the handling of returned checks by Federal Reserve Banks. Its
purpose is to provide rules for collecting and returning items and
settling balances.
(53 FR 21984, June 13, 1988)
12 CFR 210.2 Definitions.
As used in this subpart, unless the context otherwise requires:
(a) Actually and finally collected funds means cash or any other form
of payment that is, or has become, final and irrevocable.
(b) Bank includes a depository institution as defined in section 19
of the Federal Reserve Act (12 U.S.C. 461(b)).
(c) Bank draft means a check drawn by one bank on another bank.
(d) Banking day means a day during which a bank is open to the public
for carrying on substantially all its banking functions.
(e) Cash items means --
(1) A check other than one classified as a noncash item under this
section; or
(2) Any other item payable on demand and collectible at par that the
Reserve Bank of the District in which the item is payable is willing to
accept as a cash item. Cash item does not include a returned check.
(f) Check means a draft, as defined in the Uniform Commercial Code,
that is drawn on a bank and payable on demand. Check as defined in 12
CFR 229.2(k) means an item defined as a check in 12 CFR 229.2(k) for
purposes of subpart C of part 229.
(g) Item means an instrument for the payment of money, whether
negotiable or not, that is:
(1) Payable in a Federal Reserve District1 (District);
(2) Sent by a sender to a Reserve Bank for handling under this
subpart; and
(3) Collectible in funds acceptable to the Reserve Bank of the
District in which the instrument is payable.
Unless otherwise indicated, item includes both a cash and a noncash
item, and includes a returned check sent by a paying or returning bank.
Item does not include a check that cannot be collected at par, or an
item as defined in 210.26 that is handled under subpart B.
(h) Nonbank payor means a payor of an item, other than a bank.
(i) Noncash item means an item that a receiving Reserve Bank
classifies in its operating circulars as requiring special handling.
The term also means an item normally received as a cash item if a
Reserve Bank decides that special conditions require that it handle the
item as a noncash item.
(j) Paying bank means --
(1) The bank by which an item is payable unless the item is payable
or collectible at or through another bank and is sent to the other bank
for payment or collection;
(2) The bank at or through which an item is payable or collectible
and to which it sent for payment or collection; or
(3) The bank whose routing number appears on a check in magnetic
characters or fractional form and to which the check is sent for payment
or collection.
(k) Returned check means a cash item or a check as defined in 12 CFR
229.2(k) returned by a paying bank, including a notice of nonpayment in
lieu of a returned check, whether or not a Reserve Bank handled the
check for collection.
(l) Sender means any of the following that sends an item to a Reserve
Bank for forward collection:
(1) Depository institution means a depository institution as defined
in section 19(b) of the Federal Reserve Act. (12 U.S.C. 461(b))
(2) Clearing institution means:
(i) An institution that is not a depository institution, but
maintains with a Reserve Bank the balance referred to in the first
paragraph of section 13 of the Federal Reserve Act (12 U.S.C. 342); or
(ii) A corporation that maintains an account with a Reserve Bank in
conformity with 211.4 of this chapter (Regulation K).
(3) International Organization means an international organization
for which a Reserve Bank is empowered to act as depository or fiscal
agent and maintains an account.
(4) Foreign correspondent means any of the following for which a
Reserve Bank maintains an account: a foreign bank or banker, a foreign
state as defined in section 25(b) of the Federal Reserve Act (12 U.S.C.
632), or a foreign correspondent or agency referred to in section 14(e)
of that Act (12 U.S.C. 358).
(m) State means a State of the United States, the District of
Columbia, Puerto Rico, or a territory, possession, or dependency of the
United States.
Unless the context otherwise requires, the terms not defined herein
have the meanings set forth in 12 CFR 229.2 applicable to subpart C of
part 229, and the terms not defined herein or in 12 CFR 229.2 have the
meanings set forth in the Uniform Commercial Code.
(45 FR 68634, Oct. 16, 1980, as amended at 46 FR 42059, Aug. 19,
1981; 51 FR 21744, June 16, 1986; 53 FR 21984, June 13, 1988)
1For purposes of this subpart, the Virgin Islands and Puerto Rico are
deemed to be in the Second District, and Guam, American Samoa, and the
Northern Mariana Islands in the Twelfth District.
12 CFR 210.3 General provisions.
(a) General. Each Reserve Bank shall receive and handle items in
accordance with this subpart, and shall issue operating circulars
governing the details of its handling of items and other matters deemed
appropriate by the Reserve Bank. The circulars may, among other things,
classify cash items and noncash items, require separate sorts and
letters, and provide different closing times for the receipt of
different classes or types of items.
(b) Binding effect. This subpart, together with subpart C of part
229 and the operating circulars of the Reserve Banks, are binding on all
parties interested in an item handled by any Reserve Bank.
(c) Government items. As depositaries and fiscal agents of the
United States, Reserve Banks handle certain items payable by the United
States or certain Federal agencies as cash or noncash items. To the
extent provided by regulations issued by, and arrangements made with,
the United States Treasury Department and other Government departments
and agencies, the handling of such items is governed by this subpart.
The Reserve Banks shall include in their operating circulars such
information regarding these regulations and arrangements as the Reserve
Banks deem appropriate.
(d) Government senders. Except as otherwise provided by statutes of
the United States, or regulations issued or arrangements made
thereunder, this subpart and the operating circulars of the Reserve
Banks apply to the following when acting as a sender: a department,
agency, instrumentality, independent establishment, or office of the
United States, or a wholly owned or controlled Government corporation,
that maintains or uses an account with a Reserve Bank.
(e) Foreign items. A Reserve Bank also may receive and handle
certain items payable outside a Federal Reserve District, as provided in
its operating circulars. The handling of such items in a state is
governed by this subpart, and the handling of such items outside a state
is governed by the local law.
(45 FR 68634, Oct. 16, 1980, as amended at 51 FR 21744, June 16,
1986; 53 FR 21984, June 13, 1988)
12 CFR 210.4 Sending items to Reserve Banks.
(a) A sender may send any item to the Reserve Bank with which it
maintains or uses an account, but that Reserve Bank may permit or
require the sender to send direct to another Reserve Bank an item
payable within the other Reserve Bank's District.
(b) With respect to an item sent direct, the relationships and the
rights and liabilities between the sender, the Reserve Bank of its
District, and the Reserve Bank to which the item is sent are the same as
if the sender had sent the item to the Reserve Bank of its District and
that Reserve Bank had sent the item to the other Reserve Bank.
(c) The Reserve Banks shall receive cash items and other checks at
par.
12 CFR 210.5 Sender's agreement; recovery by Reserve Bank.
(a) Sender's agreement. By sending an item to a Reserve Bank, the
sender:
(1) Authorizes the receiving Reserve Bank (and any other Reserve Bank
or collecting bank to which the item is sent) to handle the item subject
to this subpart and to the Reserve Banks' operating circulars, and
warrants its authority to give this authorization;
(2) Warrants to each Reserve Bank handling the item that: (i) The
sender has good title to the item or is authorized to obtain payment on
behalf of one who has good title (whether or not this warranty is
evidenced by the sender's express guaranty of prior indorsements on the
item); and
(ii) To the extent prescribed by state law applicable to a Reserve
Bank or subsequent collecting bank handling the item, the item has not
been materially altered; but this paragraph (a)(2) does not limit any
warranty by a sender or other prior party arising under state law; and
(3) Agrees to indemnify each Reserve Bank for any loss of expense
sustained (including attorneys' fees and expenses of litigation)
resulting from (i) the sender's lack of authority to make the warranty
in paragraph (a)(1) of this section; (ii) any action taken by the
Reserve Bank within the scope of its authority in handling the item; or
(iii) any warranty made by the Reserve Bank under 210.6(b) of this
subpart.
(b) Recovery by Reserve Bank. If an action or proceeding is brought
against (or if defense is tendered to) a Reserve Bank that has handled
an item, based on:
(1) The alleged failure of the sender to have the authority to make
the warranty and agreement in paragraph (a)(1) of this section;
(2) Any action by the Reserve Bank within the scope of its authority
in handling the item; or
(3) Any warranty made by the Reserve Bank under 210.6(b) of this
subpart, the Reserve Bank may, upon entry of a final judgment or decree,
recover from the sender the amount of attorneys' fees and other expenses
of litigation incurred, as well as any amount the Reserve Bank is
required to pay because of the judgment or decree of the tender of
defense, together with interest thereon.
(c) Methods of recovery. The Reserve Bank may recover the amount
stated in paragraph (b) of this section by charging any account on its
books that is maintained or used by the sender (or if the sender is
another Reserve Bank, by entering a charge against the other Reserve
Bank through the Interdistrict Settlement Fund), if:
(1) The Reserve Bank made seasonable written demand on the sender to
assume defense of the action or proceeding; and
(2) The sender has not made any other arrangement for payment that is
acceptable to the Reserve Bank.
The Reserve Bank is not responsible for defending the action or
proceeding before using this method of recovery. A Reserve Bank that
has been charged through the Interdistrict Settlement Fund may recover
from its sender in the manner and under the circumstances set forth in
this paragraph. A Reserve Bank's failure to avail itself of the remedy
provided in this paragraph does not prejudice its enforcement in any
other manner of the indemnity agreement referred to in paragraph (a)(3)
of this section.
(45 FR 68634, Oct. 16, 1980, as amended at 51 FR 21745, June 16,
1986)
12 CFR 210.6 Status, warranties, and liability of Reserve Bank.
(a)(1) Status and Liability. A Reserve Bank shall act only as agent
or subagent of the owner with respect to an item. This agency
terminates not later than the time the Reserve Bank receives payment for
the item in actually and finally collected funds and makes the proceeds
available for use by the sender. A Reserve Bank may be liable to the
owner, to the sender, to a prior collecting bank, or to the depositary
bank's customer with respect to a check as defined in 12 CFR 229.2(k). A
Reserve Bank shall not have or assume any liability with respect to an
item or its proceeds except for the Reserve Bank's own lack of good
faith or failure to exercise ordinary care, except as provided in
paragraph (b) of this section and except as provided in subpart C of
part 229.
(2) Reliance on routing designation appearing on item. A Reserve
Bank may present or send an item based on the routing number or other
designation of a paying bank or nonbank payor appearing in any form on
the item when the Reserve Bank receives it. A Reserve Bank shall not be
responsible for any delay resulting from its acting on any designation,
whether inscribed by magnetic ink or by other means, and whether or not
the designation acted on is consistent with any other designation
appearing on the item.
(b) Warranties and liability. By presenting or sending an item, a
Reserve Bank warrants to a subsequent collecting bank and to the paying
bank and any other payor:
(1) That the Reserve Bank has good title to the item (or is
authorized to obtain payment on behalf of one who either (i) has good
title or (ii) is authorized to obtain payment on behalf of one who has
good title), whether or not this warranty is evidenced by the Reserve
Bank's express guaranty of prior indorsements on the item; and
(2) That the item has not been materially altered to the extent
prescribed by State law applicable to a Reserve Bank or subsequent
collecting bank holding the item.
The Reserve Bank shall not have or assume any other liability to the
paying bank or other payor, except for the Reserve Bank's own lack of
good faith or failure to exercise ordinary care.
(c) Time for commencing action against Reserve Bank. A claim against
a Reserve Bank for lack of good faith or failure to exercise ordinary
care shall be barred unless the action on the claim is commenced within
two years after the claim accrues. A claim accrues on the date when a
Reserve Bank's alleged failure to exercise ordinary care or to act in
good faith first results in damages to the claimant.
(45 FR 68634, Oct. 16, 1980, as amended at 51 FR 21745, June 16,
1986; 53 FR 21984, June 13, 1988)
12 CFR 210.7 Presenting items for payment.
(a) Presenting or sending. As provided under State law or as
otherwise permitted by this section: (1) a Reserve Bank or a subsequent
collecting bank may present an item for payment or send the item for
presentment and payment; and
(2) A Reserve Bank may send an item to a subsequent collecting bank
with authority to present it for payment or to send it for presentment
and payment.
(b) Place of presentment. A Reserve Bank or subsequent collecting
bank may present an item --
(1) At a place requested by the paying bank;
(2) In the case of a check as defined in 12 CFR 229.2(k), in
accordance with 12 CFR 229.36;
(3) At a place requested by the nonbank payor, if the item is payable
by a nonbank payor other than through or at a paying bank;
(4) Under a special collection agreement consistent with this
subpart; or
(5) Through a clearinghouse and subject to its rules and practices.
(c) Presenting or sending direct. A Reserve Bank or subsequent
collecting bank may, with respect to an item payable in the Reserve
Bank's District:
(1) Present or send the item direct to the paying bank, or to a place
requested by the paying bank; or
(2) If the item is payable by a nonbank payor other than through a
paying bank, present it direct to the nonbank payor. Documents,
securities, or other papers accompanying a noncash item shall not be
delivered to the nonbank payor before the item is paid unless the sender
specifically authorizes delivery.
(d) Item payable in another district. A Reserve Bank receiving an
item payable in another District ordinarily sends the item to the
Reserve Bank of the other District, but with the agreement of the other
Reserve Bank, may present or send the item as if it were payable in its
own District.
(45 FR 68634, Oct. 16, 1980, as amended at 53 FR 21985, June 13,
1988)
12 CFR 210.8 Presenting noncash Items for Acceptance.
A Reserve Bank or a subsequent collecting bank may, if instructed by
the sender, present a noncash item for acceptance in any manner
authorized by law if: (a) The item provides that it must be presented
for acceptance; (b) the item is payable elsewhere than at the residence
or place of business of the payor; or (c) the date of payment of the
item depends on presentment for acceptance. Documents accompanying a
noncash item shall not be delivered to the payor upon acceptance of the
item unless the sender specifically authorizes delivery. A Reserve Bank
shall not have or assume any other obligation to present or to send for
presentment for acceptance any noncash item.
12 CFR 210.9 Payment.
(a) Cash items. (1) A paying bank becomes accountable for the amount
of a cash item received directly or indirectly from a Reserve Bank, at
the close of the paying bank's banking day on which it receives3 the
item if it retains the item after the close of that banking day, unless,
prior to that time, it pays for the item by:
(i) Debit to an account on the Reserve Bank's books;
(ii) Cash; or
(iii) In the discretion of the Reserve Bank, any other form of
payment.
(2) The proceeds of any payment shall be available to the Reserve
Bank by the close of the Reserve Bank's banking day on the banking day
of receipt of the item by the paying bank. If the banking day of
receipt is not a banking day for the Reserve Bank, payment shall be made
on the next day that is a banking day for the Reserve Bank by the close
of the Reserve Bank's banking day. A paying bank that closes
voluntarily on a day that is a banking day for the Reserve Bank shall
either pay on that day by the close of the Reserve Bank's banking day
for cash items that the Reserve Bank makes available to the paying bank
on that day, or compensate the Reserve Bank for the value of the float
associated with the items in accordance with procedures provided in its
Reserve Bank's operating circular; in such circumstances, the paying
bank is not considered to receive the item until its next banking day.
(b) Noncash items. A Reserve Bank may require the paying or
collecting bank to which it has presented or sent a noncash item to pay
for the item in cash, but the Reserve Bank may permit payment by a debit
to an account on the Reserve Bank's books or by any of the following
that is in a form acceptable to the Reserve Bank: bank draft, transfer
of funds or bank credit, or any other form of payment authorized by
State law.
(c) Nonbank payor. A Reserve Bank may require a nonbank payor to
which it has presented an item to pay for it in cash, but the Reserve
Bank may permit payment in any of the following that is in a form
acceptable to the Reserve Bank: cashier's check, certified check, or
other bank draft or obligation.
(d) Handling of payment. A Reserve Bank may handle a bank draft or
other form of payment it receives in payment of a cash item as a cash
item. A Reserve Bank may handle a bank draft or other form of payment
it receives in payment of a noncash item as either a cash item or a
noncash item.
(e) Liability of Reserve Bank. Except as set forth in 12 CFR
229.35(b), a Reserve Bank shall not be liable for the failure of a
collecting bank, paying bank, or nonbank payor to pay for an item, or
for any loss resulting from the Reserve Bank's acceptance of any form of
payment other than cash authorized in paragraphs (a), (b), and (c) of
this section. A Reserve Bank that acts in good faith and exercises
ordinary care shall not be liable for the nonpayment of, or failure to
realize upon, a bank draft or other form of payment that it accepts
under paragraphs (a), (b), and (c) of this section.
(45 FR 68634, Oct. 16, 1980, as amended at 49 FR 4200, Feb. 3, 1984;
51 FR 21745, June 16, 1986; 53 FR 21985, June 13, 1988)
2A paying bank is deemed to receive a cash item on its next banking
day if it receives the item:
(1) On a day other than a banking day for it; or
(2) On a banking day for it, but
(i) After its regular banking hours;
(ii) After a ''cut-off hour'' established by it in accordance with
State law; or
(iii) During afternoon or evening periods when it is open for limited
functions only.
12 CFR 210.10 Time schedule and availability of credits for cash items
and returned checks.
(a) Each Reserve Bank shall include in its operating circulars a time
schedule for each of its offices indicating when the amount of any cash
item or returned check received by it (or sent direct to another Reserve
office for the account of that Reserve Bank) is counted as reserves for
purposes of part 204 of this chapter (Regulation D) and becomes
available for use by the sender or paying or returning bank. The
Reserve Bank shall give either immediate or deferred credit in
accordance with its time schedule to a sender or paying or returning
bank other than a foreign correspondent. A Reserve Bank ordinarily
gives credit to a foreign correspondent only when the Reserve Bank
receives payment of the item in actually and finally collected funds,
but, in its discretion, a Reserve Bank may give immediate or deferred
credit in accordance with its time schedule.
(b) Notwithstanding its time schedule, a Reserve Bank may refuse at
any time to permit the use of credit given for any cash item or returned
check, and may defer availability after credit is received by the
Reserve Bank for a period of time that is reasonable under the
circumstances.
(53 FR 21985, June 13, 1988)
12 CFR 210.11 Availability of proceeds of noncash items; time
schedule.
(a) Availability of credit. A Reserve Bank shall give credit to the
sender for the proceeds of a noncash item when it receives payment in
actually and finally collected funds (or advice from another Reserve
Bank of such payment to it). The amount of the item is counted as
reserve for purposes of part 204 of this chapter (Regulation D) and
becomes available for use by the sender when the Reserve Bank receives
the payment or advice, except as provided in paragraph (b) of this
section.
(b) Time schedule. A Reserve Bank may give credit for the proceeds
of a noncash item subject to payment in actually and finally collected
funds in accordance with a time schedule included in its operating
circulars. The time schedule shall indicate when the proceeds of the
noncash item will be counted as reserve for purposes of part 204 of this
chapter (Regulation D) and become available for use by the sender. A
Reserve Bank may, however, refuse at any time to permit the use of
credit given for a noncash item for which the Reserve Bank has not yet
received payment in actually and finally collected funds.
(c) Handling of payment. If a Reserve Bank receives, in payment for
a noncash item, a bank draft or other form of payment that it elects to
handle as a noncash item, the Reserve Bank shall neither count the
proceeds as reserve for purposes of part 204 of this chapter (Regulation
D) nor make the proceeds available for use until it receives payment in
actually and finally collected funds.
12 CFR 210.12 Return of cash items and handling of returned checks.
(a) Return of cash items. A paying bank that receives a cash item
directly or indirectly from a Reserve Bank, other than for immediate
payment over the counter, and that pays for the item as provided in
210.9(a) of this subpart, may, before it has finally paid the item,
return the item in accordance with subpart C of part 229, the Uniform
Commercial Code, and its Reserve Bank's operating circular. The rules
or practices of a clearinghouse through which the item was presented, or
a special collection agreement under which the item was presented, may
not extend these return times, but may provide for a shorter return
time.
(b) Return of checks not handled by Reserve Banks. A paying bank
that receives a check as defined in 12 CFR 229.2(k), other than directly
or indirectly from a Reserve Bank, and that determines not to pay the
check, may send the returned check to its Reserve Bank in accordance
with subpart C of part 229, the Uniform Commercial Code, and its Reserve
Bank's operating Circular. A returning bank may send a returned check
to its Reserve Bank in accordance with subpart C of part 229, the
Uniform Commercial Code, and its Reserve Bank's operating circular.
(c) Paying bank's and returning bank's agreement. By sending a
returned check to a Reserve Bank, the paying bank or returning bank --
(1) Authorizes the receiving Reserve Bank (and any other Reserve Bank
or returning bank to which the returned check is sent) to handle the
returned check subject to this subpart and to the Reserve Banks'
operating circulars;
(2) Makes the warranties set forth in 12 CFR 229.34; and
(3) Agrees to indemnify each Reserve Bank for any loss or expense
(including attorneys' fees and expenses of litigation) resulting from --
(i) The paying or returning bank's lack of authority to give the
authorization in paragraph (c)(1) of this section;
(ii) Any action taken by a Reserve Bank within the scope of its
authority in handling the returned check; or
(iii) Any warranty made by the Reserve Bank under 12 CFR 229.34.
(d) Recovery by Reserve Bank. If an action or proceeding is brought
against (or if defense is tendered to) a Reserve Bank that has handled a
returned Check based on --
(1) The alleged failure of the paying or returning bank to have the
authority to give the authorization in paragraph (c)(1) of this section;
(2) Any action by the Reserve Bank within the scope of its authority
in handling the returned check; or
(3) Any warranty made by the Reserve Bank under 12 CFR 229.34,
the Reserve Bank may, upon the entry of a final judgment or decree,
recover from the paying bank or returning bank the amount of attorneys'
fees and other expenses of litigation incurred, as well as any amount
the Reserve Bank is required to pay under the judgment or decree,
together with interest thereon.
(e) Methods of recovery. The Reserve Bank may recover the amount
stated in paragraph (d) of this section by charging any account on its
books that is maintained or used by the paying or returning bank (or, if
the returning bank is another Reserve Bank, by entering a charge against
the other Reserve Bank through the Interdistrict Settlement Fund), if --
(1) The Reserve Bank made seasonable written demand on the paying or
returning bank to assume defense of the action or proceeding; and
(2) The paying or returning bank has not made any other arrangement
for payment that is acceptable to the Reserve Bank.
The Reserve Bank is not responsible for defending the action or
proceeding before using this method of recovery. A Reserve Bank that
has been charged through the Interdistrict Settlement Fund may recover
from the paying or returning bank in the manner and under the
circumstances set forth in this paragraph. A Reserve Bank's failure to
avail itself of the remedy provided in this paragraph does not prejudice
its enforcement in any other manner of the indemnity agreement referred
to in parapraph (c)(3) of this section.
(f) Reserve Bank's responsibility. A Reserve Bank shall handle a
returned check, or a notice of nonpayment, in accordance with subpart C
of part 229 and its operating circular. A Reserve Bank may permit or
require the paying or returning bank to send direct to another Reserve
Bank a returned check with respect to which the depositary bank is
located within the other Reserve Bank's District, in accordance with
210.4(b).
(g) Settlement. A subsequent returning bank or depositary bank shall
settle for returned checks in the same manner as for cash items
presented for payment.
(53 FR 21985, June 13, 1988)
12 CFR 210.13 Unpaid items.
(a) Right of charge-back. If a Reserve Bank does not receive payment
in actually and finally collected fund for an item, the Reserve Bank
shall recover by charge-back or otherwise the amount of the item from
the sender, paying bank, or returning bank from which it was received,
whether or not the item itself can be sent back. In the event of
recovery, neither the owner or holder of the item, nor the sender,
paying bank, or returning bank from which it was received, shall have
any interest in any reserve balance or other funds in the Reserve Bank's
possesion of the bank failing to make payment in actually and finally
collected funds.
(b) Suspension or closing of bank. A Reserve Bank shall not pay or
act on a draft, authorization to charge, or other order on a reserve
balance or other funds in its possession after it receives notice of
suspension or closing of the bank making the payment for that bank's own
or another's account.
(45 FR 68634, Oct. 16, 1980, as amended at 53 FR 21986, June 13,
1988)
12 CFR 210.14 Extension of time limits.
If, because of interruption of communication facilities, suspension
of payments by a bank or nonbank payor, war, emergency conditions or
other circumstances beyond its control, a bank (including a Reserve
Bank) or nonbank payor is delayed in acting on an item beyond applicable
time limits, its time for acting is extended for the time necessary to
complete the action, if it exercises such diligence as the circumstances
require.
12 CFR 210.15 Direct presentment of certain warrants.
If a Reserve Bank elects to present direct to the payor a bill, note,
or warrant that is issued and payable by a State or a political
subdivision and that is a cash item not payable or collectible through a
bank: (a) Sections 210.9, 210.12, and 210.13 and the operating
circulars of the Reserve Banks apply to the payor as if it were a paying
bank; (b) 210.14 applies to the payor as if it were a bank; and (c)
under 210.9 each day on which the payor is open for the regular conduct
of its affairs or the accommodation of the public is considered a
banking day.
12 CFR 210.15 Subpart B -- Funds Transfers Through Fedwire
Source: 55 FR 40801, Oct. 5, 1990, unless otherwise noted.
12 CFR 210.25 Authority, purpose, and scope.
(a) Authority and purpose. This subpart provides rules to govern
funds transfers through Fedwire, and has been issued pursuant to the
Federal Reserve Act -- section 13 (12 U.S.C. 342), paragraph (f) of
section 19 (12 U.S.C. 464), paragraph 14 of section 16 (12 U.S.C.
248(o)), and paragraphs (i) and (j) of section 11 (12 U.S.C. 248(i) and
(j)) -- and other laws and has the force and effect of federal law.
This subpart is not a funds-transfer system rule as defined in Section
4A-501(b) of Article 4A.
(b) Scope. (1) This subpart incorporates the provisions of Article
4A set forth in appendix B to this subpart. In the event of an
inconsistency between the provisions of the sections of this subpart and
appendix B, to this subpart, the provisions of the sections of this
subpart shall prevail.
(2) Except as otherwise provided in paragraphs (b)(3) and (b)(4) of
this section, this Subpart governs the rights and obligations of:
(i) Federal Reserve Banks sending or receiving payment orders;
(ii) Senders that send payment orders directly to a Federal Reserve
Bank;
(iii) Receiving banks that receive payment orders directly from a
Federal Reserve Bank;
(iv) Beneficiaries that receive payment for payment orders sent to a
Federal Reserve Bank by means of credit to an account maintained or used
at a Federal Reserve Bank; and
(v) Other parties to a funds transfer any part of which is carried
out through Fedwire to the same extent as if this subpart were
considered a funds-transfer system rule under Article 4A.
(3) This subpart governs a funds transfer that is sent through
Fedwire, as provided in paragraph (b)(2) of this section, even though a
portion of the funds transfer is governed by the Electronic Fund
Transfer Act, but the portion of such funds transfer that is governed by
the Electronic Fund Transfer Act is not governed by this subpart.
(4) In the event that any portion of this Subpart establishes rights
or obligations with respect to the availability of funds that are also
governed by the Expedited Funds Availability Act or the Board's
Regulation CC, Availability of Funds and Collection of Checks, those
provisions of the Expedited Funds Availability Act or Regulation CC
shall apply and the portion of this Subpart, including Article 4A as
incorporated herein, shall not apply.
(c) Operating Circulars. Each Federal Reserve Bank shall issue an
Operating Circular consistent with this Subpart that governs the details
of its funds-transfer operations and other matters it deems appropriate.
Among other things, the Operating Circular may: set cut-off hours and
funds-transfer business days; address available security procedures;
specify format and media requirements for payment orders; identify
messages that are not payment orders; and impose charges for
funds-transfer services.
(d) Govenment senders, receiving banks, and beneficiaries. Except as
otherwise expressly provided by the statutes of the United States, the
parties specified in paragraphs (b)(2)(ii) through (v) of this section
include:
(1) A department, agency, instrumentality, independent establishment,
or office of the United States, or a wholly-owned or controlled
Government corporation;
(2) An international organization;
(3) A foreign central bank; and
(4) A department, agency, instrumentality, independent establishment,
or office of a foreign government, or a wholly-owned or controlled
corporation of a foreign government.
(55 FR 40801, Oct. 5, 1990; 55 FR 47428, Nov. 13, 1990)
12 CFR 210.26 Definitions.
As used in this subpart, the following definitions apply:
(a) Article 4A means article 4A of the Uniform Commercial Code as set
forth in appendix B of this subpart.
(b) As of adjustment means a debit or credit, for reserve or clearing
balance maintenance purposes only, applied to the reserve or clearing
balance of a bank that either sends a payment order to a Federal Reserve
Bank, or that receives a payment order from a Federal Reserve Bank, in
lieu of an interest charge or payment.
(c) Automated clearing house transfer means any transfer designated
as an automated clearing house transfer in a Federal Reserve Bank
Operating Circular.
(d) Beneficiary's bank has the same meaning as in Article 4A, except
that:
(1) A Federal Reserve Bank need not be identified in the payment
order in order to be the beneficiary's bank; and
(2) The term includes a Federal Reserve Bank when that Federal
Reserve Bank is the beneficiary of a payment order.
(e) Fedwire is the funds-transfer system owned and operated by the
Federal Reserve Banks that is used primarily for the transmission and
settlement of payment orders governed by this subpart. Fedwire does not
include the system for making automated clearing house transfers.
(f) Interdistrict transfer means a funds transfer involving entries
to accounts maintained at two Federal Reserve Banks.
(g) Intradistrict transfer means a funds transfer involving entries
to accounts maintained at one Federal Reserve Bank.
(h) Off-line bank means a bank that transmits payment orders to and
receives payment orders from a Federal Reserve Bank by telephone orally
or by other means other than electronic data transmission.
(i) Payment order has the same meaning as in Article 4A, except that
the term does not include automated clearing house transfers or any
communication designated in a Federal Reserve Bank Operating Circular
issued under this Subpart as not being a payment order.
(j) Sender's account, receiving bank's account, and beneficiary's
account mean the reserve, clearing, or other funds deposit account at a
Federal Reserve Bank maintained or used by the sender, receiving bank,
or beneficiary, respectively.
(k) Sender's Federal Reserve Bank and receiving bank's Federal
Reserve Bank mean the Federal Reserve Bank at which the sender or
receiving bank, respectively, maintains or uses an account.
(55 FR 40801, Oct. 5, 1990; 55 FR 47428, Nov. 13, 1990)
12 CFR 210.27 Reliance on identifying number.
(a) Reliance by a Federal Reserve Bank on number to identify an
intermediary bank or beneficiary's bank. A Federal Reserve Bank may
rely on the number in a payment order that identifies the intermediary
bank or beneficiary's bank, even if it identifies a bank different from
the bank identified by name in the payment order, if the Federal Reserve
Bank does not know of such an inconsistency in identification. A
Federal Reserve Bank has no duty to detect any such inconsistency in
identification.
(b) Reliance by a Federal Reserve Bank on number to identify
beneficiary. A Federal Reserve Bank, acting as a beneficiary's bank,
may rely on the number in a payment order that identifies the
beneficiary, even if it identifies a person different from the person
identified by name in the payment order, if the Federal Reserve Bank
does not know of such an inconsistency in identification. A Federal
Reserve Bank has no duty to detect any such inconsistency in
identification.
12 CFR 210.28 Agreement of sender.
(a) Payment of sender's obligation to a Federal Reserve Bank. A
sender (other than a Federal Reserve Bank), by maintaining or using an
account with a Federal Reserve Bank, authorizes the sender's Federal
Reserve Bank to obtain payment for the sender's payment orders by
debiting the amount of the payment order from the sender's account.
(b) Overdrafts. (1) A sender does not have the right to an overdraft
in the sender's account. In the event an overdraft is created, the
overdraft shall be due and payable immediately without the need for a
demand by the Federal Reserve Bank, at the earliest of the following
times:
(i) At the end of the funds-transfer business day;
(ii) At the time the Federal Reserve Bank, in its sole discretion,
deems itself insecure and gives notice thereof to the sender; or
(iii) At the time the sender suspends payments or is closed.
(2) The sender shall have in its account, at the time the overdraft
is due and payable, a balance of actually and finally collected funds
sufficient to cover the aggregate amount of all its obligations to the
Federal Reserve Bank, whether the obligations result from the execution
of a payment order or otherwise.
(3) To secure any overdraft, as well as any other obligation due or
to become due to its Federal Reserve Bank, each sender, by sending a
payment order to a Federal Reserve Bank that is accepted by the Federal
Reserve Bank, grants to the Federal Reserve Bank a security interest in
all of the sender's assets in the possession of, or held for the account
of, the Federal Reserve Bank. The security interest attaches when an
overdraft, or any other obligation to the Federal Reserve Bank, becomes
due and payable.
(4) A Federal Reserve Bank may take any action authorized by law to
recover the amount of an overdraft that is due and payable, including,
but not limited to, the exercise of rights of set off, the realization
on any available collateral, and any other rights it may have as a
creditor under applicable law.
(c) Review of payment orders. A sender, by sending a payment order
to a Federal Reserve Bank, agrees that for the purposes of sections
4A-204(a) and 4A-304 of Article 4A, a reasonable time to notify a
Federal Reserve Bank of the relevant facts concerning an unauthorized or
erroneously executed payment order is within 30 calendar days after the
sender receives notice that the payment order was accepted or executed,
or that the sender's account was debited with respect to the payment
order.
12 CFR 210.29 Agreement of receiving bank.
(a) Payment. A receiving bank (other than a Federal Reserve Bank)
that receives a payment order from its Federal Reserve Bank authorizes
that Federal Reserve Bank to pay for the payment order by crediting the
amount of the payment order to the receiving bank's account.
(b) Off-line banks. An off-line bank that does not expressly notify
its Federal Reserve Bank in writing that it maintains an account for
another bank warrants to that Federal Reserve Bank that the off-line
bank does not act as an intermediary bank or a beneficiary's bank with
respect to payment orders received through Fedwire for a beneficiary
that is a bank.
(55 FR 40801, Oct. 5, 1990; 55 FR 47428, Nov. 13, 1990)
12 CFR 210.30 Payment orders.
(a) Rejection. A sender shall not send a payment order to a Federal
Reserve Bank unless authorized to do so by the Federal Reserve Bank. A
Federal Reserve Bank may reject, or impose conditions that must be
satisfied before it will accept, a payment order for any reason.
(b) Selection of an intermediary bank. For an interdistrict
transfer, a Federal Reserve Bank is authorized and directed to execute a
payment order through another Federal Reserve Bank. A sender shall not
send a payment order to a Federal Reserve Bank that requires the Federal
Reserve Bank to issue a payment order to an intermediary bank (other
than a Federal Reserve Bank) unless that intermediary bank is designated
in the sender's payment order. A sender shall not send to a Federal
Reserve Bank a payment order instructing use by a Federal Reserve Bank
of a funds-transfer system or means of transmission other than Fedwire,
unless the Federal Reserve Bank agrees with the sender in writing to
follow such instructions.
(c) Same-day execution. A sender shall not issue a payment order
that instructs a Federal Reserve Bank to execute the payment order on a
funds-transfer business day that is later than the funds-transfer
business day on which the order is received by the Federal Reserve Bank,
unless the Federal Reserve Bank agrees with the sender in writing to
follow such instructions.
12 CFR 210.31 Payment by a Federal Reserve Bank to a receiving bank or
beneficiary.
(a) Payment to a receiving bank. Payment of a Federal Reserve Bank's
obligation to pay a receiving bank (other than a Federal Reserve Bank)
occurs at the earlier of the time when the amount of the payment order
is credited to the receiving bank's account or when the payment order is
sent to the receiving bank.
(b) Payment to a beneficiary. Payment by a Federal Reserve Bank to a
beneficiary of a payment order, where the Federal Reserve Bank is the
beneficiary's bank, occurs at the earlier of the time when the amount of
the payment order is credited to the beneficiary's account or when
notice of the credit is sent to the beneficiary.
12 CFR 210.32 Federal Reserve Bank liability; payment of interest.
(a) Damages. In connection with its handling of a payment order
under this subpart, a Federal Reserve Bank shall not be liable to a
sender, receiving bank, beneficiary, or other Federal Reserve Bank,
governed by this subpart, for any damages other than those payable under
Article 4A. A Federal Reserve Bank shall not agree to be liable to a
sender, receiving bank, beneficiary, or other Federal Reserve Bank for
consequential damages under section 4A-305(d) of Article 4A.
(b) Payment of interest. (1) A Federal Reserve Bank, in its
discretion, may satisfy its obligation, or that of another Federal
Reserve Bank, to pay compensation in the form of interest under Article
4A by --
(i) Providing an as of adjustment to its sender, its receiving bank,
or its beneficiary, as provided in the Federal Reserve Bank's Operating
Circular, in an amount equal to the amount on which interest is to be
calcuated multiplied by the number of days for which interest is to be
calculated; or
(ii) Paying compensation in the form of interest to its sender, its
receiving bank, its beneficiary, or another party to the funds transfer
that is entitled to such payment, in an amount that is calculated in
accordance with section 4A-506 of Article 4A.
(2) If the sender or receiving bank that is the recipient of an as of
adjustment or an interest payment is not the party entitled to
compensation under Article 4A, the sender or receiving bank shall pass
through the benefit of the as of adjustment or interest payment by
making an interest payment, as of the day the as of adjustment or
interest payment is effected, to the party entitled to compensation.
The interest payment that is made to the party entitled to compensation
shall not be less than the value of the as of adjustment or interest
payment that was provided by the Federal Reserve Bank to the sender or
receiving bank. The party entitled to compensation may agree to accept
compensation in a form other than a direct interest payment, provided
that such an alternative form of compensation is not less than the value
of the interest payment that otherwise would be made.
(c) Nonwaiver of right of recovery. Nothing in this subpart or any
Operating Circular issued hereunder shall constitute, or be construed as
constituting, a waiver by a Federal Reserve Bank of a cause of action
for recovery under any applicable law of mistake and restitution.
12 CFR 210.32 Pt. 210, Subpt. B, App. A
12 CFR 210.32 Appendix A to Subpart B -- Commentary
The Commentary provides background material to explain the intent of
the Board of Governors of the Federal Reserve System (Board) in adopting
a particular provision in the subpart and to help readers interpret that
provision. In some comments, examples are offered. The Commentary
constitutes an official Board interpretation of subpart B of this part.
Commentary is not provided for every provision of subpart B of this
part, as some provisions are self-explanatory.
(a) Authority and purpose. Section 210.25(a) states that the purpose
of subpart B of this part is to provide rules to govern funds transfers
through Fedwire and recites the Board's rulemaking authority for this
subpart. Subpart B of this part is federal law and is not a
''funds-transfer system rule,'' as defined in section 4A-501(b) of
Article 4A, Funds Transfers, of the Uniform Commercial Code (UCC), as
set forth in appendix B of this subpart. Certain provisions of Article
4A may not be varied by a funds-transfer system rule, but under section
4A-107, regulations of the Board and Operating Circulars of the Federal
Reserve Banks supersede inconsistent provisions of Article 4A to the
extent of the inconsistency. In addition, regulations of the Board may
preempt inconsistent provisions of state law. Accordingly, subpart B of
this part supersedes or preempts inconsistent provisions of state law.
It does not affect state law governing funds transfers that does not
conflict with the provisions of subpart B of this part, such as Article
4A, as enacted in any state, as it applies to parties to funds transfers
through Fedwire whose rights are not governed by subpart B of this part.
(b) Scope. (1) Subpart B of this part incorporates the provisions of
Article 4A set forth in appendix B of this subpart. The provisions set
forth expressly in the sections of subpart B of this part supersede or
preempt any inconsistent provisions of Article 4A as set forth in
appendix B of this subpart or as enacted in any state. The official
comments to Article 4A are not incorporated in subpart B of this part or
this Commentary to subpart B of this part, but the official comments may
be useful in interpreting Article 4A. Because section 4A-105 refers to
other provisions of the Uniform Commercial Code, e.g., definitions in
Article 1 of the UCC, these other provisions of the UCC, as approved by
the National Conference of Commissioners on Uniform State Laws and the
American Law Institute, from time to time, are also incorporated in
subpart B of this part. Subpart B of this part applies to any party to
a Fedwire funds transfer that is in privity with a Federal Reserve Bank.
These parties include a sender (bank or nonbank) that sends a payment
order directly to a Federal Reserve Bank, a receiving bank that receives
a payment order directly from a Federal Reserve Bank, and a beneficiary
that receives credit to an account that it uses or maintains at a
Federal Reserve Bank for a payment order sent to a Federal Reserve Bank.
Other parties to a funds transfer are covered by this subpart to the
same extent that this subpart would apply to them if this subpart were a
''funds-transfer system rule'' under Article 4A that selected subpart B
of this part as the governing law.
(2) The scope of the applicability of a funds-transfer system rule
under Article 4A is specified in section 4A-501(b), and the scope of the
choice of law provision is specified in section 4A-507(c). Under
section 4A-507(c), a choice of law provision is binding on the
participants in a funds-transfer system and certain other parties having
notice that the funds-transfer system might be used for the funds
transfer and of the choice of law provision. The Uniform Commercial
Code provides that a person has notice when the person has actual
knowledge, receives notification or has reason to know from all the
facts and circumstances known to the person at the time in question.
(See UCC section 1-201(25).) However, under sections 4A-507(b) and
4A-507(d), a choice of law by agreement of the parties takes precedence
over a choice of law made by funds-transfer system rule.
(3) If originators, receiving banks, and beneficiaries that are not
in privity with a Federal Reserve Bank have the notice contemplated by
section 4A-507(c) or if those parties agree to be bound by subpart B of
this part, subpart B of this part generally would apply to payment
orders between those remote parties, including participants in other
funds-transfer systems. For example, a funds transfer may be sent from
an originator's bank through a funds-transfer system other than Fedwire
to a receiving bank which, in turn, sends a payment order through
Fedwire to execute the funds transfer. Similarly, a Federal Reserve
Bank may execute a payment order through Fedwire to a receiving bank
that sends it through a funds-transfer system other than Fedwire to a
beneficiary's bank. In the first example, if the originator's bank has
notice that Fedwire may be used to effect part of the funds transfer,
the sending of the payment order through the other funds-transfer system
to the receiving bank will be governed by subpart B of this part unless
the parties to the payment order have agreed otherwise. In the second
example, if the beneficiary's bank has notice that Fedwire may be used
to effect part of the funds transfer, the sending of the payment order
to the beneficiary's bank through the other funds-transfer system will
be governed by subpart B of this part unless the parties have agreed
otherwise. In both cases, the other funds-transfer system's rules would
also apply to, at a minimum, the portion of these funds transfers going
through that funds-transfer system. Because subpart B of this part is
federal law, to the extent of any inconsistency, subpart B of this part
will take precedence over any funds-transfer system rule applicable to
the remote sender or receiving bank or to a Federal Reserve Bank. If
remote parties to a funds transfer, a portion of which is sent through
Fedwire, have expressly selected by agreement a law other than subpart B
of this part under section 4A-507(b), subpart B of this part would not
take precedence over the choice of law made by the agreement even though
the remote parties had notice that Fedwire may be used and of the
governing law. (See 4A-507(d)). In addition, subpart B of this part
would not apply to a funds transfer sent through another funds-transfer
system where no Federal Reserve Bank handles the funds transfer, even
though settlement for the funds transfer is made by means of a separate
net settlement or funds transfer through Fedwire.
(4) Under section 4A-108, Article 4A does not apply to a funds
transfer, any part of which is governed by the Electronic Fund Transfer
Act (15 U.S.C. 1693 et seq.). Fedwire funds transfers to or from
consumer accounts are exempt from the Electronic Fund Transfer Act and
Regulation E (12 CFR part 205). A funds transfer from a consumer
originator or a funds transfer to a consumer beneficiary could be
carried out in part through Fedwire and in part through an automated
clearing house or other means that is subject to the Electronic Fund
Transfer Act or Regulation E. In these cases, subpart B of this part
would not govern the portion of the funds transfer that is governed by
the Electronic Fund Transfer Act or Regulation E. (See Commentary to
210.26(i) ''payment order''.)
(5) Finally, section 4A-404(a) provides that a beneficiary's bank is
obliged to pay the amount of a payment order to the beneficiary on the
payment date unless acceptance of the payment order occurs on the
payment date after the close of the funds-transfer business day of the
bank. The Expedited Funds Availability Act provides that funds received
by a bank by wire transfer shall be available for withdrawal not later
than than the banking day after the business day on which such funds are
received (12 U.S.C. 4002(a)). That Act also preempts any provision of
state law that was not effective on September 1, 1989 that is
inconsistent with that Act or its implementing Regulation CC (12 CFR
part 229). Accordingly, the Expedited Funds Availability Act and
Regulation CC may preempt section 4A-404(a) as enacted in any state. In
order to ensure that section 4A-404(a), or other provisions of Article
4A, as incorporated in subpart B of this part, do not take precedence
over provisions of the Expedited Funds Availability Act, this section
provides that where subpart B of this part establishes rights or
obligations that are also governed by the Expedited Funds Availability
Act or Regulation CC, the Expedited Funds Availability Act or Regulation
CC provision shall apply and subpart B of this part shall not apply.
(c) Operating Circulars. The Federal Reserve Banks issue Operating
Circulars consistent with this Subpart that contain additional
provisions applicable to payment orders sent through Fedwire. Under
section 4A-107, these Operating Circulars supersede inconsistent
provisions of Article 4A, as set forth in appendix B and as enacted in
any state. These Operating Circulars are not funds-transfer system
rules, but, by their terms, they are binding on all parties covered by
this Subpart.
(d) Government senders, receiving banks, and beneficiaries. This
section clarifies that unless a statute of the United States provides
otherwise, subpart B of this part applies to governmental entities,
domestic or foreign, including foreign central banks as specified in
paragraph (b)(1) of this section.
Article 4A defines many terms (e.g., beneficiary, intermediary bank,
receiving bank, security procedure) used in this subpart. These terms
are defined or listed in sections 4A-103 through 4A-105. These terms,
such as the term bank (defined in section 4A-105(d)(2)), may differ from
comparable terms in subpart A of this part. As subpart B of this part
incorporates consistent provisions of Article 4A, it incorporates these
definitions unless these terms are expressly defined otherwise in
subpart B of this part. This subpart modifies the definitions of two
Article 4A terms, beneficiary's bank and payment order. This subpart
also defines terms not defined in Article 4A.
(a) Article 4A. Article 4A means the version of that article of the
Uniform Commercial Code set forth in appendix B of this subpart. It
does not refer to the law of any particular state unless the context
indicates otherwise. Subject to the express provisions of this Subpart,
this version of Article 4A is incorporated into this Subpart and made
federal law for transactions covered by this subpart.
(b) As of adjustments. As of adjustments are memorandum items that
affect a bank's reserve or clearing balance for the purpose of meeting
the required balance, but do not represent funds that can be used for
other purposes. As discussed in the Commentary to 210.32(b), the
Federal Reserve Banks generally provide as of adjustments as a means of
effecting interest payments or charges.
(d) Beneficiary's bank. The definition of beneficiary's bank in
subpart B of this part differs from the section 4A-103(a)(3) definition.
The subpart B definition clarifies that where a Federal Reserve Bank
functions as the beneficiary's bank, it need not be identified in the
payment order as the beneficiary's bank and that a Federal Reserve Bank
that receives a payment order as beneficiary is also the beneficiary's
bank with respect to that payment order.
(e) Fedwire. Fedwire refers to the funds-transfer system owned and
operated by the Federal Reserve Banks that is governed by this Subpart.
The term does not refer to any particular computer, telecommunications
facility, or funds transfer, but to the system as a whole, which may
include transfers by telephone or by written instrument in particular
circumstances. Fedwire does not include the system used for automated
clearing house transfers.
(h) Off-line bank. Most Fedwire payment orders are transmitted
electronically from a sender to a Federal Reserve Bank or from a Federal
Reserve Bank to a receiving bank. Banks transmitting payment orders to
Federal Reserve Banks electronically are often referred to as on-line
banks. Some Fedwire participants, however, transmit payment orders to a
Federal Reserve Bank or receive payment orders from a Federal Reserve
Bank orally by telephone, or, in unusual circumstances, in writing. A
bank that does not use either a terminal or a computer that links it
electronically to a terminal or computer at its Federal Reserve Bank to
send payment orders through Fedwire is an off-line bank.
(i) Payment order. (1) The definition of payment order in subpart B
of this part differs from the section 4A-103(a)(1) definition. The
subpart B definition clarifies that, for the purposes of subpart B of
this part, automated clearing house transfers and certain messages that
are transmitted through Fedwire are not payment orders. Federal Reserve
Banks and banks participating in Fedwire send various types of messages,
relating to payment orders or to other matters, through Fedwire that are
not intended to be payment orders. Under the subpart B definition,
these messages, and messages involved with automated clearing house
transfers, are not payment orders and therefore are not governed by this
subpart. The Operating Circulars of the Federal Reserve Banks specify
those messages that may be transmitted through Fedwire but that are not
payment orders.
(2) In some cases, messages sent through Fedwire, such as certain
requests for credit transfer, may be payment orders under Article 4A,
but are not treated as payment orders under subpart B because they are
not an instruction to a Federal Reserve Bank to pay money.
(3) This subpart and Article 4A govern a payment order even though
the originator's or beneficiary's account may be a consumer account
established primarily for personal, family, or household purposes.
Under section 4A-108, Article 4A does not apply to a funds transfer any
part of which is governed by the Electronic Fund Transfer Act. That
Act, and Regulation E implementing it, do not apply to funds transfers
through Fedwire (see 15 U.S.C. 1693a(6)(B) and 12 CFR 205.3(b)). Thus,
this Subpart applies to all funds transfers through Fedwire even though
some such transfers involve originators or beneficiaries that are
consumers. (See also 210.25(b) and accompanying Commentary.)
(a) Reliance by a Federal Reserve Bank on number to identify
intermediary bank or beneficiary's bank. Section 4A-208 provides that a
receiving bank, such as a Federal Reserve Bank, may rely on the routing
number of an intermediary bank or the beneficiary's bank specified in a
payment order as identifying the appropriate intermediary bank or
beneficiary's bank, even if the payment order identifies another bank by
name, provided that the receiving bank does not know of the
inconsistency. Under section 4A-208(b)(2), if the sender of the payment
order is not a bank, a receiving bank may rely on the number only if the
sender had notice before the receiving bank accepted the sender's order
that the receiving bank might rely on the number. This section provides
this notice to entities that are not banks, such as the Department of
the Treasury, that send payment orders directly to a Federal Reserve
Bank.
(b) Reliance by a Federal Reserve Bank on number to identify
beneficiary. Section 4A-207 provides that a beneficiary's bank, such as
a Federal Reserve Bank, may rely on the number identifying a
beneficiary, such as the beneficiary's account number, specified in a
payment order as identifying the appropriate beneficiary, even if the
payment order identifies another beneficiary by name, provided that the
beneficiary's bank does not know of the inconsistency. Under section
4A-207(c)(2), if the originator is not a bank, an originator is not
obliged to pay for a payment order if the originator did not have notice
that the beneficiary's bank might rely on the identifying number and the
person paid on the basis of the identifying number was not entitled to
receive payment. This section of subpart B provides this notice to
entities that are not banks, such as the Department of the Treasury,
that are originators of payment orders sent directly by the originators
to a Federal Reserve Bank, where that Federal Reserve Bank or another
Federal Reserve Bank is the beneficiary's bank (see also section
4A-402(b), providing that a sender must pay a beneficiary's bank for a
payment order accepted by the beneficiary's bank).
(a) Payment of sender's obligation to a Federal Reserve Bank. When a
sender issues a payment order to a Federal Reserve Bank and the Federal
Reserve Bank issues a conforming order implementing the sender's payment
order, under section 4A-403, the sender is indebted to the Federal
Reserve Bank for the amount of the payment order. A sender, other than
a Federal Reserve Bank, that maintains or uses an account at a Federal
Reserve Bank authorizes the Federal Reserve Bank to debit that account
so that the Federal Reserve Bank can obtain payment for the payment
order.
(b) Overdrafts. (1) In some cases, debits to a sender's account will
create an overdraft in the sender's account. The Board and the Federal
Reserve Banks have established policies concerning when a Federal
Reserve Bank will permit a bank to incur an overdraft in its account at
a Federal Reserve Bank. These policies do not give a bank or other
sender a right to an overdraft in its account. Subpart B clarifies that
a sender does not have a right to such an overdraft. If an overdraft
arises, it becomes immediately due and payable at the earliest of: The
end of the funds-transfer business day of the Federal Reserve Bank; the
time the Federal Reserve Bank in its sole discretion, deems itself
insecure and gives notice to the sender; or the time that the sender
suspends payments or is closed by governmental action, such as the
appointment of a receiver. In some cases, a Federal Reserve Bank
extends its Fedwire operations beyond its cut-off hour for that
funds-transfer business day. For the purposes of this section, unless
otherwise specified by the Federal Reserve Bank making such an
extension, an overdraft becomes due and payable at the end of the
extended operating hours. An overdraft becomes due and payable prior to
a Federal Reserve Bank's cut-off hour if the Federal Reserve Bank deems
itself insecure and gives notice to the sender. Notice that the Federal
Reserve Bank deems itself insecure may be given in accordance with the
provisions on notice in section 1-201(27) of the UCC, in accordance with
any other applicable law or agreement, or by any other reasonable means.
An overdraft also becomes due and payable at the time that a bank is
closed or suspends payments. For example, an overdraft becomes due and
payable if a receiver is appointed for the bank or the bank is prevented
from making payments by governmental order. The Federal Reserve Bank
need not make demand on the sender for the overdraft to become due and
payable.
(2) A sender must cover any overdraft and any other obligation of the
sender to the Federal Reserve Bank by the time the overdraft becomes due
and payable. By sending a payment order to a Federal Reserve Bank, the
sender grants a security interest to the Federal Reserve Bank in any
assets of the sender held by, or for the account of, the Federal Reserve
Bank in order to secure all obligations due or to become due to the
Federal Reserve Bank. The security interest attaches when the
overdraft, or other obligation of the sender to the Federal Reserve
Bank, becomes due and payable. The security interest does not apply to
assets held by the sender as custodian or trustee for the sender's
customers or third parties. Once an overdraft is due and payable, a
Federal Reserve Bank may exercise its right of set off, liquidate
collateral, or take other similar action to satisfy the overdrafting
bank's obligation owed to the Federal Reserve Bank.
(c) Review of payment orders. (1) Under section 4A-204, a receiving
bank is required to refund the principal amount of an unauthorized
payment order that the sender was not obliged to pay, together with
interest on the refundable amount calculated from the date that the
receiving bank received payment to the date of the refund. The sender
is not entitled to compensation in the form of interest if the sender
fails to exercise ordinary care to determine that the order was not
authorized and to notify the receiving bank within a reasonable period
of time after the sender receives a notice that the payment order was
accepted or that the sender's account was debited with respect to the
order. Similarly, under section 4A-304, if a sender of a payment order
that was erroneously executed does not notify the bank receiving the
payment order within a reasonable time, the bank is not liable to the
sender for compensation in the form of interest on any amount refundable
to the sender. Section 210.28(c) establishes 30 calendar days as the
reasonable period of time for the purposes of these provisions of
Article 4A.
(2) Section 4A-505 provides that a customer must object to a debit to
its account by a receiving bank within one year after the customer
received notification reasonably identifying the payment order. Subpart
B of this part does not vary this one-year period.
(b) Off-line banks. (1) Generally, an on-line bank receiving payment
orders or advices of credit for payment orders from a Federal Reserve
Bank receives the payment orders or advices electronically a short time
after the corresponding payment orders are received by the on-line
bank's Federal Reserve Bank. An off-line bank receiving payment orders
or advices of credit from a Federal Reserve Bank does not have an
electronic connection with the Federal Reserve Bank; therefore, payment
orders or advices are transmitted either by telephone on the day the
payment order is received by the receiving bank's Federal Reserve Bank,
or sent by courier or mail along with the off-line bank's daily account
statement, on the funds-transfer business day following the day the
payment order is received by the off-line bank's Federal Reserve Bank.
(2) Under section 4A-302(a)(2), a Federal Reserve Bank must transmit
payment orders at a time and by means reasonably necessary to allow
payment to the beneficiary on the payment date, or as soon thereafter as
is feasible. Therefore, where an off-line receiving bank is an
intermediary bank or beneficiary's bank in a payment order, its Federal
Reserve Bank attempts to transmit the payment order to the off-line bank
by telephone on the day the payment order is received by the Federal
Reserve Bank. A Federal Reserve Bank can generally identify these
payment orders from the type code designated in the payment order.
(3) Under section 4A-404(b), if a payment order instructs payment to
the account of the beneficiary, the beneficiary's bank must notify the
beneficiary of the receipt of a payment order before midnight of the
next funds-transfer business day following the payment date. Where an
off-line bank is the beneficiary of a payment order, telephone notice by
a Federal Reserve Bank to the off-line bank of the receipt of the order
is not required by Article 4A because the Federal Reserve Bank sends
notice to the off-line bank by courier or mail, along with its daily
account statement, on the day after the payment order is received by its
Federal Reserve Bank. Payment orders for which an off-line bank is the
beneficiary of the order are generally designated as settlement
transactions.
(4) If an off-line receiving bank maintains an account for another
bank, the off-line bank may receive payment orders designated as
settlement transactions in its capacity as beneficiary's bank or
intermediary bank. A Federal Reserve Bank cannot readily distinguish
these payment orders from settlement transactions for which the off-line
bank is the beneficiary of the order. If an off-line bank notifies its
Federal Reserve Bank that it maintains an account for another bank, the
Federal Reserve Bank will attempt to telephone the off-line bank with
respect to all settlement transactions received by such bank, whether
the off-line bank is the beneficiary, the beneficiary's bank, or an
intermediary bank in the payment order. Under this section, an off-line
bank that does not expressly notify its Federal Reserve Bank in writing
that it maintains an account for another bank warrants to that Federal
Reserve Bank that it does not act as an intermediary bank or a
beneficiary's bank for a bank beneficiary with respect to payment orders
received through Fedwire.
(a) Rejection. (1) A sender must make arrangements with its Federal
Reserve Bank before it can send payment orders to the Federal Reserve
Bank. Federal Reserve Banks reserve the right to reject or impose
conditions on the acceptance of payment orders for any reason. For
example, a Federal Reserve Bank might reject or impose conditions on
accepting a payment order where a sender does not have sufficient funds
in its account with the Federal Reserve Bank to cover the amount of the
sender's payment order and other obligations of the sender due or to
become due to the Federal Reserve Bank. A Federal Reserve Bank may
require a sender to execute a written agreement concerning security
procedures or other matters before the sender may send payment orders to
the Federal Reserve Bank.
(b) Selection of an intermediary bank. (1) Under section 4A-302, if
a receiving bank (other than a beneficiary's bank), such as a Federal
Reserve Bank, accepts a payment order, it must issue a payment order
that complies with the sender's order. The sender's order may include
instructions concerning an intermediary bank to be used that must be
followed by a receiving bank (see section 4A-302(a)(1)). If the sender
does not designate any intermediary bank in its payment order, the
receiving bank may select an intermediary bank through which the
sender's payment order can be expeditiously issued to the beneficiary's
bank so long as the receiving bank exercises ordinary care in selecting
the intermediary bank (see section 4A-302(b)).
(2) This section provides that in an interdistrict transfer, a
Federal Reserve Bank is authorized and directed to select another
Federal Reserve Bank as an intermediary bank. A sender may, however,
instruct a Federal Reserve Bank to use a particular intermediary bank by
designating that bank as the bank to be credited by that Federal Reserve
Bank (or the second Federal Reserve Bank in the case of an interdistrict
transfer) in its payment order, in which case the Federal Reserve Bank
will send the payment order to that bank if that bank receives payment
orders through Fedwire. A sender may not instruct a Federal Reserve
Bank to use its discretion to select an intermediary bank other than a
Federal Reserve Bank or an intermediary bank designated by the sender.
In addition, a sender may not instruct a Federal Reserve Bank to use a
funds-transfer system or means of transmission other than Fedwire unless
the sender and the Federal Reserve Bank agree in writing to the use of
the funds-transfer system or means of transmission.
(c) Same-day execution. Generally, Fedwire is a same-day value
transfer system through which funds may be transferred from the
originator to the beneficiary on the same funds-transfer business day.
A sender may not send a payment order to a Federal Reserve Bank that
specifies an execution date or payment date later than the day on which
the payment order is issued, unless the sender of the order and the
Federal Reserve Bank agree in writing to the arrangement.
(a) Payment to a receiving bank. (1) Under section 4A-402, when a
Federal Reserve Bank executes a sender's payment order by issuing a
conforming order to a receiving bank that accepts the payment order, the
Federal Reserve Bank must pay the receiving bank the amount of the
payment order. Section 210.29(a) authorizes a Federal Reserve Bank to
make the payment by crediting the account at the Federal Reserve Bank
maintained or used by the receiving bank. Section 210.31(a) provides
that the payment occurs when the receiving bank's account is credited or
when the payment order is sent by the Federal Reserve Bank to the
receiving bank, whichever is earlier. Ordinarily, payment will occur
during the funds-transfer business day a short time after the payment
order is received, even if the receiving bank is an off-line bank. This
credit is final and irrevocable when made and constitutes final
settlement under section 4A-403. Payment does not waive a Federal
Reserve Bank's right of recovery under the applicable law of mistake and
restitution (see 210.32(c)), affect a Federal Reserve Bank's right to
apply the funds to any obligation due or to become due to the Federal
Reserve Bank, or affect legal process or claims by third parties on the
funds.
(2) This section on final payment does not apply to settlement for
payment orders between Federal Reserve Banks. These payment orders are
settled by other means.
(b) Payment to a beneficiary. Section 210.31(b) specifies when a
Federal Reserve Bank makes payment to a beneficiary for which it is the
beneficiary's bank. As in the case of payment to a receiving bank, this
payment occurs at the earlier of the time that the Federal Reserve Bank
credits the beneficiary's account or sends notice of the credit to the
beneficiary, and is final and irrevocable when made.
(a) Damages. (1) Under section 4A-305(d), damages for failure of a
receiving bank to execute a payment order that it was obligated to
execute by express agreement are limited to expenses in the transaction
and incidental expenses and interest and do not include additional
damages, including consequential damages, unless they are provided for
in an express written agreement of the receiving bank. This section
clarifies that in connection with the handling of payment orders,
Federal Reserve Banks may not agree to be liable for consequential
damages under this provision and shall not be liable for damages other
than those that may be due under Article 4A to parties governed by this
subpart. Any agreement in conflict with these provisions would not be
effective, because it would be in violation of subpart B.
(2) This section does not affect the ability of other parties to a
funds transfer to agree to be liable for consequential damages, the
liability of a Federal Reserve Bank under section 4A-404, or the
liability to parties governed by subpart B for claims not based on the
handling of a payment order under this subpart.
(b) Payment of interest. (1) Under Article 4A, a Federal Reserve
Bank may be required to pay compensation in the form of interest to
another party in connection with its handling of a funds transfer. For
example, payment of compensation in the form of interest is required in
certain situations pursuant to sections 4A-204 (relating to refund of
payment and duty of customer to report with respect to unauthorized
payment order), 4A-209 (relating to acceptance of payment order), 4A-210
(relating to rejection of payment order), 4A-304 (relating to duty of
sender to report erroneously executed payment order), 4A-305 (relating
to liability for late or improper execution or failure to execute a
payment order), 4A-402 (relating to obligation of sender to pay
receiving bank), and 4A-404 (relating to obligation of beneficiary's
bank to pay and give notice to beneficiary). Under section 4A-506(a),
the amount of such interest may be determined by agreement between the
sender and receiving bank or by funds-transfer system rule. If there is
no such agreement, under section 4A-506(b), the amount of interest is
based on the Federal funds rate. Section 210.32(b) provides two means
by which Federal Reserve Banks may provide compensation in the form of
interest: through an as of adjustment or through an explicit interest
payment.
(2) An as of adjustment is a memorandum credit or debit that is
applied to the reserve or clearing balance of the bank that sent the
payment order to, or received the payment order from, a Federal Reserve
Bank. Federal Reserve Banks generally provide as of adjustments to
correct errors and recover float. An as of adjustment differs from a
debit or credit to an account in that it does not affect the actual
balance of the account; it only affects the balance for reserve or
clearing balance computation purposes. These adjustments affect the
level of reserve or clearing balances that the bank must fund by other
means and are therefore an effective substitute for explicit interest
payments.
(3) A party that sent or received a payment order from a Federal
Reserve Bank may be unable to make use of an as of adjustment as
compensation in lieu of explicit interest. For example, if the sender
or receiving bank is not subject to reserve requirements or satisfies
its reserve requirements with vault cash, the as of adjustment could not
be used to free other balances for investment. A Federal Reserve Bank
may, in its discretion, provide compensation by an explicit interest
payment rather than through an as of adjustment. Interest would be
calculated in accordance with the procedures specified in section
4A-506(b). Similarly, compensation in the form of explicit interest
will be paid to Government senders, receiving banks, or beneficiaries
described in 210.25(d) if they are entitled to interest under this
subpart. A Federal Reserve Bank may also, in its discretion, pay
explicit interest directly to a remote party to a Fedwire funds transfer
that is entitled to interest, rather than providing compensation to its
direct sender or receiving bank.
(4) If a bank that received an as of adjustment or explicit interest
payment is not the party entitled to interest compensation under Article
4A, the bank must pass the benefit of the as of adjustment or explicit
interest payment made to it to the party that is entitled to
compensation in the form of interest from a Federal Reserve Bank. The
benefit may be passed on either in the form of a direct payment of
interest or in the form of a compensating balance, if the party entitled
to interest agrees to accept the other form of compensation, and the
value of the compensating balance is at least equivalent to the value of
the explicit interest that otherwise would have been provided.
(c) Nonwaiver of right of recovery. Several sections of Article 4A
allow for a party to a funds transfer to make a claim pursuant to the
applicable law of mistake and restitution. Nothing in subpart B of this
part or any Operating Circular issued under subpart B of this part
waives any such claim. A Federal Reserve Bank, however, may waive such
a claim by express written agreement in order to settle litigation or
for other purposes.
(55 FR 40801, Oct. 5, 1990; 55 FR 47428, Nov. 13, 1990)
12 CFR 210.32 Pt. 210, Subpt. B, App. B
12 CFR 210.32 Appendix B to Subpart B -- Article 4A, Funds Transfers
This Article may be cited as Uniform Commercial Code -- Funds
Transfers.
Except as otherwise provided in section 4A-108, this Article applies
to funds transfers defined in section 4A-104.
(a) In this Article:
(1) Payment order means an instruction of a sender to a receiving
bank, transmitted orally, electronically, or in writing, to pay, or to
cause another bank to pay, a fixed or determinable amount of money to a
beneficiary if:
(i) The instruction does not state a condition to payment to the
beneficiary other than time of payment,
(ii) The receiving bank is to be reimbursed by debiting an account
of, or otherwise receiving payment from, the sender, and
(iii) The instruction is transmitted by the sender directly to the
receiving bank or to an agent, funds-transfer system, or communication
system for transmittal to the receiving bank.
(2) Beneficiary means the person to be paid by the beneficiary's
bank.
(3) Beneficiary's bank means the bank identified in a payment order
in which an account of the beneficiary is to be credited pursuant to the
order or which otherwise is to make payment to the beneficiary if the
order does not provide for payment to an account.
(4) Receiving bank means the bank to which the sender's instruction
is addressed.
(5) Sender means the person giving the instruction to the receiving
bank.
(b) If an instruction complying with subsection (a)(1) is to make
more than one payment to a beneficiary, the instruction is a separate
payment order with respect to each payment.
(c) A payment order is issued when it is sent to the receiving bank.
In this Article:
(a) Funds transfer means the series of transactions, beginning with
the originator's payment order, made for the purpose of making payment
to the beneficiary of the order. The term includes any payment order
issued by the originator's bank or an intermediary bank intended to
carry out the originator's payment order. A funds transfer is completed
by acceptance by the beneficiary's bank of a payment order for the
benefit of the beneficiary of the originator's payment order.
(b) Intermediary bank means a receiving bank other than the
originator's bank or the beneficiary's bank.
(c) Originator means the sender of the first payment order in a funds
transfer.
(d) Originator's bank means (i) the receiving bank to which the
payment order of the originator is issued if the originator is not a
bank, or (ii) the originator if the originator is a bank.
(a) In this Article:
(1) Authorized account means a deposit account of a customer in a
bank designated by the customer as a source of payment of payment orders
issued by the customer to the bank. If a customer does not so designate
an account, any account of the customer is an authorized account if
payment of a payment order from that account is not inconsistent with a
restriction on the use of that account.
(2) Bank means a person engaged in the business of banking and
includes a savings bank, savings and loan association, credit union, and
trust company. A branch or separate office of a bank is a separate bank
for purposes of this Article.
(3) Customer means a person, including a bank, having an account with
a bank or from whom a bank has agreed to receive payment orders.
(4) Funds-transfer business day of a receiving bank means the part of
a day during which the receiving bank is open for the receipt,
processing, and transmittal of payment orders and cancellations and
amendments of payment orders.
(5) Funds-transfer system means a wire transfer network, automated
clearing house, or other communication system of a clearing house or
other association of banks through which a payment order by a bank may
be transmitted to the bank to which the order is addressed.
(6) Good faith means honesty in fact and the observance of reasonable
commercial standards of fair dealing.
(7) Prove with respect to a fact means to meet the burden of
establishing the fact (section 1-201(8)).
(b) Other definitions applying to this Article and the sections in
which they appear are:
Acceptance Sec. 4A-209
Beneficiary Sec. 4A-103
Beneficiary's bank Sec. 4A-103
Executed Sec. 4A-301
Execution date Sec. 4A-301
Funds transfer Sec. 4A-104
Funds-transfer system rule Sec. 4A-501
Intermediary bank Sec. 4A-104
Originator Sec. 4A-104
Originator's bank Sec. 4A-104
Payment by beneficiary's bank to beneficiary Sec. 4A-405
Payment by originator to beneficiary Sec. 4A-406
Payment by sender to receiving bank Sec. 4A-403
Payment date Sec. 4A-401
Payment order Sec. 4A-103
Receiving bank Sec. 4A-103
Security procedure Sec. 4A-201
Sender Sec. 4A-103
(c) The following definitions in Article 4 apply to this Article:
Clearing house Sec. 4-104
Item Sec. 4-104
Suspends payments Sec. 4-104
(d) In addition Article 1 contains general definitions and principles
of construction and interpretation applicable throughout this Article.
(a) The time of receipt of a payment order or communication canceling
or amending a payment order is determined by the rules applicable to
receipt of a notice stated in section 1-201(27). A receiving bank may
fix a cut-off time or times on a funds-transfer business day for the
receipt and processing of payment orders and communications canceling or
amending payment orders. Different cut-off times may apply to payment
orders, cancellations, or amendments, or to different categories of
payment orders, cancellations, or amendments. A cut-off time may apply
to senders generally or different cut-off times may apply to different
senders or categories of payment orders. If a payment order or
communication canceling or amending a payment order is received after
the close of a funds-transfer business day or after the appropriate
cut-off time on a funds-transfer business day, the receiving bank may
treat the payment order or communication as received at the opening of
the next funds-transfer business day.
(b) If this Article refers to an execution date or payment date or
states a day on which a receiving bank is required to take action, and
the date or day does not fall on a funds-transfer business day, the next
day that is a funds-transfer business day is treated as the date or day
stated, unless the contrary is stated in this Article.
Operating Circulars
Regulations of the Board of Governors of the Federal Reserve System
and operating circulars of the Federal Reserve Banks supersede any
inconsistent provision of this Article to the extent of the
inconsistency.
Governed by Federal Law
This Article does not apply to a funds transfer any part of which is
governed by the Electronic Fund Transfer Act of 1978 (title XX, Pub. L.
95-630, 92 Stat. 3728, 15 U.S.C. 1693 et seq.) as amended from time to
time.
Security procedure means a procedure established by agreement of a
customer and a receiving bank for the purpose of (i) verifying that a
payment order or communication amending or canceling a payment order is
that of the customer, or (ii) detecting error in the transmission or the
content of the payment order or communication. A security procedure may
require the use of algorithms or other codes, identifying words or
numbers, encryption, callback procedures, or similar security devices.
Comparison of a signature on a payment order or communication with an
authorized specimen signature of the customer is not by itself a
security procedure.
(a) A payment order received by the receiving bank is the authorized
order of the person identified as sender if that person authorized the
order or is otherwise bound by it under the law of agency.
(b) If a bank and its customer have agreed that the authenticity of
payment orders issued to the bank in the name of the customer as sender
will be verified pursuant to a security procedure, a payment order
received by the receiving bank is effective as the order of the
customer, whether or not authorized, if (i) the security procedure is a
commercially reasonable method of providing security against
unauthorized payment orders, and (ii) the bank proves that it accepted
the payment order in good faith and in compliance with the security
procedure and any written agreement or instruction of the customer
restricting acceptance of payment orders issued in the name of the
customer. The bank is not required to follow an instruction that
violates a written agreement with the customer or notice of which is not
received at a time and in a manner affording the bank a reasonable
opportunity to act on it before the payment order is accepted.
(c) Commercial reasonableness of a security procedure is a question
of law to be determined by considering the wishes of the customer
expressed to the bank, the circumstances of the customer known to the
bank, including the size, type, and frequency of payment orders normally
issued by the customer to the bank, alternative security procedures
offered to the customer, and security procedures in general use by
customers and receiving banks similarly situated. A security procedure
is deemed to be commercially reasonable if (i) the security procedure
was chosen by the customer after the bank offered, and the customer
refused, a security procedure that was commercially reasonable for that
customer, and (ii) the customer expressly agreed in writing to be bound
by any payment order, whether or not authorized, issued in its name and
accepted by the bank in compliance with the security procedure chosen by
the customer.
(d) The term sender in this Article includes the customer in whose
name a payment order is issued if the order is the authorized order of
the customer under subsection (a), or it is effective as the order of
the customer under subsection (b).
(e) This section applies to amendments and cancellations of payment
orders to the same extent it applies to payment orders.
(f) Except as provided in this section and in section 4A-203(a)(1),
rights and obligations arising under this section or section 4A-203 may
not be varied by agreement.
Payment Orders
(a) If an accepted payment order is not, under section 4A-202(a), an
authorized order of a customer identified as sender, but is effective as
an order of the customer pursuant to section 4A-202(b), the following
rules apply:
(1) By express written agreement, the receiving bank may limit the
extent to which it is entitled to enforce or retain payment of the
payment order.
(2) The receiving bank is not entitled to enforce or retain payment
of the payment order if the customer proves that the order was not
caused, directly or indirectly, by a person (i) entrusted at any time
with duties to act for the customer with respect to payment orders or
the security procedure, or (ii) who obtained access to transmitting
facilities of the customer or who obtained, from a source controlled by
the customer and without authority of the receiving bank, information
facilitating breach of the security procedure, regardless of how the
information was obtained or whether the customer was at fault.
Information includes any access device, computer software, or the like.
(b) This section applies to amendments of payment orders to the same
extent it applies to payment orders.
To Report with Respect to Unauthorized Payment Order
(a) If a receiving bank accepts a payment order issued in the name of
its customer as sender which is (i) not authorized and not effective as
the order of the customer under section 4A-202, or (ii) not enforceable,
in whole or in part, against the customer under section 4A-203, the bank
shall refund any payment of the payment order received from the customer
to the extent the bank is not entitled to enforce payment and shall pay
interest on the refundable amount calculated from the date the bank
received payment to the date of the refund. However, the customer is
not entitled to interest from the bank on the amount to be refunded if
the customer fails to exercise ordinary care to determine that the order
was not authorized by the customer and to notify the bank of the
relevant facts within a reasonable time not exceeding 90 days after the
date the customer received notification from the bank that the order was
accepted or that the customer's account was debited with respect to the
order. The bank is not entitled to any recovery from the customer on
account of a failure by the customer to give notification as stated in
this section.
(b) Reasonable time under subsection (a) may be fixed by agreement as
stated in section 1-204(1), but the obligation of a receiving bank to
refund payment as stated in subsection (a) may not otherwise be varied
by agreement.
(a) If an accepted payment order was transmitted pursuant to a
security procedure for the detection of error and the payment order (i)
erroneously instructed payment to a beneficiary not intended by the
sender, (ii) erroneously instructed payment in an amount greater than
the amount intended by the sender, or (iii) was an erroneously
transmitted duplicate of a payment order previously sent by the sender,
the following rules apply:
(1) If the sender proves that the sender or a person acting on behalf
of the sender pursuant to section 4A-206 complied with the security
procedure and that the error would have been detected if the receiving
bank had also complied, the sender is not obliged to pay the order to
the extent stated in paragraphs (2) and (3).
(2) If the funds transfer is completed on the basis of an erroneous
payment order described in clause (i) or (iii) of subsection (a), the
sender is not obliged to pay the order and the receiving bank is
entitled to recover from the beneficiary any amount paid to the
beneficiary to the extent allowed by the law governing mistake and
restitution.
(3) If the funds transfer is completed on the basis of a payment
order described in clause (ii) of subsection (a), the sender is not
obliged to pay the order to the extent the amount received by the
beneficiary is greater than the amount intended by the sender. In that
case, the receiving bank is entitled to recover from the beneficiary the
excess amount received to the extent allowed by the law governing
mistake and restitution.
(b) If (i) the sender of an erroneous payment order described in
subsection (a) is not obliged to pay all or part of the order, and (ii)
the sender receives notification from the receiving bank that the order
was accepted by the bank or that the sender's account was debited with
respect to the order, the sender has a duty to exercise ordinary care,
on the basis of information available to the sender, to discover the
error with respect to the order and to advise the bank of the relevant
facts within a reasonable time, not exceeding 90 days, after the bank's
notification was received by the sender. If the bank proves that the
sender failed to perform that duty, the sender is liable to the bank for
the loss the bank proves it incurred as a result of the failure, but the
liability of the sender may not exceed the amount of the sender's order.
(c) This section applies to amendments to payment orders to the same
extent it applies to payment orders.
Funds-Transfer or Other Communication System
(a) If a payment order addressed to a receiving bank is transmitted
to a funds-transfer system or other third-party communication system for
transmittal to the bank, the system is deemed to be an agent of the
sender for the purpose of transmitting the payment order to the bank.
If there is a discrepancy between the terms of the payment order
transmitted to the system and the terms of the payment order transmitted
by the system to the bank, the terms of the payment order of the sender
are those transmitted by the system. This section does not apply to a
funds-transfer system of the Federal Reserve Banks.
(b) This section applies to cancellations and amendments of payment
orders to the same extent it applies to payment orders.
(a) Subject to subsection (b), if, in a payment order received by the
beneficiary's bank, the name, bank account number, or other
identification of the beneficiary refers to a nonexistent or
unidentifiable person or account, no person has rights as a beneficiary
of the order and acceptance of the order cannot occur.
(b) If a payment order received by the beneficiary's bank identifies
the beneficiary both by name and by an identifying or bank account
number and the name and number identify different persons, the following
rules apply:
(1) Except as otherwise provided in subsection (c), if the
beneficiary's bank does not know that the name and number refer to
different persons, it may rely on the number as the proper
identification of the beneficiary of the order. The beneficiary's bank
need not determine whether the name and number refer to the same person.
(2) If the beneficiary's bank pays the person identified by name or
knows that the name and number identify different persons, no person has
rights as beneficiary except the person paid by the beneficiary's bank
if that person was entitled to receive payment from the originator of
the funds transfer. If no person has rights as beneficiary, acceptance
of the order cannot occur.
(c) If (i) a payment order described in subsection (b) is accepted,
(ii) the originator's payment order described the beneficiary
inconsistently by name and number, and (iii) the beneficiary's bank pays
the person identified by number as permitted by subsection (b)(1), the
following rules apply:
(1) If the originator is a bank, the originator is obliged to pay its
order.
(2) If the originator is not a bank and proves that the person
identified by number was not entitled to receive payment from the
originator, the originator is not obliged to pay its order unless the
originator's bank proves that the originator, before acceptance of the
originator's order, had notice that payment of a payment order issued by
the originator might be made by the beneficiary's bank on the basis of
an identifying or bank account number even if it identifies a person
different from the named beneficiary. Proof of notice may be made by
any admissible evidence. The originator's bank satisfies the burden of
proof if it proves that the originator, before the payment order was
accepted, signed a writing stating the information to which the notice
relates.
(d) In a case governed by subsection (b)(1), if the beneficiary's
bank rightfully pays the person identified by number and that person was
not entitled to receive payment from the originator, the amount paid may
be recovered from that person to the extent allowed by the law governing
mistake and restitution as follows:
(1) If the originator is obliged to pay its payment order as stated
in subsection (c), the originator has the right to recover.
(2) If the originator is not a bank and is not obliged to pay its
payment order, the originator's bank has the right to recover.
Beneficiary's Bank
(a) This subsection applies to a payment order identifying an
intermediary bank or the beneficiary's bank only by an identifying
number.
(1) The receiving bank may rely on the number as the proper
identification of the intermediary or beneficiary's bank and need not
determine whether the number identifies a bank.
(2) The sender is obliged to compensate the receiving bank for any
loss and expenses incurred by the receiving bank as a result of its
reliance on the number in executing or attempting to execute the order.
(b) This subsection applies to a payment order identifying an
intermediary bank or the beneficiary's bank both by name and an
identifying number if the name and number identify different persons.
(1) If the sender is a bank, the receiving bank may rely on the
number as the proper identification of the intermediary or beneficiary's
bank if the receiving bank, when it executes the sender's order, does
not know that the name and number identify different persons. The
receiving bank need not determine whether the name and number refer to
the same person or whether the number refers to a bank. The sender is
obliged to compensate the receiving bank for any loss and expenses
incurred by the receiving bank as a result of its reliance on the number
in executing or attempting to execute the order.
(2) If the sender is not a bank and the receiving bank proves that
the sender, before the payment order was accepted, had notice that the
receiving bank might rely on the number as the proper identification of
the intermediary or beneficiary's bank even if it identifies a person
different from the bank identified by name, the rights and obligations
of the sender and the receiving bank are governed by subsection (b)(1),
as though the sender were a bank. Proof of notice may be made by any
admissible evidence. The receiving bank satisfies the burden of proof
if it proves that the sender, before the payment order was accepted,
signed a writing stating the information to which the notice relates.
(3) Regardless of whether the sender is a bank, the receiving bank
may rely on the name as the proper identification of the intermediary or
beneficiary's bank if the receiving bank, at the time it executes the
sender's order, does not know that the name and number identify
different persons. The receiving bank need not determine whether the
name and number refer to the same person.
(4) If the receiving bank knows that the name and number identify
different persons, reliance on either the name or the number in
executing the sender's payment order is a breach of the obligation
stated in section 4A-302(a)(1).
(a) Subject to subsection (d), a receiving bank other than the
beneficiary's bank accepts a payment order when it executes the order.
(b) Subject to subsections (c) and (d), a beneficiary's bank accepts
a payment order at the earliest of the following times:
(1) When the bank (i) pays the beneficiary as stated in section
4A-405(a) or 4A-405(b), or (ii) notifies the beneficiary of receipt of
the order or that the account of the beneficiary has been credited with
respect to the order unless the notice indicates that the bank is
rejecting the order or that funds with respect to the order may not be
withdrawn or used until receipt of payment from the sender of the order;
(2) When the bank receives payment of the entire amount of the
sender's order pursuant to section 4A-403(a)(1) or 4A-403(a)(2); or
(3) The opening of the next funds-transfer business day of the bank
following the payment date of the order if, at that time, the amount of
the sender's order is fully covered by a withdrawable credit balance in
an authorized account of the sender or the bank has otherwise received
full payment from the sender, unless the order was rejected before that
time or is rejected within (i) one hour after that time, or (ii) one
hour after the opening of the next business day of the sender following
the payment date if that time is later. If notice of rejection is
received by the sender after the payment date and the authorized account
of the sender does not bear interest, the bank is obliged to pay
interest to the sender on the amount of the order for the number of days
elapsing after the payment date to the day the sender receives notice or
learns that the order was not accepted, counting that day as an elapsed
day. If the withdrawable credit balance during that period falls below
the amount of the order, the amount of interest payable is reduced
accordingly.
(c) Acceptance of a payment order cannot occur before the order is
received by the receiving bank. Acceptance does not occur under
subsection (b)(2) or (b)(3) if the beneficiary of the payment order does
not have an account with the receiving bank, the account has been
closed, or the receiving bank is not permitted by law to receive credits
for the beneficiary's account.
(d) A payment order issued to the originator's bank cannot be
accepted until the payment date if the bank is the beneficiary's bank,
or the execution date if the bank is not the beneficiary's bank. If the
originator's bank executes the originator's payment order before the
execution date or pays the beneficiary of the originator's payment order
before the payment date and the payment order is subsequently canceled
pursuant to section 4A-211(b), the bank may recover from the beneficiary
any payment received to the extent allowed by the law governing mistake
and restitution.
(a) A payment order is rejected by the receiving bank by a notice of
rejection transmitted to the sender orally, electronically, or in
writing. A notice of rejection need not use any particular words and is
sufficient if it indicates that the receiving bank is rejecting the
order or will not execute or pay the order. Rejection is effective when
the notice is given if transmission is by a means that is reasonable in
the circumstances. If notice of rejection is given by a means that is
not reasonable, rejection is effective when the notice is received. If
an agreement of the sender and receiving bank establishes the means to
be used to reject a payment order, (i) any means complying with the
agreement is reasonable and (ii) any means not complying is not
reasonable unless no significant delay in receipt of the notice resulted
from the use of the noncomplying means.
(b) This subsection applies if a receiving bank other than the
beneficiary's bank fails to execute a payment order despite the
existence on the execution date of a withdrawable credit balance in an
authorized account of the sender sufficient to cover the order. If the
sender does not receive notice of rejection of the order on the
execution date and the authorized account of the sender does not bear
interest, the bank is obliged to pay interest to the sender on the
amount of the order for the number of days elapsing after the execution
date to the earlier of the day the order is canceled pursuant to section
4A-211(d) or the day the sender receives notice or learns that the order
was not executed, counting the final day of the period as an elapsed
day. If the withdrawable credit balance during that period falls below
the amount of the order, the amount of interest is reduced accordingly.
(c) If a receiving bank suspends payments, all unaccepted payment
orders issued to it are deemed rejected at the time the bank suspends
payments.
(d) Acceptance of a payment order precludes a later rejection of the
order. Rejection of a payment order precludes a later acceptance of the
order.
Order
(a) A communication of the sender of a payment order canceling or
amending the order may be transmitted to the receiving bank orally,
electronically, or in writing. If a security procedure is in effect
between the sender and the receiving bank, the communication is not
effective to cancel or amend the order unless the communication is
verified pursuant to the security procedure or the bank agrees to the
cancellation or amendment.
(b) Subject to subsection (a), a communication by the sender
canceling or amending a payment order is effective to cancel or amend
the order if notice of the communication is received at a time and in a
manner affording the receiving bank a reasonable opportunity to act on
the communication before the bank accepts the payment order.
(c) After a payment order has been accepted, cancellation or
amendment of the order is not effective unless the receiving bank agrees
or a funds-transfer system rule allows cancellation or amendment without
agreement of the bank.
(1) With respect to a payment order accepted by a receiving bank
other than the beneficiary's bank, cancellation or amendment is not
effective unless a conforming cancellation or amendment of the payment
order issued by the receiving bank is also made.
(2) With respect to a payment order accepted by the beneficiary's
bank, cancellation or amendment is not effective unless the order was
issued in execution of an unauthorized payment order, or because of a
mistake by a sender in the funds transfer which resulted in the issuance
of a payment order (i) that is a duplicate of a payment order previously
issued by the sender, (ii) that orders payment to a beneficiary not
entitled to receive payment from the originator, or (iii) that orders
payment in an amount greater than the amount the beneficiary was
entitled to receive from the originator. If the payment order is
canceled or amended, the beneficiary's bank is entitled to recover from
the beneficiary any amount paid to the beneficiary to the extent allowed
by the law governing mistake and restitution.
(d) An unaccepted payment order is canceled by operation of law at
the close of the fifth funds-transfer business day of the receiving bank
after the execution date or payment date of the order.
(e) A canceled payment order cannot be accepted. If an accepted
payment order is canceled, the acceptance is nullified and no person has
any right or obligation based on the acceptance. Amendment of a payment
order is deemed to be cancellation of the original order at the time of
amendment and issue of a new payment order in the amended form at the
same time.
(f) Unless otherwise provided in an agreement of the parties or in a
funds-transfer system rule, if the receiving bank, after accepting a
payment order, agrees to cancellation or amendment of the order by the
sender or is bound by a funds-transfer system rule allowing cancellation
or amendment without the bank's agreement, the sender, whether or not
cancellation or amendment is effective, is liable to the bank for any
loss and expenses, including reasonable attorney's fees, incurred by the
bank as a result of the cancellation or amendment or attempted
cancellation or amendment.
(g) A payment order is not revoked by the death or legal incapacity
of the sender unless the receiving bank knows of the death or of an
adjudication of incapacity by a court of competent jurisdiction and has
reasonable opportunity to act before acceptance of the order.
(h) A funds-transfer system rule is not effective to the extent it
conflicts with subsection (c)(2).
Regarding Unaccepted Payment Order
If a receiving bank fails to accept a payment order that it is
obliged by express agreement to accept, the bank is liable for breach of
the agreement to the extent provided in the agreement or in this
Article, but does not otherwise have any duty to accept a payment order
or, before acceptance, to take any action, or refrain from taking
action, with respect to the order except as provided in this Article or
by express agreement. Liability based on acceptance arises only when
acceptance occurs as stated in section 4A-209, and liability is limited
to that provided in this Article. A receiving bank is not the agent of
the sender or beneficiary of the payment order it accepts, or of any
other party to the funds transfer, and the bank owes no duty to any
party to the funds transfer except as provided in this Article or by
express agreement.
(a) A payment order is executed by the receiving bank when it issues
a payment order intended to carry out the payment order received by the
bank. A payment order received by the beneficiary's bank can be
accepted but cannot be executed.
(b) Execution date of a payment order means the day on which the
receiving bank may properly issue a payment order in execution of the
sender's order. The execution date may be determined by instruction of
the sender but cannot be earlier than the day the order is received and,
unless otherwise determined, is the day the order is received. If the
sender's instruction states a payment date, the execution date is the
payment date or an earlier date on which execution is reasonably
necessary to allow payment to the beneficiary on the payment date.
Execution of Payment Order
(a) Except as provided in subsections (b) through (d), if the
receiving bank accepts a payment order pursuant to section 4A-209(a),
the bank has the following obligations in executing the order:
(1) The receiving bank is obliged to issue, on the execution date, a
payment order complying with the sender's order and to follow the
sender's instructions concerning (i) any intermediary bank or
funds-transfer system to be used in carrying out the funds transfer, or
(ii) the means by which payment orders are to be transmitted in the
funds transfer. If the originator's bank issues a payment order to an
intermediary bank, the originator's bank is obliged to instruct the
intermediary bank according to the instruction of the originator. An
intermediary bank in the funds transfer is similarly bound by an
instruction given to it by the sender of the payment order it accepts.
(2) If the sender's instruction states that the funds transfer is to
be carried out telephonically or by wire transfer or otherwise indicates
that the funds transfer is to be carried out by the most expeditious
means, the receiving bank is obliged to transmit its payment order by
the most expeditious available means, and to instruct any intermediary
bank accordingly. If a sender's instruction states a payment date, the
receiving bank is obliged to transmit its payment order at a time and by
means reasonably necessary to allow payment to the beneficiary on the
payment date or as soon thereafter as is feasible.
(b) Unless otherwise instructed, a receiving bank executing a payment
order may (i) use any funds-transfer system if use of that system is
reasonable in the circumstances, and (ii) issue a payment order to the
beneficiary's bank or to an intermediary bank through which a payment
order conforming to the sender's order can expeditiously be issued to
the beneficiary's bank if the receiving bank exercises ordinary care in
the selection of the intermediary bank. A receiving bank is not
required to follow an instruction of the sender designating a
funds-transfer system to be used in carrying out the funds transfer if
the receiving bank, in good faith, determines that it is not feasible to
follow the instruction or that following the instruction would unduly
delay completion of the funds transfer.
(c) Unless subsection (a)(2) applies or the receiving bank is
otherwise instructed, the bank may execute a payment order by
transmitting its payment order by first class mail or by any means
reasonable in the circumstances. If the receiving bank is instructed to
execute the sender's order by a particular means, the receiving bank may
issue its payment order by transmitting its payment order by the means
stated or by any means as expeditious as the means stated.
(d) Unless instructed by the sender, (i) the receiving bank may not
obtain payment of its charges for services and expenses in connection
with the execution of the sender's order by issuing a payment order in
an amount equal to the amount of the sender's order less the amount of
the charges, and (ii) may not instruct a subsequent receiving bank to
obtain payment of its charges in the same manner.
(a) A receiving bank that (i) executes the payment order of the
sender by issuing a payment order in an amount greater than the amount
of the sender's order, or (ii) issues a payment order in execution of
the sender's order and then issues a duplicate order, is entitled to
payment of the amount of the sender's order under section 4A-402(c) if
that subsection is otherwise satisfied. The bank is entitled to recover
from the beneficiary of the erroneous order the excess payment received
to the extent allowed by the law governing mistake and restitution.
(b) A receiving bank that executes the payment order of the sender by
issuing a payment order in an amount less than the amount of the
sender's order is entitled to payment of the amount of the sender's
order under section 4A-402(c) if (i) that subsection is otherwise
satisfied and (ii) the bank corrects its mistake by issuing an
additional payment order for the benefit of the beneficiary of the
sender's order. If the error is not corrected, the issuer of the
erroneous order is entitled to receive or retain payment from the sender
of the order it accepted only to the extent of the amount of the
erroneous order. This subsection does not apply if the receiving bank
executes the sender's payment order by issuing a payment order in an
amount less than the amount of the sender's order for the purpose of
obtaining payment of its charges for services and expenses pursuant to
instruction of the sender.
(c) If a receiving bank executes the payment order of the sender by
issuing a payment order to a beneficiary different from the beneficiary
of the sender's order and the funds transfer is completed on the basis
of that error, the sender of the payment order that was erroneously
executed and all previous senders in the funds transfer are not obliged
to pay the payment orders they issued. The issuer of the erroneous
order is entitled to recover from the beneficiary of the order the
payment received to the extent allowed by the law governing mistake and
restitution.
Executed Payment Order
If the sender of a payment order that is erroneously executed as
stated in section 4A-303 receives notification from the receiving bank
that the order was executed or that the sender's account was debited
with respect to the order, the sender has a duty to exercise ordinary
care to determine, on the basis of information available to the sender,
that the order was erroneously executed and to notify the bank of the
relevant facts within a reasonable time not exceeding 90 days after the
notification from the bank was received by the sender. If the sender
fails to perform that duty, the bank is not obliged to pay interest on
any amount refundable to the sender under section 4A-402(d) for the
period before the bank learns of the execution error. The bank is not
entitled to any recovery from the sender on account of a failure by the
sender to perform the duty stated in this section.
or Failure To Execute Payment Order
(a) If a funds transfer is completed but execution of a payment order
by the receiving bank in breach of section 4A-302 results in delay in
payment to the beneficiary, the bank is obliged to pay interest to
either the originator or the beneficiary of the funds transfer for the
period of delay caused by the improper execution. Except as provided in
subsection (c), additional damages are not recoverable.
(b) If execution of a payment order by a receiving bank in breach of
section 4A-302 results in (i) noncompletion of the funds transfer, (ii)
failure to use an intermediary bank designated by the originator, or
(iii) issuance of a payment order that does not comply with the terms of
the payment order of the originator, the bank is liable to the
originator for its expenses in the funds transfer and for incidental
expenses and interest losses, to the extent not covered by subsection
(a), resulting from the improper execution. Except as provided in
subsection (c), additional damages are not recoverable.
(c) In addition to the amounts payable under subsections (a) and (b),
damages, including consequential damages, are recoverable to the extent
provided in an express written agreement of the receiving bank.
(d) If a receiving bank fails to execute a payment order it was
obliged by express agreement to execute, the receiving bank is liable to
the sender for its expenses in the transaction and for incidential
expenses and interest losses resulting from the failure to execute.
Additional damages, including consequential damages, are recoverable to
the extent provided in an express written agreement of the receiving
bank, but are not otherwise recoverable.
(e) Reasonable attorney's fees are recoverable if demand for
compensation under subsection (a) or (b) is made and refused before an
action is brought on the claim. If a claim is made for breach of an
agreement under subsection (d) and the agreement does not provide for
damages, reasonable attorney's fees are recoverable if demand for
compensation under subsection (d) is made and refused before an action
is brought on the claim.
(f) Except as stated in this section, the liability of a receiving
bank under subsections (a) and (b) may not be varied by agreement.
Payment date of a payment order means the day on which the amount of
the order is payable to the beneficiary by the beneficiary's bank. The
payment date may be determined by instruction of the sender but cannot
be earlier than the day the order is received by the beneficiary's bank
and, unless otherwise determined, is the day the order is received by
the beneficiary's bank.
Bank
(a) This section is subject to sections 4A-205 and 4A-207.
(b) With respect to a payment order issued to the beneficiary's bank,
acceptance of the order by the bank obliges the sender to pay the bank
the amount of the order, but payment is not due until the payment date
of the order.
(c) This subsection is subject to subsection (e) and to section
4A-303. With respect to a payment order issued to a receiving bank
other than the beneficiary's bank, acceptance of the order by the
receiving bank obliges the sender to pay the bank the amount of the
sender's order. Payment by the sender is not due until the execution
date of the sender's order. The obligation of that sender to pay its
payment order is excused if the funds transfer is not completed by
acceptance by the beneficiary's bank of a payment order instructing
payment to the beneficiary of that sender's payment order.
(d) If the sender of a payment order pays the order and was not
obliged to pay all or part of the amount paid, the bank receiving
payment is obliged to refund payment to the extent the sender was not
obliged to pay. Except as provided in sections 4A-204 and 4A-304,
interest is payable on the refundable amount from the date of payment.
(e) If a funds transfer is not completed as stated in subsection (c)
and an intermediary bank is obliged to refund payment as stated in
subsection (d) but is unable to do so because not permitted by
applicable law or because the bank suspends payments, a sender in the
funds transfer that executed a payment order in compliance with an
instruction, as stated in section 4A-302(a)(1), to route the funds
transfer through that intermediary bank is entitled to receive or retain
payment from the sender of the payment order that it accepted. The
first sender in the funds transfer that issued an instruction requiring
routing through that intermediary bank is subrogated to the right of the
bank that paid the intermediary bank to refund as stated in subsection
(d).
(f) The right of the sender of a payment order to be excused from the
obligation to pay the order as stated in subsection (c) or to receive
refund under subsection (d) may not be varied by agreement.
(a) Payment of the sender's obligation under section 4A-402 to pay
the receiving bank occurs as follows:
(1) If the sender is a bank, payment occurs when the receiving bank
receives final settlement of the obligation through a Federal Reserve
Bank or through a funds-transfer system.
(2) If the sender is a bank and the sender (i) credited an account of
the receiving bank with the sender, or (ii) caused an account of the
receiving bank in another bank to be credited, payment occurs when the
credit is withdrawn or, if not withdrawn, at midnight of the day on
which the credit is withdrawable and the receiving bank learns of that
fact.
(3) If the receiving bank debits an account of the sender with the
receiving bank, payment occurs when the debit is made to the extent the
debit is covered by a withdrawable credit balance in the account.
(b) If the sender and receiving bank are members of a funds-transfer
system that nets obligations multilaterally among participants, the
receiving bank receives final settlement when settlement is complete in
accordance with the rules of the system. The obligation of the sender
to pay the amount of a payment order transmitted through the
funds-transfer system may be satisfied, to the extent permitted by the
rules of the system, by setting off and applying against the sender's
obligation the right of the sender to receive payment from the receiving
bank of the amount of any other payment order transmitted to the sender
by the receiving bank through the funds-transfer system. The aggregate
balance of obligations owed by each sender to each receiving bank in the
funds-transfer system may be satisfied, to the extent permitted by the
rules of the system, by setting off and applying against that balance
the aggregate balance of obligations owed to the sender by other members
of the system. The aggregate balance is determined after the right of
setoff stated in the second sentence of this subsection has been
exercised.
(c) If two banks transmit payment orders to each other under an
agreement that settlement of the obligations of each bank to the other
under section 4A-402 will be made at the end of the day or other period,
the total amount owed with respect to all orders transmitted by one bank
shall be set off against the total amount owed with respect to all
orders transmitted by the other bank. To the extent of the setoff, each
bank has made payment to the other.
(d) In a case not covered by subsection (a), the time when payment of
the sender's obligation under section 4A-402(b) or 4A-402(c) occurs is
governed by applicable principles of law that determine when an
obligation is satisfied.
and Give Notice to Beneficiary
(a) Subject to sections 4A-211(e), 4A-405(d), and 4A-405(e), if a
beneficiary's bank accepts a payment order, the bank is obliged to pay
the amount of the order to the beneficiary of the order. Payment is due
on the payment date of the order, but if acceptance occurs on the
payment date after the close of the funds-transfer business day of the
bank, payment is due on the next funds-transfer business day. If the
bank refuses to pay after demand by the beneficiary and receipt of
notice of particular circumstances that will give rise to consequential
damages as a result of nonpayment, the beneficiary may recover damages
resulting from the refusal to pay to the extent the bank had notice of
the damages, unless the bank proves that it did not pay because of a
reasonable doubt concerning the right of the beneficiary to payment.
(b) If a payment order accepted by the beneficiary's bank instructs
payment to an account of the beneficiary, the bank is obliged to notify
the beneficiary of receipt of the order before midnight of the next
funds-transfer business day following the payment date. If the payment
order does not instruct payment to an account of the beneficiary, the
bank is required to notify the beneficiary only if notice is required by
the order. Notice may be given by first class mail or any other means
reasonable in the circumstances. If the bank fails to give the required
notice, the bank is obliged to pay interest to the beneficiary on the
amount of the payment order from the day notice should have been given
until the day the beneficiary learned of receipt of the payment order by
the bank. No other damages are recoverable. Reasonable attorney's fees
are also recoverable if demand for interest is made and refused before
an action is brought on the claim.
(c) The right of a beneficiary to receive payment and damages as
stated in subsection (a) may not be varied by agreement or a
funds-transfer system rule. The right of a beneficiary to be notified
as stated in subsection (b) may be varied by agreement of the
beneficiary or by a funds-transfer system rule if the beneficiary is
notified of the rule before initiation of the funds transfer.
Beneficiary
(a) If the beneficiary's bank credits an account of the beneficiary
of a payment order, payment of the bank's obligation under section
4A-404(a) occurs when and to the extent (i) the beneficiary is notified
of the right to withdraw the credit, (ii) the bank lawfully applies the
credit to a debt of the beneficiary, or (iii) funds with respect to the
order are otherwise made available to the beneficiary by the bank.
(b) If the beneficiary's bank does not credit an account of the
beneficiary of a payment order, the time when payment of the bank's
obligation under section 4A-404(a) occurs is governed by principles of
law that determine when an obligation is satisfied.
(c) Except as stated in subsections (d) and (e), if the beneficiary's
bank pays the beneficiary of a payment order under a condition to
payment or agreement of the beneficiary giving the bank the right to
recover payment from the beneficiary if the bank does not receive
payment of the order, the condition to payment or agreement is not
enforceable.
(d) A funds-transfer system rule may provide that payments made to
beneficiaries of funds transfer made through the system are provisional
until receipt of payment by the beneficiary's bank of the payment order
it accepted. A beneficiary's bank that makes a payment that is
provisional under the rule is entitled to refund from the beneficiary if
(i) the rule requires that both the beneficiary and the originator be
given notice of the provisional nature of the payment before the funds
transfer is initiated, (ii) the beneficiary, the beneficiary's bank and
the originator's bank agreed to be bound by the rule, and (iii) the
beneficiary's bank did not receive payment of the payment order that it
accepted. If the beneficiary is obliged to refund payment to the
beneficiary's bank, acceptance of the payment order by the beneficiary's
bank is nullified and no payment by the originator of the funds transfer
to the beneficiary occurs under section 4A-406.
(e) This subsection applies to a funds transfer that includes a
payment order transmitted over a funds-transfer system that (i) nets
obligations-multilaterally among participants, and (ii) has in effect a
loss-sharing agreement among participants for the purpose of providing
funds necessary to complete settlement of the obligations of one or more
participants that do not meet their settlement obligations. If the
beneficiary's bank in the funds transfer accepts a payment order and the
system fails to complete settlement pursuant to its rules with respect
to any payment order in the funds transfer, (i) the acceptance by the
beneficiary's bank is nullified and no person has any right or
obligation based on the acceptance, (ii) the beneficiary's bank is
entitled to recover payment from the beneficiary, (iii) no payment by
the originator to the beneficiary occurs under section 4A-406, and (iv)
subject to section 4A-402(e), each sender in the funds transfer is
excused from its obligation to pay its payment order under section
4A-402(c) because the funds transfer has not been completed.
Discharge of Underlying Obligation
(a) Subject to sections 4A-211(e), 4A-405(d), and 4A-405(e), the
originator of a funds transfer pays the beneficiary of the originator's
payment order (i) at the time a payment order for the benefit of the
beneficiary is accepted by the beneficiary's bank in the funds transfer
and (ii) in an amount equal to the amount of the order accepted by the
beneficiary's bank, but not more than the amount of the originator's
order.
(b) If payment under subsection (a) is made to satisfy an obligation,
the obligation is discharged to the same extent discharge would result
from payment to the beneficiary of the same amount in money, unless (i)
the payment under subsection (a) was made by a means prohibited by the
contract of the beneficiary with respect to the obligation, (ii) the
beneficiary, within a reasonable time after receiving notice of receipt
of the order by the beneficiary's bank, notified the originator of the
beneficiary's refusal of the payment, (iii) funds with respect to the
order were not withdrawn by the beneficiary or applied to a debt of the
beneficiary, and (iv) the beneficiary would suffer a loss that could
reasonably have been avoided if payment had been made by a means
complying with the contract. If payment by the originator does not
result in discharge under this section, the originator is subrogated to
the rights of the beneficiary to receive payment from the beneficiary's
bank under section 4A-404(a).
(c) For the purpose of determining whether discharge of an obligation
occurs under subsection (b), if the beneficiary's bank accepts a payment
order in an amount equal to the amount of the originator's payment order
less charges of one or more receiving banks in the funds transfer,
payment to the beneficiary is deemed to be in the amount of the
originator's order unless upon demand by the beneficiary the originator
does not pay the beneficiary the amount of the deducted charges.
(d) Rights of the originator or of the beneficiary of a funds
transfer under this section may be varied only by agreement of the
originator and the beneficiary.
Funds-Transfer System Rule
(a) Except as otherwise provided in this Article, the rights and
obligations of a party to a funds transfer may be varied by agreement of
the affected party.
(b) Funds-transfer system rule means a rule of an association of
banks (i) governing transmission of payment orders by means of a
funds-transfer system of the association or rights and obligations with
respect to those orders, or (ii) to the extent the rule governs rights
and obligations between banks that are parties to a funds transfer in
which a Federal Reserve Bank, acting as an intermediary bank, sends a
payment order to the beneficiary's bank. Except as otherwise provided
in this Article, a funds-transfer system rule governing rights and
obligations between participating banks using the system may be
effective even if the rule conflicts with this Article and indirectly
affects another party to the funds transfer who does not consent to the
rule. A funds-transfer system rule may also govern rights and
obligations of parties other than participating banks using the system
to the extent stated in sections 4A-404(c), 4A-405(d), and 4A-507(c).
Bank; Setoff by Beneficiary's Bank
(a) As used in this section, creditor process means levy, attachment,
garnishment, notice of lien, sequestration, or similar process issued by
or on behalf of a creditor or other claimant with respect to an account.
(b) This subsection applies to creditor process with respect to an
authorized account of the sender of a payment order if the creditor
process is served on the receiving bank. For the purpose of determining
rights with respect to the creditor process, if the receiving bank
accepts the payment order the balance in the authorized account is
deemed to be reduced by the amount of the payment order to the extent
the bank did not otherwise receive payment of the order, unless the
creditor process is served at a time and in a manner affording the bank
a reasonable opportunity to act on it before the bank accepts the
payment order.
(c) If a beneficiary's bank has received a payment order for payment
to the beneficiary's account in the bank, the following rules apply:
(1) The bank may credit the beneficiary's account. The amount
credited may be set off against an obligation owed by the beneficiary to
the bank or may be applied to satisfy creditor process served on the
bank with respect to the account.
(2) The bank may credit the beneficiary's account and allow
withdrawal of the amount credited unless creditor process with respect
to the account is served at a time and in a manner affording the bank a
reasonable opportunity to act to prevent withdrawal.
(3) If creditor process with respect to the beneficiary's account has
been served and the bank has had a reasonable opportunity to act on it,
the bank may not reject the payment order except for a reason unrelated
to the service of process.
(d) Creditor process with respect to a payment by the originator to
the beneficiary pursuant to a funds transfer may be served only on the
beneficiary's bank with respect to the debt owned by that bank to the
beneficiary. Any other bank served with the creditor process is not
obliged to act with respect to the process.
Respect to Funds Transfer
For proper cause and in compliance with applicable law, a court may
restrain (i) a person from issuing a payment order to initiate a funds
transfer, (ii) an originator's bank from executing the payment order of
the originator, or (iii) the beneficiary's bank from releasing funds to
the beneficiary or the beneficiary from withdrawing the funds. A court
may not otherwise restrain a person from issuing a payment order, paying
or receiving payment of a payment order, or otherwise acting with
respect to a funds transfer.
May Be Charged to Account; Order of Withdrawals from
Account
(a) If a receiving bank has received more than one payment order of
the sender or one or more payment orders and other items that are
payable from the sender's account, the bank may charge the sender's
account with respect to the various orders and items in any sequence.
(b) In determining whether a credit to an account has been withdrawn
by the holder of the account or applied to a debt of the holder of the
account, credits first made to the account are first withdrawn or
applied.
mer's Account
If a receiving bank has received payment from its customer with
respect to a payment order issued in the name of the customer as sender
and accepted by the bank, and the customer received notification
reasonably identifying the order, the customer is precluded from
asserting that the bank is not entitled to retain the payment unless the
customer notifies the bank of the customer's objection to the payment
within one year after the notification was received by the customer.
(a) If, under this Article, a receiving bank is obliged to pay
interest with respect to a payment order issued to the bank, the amount
payable may be determined (i) by agreement of the sender and receiving
bank, or (ii) by a funds-transfer system rule if the payment order is
transmitted through a funds-transfer system.
(b) If the amount of interest is not determined by an agreement or
rule as stated in subsection (a), the amount is calculated by
multiplying the applicable Federal Funds rate by the amount on which
interest is payable, and then multiplying the product by the number of
days for which interest is payable. The applicable Federal Funds rate
is the average of the Federal Funds rates published by the Federal
Reserve Bank of New York for each of the days for which interest is
payable divided by 360. The Federal Funds rate for any day on which a
published rate is not available is the same as the published rate for
the next preceding day for which there is a published rate. If a
receiving bank that accepted a payment order is required to refund
payment to the sender of the order because the funds transfer was not
completed, but the failure to complete was not due to any fault by the
bank, the interest payable is reduced by a percentage equal to the
reserve requirement on deposits of the receiving bank.
(a) The following rules apply unless the affected parties otherwise
agree or subsection (c) applies:
(1) The rights and obligations between the sender of a payment order
and the receiving bank are governed by the law of the jurisdiction in
which the receiving bank is located.
(2) The rights and obligations between the beneficiary's bank and the
beneficiary are governed by the law of the jurisdiction in which the
beneficiary's bank is located.
(3) The issue of when payment is made pursuant to a funds transfer by
the originator to the beneficiary is governed by the law of the
jurisdiction in which the beneficiary's bank is located.
(b) If the parties described in each paragraph of subsection (a) have
made an agreement selecting the law of a particular jurisdiction to
govern rights and obligations between each other, the law of that
jurisdiction governs those rights and obligations, whether or not the
payment order or the funds transfer bears a reasonable relation to that
jurisdiction.
(c) A funds-transfer system rule may select the law of a particular
jurisdiction to govern (i) rights and obligations between participating
banks with respect to payment orders transmitted or processed through
the system, or (ii) the rights and obligations of some or all parties to
a funds transfer any part of which is carried out by means of the
system. A choice of law made pursuant to clause (i) is binding on
participating banks. A choice of law made pursuant to clause (ii) is
binding on the originator, other sender, or a receiving bank having
notice that the funds-transfer system might be used in the funds
transfer and of the choice of law by the system when the originator,
other sender, or receiving bank issued or accepted a payment order. The
beneficiary of a funds transfer is bound by the choice of law if, when
the funds transfer is initiated, the beneficiary has notice that the
funds-transfer system might be used in the funds transfer and of the
choice of law by the system. The law of a jurisdiction selected
pursuant to this subsection may govern, whether or not that law bears a
reasonable relation to the matter in issue.
(d) In the event of inconsistency between an agreement under
subsection (b) and a choice-of-law rule under subsection (c), the
agreement under subsection (b) prevails.
(e) If a funds transfer is made by use of more than one
funds-transfer system and there is inconsistency between choice-of-law
rules of the systems, the matter in issue is governed by the law of the
selected jurisdiction that has the most significant relationship to the
matter in issue.
(55 FR 40801, Oct. 5, 1990; 55 FR 47428, Nov. 13, 1990)
12 CFR 210.32 PART 211 -- INTERNATIONAL BANKING OPERATIONS
12 CFR 210.32 Subpart A -- International Operations of United States
Banking Organizations
Sec.
211.1 Authority, purpose, and scope.
211.2 Definitions.
211.3 Foreign branches of U.S. banking organizations.
211.4 Edge and Agreement corporations.
211.5 Investments and activities abroad.
211.6 Lending limits and capital requirements.
211.7 Supervision and reporting.
12 CFR 210.32 Subpart B -- Foreign Banking Organizations
211.21 Authority, purpose, and scope.
211.22 Interstate banking operations of foreign banking
organizations.
211.23 Nonbanking activities of foreign banking organizations.
12 CFR 210.32 Subpart C -- Export Trading Companies
211.31 Authority, purpose, and scope.
211.32 Definitions.
211.33 Investments and extensions of credit.
211.34 Procedures for filing and processing notices.
12 CFR 210.32 Subpart D -- International Lending Supervision
211.41 Authority, purpose and scope.
211.42 Definitions.
211.43 Allocated transfer risk reserve.
211.44 Reporting and disclosure of international assets.
211.45 Accounting for fees on international loans.
211.601 Status of certain offices for purposes of the International
Banking Act restrictions on interstate banking operations.
211.602 Investments by United States banking organizations in foreign
companies that transact business in the United States.
211.603 Commodity swap transactions.
Authority: Federal Reserve Act (12 U.S.C. 221 et seq.); Bank
Holding Company Act of 1956, as amended (12 U.S.C. 1841 et seq.); the
International Banking Act of 1978 (Pub. L. 95-369; 92 Stat. 607; 12
U.S.C. 3101 et seq.); the Bank Export Services Act (title II, Pub. L.
97-290, 96 Stat. 1235); the International Lending Supervision Act
(title IX, Pub. L. 98-181, 97 Stat. 1153, 12 U.S.C. 3901 et seq.); and
the Export Trading Company Act Amendments of 1988 (title III, Pub. L.
100-418, 102 Stat. 1384 (1988)).
12 CFR 210.32 Subpart A -- International Operations of United States
Banking Organizations
Source: 56 FR 19565, Apr. 29, 1991, unless otherwise noted.
12 CFR 211.1 Authority, purpose, and scope.
(a) Authority. This subpart is issued by the Board of Governors of
the Federal Reserve System (''Board'') under the authority of the
Federal Reserve Act (''FRA'') (12 U.S.C. 221 et seq.); the Bank Holding
Company Act of 1956 (''BHC Act'') (12 U.S.C. 1841 et seq.); and the
International Banking Act of 1978 (''IBA'') (12 U.S.C. 3101 et seq.).
Requirements for the collection of information contained in this
regulation have been approved by the Office of Management and Budget
under the provision of 44 U.S.C. 3501, et seq. and have been assigned
OMB numbers 7100-0107; 7100-0109; 7100-0110; 7100-0069; 7100-0086;
and 7100-0073.
(b) Purpose. This subpart sets out rules governing the international
and foreign activities of U.S. banking organizations, including
procedures for establishing foreign branches and Edge corporations to
engage in international banking and for investments in foreign
organizations.
(c) Scope. This subpart applies to:
(1) Corporations organized under section 25(a) of the FRA (12 U.S.C.
611-631), ''Edge corporations'';
(2) Corporations having an agreement or undertaking with the Board
under section 25 of the FRA (12 U.S.C. 601-604a), ''Agreement
corporations'';
(3) Member banks with respect to their foreign branches and
investments in foreign banks under section 25 of the FRA (12 U.S.C.
601-604a); /1/ and
(4) Bank holding companies with respect to the exemption from the
nonbanking prohibitions of the BHC Act afforded by section 4(c)(13) of
the BHC Act (12 U.S.C. 1843(c)(13)).
/1/ Section 25 of the FRA, which refers to national banking
associations, also applies to state member banks of the Federal Reserve
System by virtue of section 9 of the FRA (12 U.S.C. 321).
12 CFR 211.2 Definitions.
Unless otherwise specified, for the purposes of this subpart:
(a) An affiliate of an organization means:
(1) Any entity of which the organization is a direct or indirect
subsidiary; or
(2) Any direct or indirect subsidiary of the organization or such
entity.
(b) Capital Adequacy Guidelines means the Capital Adequacy Guidelines
for State Member Banks: Risk-Based Measure (12 CFR part 208, app. A).
(c)Capital and surplus means paid-in and unimpaired capital and
surplus, and includes undivided profits but does not include the
proceeds of capital notes or debentures.
(d) Directly or indirectly, when used in reference to activities or
investments of an organization, means activities or investments of the
organization or of any subsidiary of the organization.
(e) Eligible country means a country that, since 1980, has
restructured its sovereign debt held by foreign creditors, and any other
country that the Board deems to be eligible.
(f) An Edge corporation is engaged in banking if it is ordinarily
engaged in the business of accepting deposits in the United States from
nonaffiliated persons.
(g) Engaged in business or engaged in activities in the United States
means maintaining and operating an office (other than a representative
office) or subsidiary in the United States.
(h) Equity means an ownership interest in an organization, whether
through:
(1) Voting or nonvoting shares;
(2) General or limited partnership interests;
(3) Any other form of interest conferring ownership rights, including
warrants, debt, or any other interests that are convertible into shares
or other ownership rights in the organization; or
(4) Loans that provide rights to participate in the profits of an
organization, unless the investor receives a determination that such
loans should not be considered equity in the circumstances of the
particular investment.
(i) Foreign or foreign country refers to one or more foreign nations,
and includes the overseas territories, dependencies, and insular
possessions of those nations and of the United States, and the
Commonwealth of Puerto Rico.
(j) Foreign bank means an organization that:
(1) Is organized under the laws of a foreign country;
(2) Engages in the business of banking;
(3) Is recognized as a bank by the bank supervisory or monetary
authority of the country of its organization or principal banking
operations;
(4) Receives deposits to a substantial extent in the regular course
of its business; and
(5) Has the power to accept demand deposits.
(k) Foreign branch means an office of an organization (other than a
representative office) that is located outside the country under the
laws of which the organization is established, at which a banking or
financing business is conducted.
(l) Foreign person means an office or establishment located, or
individual residing, outside the United States.
(m) Investment means: (1) The ownership or control of equity;
(2) Binding commitments to acquire equity;
(3) Contributions to the capital and surplus of an organization; and
(4) The holding of an organization's subordinated debt when the
investor and the investor's affiliates hold more than 5 percent of the
equity of the organization.
(n) Investor means an Edge corporation, Agreement corporation, bank
holding company, or member bank.
(o) Joint venture means an organization that has 20 percent or more
of its voting shares held directly or indirectly by the investor or by
an affiliate of the investor under any authority, but which is not a
subsidiary of the investor.
(p) Loans and extensions of credit means all direct and indirect
advances of funds to a person made on the basis of any obligation of
that person to repay funds.
(q) Organization means a corporation, government, partnership,
association, or any other entity.
(r) Person means an individual or an organization.
(s) Portfolio investment means an investment in an organization other
than a subsidiary or joint venture.
(t) Representative office means an office that:
(1) Engages solely in representational and administrative functions
such as solicitation of new business for or liaison between the
organization's head office and customers in the United States; and
(2) Does not have authority to make business decisions for the
account of the organization represented.
(u) Subsidiary means an organization more than 50 percent of the
voting shares of which is held directly or indirectly, or which is
otherwise controlled or capable of being controlled, by the investor or
an affiliate of the investor under any authority. Among other
circumstances, an investor is considered to control an organization if
the investor or an affiliate is a general partner of the organization or
if the investor and its affiliates directly or indirectly own or control
more than 50 percent of the equity of the organization.
(v) Tier 1 capital has the same meaning as provided under the Capital
Adequacy Guidelines (12 CFR part 208, appendix A).
12 CFR 211.3 Foreign branches of U.S. banking organizations.
(a) Establishment of foreign branches -- (1) Right to establish
branches. Foreign branches may be established by any member bank having
capital and surplus of $1,000,000 or more, an Edge corporation, an
Agreement corporation, or a subsidiary held pursuant to this subpart.
Unless otherwise provided in this section, the establishment of a
foreign branch requires the specific prior approval of the Board.
(2) Branching within a foreign country. Unless the organization has
been notified otherwise, no prior Board approval is required for an
organization to establish additional branches in any foreign country
where it operates one or more branches. /2/
(3) Branching into additional foreign countries. After giving the
Board 45 days' prior written notice, an organization that operates
branches in two or more foreign countries may establish a branch in an
additional foreign country, unless notified otherwise by the Board. /2/
(4) Expiration of branching authority. Authority to establish
branches through prior approval or prior notice shall expire one year
from the earliest date on which the authority could have been exercised,
unless the Board extends the period.
(5) Reporting. Any organization that opens, closes, or relocates a
branch shall report such change in a manner prescribed by the Board.
(b) Further powers of foreign branches of member banks. In addition
to its general banking powers, and to the extent consistent with its
charter, a foreign branch of a member bank may engage in the following
activities so far as usual in connection with the business of banking in
the country where it transacts business:
(1) Guarantees. Guarantee debts, or otherwise agree to make payments
on the occurrence of readily ascertainable events, /3/ if the guarantee
or agreement specifies a maximum monetary liability; but except to the
extent that the member bank is fully secured, it may not have
liabilities outstanding for any person on account of such guarantees or
agreements which, when aggregated with other unsecured obligations of
the same person, exceed the limit contained in paragraph (a)(1) of
section 5200 of the Revised Statutes (12 U.S.C. 84) for loans and
extensions of credit;
(2) Government obligations. Underwrite, distribute, buy, sell, and
hold obligations of:
(i) The national government of the country in which the branch is
located;
(ii) An agency or instrumentality of the national government where
supported by the taxing authority, guarantee, or full faith and credit
of the national government; and
(iii) A political subdivision of the country;
Provided however that, no member bank may hold, or be under
commitment with respect to, such obligations for its own account in an
aggregate amount exceeding the greater of:
(A) 10 percent of its Tier 1 capital; or
(B) 10 percent of the total deposits of the bank's branches in that
country on the preceding year-end call report date (or the date of
acquisition of the branch in the case of a branch that has not been so
reported);
(3) Other Investments. Invest in:
(i) The securities of the central bank, clearing houses, governmental
entities other than those authorized under paragraph (b)(2) of this
section, and government-sponsored development banks of the country in
which the foreign branch is located;
(ii) Other debt securities eligible to meet local reserve or similar
requirements; and
(iii) Shares of automated electronic payments networks, professional
societies, schools, and the like necessary to the business of the
branch;
Provided however that, the total investments of the bank's branches
in that country under this paragraph (exclusive of securities held as
required by the law of that country or as authorized under section 5136
of the Revised Statutes (12 U.S.C. 24, Seventh)) may not exceed 1
percent of the total deposits of the bank's branches in that country on
the preceding year-end call report date (or on the date of acquisition
of the branch in the case of a branch that has not so reported);
(4) Credit extensions to bank's officers. Extend credit to an
officer of the bank residing in the country in which the foreign branch
is located to finance the acquisition or construction of living quarters
to be used as the officer's residence abroad, provided however that:
(i) The credit extension is reported promptly to the branch's home
office; and
(ii) Any extension of credit exceeding $100,000 (or the equivalent in
local currency) is reported also to the bank's board of directors;
(5) Real estate loans. Take liens or other encumbrances on foreign
real estate in connection with its extensions of credit, whether or not
of first priority and whether or not the real estate has been improved;
(6) Insurance. Act as insurance agent or broker;
(7) Employee benefits program. Pay to an employee of the branch, as
part of an employee benefits program, a greater rate of interest than
that paid to other depositors of the branch;
(8) Repurchase agreements. Engage in repurchase agreements involving
securities and commodities that are the functional equivalents of
extensions of credit;
(9) Investment in subsidiaries. With the Board's prior approval,
acquire all of the shares of a company (except where local law requires
other investors to hold directors' qualifying shares or similar types of
instruments) that engages solely in activities:
(i) In which the member bank is permitted to engage; or
(ii) That are incidental to the activities of the foreign branch;
and
(10) Other activities. With the Board's prior approval, engage in
other activities that the Board determines are usual in connection with
the transaction of the business of banking in the places where the
member bank's branches transact business.
(c) Reserves of foreign branches of member banks. Member banks shall
maintain reserves against foreign branch deposits when required by part
204 of this chapter (Regulation D).
/2/ For the purpose of this paragraph, a subsidiary other than a bank
or an Edge or Agreement corporation is considered to be operating a
branch in a foreign country if it has an affiliate that operates an
office (other than a representative office) in that country.
/3/ Readily ascertainable events include, but are not limited to,
events such as nonpayment of taxes, rentals, customs duties, or costs of
transport and loss or nonconformance of shipping documents.
12 CFR 211.4 Edge and Agreement corporations.
(a) Organization -- (1) Board authority. The Board shall have the
authority to approve:
(i) The establishment of Edge corporations; and
(ii) Investments by member banks and bank holding companies in
Agreement corporations.
(2) Permit. A proposed Edge corporation shall become a body
corporate when the Board issues a permit approving its proposed name,
articles of association, and organization certificate.
(3) Name. The name shall include international, foreign, overseas,
or some similar word, but may not resemble the name of another
organization to an extent that might mislead or deceive the public.
(4) Federal Register notice. The Board shall publish in the Federal
Register notice of any proposal to organize an Edge corporation and will
give interested persons an opportunity to express their views on the
proposal.
(5) Factors considered by the Board. The factors considered by the
Board in acting on a proposal to organize an Edge corporation include:
(i) The financial condition and history of the applicant;
(ii) The general character of its management;
(iii) The convenience and needs of the community to be served with
respect to international banking and financing services; and
(iv) The effects of the proposal on competition.
(6) Authority to commence business. (i) After the Board issues a
permit, the Edge corporation may elect officers and otherwise complete
its organization, invest in obligations of the United States Government,
and maintain deposits with depository institutions, but it may not
exercise any other powers until at least 25 percent of the authorized
capital stock specified in the articles of association has been paid in
cash, and each shareholder has paid in cash at least 25 percent of that
shareholder's stock subscription.
(ii) Unexercised authority to commence business as an Edge
corporation shall expire one year after issuance of the permit, unless
the Board extends the period.
(7) Amendments to articles of association. No amendment to the
articles of association shall become effective until approved by the
Board.
(8) Shareholders meeting. An Edge Corporation shall provide in its
bylaws that:
(i) A shareholders meeting shall be convened at the request of the
Board within five days after the Board gives notice of the request to
the Edge corporation;
(ii) Any shareholder or group of shareholders that owns or controls
25 percent or more of the shares of the Edge corporation shall attend
such a meeting in person or by proxy; and
(iii) Failure by a shareholder or authorized representative to attend
any such meeting in person or by proxy may result in removal or barring
of such shareholders or any representatives from further participation
in the management or affairs of the Edge corporation.
(b) Nature and ownership of shares -- (1) Shares. (i) Shares of
stock in an Edge corporation may not include no-par value shares and
shall be issued and transferred only on its books and in compliance with
section 25(a) of the FRA and this subpart.
(ii) The share certificates of an Edge corporation shall:
(A) Name and describe each class of shares indicating its character
and any unusual attributes such as preferred status or lack of voting
rights; and
(B) Conspicuously set forth the substance of:
(1) Any limitations upon the rights of ownership and transfer of
shares imposed by section 25(a) of the FRA; and
(2) Any rules that the Edge corporation prescribes in its by-laws to
ensure compliance with this paragraph.
(iii) Any change in status of a shareholder that causes a violation
of section 25(a) of the FRA shall be reported to the Board as soon as
possible, and the Edge corporation shall take such action as the Board
may direct.
(2) Ownership of Edge corporations by foreign institutions -- (i)
Prior Board approval. One or more foreign or foreign-controlled
domestic institutions referred to in paragraph 13 of section 25(a) of
the FRA (12 U.S.C. 619) may apply for the Board's prior approval to
acquire directly or indirectly a majority of the shares of the capital
stock of an Edge corporation.
(ii) Conditions and requirements. Such an institution shall:
(A) Provide the Board information related to its financial condition
and activities and such other information as the Board may require;
(B) Ensure that any transaction by an Edge corporation with an
affiliate /4/ is on substantially the same terms, including interest
rates and collateral, as those prevailing at the same time for
comparable transactions by the Edge corporation with nonaffiliated
persons, and does not involve more than the normal risk of repayment or
present other unfavorable features;
(C) Ensure that the Edge corporation will not provide funding on a
continual or substantial basis to any affiliate or office of the foreign
institution through transactions that would be inconsistent with the
international and foreign business purposes for which Edge corporations
are organized;
(D) Invest no more than 10 percent of the institution's capital and
surplus in the aggregate amount of stock held in all Edge corporations;
and
(E) In the case of a foreign institution not subject to section 4 of
the BHC Act:
(1) Comply with any conditions that the Board may impose that are
necessary to prevent undue concentration of resources, decreased or
unfair competition, conflicts of interest, or unsound banking practices
in the United States; and
(2) Give the Board 45 days' prior written notice, in a form to be
prescribed by the Board, before engaging in any nonbanking activity in
the United States, or making any initial or additional investments in
another organization, that would require prior Board approval or notice
by an organization subject to section 4 of the BHC Act; in connection
with such notice, the Board may impose conditions necessary to prevent
adverse effects that may result from such activity or investment.
(3) Change in control -- (i) Prior notice. Any person shall give the
Board 60 days' prior written notice, in a form to be prescribed by the
Board, before acquiring, directly or indirectly, 25 percent or more of
the voting shares, or otherwise acquiring control, of an Edge
corporation. The Board may extend the 60-day period for an additional
30 days by notifying the acquiring party. A notice under this paragraph
need not be filed where a change in control is effected through a
transaction requiring the Board's approval under section 3 of the BHC
Act (12 U.S.C. 1842).
(ii) Board review. In reviewing a notice filed under this paragraph,
the Board shall consider the factors set forth in paragraph (a)(5) of
this section and may disapprove a notice or impose any conditions that
it finds necessary to assure the safe and sound operation of the Edge
corporation, to assure the international character of its operation, and
to prevent adverse effects such as decreased or unfair competition,
conflicts of interest, or undue concentration of resources.
(c) Domestic branches -- (1) Prior notice. (i) An Edge corporation
may establish branches in the United States 45 days after the Edge
corporation has given notice to its Reserve Bank, unless the Edge
corporation is notified to the contrary within that time.
(ii) The notice to the Reserve Bank shall include a copy of the
notice of the proposal published in a newspaper of general circulation
in the communities to be served by the branch.
(iii) The newspaper notice may appear no earlier than 90 calendar
days prior to submission of notice of the proposal to the Reserve Bank.
The newspaper notice must provide an opportunity for the public to give
written comment on the proposal to the appropriate Reserve Bank for at
least 30 days after the date of publication.
(2) Factors considered. The factors considered in acting upon a
proposal to establish a branch are enumerated in paragraph (a)(5) of
this section.
(3) Expiration of authority. Authority to open a branch under prior
notice shall expire one year from the earliest date on which that
authority could have been exercised, unless the Board extends the
period.
(d) Reserve requirements and interest rate limitations. The deposits
of an Edge or Agreement corporation are subject to parts 204 and 217 of
this chapter (Regulations D and Q) in the same manner and to the same
extent as if the Edge or Agreement corporation were a member bank.
(e) Permissible activities in the United States. An Edge corporation
may engage directly or indirectly in activities in the United States
that are permitted by the sixth paragraph of section 25(a) of the FRA
and are incidental to international or foreign business, and in such
other activities as the Board determines are incidental to international
or foreign business. The following activities will ordinarily be
considered incidental to an Edge corporation's international or foreign
business:
(1) Deposit activities -- (i) Deposits from foreign governments and
foreign persons. An Edge corporation may receive in the United States
transaction accounts, savings, and time deposits (including issuing
negotiable certificates of deposits) from foreign governments and their
agencies and instrumentalities, and from foreign persons.
(ii) Deposits from other persons. An Edge corporation may receive
from any other person in the United States transaction accounts,
savings, and time deposits (including issuing negotiable certificates of
deposit) if such deposits:
(A) Are to be transmitted abroad;
(B) Consist of funds to be used for payment of obligations to the
Edge corporation or collateral securing such obligations;
(C) Consist of the proceeds of collections abroad that are to be used
to pay for exported or imported goods or for other costs of exporting or
importing or that are to be periodically transferred to the depositor's
account at another financial institution;
(D) Consist of the proceeds of extensions of credit by the Edge
corporation;
(E) Represent compensation to the Edge corporation for extensions of
credit or services to the customer;
(F) Are received from Edge or Agreement corporations, foreign banks
and other depository institutions (as described in part 204 of this
chapter (Regulation D));
(G) Are received from an organization that by its charter, license,
or enabling law is limited to business that is of an international
character, including Foreign Sales Corporations (26 U.S.C. 921);
transportation organizations engaged exclusively in the international
transportation of passengers or in the movement of goods, wares,
commodities or merchandise in international or foreign commerce; and
export trading companies that are exclusively engaged in activities
related to international trade.
(2) Liquid funds. Funds of an Edge or Agreement corporation that are
not currently employed in its international or foreign business, if held
or invested in the United States, shall be in the form of:
(i) Cash;
(ii) Deposits with depository institutions, as described in part 204
of this chapter (Regulation D), and other Edge and Agreement
corporations;
(iii) Money market instruments (including repurchase agreements with
respect to such instruments), such as bankers' acceptances, federal
funds sold, and commercial paper; and
(iv) Short- or long-term obligations of, or fully guaranteed by,
federal, state, and local governments and their instrumentalities.
(3) Borrowings. An Edge corporation may:
(i) Borrow from offices of other Edge and Agreement corporations,
foreign banks, and depository institutions (as described in part 204 of
this chapter (Regulation D)) or issue obligations to the United States
or any of its agencies or instrumentalities;
(ii) Incur indebtedness from a transfer of direct obligations of, or
obligations that are fully guaranteed as to principal and interest by,
the United States or any agency or instrumentality thereof that the Edge
corporation is obligated to repurchase;
(iii) Issue long-term subordinated debt that does not qualify as a
deposit under part 204 of this chapter (Regulation D).
(4) Credit activities. An Edge corporation may:
(i) Finance the following:
(A) Contracts, projects, or activities performed substantially
abroad;
(B) The importation into or exportation from the United States of
goods, whether direct or through brokers or other intermediaries;
(C) The domestic shipment or temporary storage of goods being
imported or exported (or accumulated for export); and
(D) The assembly or repackaging of goods imported or to be exported;
(ii) Finance the costs of production of goods and services for which
export orders have been received or which are identifiable as being
directly for export;
(iii) Assume or acquire participations in extensions of credit, or
acquire obligations arising from transactions the Edge corporation could
have financed, including acquisitions of obligations of foreign
governments;
(iv) Guarantee debts, or otherwise agree to make payments on the
occurrence of readily ascertainable events, /5/ if the guarantee or
agreement specifies the maximum monetary liability thereunder and is
related to a type of transaction described in paragraphs (e)(4)(i) and
(ii) of this section; and
(v) Provide credit and other banking services for domestic and
foreign purposes to foreign governments and their agencies and
instrumentalities; foreign persons; and organizations of the type
described in paragraph 211.4(e)(1)(ii)(G) of this section.
(5) Payments and collections. An Edge corporation may receive
checks, bills, drafts, acceptances, notes, bonds, coupons, and other
instruments for collection abroad, and collect such instruments in the
United States for a customer abroad; and may transmit and receive wire
transfers of funds and securities for depositors.
(6) Foreign exchange. An Edge corporation may engage in foreign
exchange activities.
(7) Fiduciary and investment advisory activities. An Edge
corporation may:
(i) Hold securities in safekeeping for, or buy and sell securities
upon the order and for the account and risk of, a person, provided such
services for U.S. persons shall be with respect to foreign securities
only;
(ii) Act as paying agent for securities issued by foreign governments
or other entities organized under foreign law;
(iii) Act as trustee, registrar, conversion agent, or paying agent
with respect to any class of securities issued to finance foreign
activities and distributed solely outside the United States;
(iv) Make private placements of participations in its investments and
extensions of credit; however, except to the extent permissible for
member banks under section 5136 of the Revised Statutes (12 U.S.C. 24,
Seventh), no Edge corporation may otherwise engage in the business of
underwriting, distributing, or buying or selling securities in the
United States;
(v) Act as investment or financial adviser by providing portfolio
investment advice and portfolio management with respect to securities,
other financial instruments, real property interests and other
investment assets, /6/ and by providing advice on mergers and
acquisitions, provided such services for U.S. persons shall be with
respect to foreign assets only; and
(vi) Provide general economic information and advice, general
economic statistical forecasting services and industry studies, provided
such services for U.S. persons shall be with respect to foreign
economies and industries only.
(8) Banking services for employees. Provide banking services,
including deposit services, to the officers and employees of the Edge
corporation and its affiliates; however, extensions of credit to such
persons shall be subject to the restrictions of part 215 of this chapter
(Regulation O) as if the Edge corporation were a member bank.
(9) Other activities. With the Board's prior approval, engage in
other activities in the United States that the Board determines are
incidental to the international or foreign business of Edge
corporations.
(f) Agreement corporations. With the prior approval of the Board, a
member bank or bank holding company may invest in a federally- or
state-chartered corporation that has entered into an agreement or
undertaking with the Board that it will not exercise any power that is
impermissible for an Edge corporation under this subpart.
/4/ For purposes of this paragraph, affiliate means any organization
that would be an affiliate under section 23A of the FRA (12 U.S.C. 371c)
if the Edge corporation were a member bank.
/5/ Readily ascertainable events include, but are not limited to,
events such as nonpayment of taxes, rentals, customs duties, or cost of
transport and loss or nonconformance of shipping documents.
/6/ For purposes of this section, management of an investment
portfolio does not include operational management of real property, or
industrial or commercial assets.
12 CFR 211.5 Investments and activities abroad.
(a) General policy. Activities abroad, whether conducted directly or
indirectly, shall be confined to activities of a banking or financial
nature and those that are necessary to carry on such activities. In
doing so, investors shall at all times act in accordance with high
standards of banking or financial prudence, having due regard for
diversification of risks, suitable liquidity, and adequacy of capital.
Subject to these considerations and the other provisions of this
section, it is the Board's policy to allow activities abroad to be
organized and operated as best meets corporate policies.
(b) Investment requirements -- (1) Eligible investments. Subject to
the limitations in paragraph (b)(2) of this section, an investor may
directly or indirectly:
(i) Invest in a subsidiary that engages solely in activities listed
in paragraph (d) of this section or in such other activities as the
Board has determined in the circumstances of a particular case are
permissible; provided however that, in the case of an acquisition of a
going concern, existing activities that are not otherwise permissible
for a subsidiary may account for not more than 5 percent of either the
consolidated assets or revenues of the acquired organization;
(ii) Invest in a joint venture provided that, unless otherwise
permitted by the Board, not more than 10 percent of the joint venture's
consolidated assets or revenues are attributable to activities not
listed in paragraph (d) of this section; and
(iii) Make portfolio investments in an organization, provided however
that:
(A) The total direct and indirect portfolio investments by the
investor and its affiliates in organizations engaged in activities that
are not permissible for joint ventures do not exceed:
(1) 40 percent of the total equity of the organization, when combined
with shares in the organization held in trading or dealing accounts
pursuant to paragraph (d)(14) of this section and shares in the
organization held under any other authority; or
(2) 25 percent of the investor's Tier 1 capital where the investor is
a bank holding company or 100 percent of Tier 1 capital for any other
investor, when combined with underwriting commitments and shares held in
trading or dealing accounts pursuant to paragraph (d)(14) of this
section; /7/ and
(B) Any loans and extensions of credit made by an investor or its
affiliates to the organization are on substantially the same terms,
including interest rates and collateral, as those prevailing at the same
time for comparable transactions between the investor or its affiliates
and nonaffiliated persons.
(2) Direct investments by member banks. A member bank's direct
investments under section 25 of the FRA shall be limited to:
(i) Foreign banks;
(ii) Foreign organizations formed for the sole purpose of either
holding shares of a foreign bank or performing nominee, fiduciary, or
other banking services incidental to the activities of a foreign branch
or foreign bank affiliate of the member bank; and
(iii) Subsidiaries established pursuant to 211.3(b)(9) of this
subpart.
(3) Investment limit. In computing the amount that may be invested
in any organization under this section, there shall be included any
unpaid amount for which the investor is liable and any investments in
the same organization held by affiliates under any authority.
(4) Divestiture. An investor shall dispose of an investment promptly
(unless the Board authorizes retention) if:
(i) The organization invested in:
(A) Engages in the general business of buying or selling goods,
wares, merchandise, or commodities in the United States;
(B) Engages directly or indirectly in other business in the United
States that is not permitted to an Edge corporation in the United States
except that an investor may hold up to 5 percent of the shares of a
foreign company that engages directly or indirectly in business in the
United States that is not permitted to an Edge corporation; or
(C) Engages in impermissible activities to an extent not permitted
under paragraph (b)(1) of this section; or
(ii) After notice and opportunity for hearing, the investor is
advised by the Board that its investment is inappropriate under the FRA,
the BHC Act, or this subpart.
(c) Investment procedures. /8/ Direct and indirect investments shall
be made in accordance with the general consent, prior notice, or
specific consent procedures contained in this paragraph. Except as the
Board may otherwise determine, in order for an investor to make
investments under the general consent procedure, the investor and any
other investor of which it is a subsidiary shall be in compliance with
applicable minimum standards for capital adequacy. The Board may at any
time, upon notice, modify or suspend the general consent and prior
notice procedures with respect to any investor or with respect to the
acquisition of shares of organizations engaged in particular kinds of
activities. An investor shall apply for and receive the prior specific
consent of the Board for its initial investment in its first subsidiary
or joint venture unless an affiliate has made such an investment.
Authority to make investments under prior notice or specific consent
shall expire one year from the earliest date on which the authority
could have been exercised, unless the Board extends the period.
(1) General consent. Subject to the other limitations of this
section, the Board grants its general consent for the following: /9/
(i) Any investment in a joint venture or subsidiary, and any
portfolio investment, if the total amount invested (in one transaction
or in a series of transactions) does not exceed the lesser of:
(A) $25 million; or
(B) 5 percent of the investor's Tier 1 capital in the case of a
member bank, bank holding company, or Edge corporation engaged in
banking, or 25 percent of the investor's Tier 1 capital in the case of
an Edge corporation not engaged in banking;
(ii) Any additional investment in an organization in any calendar
year so long as:
(A) The total amount invested in that calendar year does not exceed
10 percent of the investor's Tier 1 capital; and
(B) The total amount invested under 211.5 (including investments
made pursuant to specific consent or prior notice) in that calendar year
does not exceed cash dividends reinvested under paragraph (c)(1)(iii) of
this section plus 10 percent of the investor's direct and indirect
historical cost /10/ in the organization, which investment authority, to
the extent unexercised, may be carried forward and accumulated for up to
five consecutive years;
(iii) Any additional investment in an organization in an amount equal
to cash dividends received from that organization during the preceding
twelve calendar months; or
(iv) Any investment that is acquired from an affiliate at net asset
value.
(2) Prior notice. An investment that does not qualify under the
general consent procedure may be made after the investor has given 45
days' prior written notice to the Board. The Board may waive the 45-day
period if it finds immediate action is required by the circumstances
presented. The notice period shall commence at the time the notice is
accepted. The Board may suspend the period or act on the investment
under the Board's specific consent procedures.
(3) Specific consent. Any investment that does not qualify for
either the general consent or the prior notice procedure shall not be
consummated without the specific consent of the Board.
(d) Permissible activities. The Board has determined that the
following activities are usual in connection with the transaction of
banking or other financial operations abroad:
(1) Commercial and other banking activities;
(2) Financing, including commercial financing, consumer financing,
mortgage banking, and factoring;
(3) Leasing real or personal property, or acting as agent, broker, or
advisor in leasing real or personal property, if the lease serves as the
functional equivalent of an extension of credit to the lessee of the
property;
(4) Acting as fiduciary;
(5) Underwriting credit life insurance and credit accident and health
insurance;
(6) Performing services for other direct or indirect operations of a
U.S. banking organization, including representative functions, sale of
long-term debt, name saving, holding assets acquired to prevent loss on
a debt previously contracted in good faith, and other activities that
are permissible domestically for a bank holding company under sections
4(a)(2)(A) and 4(c)(1)(C) of the BHC Act;
(7) Holding the premises of a branch of an Edge corporation or member
bank or the premises of a direct or indirect subsidiary, or holding or
leasing the residence of an officer or employee of a branch or
subsidiary;
(8) Providing investment, financial, or economic advisory services;
(9) General insurance agency and brokerage;
(10) Data processing;
(11) Organizing, sponsoring, and managing a mutual fund if the fund's
shares are not sold or distributed in the United States or to U.S.
residents and the fund does not exercise managerial control over the
firms in which it invests;
(12) Performing management consulting services provided that such
services when rendered with respect to the U.S. market shall be
restricted to the initial entry;
(13) Underwriting, distributing and dealing in debt securities
outside the United States;
(14) Underwriting, distributing, and dealing in equity securities
outside the United States as follows:
(i) By an investor, or an affiliate, that had commenced such
activities prior to March 27, 1991, and subject to limitations in effect
at that time (12 CFR part 211 (1990)); or
(ii) With the approval of the Board, underwriting equity securities
if:
(A) Commitments by an investor and its affiliates for the shares of
an organization do not in the aggregate exceed the lesser of $60 million
or 25 percent of the investor's Tier l capital unless the underwriter is
covered by binding commitments from subunderwriters or other purchasers
obtained by the investor or its affiliates; and
(B) Commitments by an investor and its affiliates for the shares of
an organization in excess of those permitted by paragraph (d)(14)(ii)(A)
of this section provided that:
(1) The underwriting level approved by the Board for the investor and
its affiliates in excess of the limitations of paragraph (d)(14)(ii)(A)
of this section is fully deducted from the capital of the bank holding
company, and from the capital of the bank where the securities
activities are conducted by a subsidiary of a U.S. bank; /11/ and
(2) In the Board's judgment such bank holding company and bank would
remain strongly capitalized after such deduction from capital; and
(iii) With the approval of the Board, dealing in the shares of an
organization (including the shares of a U.S. organization with respect
to foreign persons only and subject to the limitations on owning or
controlling shares of a company in section 4 of the BHC Act and the
Board's Regulation Y (12 CFR part 225)) where the shares held in the
trading or dealing accounts of an investor and its affiliates, when
combined with any shares held pursuant to the authority provided under
paragraph (b) of this section, do not in the aggregate exceed the lesser
of $30 million or 10 percent of the investor's Tier l capital, provided
however that:
(A) For purposes of determining compliance with the limitations of
this paragraph (d)(14)(iii) and paragraph (b)(1)(iii)(A)(2) of this
section, long and short positions in the same security may be netted and
positions in a security may be offset by futures, forwards, options, and
similar instruments referenced to the same security through hedging
methods approved by the Board, except that any position in a security
shall not be deemed to have been reduced by more than 75 percent;
(B) Any shares held in trading or dealing accounts for longer than 90
days shall be reported to the senior management of the investor;
(C) Any shares acquired pursuant to an underwriting commitment for up
to 90 days after the payment date for such underwriting shall not be
subject to the dollar and percentage limitations of paragraph
(d)(14)(iii) of this section or the investment provisions of paragraph
(b) of this section, other than the aggregate limits in paragraph
(b)(1)(iii)(A)(2) of this section; and
(D) Shares of an organization held in all trading and dealing
accounts, when combined with all other equity interests in the
organization held by the investor and its affiliates, other than
underwriting commitments for shares and shares held pursuant to an
underwriting for 90 days following the payment date for such shares,
must conform to the permissible limits for investments in an
organization under paragraph (b) of this section. /12/
(iv) Underwriting commitments for shares and shares held by an
affiliate authorized to underwrite equity securities under section
4(c)(8) of the BHC Act shall not be included in determining compliance
with the aggregates limits in paragraph (b)(1)(iii)(A)(2) of this
section and the limits of paragraphs (d)(14)(ii)(A) and (iii) of this
section, except that shares held by such an affiliate shall be included
for purposes of determining compliance with paragraph (d)(14)(iii)(D) of
this section.
(15) Operating a travel agency provided that the travel agency is
operated in connection with financial services offered abroad by the
investor or others;
(16) Underwriting life, annuity, pension fund-related, and other
types of insurance, where the associated risks have been previously
determined by the Board to be actuarially predictable, provided however
that:
(i) Investments in, and loans and extensions of credit (other than
loans and extensions of credit fully secured in accordance with the
requirements of section 23A of the FRA (12 U.S.C. 371c) or with such
other standards as the Board may require) to, the company by the
investor or its affiliates are deducted from the capital of the
investor; /13/ and
(ii) Activities conducted directly or indirectly by a subsidiary of a
U.S. insured bank are excluded from the authority of this paragraph.
(17) Acting as a futures commission merchant for financial
instruments of the type, and on exchanges, that the Board has previously
approved, provided however that:
(i) Activities are conducted in accordance with the standards set
forth in 225.25(b)(18) of the Board's Regulation Y (12 CFR
225.25(b)(18)); and
(ii) Prior approval must be obtained for activities conducted on an
exchange that requires members to guarantee or otherwise contract to
cover losses suffered by other members.
(18) Acting as principal or agent in swap transactions /14/ subject
to any limitations applicable to state member banks under the Board's
Regulation H (12 CFR part 208), except that where such activities
involve contracts related to a commodity, such contracts must provide an
option for cash settlement and the option must be exercised upon
settlement.
(19) Engaging in activities that the Board has determined in
Regulation Y (12 CFR 225.25(b)) are closely related to banking under
section 4(c)(8) of the BHC Act; and
(20) With the Board's specific approval, engaging in other activities
that the Board determines are usual in connection with the transaction
of the business of banking or other financial operations abroad and are
consistent with the FRA or the BHC Act.
(e) Debts previously contracted. Shares or other ownership interests
acquired to prevent a loss upon a debt previously contracted in good
faith are not subject to the limitations or procedures of this section;
however, they shall be disposed of promptly but in no event later than
two years after their acquisition, unless the Board authorizes retention
for a longer period.
(f) Investments made through debt-for-equity conversions -- (1)
Permissible investments. A bank holding company may make investments
through the conversion of sovereign or private debt obligations of an
eligible country, either through direct exchange of the debt obligations
for the investment or by a payment for the debt in local currency, the
proceeds of which, including an additional cash investment not exceeding
in the aggregate more than 10 percent of the fair value of the debt
obligations being converted as part of such investment, are used to
purchase the following investments:
(i) Public sector companies. A bank holding company may acquire up
to and including 100 percent of the shares of (or other ownership
interests in) any foreign company located in an eligible country if the
shares are acquired from the government of the eligible country or from
its agencies or instrumentalities.
(ii) Private sector companies. A bank holding company may acquire up
to and including 40 percent of the shares, including voting shares, of
(or other ownership interests in) any other foreign company located in
an eligible country subject to the following conditions:
(A) A bank holding company may acquire more than 25 percent of the
voting shares of the foreign company only if another shareholder or
control group of shareholders unaffiliated with the bank holding company
holds a larger block of voting shares of the company;
(B) The bank holding company and its affiliates may not lend or
otherwise extend credit to the foreign company in amounts greater than
50 percent of the total loans and extensions of credit to the foreign
company; and
(C) The bank holding company's representation on the board of
directors or on management committees of the foreign company may be no
more than proportional to its shareholding in the foreign company.
(2) Investments by bank subsidiary of bank holding company. Upon
application, the Board may permit an indirect investment to be made
pursuant to this paragraph through an insured bank subsidiary of the
bank holding company where the bank holding company demonstrates that
such ownership is consistent with the purposes of the FRA. In granting
its consent, the Board may impose such conditions as it deems necessary
or appropriate to prevent adverse effects, including prohibiting loans
from the bank to the company in which the investment is made.
(3) Divestiture -- (i) Time limits for divestiture. The bank holding
company shall divest the shares of, or other ownership interests in, any
company acquired pursuant to this paragraph (unless the retention of the
shares or other ownership interest is otherwise permissible at the time
required for divestiture) within the longer of:
(A) Ten years from the date of acquisition of the investment except
that the Board may extend such period if, in the Board's judgment, such
an extension would not be detrimental to the public interest; or
(B) Two years from the date on which the bank holding company is
permitted to repatriate in full the investment in the foreign company;
Provided however that, in either event divestiture occurs within
fifteen years of the date of the acquisition.
(ii) Report to the Board. The bank holding company shall report to
the Board on its plans for divesting an investment made under this
paragraph two years prior to the final date for divestiture, in a manner
to be prescribed by the Board.
(iii) Other conditions requiring divestiture. All investments made
pursuant to this paragraph are subject to paragraphs (b)(4)(i)(A) and
(B) of this section requiring prompt divestiture (unless the Board upon
application authorizes retention) if the company invested in engages in
impermissible business in the United States that exceeds in the
aggregate 10 percent of the company's consolidated assets or revenues
calculated on an annual basis; provided however that, such company may
not engage in activities in the United States that consist of banking or
financial operations (as defined in 211.23(f)(5)(iii)(B) of this
chapter), or types of activities permitted by regulation or order under
section 4(c)(8) of the BHC Act, except under regulations of the Board or
with the prior approval of the Board.
(4) Investment procedures -- (i) General consent. Subject to the
other limitations of this paragraph, the Board grants its general
consent for investments made under this paragraph if the total amount
invested does not exceed the greater of $25 million or 1 percent of the
Tier 1 capital of the investor.
(ii) All other investments shall be made in accordance with the
procedures of paragraph (c) of this section requiring prior notice or
specific consent.
(5) Conditions -- (i) Name. Any company acquired pursuant to this
paragraph shall not bear a name similar to the name of the acquiring
bank holding company or any of its affiliates.
(ii) Confidentiality. Neither the bank holding company nor its
affiliates shall provide to any company acquired pursuant to this
paragraph any confidential business information or other information
concerning customers that are engaged in the same or related lines of
business as the company.
/7/ For this purpose, a direct subsidiary of a member bank is deemed
to be an investor.
/8/ When necessary, the general consent and prior notice provisions
of this section constitute the Board's approval under the eighth
paragraph of section 25(a) of the FRA for investments in excess of the
limitations therein based on capital and surplus.
/9/ In determining compliance with these limits, an investor shall
combine the value of all shares of an organization held in trading or
dealing accounts under 211.5(d)(14) of this part with investments in
the same organization. Shares held in trading or dealing accounts are
also subject to the limits in 211.5(d)(14) of this part.
/10/ The historical cost of an investment consists of the actual
amounts paid for shares or otherwise contributed to the capital
accounts, as measured in dollars at the exchange rate in effect at the
time each investment was made. It does not include subordinated debt or
unpaid commitments to invest even though these may be considered
investments for other purposes of this part. For investments acquired
indirectly as a result of acquiring a subsidiary, the historical cost to
the investor is measured as of the date of acquisition of the subsidiary
at the net asset value of the equity interest in the case of
subsidiaries and joint ventures, and in the case of portfolio
investments, at the book carrying value.
/11/ Fifty percent of such capital deductions shall be from Tier 1
capital.
/12/ Underwriting commitments are combined with shares held by an
investor and its affiliates (other than an affiliate authorized to deal
in shares under section 4(c)(8) of the BHC Act) in dealing or trading
accounts and with portfolio investments for purposes of determining
compliance with the aggregate limits in paragraph (b)(1)(iii)(A)(2) of
this section.
/13/ Fifty percent of such capital deduction shall be from Tier 1
capital.
/14/ Swap transactions involving equity instruments are separately
authorized under paragraph (d)(14) of this section.
12 CFR 211.6 Lending limits and capital requirements.
(a) Acceptances of Edge corporations -- (1) Limitations. An Edge
corporation shall be and remain fully secured for:
(i) All acceptances outstanding in excess of 200 percent of its Tier
1 capital; and
(ii) All acceptances outstanding for any one person in excess of 10
percent of its Tier 1 capital; Provided however that, these limitations
apply only to acceptances of the types described in paragraph 7 of
section 13 of the FRA (12 U.S.C. 372).
(2) Exceptions. These limitations do not apply if the excess
represents the international shipment of goods and the Edge corporation
is:
(i) Fully covered by primary obligations to reimburse it that are
guaranteed by banks or bankers; or
(ii) Covered by participation agreements from other banks, as such
agreements are described in 250.165 of this chapter.
(b) Loans and extensions of credit to one person -- (1) Limitations.
Except as the Board may otherwise specify:
(i) The total loans and extensions of credit outstanding to any
person by an Edge corporation engaged in banking and its direct or
indirect subsidiaries may not exceed 15 percent of the Edge
corporation's Tier 1 capital; /15/ and
(ii) The total loans and extensions of credit to any person by a
foreign bank or Edge corporation subsidiary of a member bank, and by
majority-owned subsidiaries of a foreign bank or Edge corporation, when
combined with the total loans and extensions of credit to the same
person by the member bank and its majority-owned subsidiaries, may not
exceed the member bank's limitation on loans and extensions of credit to
one person.
(2) Loans and extensions of credit has the meaning set forth in
211.2(p) of this part /16/ and, for purposes of this paragraph, include:
(i) Acceptances outstanding that are not of the types described in
paragraph 7 of section 13 of the FRA (12 U.S.C. 372);
(ii) Any liability of the lender to advance funds to or on behalf of
a person pursuant to a guarantee, standby letter of credit, or similar
agreements;
(iii) Investments in the securities of another organization except
where the organization is a subsidiary; and
(iv) Any underwriting commitments to an issuer of securities where no
binding commitments have been secured from subunderwriters or other
purchasers.
(3) Exceptions. The limitations of paragraph (b)(1) of this section
do not apply to:
(i) Deposits with banks and federal funds sold;
(ii) Bills or drafts drawn in good faith against actual goods and on
which two or more unrelated parties are liable;
(iii) Any bankers' acceptance of the kind described in paragraph 7 of
section 13 of the FRA that is issued and outstanding;
(iv) Obligations to the extent secured by cash collateral or by
bonds, notes, certificates of indebtedness, or Treasury bills of the
United States;
(v) Loans and extensions of credit that are covered by bona fide
participation agreements; or
(vi) Obligations to the extent supported by the full faith and credit
of the following:
(A) The United States or any of its departments, agencies,
establishments, or wholly-owned corporations (including obligations to
the extent insured against foreign political and credit risks by the
Export-Import Bank of the United States or the Foreign Credit Insurance
Association), the International Bank for Reconstruction and Development,
the International Finance Corporation, the International Development
Association, the Inter-American Development Bank, the African
Development Bank, the Asian Development Bank, or the European Bank for
Reconstruction and Development;
(B) Any organization if at least 25 percent of such an obligation or
of the total credit is also supported by the full faith and credit of,
or participated in by, any institution designated in paragraph
(b)(3)(vi)(A) of this section in such manner that default to the lender
will necessarily include default to that entity. The total loans and
extensions of credit under this paragraph (b)(3)(vi)(B) to any person
shall at no time exceed 100 percent of the Tier 1 capital of the Edge
corporation.
(c) Capitalization. An Edge corporation shall at all times be
capitalized in an amount that is adequate in relation to the scope and
character of its activities. In the case of an Edge corporation engaged
in banking, after December 31, 1992, its minimum ratio of qualifying
total capital to weighted-risk assets, as determined under the Capital
Adequacy Guidelines, shall not be less than 10 percent, of which at
least 50 percent shall consist of Tier 1 capital; provided however that
for purposes of this paragraph, no limitation shall apply as to the
inclusion of subordinated debt that qualifies as Tier 2 capital under
the Capital Adequacy Guidelines.
/15/ For purposes of this subsection, subsidiary includes
subsidiaries controlled by the Edge corporation but does not include
companies otherwise controlled by affiliates of the Edge corporation.
/16/ In the case of a foreign government, these include loans and
extensions of credit to the foreign government's departments or agencies
deriving their current funds principally from general tax revenues. In
the case of a partnership or firm, these include loans and extensions of
credit to its members and, in the case of a corporation, these include
loans and extensions of credit to the corporation's affiliates where the
affiliate incurs the liability for the benefit of the corporation.
12 CFR 211.7 Supervision and reporting.
(a) Supervision -- (1) Foreign branches and subsidiaries.
Organizations conducting international banking operations under this
subpart shall supervise and administer their foreign branches and
subsidiaries in such a manner as to ensure that their operations conform
to high standards of banking and financial prudence. Effective systems
of records, controls, and reports shall be maintained to keep management
informed of their activities and condition. Such systems shall provide,
in particular, information on risk assets, liquidity management,
operations, internal controls, and conformance to management policies.
Reports on risk assets shall be sufficient to permit an appraisal of
credit quality and assessment of exposure to loss, and for this purpose
provide full information on the condition of material borrowers.
Reports on the operations and controls shall include internal and
external audits of the branch or subsidiary.
(2) Joint ventures. Investors shall maintain sufficient information
with respect to joint ventures to keep informed of their activities and
condition. Such information shall include audits and other reports on
financial performance, risk exposure, management policies, operations,
and controls. Complete information shall be maintained on all
transactions with the joint venture by the investor and its affiliates.
(3) Availability of reports to examiners. The reports and
information specified in paragraphs (a)(1) and (2) of this section shall
be made available to examiners of the appropriate bank supervisory
agencies.
(b) Examinations. Examiners appointed by the Board shall examine
each Edge corporation once a year. An Edge corporation shall make
available to examiners sufficient information to assess its condition
and operations and the condition and activities of any organization
whose shares it holds.
(c) Reports -- (1) Reports of condition. Each Edge corporation shall
make reports of condition to the Board at such times and in such form as
the Board may prescribe. The Board may require that statements of
condition or other reports be published or made available for public
inspection.
(2) Foreign operations. Edge and Agreement corporations, member
banks, and bank holding companies shall file such reports on their
foreign operations as the Board may require.
(3) Acquisition or disposition of shares. A member bank, Edge or
Agreement corporation or a bank holding company shall report, in a
manner prescribed by the Board, any acquisition or disposition of
shares.
(d) Filing and processing procedures. (1) Unless otherwise directed
by the Board, applications, notifications, and reports required by this
part shall be filed with the Reserve Bank of the district in which the
parent bank or bank holding company is located or, if none, the Reserve
Bank of the district in which the applying or reporting institution is
located. Instructions and forms for such applications, notifications
and reports are available from the Reserve Banks.
(2) The Board shall act on an application or notification under this
subpart within 60 calendar days after the Reserve Bank has accepted the
application or notification unless the Board notifies the investor that
the 60-day period is being extended and states the reasons for the
extension.
12 CFR 211.7 Subpart B -- Foreign Banking Organizations
12 CFR 211.21 Authority, purpose, and scope.
(a) Authority. This subpart is issued by the Board of Governors of
the Federal Reserve System (''Board'') under the authority of the Bank
Holding Company Act of 1956 (12 U.S.C. 1841 et seq.) (''BHC Act''); and
the International Banking Act of 1978 (12 U.S.C. 3101 et seq.)
(''IBA'').
(b) Purpose and scope. This subpart is in furtherance of the
purposes of the BHC Act and the IBA. It applies to foreign banks and
foreign banking organizations with respect to:
(1) The limitations on interstate banking under section 5 of the IBA
(12 U.S.C. 3103); and
(2) The exemptions from the nonbanking prohibitions of the BHC Act
and the IBA afforded by sections 2(h) and 4(c)(9) of the BHC Act (12
U.S.C. 1841(h) and 1843(c)(9)).
(56 FR 19574, Apr. 29, 1991)
12 CFR 211.22 Interstate banking operations of foreign banking
organizations.
(a) Definitions. The definitions of 211.2 in subpart A apply to
this section subject to the following:
(1) Agency means any office or any place of business of a foreign
bank located in any State of the United States or the District of
Columbia at which credit balances are maintained, checks are paid, or
money is lent, but at which deposits may not be accepted from a citizen
or resident of the United States. Obligations shall not be considered
credit balances unless they:
(i) Are incidental to, or arise out of the exercise of other lawful
banking powers;
(ii) Are to serve a specific purpose;
(iii) Are not solicited from the general public;
(iv) Are not used to pay routine operating expenses in the United
States such as salaries, rent, or taxes;
(v) Are withdrawn within a reasonable period of time after the
specific purpose for which they were placed has been accomplished; and
(vi) Are drawn upon in a manner reasonable in relation to the size
and nature of the account.
(2) Banking subsidiary, with respect to a specified foreign bank,
means a bank that is a subsidiary as the terms bank and subsidiary are
defined in section 2 of the BHC Act (12 U.S.C. 1841).
(3) Commercial lending company means any organization, other than a
bank or an organization operating under section 25 of the FRA, organized
under the laws of any State of the United States or the Districit of
Columbia, that maintains credit balances as may be maintained by an
agency and engages in the business of making commercial loans.
(4) Domestic branch means any office or any place of business of a
foreign bank located in any State of the United States or the District
of Columbia that may accept domestic deposits and deposits that are
incidental to or for the purpose of carrying out transactions in foreign
countries.
(5) Foreign bank, for purposes of this section, is an organization
that is organized under the laws of a foreign country and that engages
in the business of banking.
(b) Determination of home State. (1) A foreign bank selecting its
home State shall do so by filing with the Board a declaration of home
State within 180 days of the effective date of this subpart. In the
absence of such selection, the Board shall designate a foreign bank's
home State. Within one year after the home State of a foreign bank has
been determined, unless the Board authorizes a longer period:
(i) The foreign bank shall close domestic branches whose activities
are not permissible under section 5(b) of the IBA, convert such domestic
branches to agencies, or enter into an agreement with the Board
regarding the deposits of such branches as prescribed in section 5(a) of
the IBA; and
(ii) The foreign bank shall divest voting shares of interests in, or
assets of banks that are not permissible under section 5(b) of the IBA.
(2) A foreign bank that currently does not operate a domestic branch
or banking subsidiary shall not be required to select a home State and
shall not have its home State designated by the Board.
(3) A foreign bank (except a foreign bank to which paragraph (b)(5)
of this section applies) that has any combination of domestic branches,
banking subsidiaries, agencies, or commercial lending company
subsidiaries that, before July 27, 1978, were established or applies for
in more than one State may select its home State only from those States
in which the foreign bank has continuously operated such offices.
(4) A foreign bank that established or applied for one domestic
branch or one banking subsidiary before July 27, 1978, and that was not
otherwise engaged in banking in the United States on that date, shall
have as its home State the State in which such domestic branch or
banking subsidiary is located.
(5) A foreign bank that before July 27, 1978, had no domestic
branches or banking subsidiaries or had only agencies or commercial
lending companies, and, after that date, has established or establishes
any domestic branch or banking subsidiary shall have as its home State
that State in which its initial domestic branch or banking subsidiary is
located.
(c) Change of home State. A foreign bank may change its home State
once if:
(1) 30 days' prior notification of the proposed change is filed with
the Board; and
(2) Domestic branches established and investments in banks acquired
in reliance on its original home State selection are conformed to those
that would have been permissible had the new home State been selected as
its home State originally.
(d) Bank mergers. (1) A foreign bank with one or more banking
subsidiaries that selects as its home State a State other than that in
which a banking subsidiary is located, and that proposes to acquire
through its subsidiary bank all or substantially all of the assets of a
bank larger than its subsidiary bank (in terms of deposits) located
outside the foreign bank's home State shall give 60 days' notification
to the Board prior to consummation of the proposed transaction.
(2) If, after receiving the notification, the Board makes a
preliminary determination within that period that the proposed
acquisition would be inconsistent with the foreign bank's home State
selection, the foreign bank shall:
(i) Redesignate as its home State the State in which its subsidiary
bank is located; or
(ii) Show cause why in the facts and circumstances of its case its
home State should not be redesignated (the foreign bank's submission may
include a request for a hearing).
(3) On the basis of information available, the Board shall:
(i) Direct the foreign bank redesignate as its home State the State
in which its subsidiary bank is located; or
(ii) Take no action with respect to the foreign bank's home State.
(4) Factors to be considered by the Board in making its preliminary
and final determinations include the size of the proposed acquisition
relative to the foreign bank's other operations in the United States and
the ability of the foreign bank to change its home State.
(e) Attribution of home State. (1) A foreign bank or organization
and the other foreign banks or organizations over which it exercises
actual control shall be regarded as one foreign bank and shall be
entitled to one home State.
(2) Actual control shall be conclusively presumed to exist in the
case of a bank or organization that owns or controls a majority of the
voting shares of another bank or organization.
(3) Where it appears to the Board that a foreign bank or organization
exercises actual control over the management or policies of another
foreign bank or organization, the Board may inform the parties that a
preliminary determination of control has been made on the basis of the
facts summarized in the communication. In the event of a preliminary
determination of control by the Board, the parties shall within 30 days
(or such longer period as may be permitted by the Board):
(i) Indicate to the Board a willingness to terminate the control
relationship; or
(ii) Set forth such facts and circumstances as may support the
contention that actual control does not exist (and may request a hearing
to contest the Board's preliminary determination); or
(iii) Accede to the Board's preliminary determination, in which event
the parties shall be regarded as one foreign bank and shall be entitled
to one home State.
(45 FR 67058, Oct. 9, 1980, as amended at 56 FR 19574, Apr. 29, 1991)
12 CFR 211.23 Nonbanking activities of foreign banking organizations.
(a) Definitions. The definitions of 211.2 in Subpart A apply to
this section subject to the following:
(1) Directly or indirectly when used in reference to activities or
investments of a foreign banking organization means activities or
investments of the foreign banking organization or of any subsidiary of
the foreign banking organization.
(2) Foreign banking organization means a foreign bank (as defined in
section 1 (b)(7) of the IBA) that operates a branch, agency, or
commercial lending company subsdiary in the United States or that
controls a bank in the United States; and a company of which such
foreign bank is a subsidiary.
(3) Subsidiary means any organization 25 percent or more of whose
voting shares is directly or indirectly owned, controlled or held with
power to vote by a foreign banking organization, or which is otherwise
controlled or capable of being controlled by a foreign banking
organization.
(b) Qualifying foreign banking organizations. Unless specifically
made eligible for the exemptions by the Board, a foreign banking
organization shall qualify for the exemptions afforded by this section
only if, disregarding its United States banking, more than half of its
worldwide business is banking; and more than half of its banking
business is outside the United States. 1In order to qualify, a foreign
banking organization shall:
(1) Meet at least two of the following requirements:
(i) Banking assets held outside the United States exceed total
worldwide nonbanking assets;
(ii) Revenues derived from business of banking outside the United
States exceed total revenues derived from its worldwide nonbanking
business; or
(iii) Net income derived from the business of banking outside the
United States exceeds total net income derived from its worldwide
nonbanking businesses; and
(2) Meet at least two of the following requirements:
(i) Banking assets held outside the United States exceed banking
assets held in the United States;
(ii) Revenues derived from the business of banking outside the United
States exceed revenues derived from the business of banking in the
United States; or
(iii) Net income derived from the business of banking outside the
United States exceeds net income derived from the business of banking in
the United States.
(c) Determining assets, revenues, and net income. (1) For purposes
of paragraph (b) of this section, the total assets, revenues, and net
income of an organization may be determined on a consolidated or
combined basis. Assets, revenues and net income of companies in which
the foreign banking organization owns 50 per cent or more of the voting
shares shall be included when determining total assets, revenues, and
net income. The foreign banking organization may include assets,
revenues, and net income of companies in which it owns 25 per cent or
more of the voting shares if all such companies within the organization
are included;
(2) Assets devoted to, or revenues or net income derived from,
activities listed in 211.5(d) shall be considered banking assets, or
revenues or net income derived from the banking business, when conducted
within the foreign banking organization by a foreign bank or its
subsidiaries.
(d) Loss of eligibility for exemptions. (1) A foreign banking
organization that qualified under paragraph (b) of this section shall
cease to be eligible for the exemptions of this section if it fails to
meet the requirements of paragraph (b) of this section for two
consecutive years as reflected in its Annual Reports (F.R. Y-7) filed
with the Board.
(2) A foreign banking organization that ceases to be eligible for the
exemptions of this section may continue to engage in activities or
retain investments commenced or acquired prior to the end of the first
fiscal year for which its Annual Report reflects nonconformance with
paragraph (b) of this section. Activities commenced or investments made
after that date shall be terminated or divested within three months of
the filing of the second Annual Report unless the Board grants consent
to continue the activity or retain the investment under paragraph (e) of
this section.
(3) A foreign banking organization that ceases to qualify under
paragraph (b) of this section, or an affiliate of such foreign banking
organization, that requests a specific determination of eligibility
under paragraph (e) of this section may, prior to the Board's
determination on eligibility, continue to engage in activities and make
investments under the provisions of paragraphs (f)(1), (2) and (4) of
this section.
(e) Specific determination of eligibility for nonqualifying foreign
banking organizations. (1) A foreign banking organization that does not
qualify under paragraph (b) of this section for the exemptions afforded
by this section, or that has lost its eligibility for the exemptions
under paragraph (d) of this section, may apply to the Board for a
specific determination of eligibility for the exemptions.
(2) A foreign banking organization may apply for a specific
determination prior to the time it ceases to be eligible for the
exemptions afforded by this section.
(3) In determining whether eligibility for the exemptions would be
consistent with the purposes of the BHC Act and in the public interest,
the Board shall consider:
(i) The history and the financial and managerial resources of the
organization;
(ii) The amount of its business in the United States;
(iii) The amount, type, and location of its nonbanking activities,
including whether such activities may be conducted by U.S. banks or bank
holding companies; and
(iv) Whether eligibility of the foreign banking organization would
result in undue concentration of resources, decreased or unfair
competition, conflicts of interests, or unsound banking practices.
(4) Such determination shall be subject to any conditions and
limitations imposed by the Board, including any requirements to cease
activities or dispose of investments.
(5) Determinations of eligibility would generally not be granted
where a majority of the business of the foreign banking organization
derives from commercial or industrial activities or where the U.S.
banking business of the organization is larger than the non-U.S.
banking business conducted directly by the foreign bank or banks (as
defined in 211.2(j) of this part) of the organization.
(f) Permissible activities and investments. A foreign banking
organization that qualifies under paragraph (b) of this section may:
(1) Engage in activities of any kind outside the United States;
(2) Engage directly in activities in the United States that are
incidential to its activities outside the United States;
(3) Own or control voting shares of any company that is not engaged,
directly or indirectly, in any activities in the United States other
than those that are incidental to the international or foreign business
of such company;
(4) Own or control voting shares of any company in a fiduciary
capacity under circumstances that would entitle such shareholding to an
exemption under section 4(c)(4) of the BHC Act if the shares were held
or acquired by a bank.
(5) Own or control voting shares of a foreign company that is engaged
directly or indirectly in business in the United States other than that
which is incidental to its international or foreign business, subject to
the following limitations:
(i) More than 50 percent of the foreign company's consolidated assets
shall be located, and consolidated revenues derived from, outside the
United States; provided however that, if the foreign company fails to
meet the requirements of this paragraph for two consecutive years (as
reflected in Annual Reports (F.R. Y-7)) filed with the Board by the
foreign banking organization, the foreign company shall be divested or
its activities terminated within one year of the filing of the second
consecutive Annual Report that reflects nonconformance with the
requirements of this paragraph, unless the Board grants consent to
retain the investment under paragraph (g) of this section;
(ii) The foreign company shall not directly underwrite, sell, or
distribute, nor own or control more than 5 percent of the voting shares
of a company that underwrites, sells, or distributes securities in the
United States except to the extent permitted bank holding companies;
(iii) If the foreign company is a subsidiary of the foreign banking
organization, the foreign company must be, or must control, an operating
company, and its direct or indirect activities in the United States
shall be subject to the following limitations:
(A) The foreign company's activities in the United States shall be
the same kind of activities or related to the activities engaged in
directly or indirectly by the foreign company abroad as measured by the
establishment categories of the Standard Industrial Classification (SIC)
(an activity in the United States shall be considered related to an
activity outside the United States if it consists of supply,
distribution, or sales in furtherance of the activity);
(B) The foreign company may engage in activities in the United States
that consist of banking, securities, insurance or other financial
operations, or types of activities permitted by regulation or order
under section 4(c)(8) of the BHC Act, only under regulations of the
Board or with the prior approval of the Board.
(1) Activities within Division H (Finance, Insurance, and Real
Estate) of the SIC shall be considered banking or financial operations
for this purpose, with the exception of acting as operators of
nonresidential buildings (SIC 6512), operators of apartment buildings
(SIC 6513), operators of dwellings other than apartment buildings (SIC
6514), and operators of residential mobile home sites (SIC 6515); and
operating title abstract offices (SIC 6541); and
(2) The following activities shall be considered financial activities
and may be engaged in only with the approval of the Board under
subsection (g): Credit reporting services (SIC 7323); computer and
data processing services (SIC 7371, 7372, 7373, 7374, 7375, 7376, 7377,
7378, and 7379); armored car services (SIC 7381); management
consulting (SIC 8732, 8741, 8742, and 8748); certain rental and leasing
activities (SIC 4741, 7352, 7353, 7359, 7513, 7514, 7515, and 7519);
accounting, auditing and bookkeeping services (SIC 8721); courier
services (SIC 4215 and 4513); and arrangement of passenger
transportation (SIC 4724, 4725, and 4729).
(g) Exemptions under section 4(c)(9) of the BHC Act. A foreign
banking organization that is of the opinion that other activities or
investments may, in particular circumstances, meet the conditions for an
exemption under section 4(c)(9) of the BHC Act may apply to the Board
for such a determination by submitting to the Reserve Bank of the
District in which its banking operations in the United States are
principally conducted a letter setting forth the basis for that opinion.
(h) Reports. (1) The foreign banking organization shall inform the
Board through the organization's Reserve Bank within 30 days after the
close of each quarter of all shares of companies engaged, directly or
indirectly, in activities in the United States that were acquired during
such quarter under the authority of this section.
(2) The foreign banking organization shall also report any direct
activities in the United States commenced during such quarter by a
foreign subsidiary of the foreign banking organization. This
information shall (unless previously furnished) include a brief
description of the nature and scope of each company's business in the
United States, including the 4-digit SIC numbers of the activities in
which the company engages. Such information shall also include the
4-digit SIC numbers of the direct parent of any U.S. company acquired,
together with a statement of total assets and revenues of the direct
parent.
(i) Availability of information. If any information required under
this section is unknown and not reasonably available to the foreign
banking organization, either because obtaining it would involve
unreasonable effort or expense or because it rests peculiarly within the
knowledge of a company that is not controlled by the organization, the
organization shall:
(1) Give such information on the subject as it possesses or can
reasonably acquire together with the sources thereof; and
(2) Include a statement either showing that unreasonable effort or
expense would be involved or indicating that the company whose shares
were acquired is not controlled by the organization and stating the
result of a request for information.
(12 U.S.C. 3101 et seq.; 12 U.S.C. 1841 et seq.; sec. 25(a) of the
Federal Reserve Act (12 U.S.C. 611 et seq.)
(45 FR 81540, Dec. 11, 1980, as amended at 47 FR 51095, Nov. 12,
1982; 50 FR 39986, Oct. 1, 1985; 56 FR 19574, Apr. 29, 1991)
1None of the assets, revenues, or net income, whether held or derived
directly or indirectly, of a subsidiary bank, branch, agency, commercial
lending company, or other company engaged in the business of banking in
the United States (including any territory of the United States, Puerto
Rico, Guam, American Samoa, or the Virgin Islands) shall be considered
held or derived from the business of banking outside the United States.
12 CFR 211.23 Subpart C -- Export Trading Companies
Source: 56 FR 19575, Apr. 29, 1991, unless otherwise noted.
12 CFR 211.31 Authority, purpose, and scope.
(a) Authority. This subpart is issued by the Board of Governors of
the Federal Reserve System (''Board'') under the authority of the Bank
Holding Company Act of 1956, as amended (12 U.S.C. 1841 et seq. ) (''BHC
Act''), the Bank Export Services Act (Title II, Pub. L. 97-290, 96 Stat.
1235 (1982)) (''BESA''), and the Export Trading Company Act Amendments
of 1988 (Title III, Pub. L. 100-418, 102 Stat. 1384 (1988)) (''ETC Act
Amendments'').
(b) Purpose and scope. This subpart is in furtherance of the
purposes of the BHC Act, the BESA, and the ETC Act Amendments, the
latter two statutes being designed to increase U.S. exports by
encouraging investments and participation in export trading companies by
bank holding companies and the specified investors. The provisions of
this subpart apply to the following (hereinafter referred to as
''eligible investors''):
(1) Bank holding companies as defined in section 2 of the BHC Act (12
U.S.C. 1841(a));
(2) Edge and Agreement corporations, as described in 211.1(c) of
this part, that are subsidiaries of bank holding companies but are not
subsidiaries of banks;
(3) Bankers' banks as described in section 4(c)(14)(F)(iii) of the
BHC Act (12 U.S.C. 1843(c)(14)(F)(iii)); and
(4) Foreign banking organizations as defined in 211.23(a)(2) of this
part.
12 CFR 211.32 Definitions.
The definitions of 211.2 in subpart A apply to this subpart subject
to the following:
(a) Export trading company means a company that is exclusively
engaged in activities related to international trade and, by engaging in
one or more export trade services, derives:
(1) At least one-third of its revenues in each consecutive four-year
period from the export of, or from facilitating the export of, goods and
services produced in the United States by persons other than the export
trading company or its subsidiaries; and
(2) More revenues in each four-year period from export activities as
described in paragraph (a)(1) of this section than it derives from the
import, or facilitating the import, into the United States of goods or
services produced outside the United States.
For purposes of this section, revenues shall include net sales
revenues from exporting, importing, or third party trade in goods by the
export trading company for its own account, and gross revenues derived
from all other activities of the export trading company.
(b) The terms bank, company and subsidiary have the same meanings as
those contained in section 2 of the BHC Act (12 U.S.C. 1841).
12 CFR 211.33 Investments and extensions of credit.
(a) Amount of investments. In accordance with the procedures of
211.34 of this subpart, an eligible investor may invest no more than 5
percent of its consolidated capital and surplus in one or more export
trading companies, except that an Edge or Agreement corporation not
engaged in banking may invest as much as 25 percent of its consolidated
capital and surplus but no more than 5 percent of the consolidated
capital and surplus of its parent bank holding company.
(b) Extensions of credit -- (1) Amount. An eligible investor in an
export trading company or companies may extend credit directly or
indirectly to the export trading company or companies in a total amount
that at no time exceeds 10 percent of the investor's consolidated
capital and surplus.
(2) Terms -- (i) An eligible investor in an export trading company
may not extend credit directly or indirectly to the export trading
company or any of its customers or to any other investor holding 10
percent or more of the shares of the export trading company on terms
more favorable than those afforded similar borrowers in similar
circumstances, and such extensions of credit shall not involve more than
the normal risk of repayment or present other unfavorable features.
(ii) For the purposes of this provision, an investor in an export
trading company includes any affiliate of the investor.
(3) Collateral requirements. Covered transactions between a bank and
an affiliated export trading company in which a bank holding company has
invested pursuant to this subpart are subject to the collateral
requirements of section 23A of the Federal Reserve Act (12 U.S.C. 371c),
except where a bank issues a letter of credit or advances funds to an
affiliated export trading company solely to finance the purchase of
goods for which:
(i) The export trading company has a bona fide contract for the
subsequent sale of the goods; and
(ii) The bank has a security interest in the goods or in the proceeds
from their sale at least equal in value to the letter of credit or the
advance.
12 CFR 211.34 Procedures for filing and processing notices.
(a) Filing notice -- (1) Prior notice of investment. An eligible
investor shall give the Board 60 days' prior written notice of any
investment in an export trading company.
(2) Subsequent notice -- (i) An eligible investor shall give the
Board 60 days' prior written notice of changes in the activities of an
export trading company that is a subsidiary of the investor if the
export trading company expands its activities beyond those described in
the initial notice to include:
(A) Taking title to goods where the export trading company does not
have a firm order for the sale of those goods;
(B) Product research and design;
(C) Product modification; or
(D) Activities not specifically covered by the list of activities
contained in section 4(c)(14)(F)(ii) of the BHC Act.
(ii) Such an expansion of activities shall be regarded as a proposed
investment under this subpart.
(b) Time period for Board action. (1) A proposed investment that has
not been disapproved by the Board may be made 60 days after the Reserve
Bank accepts the notice for processing. A proposed investment may be
made before the expiration of the 60-day period if the Board notifies
the investor in writing of its intention not to disapprove the
investment.
(2) The Board may extend the 60-day period for an additional 30 days
if the Board determines that the investor has not furnished all
necessary information or that any material information furnished is
substantially inaccurate. The Board may disapprove an investment if the
necessary information is provided within a time insufficient to allow
the Board reasonably to consider the information received.
(3) Within three days of a decision to disapprove an investment, the
Board shall notify the investor in writing and state the reasons for the
disapproval.
(c) Time period for investment. An investment in an export trading
company that has not been disapproved shall be made within one year from
the date of the notice not to disapprove, unless the time period is
extended by the Board or by the appropriate Reserve Bank.
(d) Time period for calculating revenues. For any export trading
company that commenced operations two years or more prior to August 23,
1988, the four-year period within which to calculate revenues derived
from its activities under 211.32(a) of this part shall be deemed to
have commenced with the beginning of the 1988 fiscal year for that
export trading company. For all other export trading companies, the
four-year period shall commence with the first fiscal year after the
respective export trading company has been in operation for two years.
12 CFR 211.34 Subpart D -- International Lending Supervision
Source: 49 FR 5592, Feb. 13, 1984, unless otherwise noted.
12 CFR 211.41 Authority, purpose, and scope.
(a) Authority. This subpart is issued by the Board of Governors of
the Federal Reserve System (''Board'') under the authority of the
International Lending Supervision Act of 1983 (Pub. L. 98-181, title IX,
97 Stat. 1153) (''International Lending Supervision Act''); the Federal
Reserve Act (12 U.S.C. 221 et seq.) (''FRA''), and the Bank Holding
Company Act of 1956, as amended (12 U.S.C. 1841 et seq.) (''BHC Act'').
(b) Purpose and scope. This subpart is issued in furtherance of the
purposes of the International Lending Supervision Act. It applies to
State banks that are members of the Federal Reserve System (''State
member banks''); corporations organized under section 25(a) of the FRA
(12 U.S.C. 611 through 631) (''Edge Corporations''); corporations
operating subject to an agreement with the Board under section 25 of the
FRA (12 U.S.C. 601 through 604a) (''Agreement Corporations''); and bank
holding companies (as defined in section 2 of the BHC Act (12 U.S.C.
1841(a)) but not including a bank holding company that is a foreign
banking organization as defined in 211.23(a)(2) of this regulation.
12 CFR 211.42 Definitions.
For the purposes of this subpart:
(a) Banking institution means a State member bank; bank holding
company; Edge Corporation and Agreement Corporation engaged in banking.
Banking institution does not include a foreign banking organization as
defined in 211.23(a)(2).
(b) Federal banking agencies means the Board of Governors of the
Federal Reserve System, the Comptroller of the Currency, and the Federal
Deposit Insurance Corporation.
(c) International assets means those assets required to be included
in banking institutions' Country Exposure Report forms (FFIEC No. 009).
(d) International loan means a loan as defined in the instructions to
the Report of Condition and Income for the respective banking
institution (FFIEC Nos. 031, 032, 033 and 034) and made to a foreign
government, or to an individual, a corporation, or other entity not a
citizen of, resident in, or organized or incorporated in the United
States.
(e) International syndicated loan means a loan characterized by the
formation of a group of managing banking institutions and, in the usual
case, assumption by them of underwriting commitments and participation
in the loan by other banking institutions.
(f) Loan agreement means the documents signed by all of the parties
to a loan, containing the amount, terms and conditions of the loan, and
the interest and fees to be paid by the borrower.
(g) Restructed international loan means a loan that meets the
following criteria:
(1) The borrower is unable to service the existing loan according to
its terms and is a resident of a foreign country in which there is a
generalized inability of public and private sector obligors to meet
their external debt obligations on a timely basis because of a lack of,
or restraints on the availability of, needed foreign exchange in the
country; and
(2) The terms of the existing loan are amended to reduce stated
interest or extend the schedule of payments; or
(3) A new loan is made to, or for the benefit or, the borrower,
enabling the borrower to service or refinance the existing debt.
(h) Transfer risk means the possibility that an asset cannot be
serviced in the currency of payment because of a lack of, or restraints
on the availability of, needed foreign exchange in the country of the
obligor.
(49 FR 5592, Feb. 13, 1984, as amended at 49 FR 12197, Mar. 29, 1984)
12 CFR 211.43 Allocated transfer risk reserve.
(a) Establishment of Allocated Transfer Risk Reserve. A banking
institution shall establish an allocated transfer risk reserve (ATRR)
for specified international assets when required by the Board in
accordance with this section.
(b) Procedures and standards -- (1) Joint agency determination. At
least annually, the Federal banking agencies shall determine jointly,
based on the standards set forth in paragraph (b)(2) of this section,
the following:
(i) Which international assets subject to transfer risk warrant
establishment of an ATRR;
(ii) The amount of the ATRR for the specified assets; and
(iii) Whether an ATRR established for specified assets may be
reduced.
(2) Standards for requiring ATRR -- (i) Evaluation of assets. The
Federal banking agencies shall apply the following criteria in
determining whether an ATRR is required for particular international
assets:
(A) Whether the quality of a banking institution's assets has been
impaired by a protracted inability of public or private obligors in a
foreign country to make payments on their external indebtedness as
indicated by such factors, among others, as whether:
(1) Such obligors have failed to make full interest payments on
external indebtedness;
(2) Such obligors have failed to comply with the terms of any
restructured indebtedness; or
(3) A foreign country has failed to comply with any International
Monetary Fund or other suitable adjustment program; or
(B) Whether no definite prospects exist for the orderly restoration
of debt service.
(ii) Determination of amount of ATRR. (A) In determining the amount
of the ATRR, the Federal banking agencies shall consider:
(1) The length of time the quality of the asset has been impaired;
(2) Recent actions taken to restore debt service capability;
(3) Prospects for restored asset quality; and
(4) Such other factors as the Federal banking agencies may consider
relevant to the quality of the asset.
(B) The initial year's provision for the ATRR shall be ten percent of
the principal amount of each specified international asset, or such
greater or lesser percentage determined by the Federal banking agencies.
Additional provision, if any, for the ATRR in subsequent years shall be
fifteen percent of the principal amount of each specified international
asset, or such greater or lesser percentage determined by the Federal
banking agencies.
(3) Board notification. Based on the joint agency determinations
under paragraph (b)(1) of this section, the Board shall notify each
banking institution holding assets subject to an ATRR:
(i) Of the amount of the ATRR to be established by the institution
for specified international assets; and
(ii) That an ATRR established for specified assets may be reduced.
(c) Accounting treatment of ATRR -- (1) Charge to current income. A
banking institution shall establish an ATRR by a charge to current
income and the amounts so charged shall not be included in the banking
institution's capital or surplus.
(2) Separate accounting. A banking institution shall account for an
ATRR separately from the Allowance for Possible Loan Losses, and shall
deduct the ATRR from ''gross loans and leases'' to arrive at ''net loans
and leases.'' The ATRR must be established for each asset subject to the
ATRR in the percentage amount specified.
(3) Consolidation. A banking institution shall establish an ATRR, as
required, on a consolidated basis. For banks, consolidation should be
in accordance with the procedures and tests of significance set forth in
the instructions for preparation of Consolidated Reports of Condition
and Income (FFIEC Nos. 031, 032, 033 and 034). For bank holding
companies, the consolidation shall be in accordance with the principles
set forth in the ''Instructions to the Bank Holding Company Financial
Supplement to Report F.R. Y-6'' (Form F.R. Y-9). Edge and Agreement
corporations engaged in banking shall report in accordance with
instructions for preparation of the Report of Condition for Edge and
Agreement Corporations (Form F.R. 2886b).
(4) Alternative accounting treatment. A banking institution need not
establish an ATRR if it writes down in the period in which the ATRR is
required, or has written down in prior periods, the value of the
specified international assets in the requisite amount for each such
asset. For purposes of this paragraph, international assets may be
written down by a charge to the Allowance for Possible Loan Losses or a
reduction in the principal amount of the asset by application of
interest payments or other collections on the asset. However, the
Allowance for Possible Loan Losses must be replenished in such amount
necessary to restore it to a level which adequately provides for the
estimated losses inherent in the banking institutions's loan portfolio.
(5) Reduction of ATRR. A banking institution may reduce an ATRR when
notified by the Board or, at any time, by writing down such amount of
the international asset for which the ATRR was established.
12 CFR 211.44 Reporting and disclosure of international assets.
(a) Requirements. (1) Pursuant to section 907(a) of the
International Lending Supervision Act of 1983 (Title IX, Pub. L.
98-181, 97 Stat. 1153) (ILSA), a banking institution shall submit to the
Board, at least quarterly, information regarding the amounts and
composition of its holdings of international assets.
(2) Pursuant to section 907(b) of ILSA, a banking institution shall
submit to the Board information regarding concentrations in its holdings
of international assets that are material in relation to total assets
and to capital of the institution, such information to be made publicly
available by the Board on request.
(b) Procedures. The format, content and reporting and filing dates
of the reports required under paragraph (a) of this section shall be
determined jointly by the Federal banking agencies. The requirements to
be prescribed by the agencies may include changes to existing reporting
forms (such as the Country exposure Report, form FFIEC No. 009) or such
other requirements as the agencies deem appropriate. The agencies also
may determine to exempt from the requirements of paragraph (a) of this
section banking institutions that, in the agencies' judgment, have de
minimis holdings of international assets.
(c) Reservation of authority. Nothing contained in this rule shall
preclude the Board from requiring from a banking institution such
additional or more frequent information on the institution's holding of
international assets as the Board may consider necessary.
(49 FR 5587, Feb. 13, 1984)
12 CFR 211.45 Accounting for fees on international loans.
(a) Restrictions on fees for restructured international loans. No
banking institution shall charge any fee in connection with a
restructured international loan unless all fees exceeding the banking
institution's administrative costs, as described in paragraph (c)(2) of
this section, are deferred and recognized over the term of the loan as
an interest yield adjustment.
(b) Amortizing fees. Except as otherwise provided by this section,
fees received on international loans shall be deferred and amortized
over the term of the loan. The interest method should be used during
the loan period to recognize the deferred fee revenue in relation to the
outstanding loan balance. If it is not practicable to apply the
interest method during the loan period, the straight-line method shall
be used.
(c) Accounting treatment of international loan or syndication
administrative costs and corresponding fees. (1) Administrative costs
of originating, restructuring or syndicating an international loan shall
be expensed as incurred. A portion of the fee income equal to the
banking institution's administrative costs may be recognized as income
in the same period such costs are expensed.
(2) The administrative costs of originating, restructuring, or
syndicating an international loan include those costs which are
specifically identified with negotiating, processing and consummating
the loan. These costs include, but are not necessarily limited to:
legal fees; costs of preparing and processing loan documents; and an
allocable portion of salaries and related benefits of employees engaged
in the international lending function and, where applicable, the
syndication function. No portion of supervisory and administrative
expenses or other indirect expenses such as occupancy and other similar
overhead costs shall be included.
(d) Fees received by managing banking institutions in an
international syndicated loan. Fees received on international
syndicated loans representing an adjustment of the yield on the loan
shall be recognized over the loan period using the interest method. If
the interest yield portion of a fee received on an international
syndicated loan by a managing banking institution is unstated or differs
materially from the pro rata portion of fees paid other participants in
the syndication, an amount necessary for an interest yield adjustment
shall be recognized. This amount shall at least be equivalent (on a pro
rata basis) to the largest fee received by a loan participant in the
syndication that is not a managing banking institution. The remaining
portion of the syndication fee may be recognized as income at the loan
closing date to the extent that it is identified and documented as
compensation for services in arranging the loan. Such documentation
shall include the loan agreement. Otherwise, the fee shall be deemed an
adjustment of yield.
(e) Loan commitment fees. (1) Fees which are based upon the unfunded
portion of a credit for the period until it is drawn and represent
compensation for a binding commitment to provide funds or for rendering
a service in issuing the commitment shall be recognized as income over
the term of the commitment period using the straight-line method of
amortization. Such fees for revolving credit arrangements, where the
fees are received periodically in arrears and are based on the amount of
the unused loan commitment, may be recognized as income when received
provided the income result would not be materially different.
(2) If it is not practicable to separate the commitment portion from
other components of the fee, the entire fee shall be amortized over the
term of the combined commitment and expected loan period. The
straight-line method of amortization should be used during the
commitment period to recognize the fee revenue. The interest method
should be used during the loan period to recognize the remaining fee
revenue in relation to the outstanding loan balance. If the loan is
funded before the end of the commitment period, any unamortized
commitment fees shall be recognized as revenue at that time.
(f) Agency fees. Fees paid to an agent banking institution for
administrative services in an international syndicated loan shall be
recognized at the time of the loan closing or as the service is
performed, if later.
(49 FR 12197, Mar. 29, 1984)
12 CFR 211.45 Interpretations
12 CFR 211.601 Status of certain offices for purposes of the
International Banking Act restrictions on interstate banking operations.
The Board has considered the question of whether a foreign bank's
California office that may accept deposits from certain foreign sources
(e.g., a United States citizen residing abroad) is a branch or an agency
for the purposes of the grandfather provisions of section 5 of the
International Banking Act of 1978 (12 U.S.C. 3103(b)). The question has
arisen as a result of the definitions in the International Banking Act
of branch and agency, and the limited deposit-taking capabilities of
certain California offices of foreign banks.
The International Banking Act defines agency as ''any office * * * at
which deposits may not be accepted from citizens or residents of the
United States,'' and defines branch as ''any office * * * of a foreign
bank * * * at which deposits are received'' (12 U.S.C. 3101(1) and (3)).
Offices of foreign banks in California prior to the International
Banking Act were generally prohibited from accepting deposits by the
requirement of State law that such offices obtain Federal deposit
insurance (Cal. Fin. Code 1756); until the passage of the International
Banking Act an office of a foreign bank could not obtain such insurance.
California law, however, permits offices of foreign banks, with the
approval of the Banking Department, to accept deposits from any person
that resides, is domiciled, and maintains its principal place of
business in a foreign country (Cal. Fin. Code 1756.2). Thus, under a
literal reading of the definitions of branch and agency contained in the
International Banking Act, a foreign bank's California office that
accepts deposits from certain foreign sources (e.g., a U.S. citizen
residing abroad), is a branch rather than an agency.
Section 5 of the International Banking Act establishes certain
limitations on the expansion of the domestic deposit-taking capabilities
of a foreign bank outside its home State. It also grandfathers offices
established or applied for prior to July 27, 1978, and permits a foreign
bank to select its home State from among the States in which it operated
branches and agencies on the grandfather date. If a foreign bank's
office that was established or applied for prior to June 27, 1978, is a
branch as defined in the International Banking Act, then it is
grandfathered as a branch. Accordingly, a foreign bank could designate
a State other than California as its home State and subsequently convert
its California office to a full domestic deposit-taking facility by
obtaining Federal deposit insurance. If, however, the office is
determined to be an agency, then it is grandfathered as such and the
foreign bank may may not expand its deposit-taking capabilities in
California without declaring California its home State.
In the Board's view, it would be inconsistent with the purposes and
the legislative history of the International Banking Act to enable a
foreign bank to expand its domestic interstate deposit-taking
capabilities by grandfathering these California offices as branches
because of their ability to receive certain foreign source deposits.
The Board also notes that such deposits are of the same general type
that may be received by an Edge Corporation and, hence in accordance
with section 5(a) of the International Banking Act, by branches
established and operated outside a foreign bank's home State. It would
be inconsistent with the structure of the interstate banking provisions
of the International Banking Act to grandfather as full deposit-taking
offices those facilities whose activities have been determined by
Congress to be appropriate for a foreign bank's out-of-home State
branches.
Accordingly, the Board, in administering the interstate banking
provisions of the IBA, regards as agencies those offices of foreign
banks that do not accept domestic deposits but that may accept deposits
from any person that resides, is domiciled, and maintains its principal
place of business in a foreign country.
(45 FR 67309, Oct. 10, 1980)
12 CFR 211.602 Investments by United States Banking Organizations in
Foreign Companies that Transact Business in the United States.
Section 25(a) of the Federal Reserve Act (12 U.S.C. 611, the ''Edge
Act'') provides for the establishment of corporations to engage in
international or foreign banking or other international or foreign
financial operations (''Edge Corporations''). Congress has declared
that Edge Corporations are to serve the purpose of stimulating the
provision of international banking and financing services throughout the
United States and are to have powers sufficiently broad to enable them
to compete effectively with foreign-owned institutions in the United
States and abroad. The Board was directed by the International Banking
Act of 1978 (12 U.S.C. 3101) to revise its regulations governing Edge
Corporations in order to accomplish these and other objectives and was
further directed to modify or eliminate any interpretations that impede
the attainment of these purposes.
One of the powers of Edge Corporations is that of investing in
foreign companies. Under the relevant statutes, however, an Edge
Corporation is prohibited from investing in foreign companies that
engage in the general business of buying or selling goods, wares,
merchandise or commodities in the United States. In addition, an Edge
Corporation may not invest in foreign companies that transact any
business in the United States that is not, in the Board's judgment,
''incidental'' to its international or foreign business. The latter
limitation also applies to investments by bank holding companies (12
U.S.C. 1843(c)(13)) and member banks (12 U.S.C. 601).
The Board has been asked to determine whether an Edge Corporation's
minority investment (involving less than 25 percent of the voting
shares) in a foreign company would continue to be permissible after the
foreign company establishes or acquires a United States subsidiary that
engages in domestic activities that are closely related to banking. The
Board has also been asked to determine whether an Edge Corporation's
minority investment in a foreign bank would continue to be permissible
after the foreign bank establishes a branch in the United States that
engages in domestic banking activities. In the latter case, the branch
would be located outside the State in which the Edge Corporation and its
parent bank are located.
In the past the Board, in exercising its discretionary authority to
determine those activities that are permissible in the United States,
has followed the policy that an Edge Corporation could not hold even a
minority interest in a foreign company that engaged, directly or
indirectly, in any purely domestic business in the United States. The
United States activities considered permissible were those
internationally related activities that Edge Corporations may engage in
directly. If this policy were applied to the subject requests, the Edge
Corporations would be required to divest their interests in the foreign
companies notwithstanding the fact that, in each case, the Edge
Corporation, as a minority investor, did not control the decision to
undertake activities in the United States, and that even after the
United States activities are undertaken the business of the foreign
company will remain predominantly outside the United States.
International banking and finance have undergone considerable growth
and change in recent years. It is increasingly common, for example, for
United States institutions to have direct or indirect offices in foreign
countries and to engage in activities at those offices that are
domestically as well as internationally oriented. In this climate,
United States banking organizations would be placed at a competitive
disadvantage if their minority investments in foreign companies were
limited to those companies that do no domestic business in the United
States. Moreover, continued adherence to the existing policy would be
contrary to the declaration in the International Banking Act of 1978
that Edge Corporations' powers are to be sufficiently broad to enable
them to compete effectively in the United States and abroad.
Furthermore, where the activities to be conducted in the United States
by the foreign company are banking or closely related to banking, it
does not appear that any regulatory or supervisory purpose would be
served by prohibiting a minority investment in the foreign firm by a
United States banking organization.
In view of these considerations, the Board has reviewed its policy
relating to the activities that may be engaged in in the United States
by foreign companies (including foreign banks) in which Edge
Corporations, member banks, and bank holding companies invest. As a
result of that review, the Board has determined that it would be
appropriate to interpret sections 25 and 25(a)of the Federal Reserve Act
(12 U.S.C. 601, 611) and section 4(c)(13) of the Bank Holding Company
Act (12 U.S.C. 1843(c)(13)) generally to allow United States banking
organizations, with the prior consent of the Board, to acquire and hold
investments in foreign companies that do business in the United States
subject to the following conditions:
(1) The foreign company is engaged predominantly in business outside
the United States or in internationally related activities in the United
States;* (2) the direct or indirect activities of the foreign company in
the United States are either banking or closely related to banking; and
(3) the United States banking organization does not own 25 percent or
more of the voting stock of, or otherwise control, the foreign company.
In considering whether to grant its consent for such investments, the
Board would also review the proposals to ensure that they are consistent
with the purposes of the Bank Holding Company Act and the Federal
Reserve Act.
(46 FR 8437, Jan. 27, 1981)
*This condition would ordinarily not be met where a foreign company
merely maintains a majority of its business in international activities.
Each case will be scrutinized to ensure that the activities in the
United States do not alter substantially the international orientation
of the foreign company's business.
12 CFR 211.603 Commodity swap transactions.
For text of interpretation relating to this subject, see 208.128 of
this chapter.
(56 FR 63408, Dec. 4, 1991)
12 CFR 211.603 PART 212 -- MANAGEMENT OFFICIAL INTERLOCKS
Sec.
212.1 Authority, purpose, and scope.
212.2 Definitions.
212.3 General prohibitions.
212.4 Permitted Interlocking Relationships.
212.5 Grandfathered Interlocking Relationships.
212.6 Changes in circumstances.
212.7 Effect of Interlocks Act on Clayton Act.
212.8 Enforcement.
Authority: 12 U.S.C. 3201 et seq.; 15 U.S.C. 19.
Source: 45 FR 24389, Apr. 9, 1980, unless otherwise noted.
12 CFR 212.1 Authority, purpose, and scope.
(a) Authority. This part is issued under the provisions of the
Depository Institution Management Interlocks Act (''Interlocks Act'')
(12 U.S.C. 3210 et seq.).
(b) Purpose and scope. The general purpose of the Interlocks Act and
this part is to foster competition by generally prohibiting a management
official of a depository institution or depository holding company from
also serving as a management official of another depository institution
or depository holding company if the two organizations (1) are not
affiliated and (2) are very large or are located in the same local area.
This part applies to management officials of State member banks, bank
holding companies, and their affiliates.
12 CFR 212.2 Definitions.
For the purpose of this part, the following definitions apply:
(a) Adjacent cities, towns, or villages means cities, towns or
villages whose borders are within ten road miles of each other at their
closest points. The property line of an office located in an
unincorporated city, town, or village is regarded as the boundary line
of that city, town, or village for the purpose of this definition.
(b) Affiliate has the meaning given in section 202 of the Interlocks
Act. For purposes of section 202, an individual's shares include shares
of members of his or her immediate family. For the purpose of section
202(3)(B) of the Interlocks Act, an affiliate relationship based on
common ownership does not exist if the appropriate Federal supervisory
agency or agencies determine, after giving the affected persons the
opportunity to respond, that the asserted affiliation appears to have
been established in order to avoid the prohibitions of the Interlocks
Act and does not represent a true commonality of interest between the
depository organizations. In making this determination, the agencies
will consider, among other things, whether a person, including members
of his or her immediate family, whose shares are necessary to constitute
the group owns a nominal percentage of the shares of one of the
organizations and the percentage is substantially disproportionate with
that person's ownership of shares in the other organization. Immediate
family includes spouse, mother, father, child, grandchild, sister,
brother, or any of their spouses, whether or not any of their shares are
held in trust.
(c) Community means city, town, or village, or contiguous or adjacent
cities, towns, or villages.
(d) Contiguous cities, towns, or villages means cities, towns, or
villages whose borders actually touch each other.
(e) Depository holding company means a bank holding company or a
savings and loan holding company (as more fully defined in section 202
of the Interlocks Act) having its principal office located in the United
States.
(f) Depository institution means a commercial bank (including a
private bank), a savings bank, a trust company, a savings and loan
association, a building and loan association, a homestead association, a
cooperative bank, an industrial bank, or a credit union, chartered in
the United States and having a principal office located in the United
States. Additionally, a United States office, including a branch or
agency, of a foreign commercial bank is a depository institution.
(g) Depository organization means a depository institution or a
depository holding company.
(h)(1) Management official means (i) an employee or officer with
management functions (including a branch manager); (ii) a director
(including an advisory director or honorary director); (iii) a trustee
of a business organization under the control of trustees (e.g., a mutual
savings bank); or (iv) any person who has a representative or nominee
serving in any such capacity.
(2) Management official does not include (i) a person whose
management functions relate exclusively to the business of retail
merchandising or manufacturing; (ii) a person whose managment functions
relate principally to the business outside the United States of a
foreign commercial bank; or (iii) persons described in the provisos of
section 202(4) of the Interlocks Act (12 U.S.C. 3201(4)).
(i) Office means a principal or branch office, located in the United
States, of a depository institution. Office does not include a
representative office of a foreign commercial bank, an electronic
terminal, a loan production office, or any office of a depository
holding company.
(j) Person means a natural person, corporation, or other business.
(k) Representative or nominee means a person who serves as a
management official and has an express or implied obligation to act on
behalf of another person with respect to management responsibilities.
Whether a person is a representative or nominee depends upon the facts
in individual cases, and the appropriate Federal supervisory agency or
agencies will determine, after giving the affected persons an
opportunity to respond, whether a person is a representative or nominee.
Certain relationships, including family, employment, or agency
relationships, or the ability and exercise of ability by a shareholder
of a depository organization to elect a director may be evidence of such
an express or implied obligation by the management official to another
person. For the purposes of this definition, person shall include only
natural persons.
(l) Total assets means assets measured on a consolidated basis as of
the close of the organization's last fiscal year. The total assets of a
depository holding company include the total assets of all of its
subsidiary affiliates, except that total assets of a diversified savings
and loan holding company, as defined in section 408(a)(1)(F) of the
National Housing Act (12 U.S.C. 1730a(a)(F)), or of a bank holding
company that is exempt from the prohibitions of section 4 of the Bank
Holding Company Act of 1956 pursuant to an order issued under section
4(d) of that Act (12 U.S.C. 1843(d)), means only the total assets of its
depository institution affiliate. Total assets of a United States
branch or agency of a foreign commercial bank means the total assets of
such branch or agency itself exclusive of the assets of the other
offices of the foreign commercial bank.
(m) United States means any State of the United States, the District
of Columbia, any territory of the United States, Puerto Rico, Guam,
American Samoa, or the Virgin Islands.
(n) Relevant metropolitan statistical area means a Primary
Metropolitan Statistical Area, a Metropolitan Statistical Area, or a
Consolidated Metropolitan Statistical Area that is not comprised of
designated Primary Metropolitan Statistical Areas as defined by the
Office of Management and Budget.
(45 FR 24389, Apr. 9, 1980, as amended at 48 FR 50303, Nov. 1, 1983;
49 FR 28043, July 10, 1984)
12 CFR 212.3 General prohibitions.
(a) Community. A management official of a depository organization
may not serve at the same time as a management official of another
depository organization not affiliated with it if:
(1) Both are depository institutions and each has an office in the
same community;
(2) Offices of depository institution affiliates of both are located
in the same community; or
(3) One is a depository institution that has an office in the same
community as a depository institution affiliate of the other.
(b) Metropolitan Statistical Area. A management official of a
depository organization may not serve at the same time as a management
official of another depository organization not affiliated with it if:
(1) Both are depository institutions, each has an office in the same
relevant metropolitan statistical area, and either institution has total
assets of $20 million or more;
(2) Offices of depository institution affiliates of both are located
in the same relevant metropolitan statistical area and either of the
depository institution affiliates has total assets of $20 million or
more; or
(3) One is a depository institution that has an office in the same
relevant metropolitan statistical area as a depository institution
affiliate of the other and either the depository institution or the
depository institution affiliate has total assets of $20 million or
more.
(c) Major Assets. Without regard to location, a management official
of a depository organization with total assets exceeding $1 billion or a
management official of any affiliate of the greater than $1 billion
depository organization may not serve at the same time as a management
official of a nonaffiliated depository organization with total assets
exceeding $500 million or a management official of any affiliate of the
greater than $500 million depository organization.
(45 FR 24389, Apr. 9, 1980, as amended at 48 FR 50303, Nov. 1, 1983;
49 FR 28043, July 10, 1984)
12 CFR 212.4 Permitted interlocking relationships.
(a) Interlocking relationships permitted by statute. The
prohibitions of 212.3 do not apply in the case of any one or more of
the following organizations or their subsidiaries:
(1) A depository organization that does not do business within the
United States except as an incident to its activities outside the United
States;
(2) A corporation operating under section 25 or 25(a) of the Federal
Reserve Act (''Edge Corporations'' and ''Agreement Corporations'');
(3) A depository organization that has been placed formally in
liquidation, or that is in the hands of a receiver, conservator, or
other official exercising a similar function;
(4) A credit union being served by a management official of another
credit union;
(5) A State-chartered savings and loan guaranty corporation; or
(6) A Federal Home Loan Bank or any other bank organized solely for
the purpose of serving depository institutions (commonly referred to as
bankers' banks) or solely for the purpose of providing securities
clearing services and services related thereto for depository
institutions, securities companies, or both.
(b) Interlocking relationships permitted by agency order. A
management official or a prospective management official of a state
member bank, bank holding company, or an affiliate of either, may enter
into an otherwise prohibited interlocking relationship with a depository
organization that falls within one of the classifications enumerated in
this paragraph (b) if the Federal supervisory agency (as specified in
section 207 of the Interlocks Act) of the organization that falls within
one of the classifications determines that the relationship meets the
requirements set forth in this paragraph. If the depository
organization that falls within one of the classifications is not subject
to the interlocks regulations of any of the Federal supervisory
agencies, then the Board shall determine whether the relationship meets
the requirements of this paragraph.
(1) Organization in low income area; minority or women's
organization. A person may serve at the same time as a management
official of two or more depository organizations (or affiliates thereof)
if one of the depository organizations is (i) located, or to be located,
in a low income or other economically depressed area, or (ii) controlled
or managed by persons who are members of minority groups or by women,
subject to the following conditions:
(A) The relationship is necessary to provide management or operating
expertise to the organization specified in paragraph (b)(1) (i) or (ii)
of this section; (B) no interlocking relationship permitted by this
paragraph shall continue for more than five years; and (C) other
conditions in addition to, or in lieu of, the foregoing may be imposed
by the appropriate Federal supervisory agency in any specific case.
(2) Newly-chartered organization. A person may serve at the same
time as a management official of two or more depository organizations if
one of the depository organizations (or an affiliate thereof) is a
newly-chartered organization, subject to the following conditions:
(i) The relationship is necessary to provide management or operating
expertise to the newly-chartered organization; (ii) no interlocking
relationship permitted by this paragraph shall continue for more than
two years after the newly-chartered organization commences business;
and (iii) other conditions in addition to, or in lieu of, the foregoing
may be imposed by the appropriate Federal supervisory agency in any
specific case.
(3) Conditions endangering safety or soundness. A person may serve
at the same time as a management official of two or more depository
organizations (or affiliates thereof) if one of the depository
organizations faces conditions endangering the organization's safety or
soundness, subject to the following conditions:
(i) The relationship is necessary to provide management or operating
expertise to such organization facing conditions endangering safety or
soundness; and (ii) other conditions in addition to, or in lieu of, the
foregoing may be imposed by the appropriate Federal supervisory agency
in any specific case.
(4) Organization sponsoring credit union. A management official of a
depository organization or its affiliate may serve at the same time as a
management official of a federally-insured credit union that is
sponsored by the depository organization or its affiliate primarily to
serve employees of the depository organization.
(5) Loss of management officials due to changes in circumstances. If
a depository organization is likely to lose 30 percent or more of its
directors or of its total management officials due to a change in
circumstances described in 212.6 of this part, the affected management
officials may continue to serve in excess of the time periods specified
in 212.6, provided that:
(i) The depository organization's prospective loss of management
officials or directors will be disruptive to the internal management of
the depository organization;
(ii) The depository organization demonstrates that, absent a grant of
relief in accordance with this paragraph, 30 percent or more of either
its directors or management officials are likely to sever their
interlocking relationships with the depository organization;
(iii) If the prospective losses of management officials resulted from
more than one change in circumstances, such changes in circumstances
must have occurred within a fifteen-month period; and
(iv) The depository organization develops a plan for the orderly
termination of service by each such management official over a period
not longer than 30 months after the change in circumstances which caused
the person's service to become prohibited (but if the loss of management
officials is the result of more than one change in circumstances, the
30-month period is measured from the first change in circumstances).
Other conditions in addition to, or in lieu of, the foregoing may be
imposed by the appropriate Federal supervisory agency. In evaluating
requests made pursuant to this paragraph, the appropriate Federal
supervisory agency will presume that a director who also is a paid,
full-time employee of the depository organization, absent unusual
circumstances, will not resign from the position of director with that
depository organization. This presumption may, however, be rebutted by
a showing that such unusual circumstances exist.
(c) Diversified savings and loan holding company. Notwithstanding
212.3, a person who serves as a management official of a depository
organization and of a nondepository organization (or any subsidiary
thereof) is not prohibited from continuing the interlocking service when
the nondepository organization becomes a diversified savings and loan
holding company as that term is defined in section 408(a)(1)(F) of the
National Housing Act (12 U.S.C. 1730a(a)(1)(F)), and may continue to
serve until November 10, 1988, despite the occurrence of any subsequent
changes in circumstances, whether or not those changes in circumstances
occurred prior to November 30, 1983.
(45 FR 24389, Apr. 9, 1980, as amended at 48 FR 50304, Nov. 1, 1983)
12 CFR 212.5 Grandfathered interlocking relationships.
A person whose interlocking service in a position as a management
official of two or more depository organizations began prior to November
10, 1978, and was not immediately prior to that date in violation of
section 8 of the Clayton Act (15 U.S.C. 19) is not prohibited from
continuing to serve in such interlocking positions until November 10,
1988. Any management official who has been required to terminate or who
has terminated service in one or more such interlocking positions as a
result of a merger, acquisition, consolidation, or establishment of an
office that formerly was defined as a change in circumstances in 12 CFR
212.6(a) (1981) is not prohibited from continuing or resuming such
service until November 10, 1988.
(48 FR 5534, Feb. 7, 1983)
12 CFR 212.6 Changes in circumstances.
(a) Non-grandfathered interlocks. If a person's service as a
management official is not grandfathered under 212.5 of this part, the
person's service must be terminated if a change in circumstances causes
such service to become prohibited. Such a change may include, but is
not limited to, an increase in asset size of an organization due to
natural growth, a change in relevant metropolitan statistical area or
community boundaries or the designation of a new relevant metropolitan
statistical area, an acquisition, merger, or consolidation, the
establishment of an office, or a disaffiliation.
(b) Grace period. If a person's nongrandfathered service as a
management official becomes prohibited under paragraph (a) of this
section, the person may continue to serve as a management official of
all organizations involved in the prohibited interlocking relationship
until 15 months after the date on which the change in circumstances that
caused the interlock to become prohibited occurred, unless the
appropriate Federal supervisory agency or agencies take affirmative
action in an individual case to establish a shorter period.
(48 FR 50304, Nov. 1, 1983, as amended at 49 FR 28043, July 10, 1984)
12 CFR 212.7 Effect of Interlocks Act on Clayton Act.
The Board of Governors of the Federal Reserve System regards the
provisions of the first three paragraphs of section 8 of the Clayton Act
(15 U.S.C. 19) to have been supplanted by the revised and more
comprehensive prohibitions on management official interlocks between
depository organizations in the Interlocks Act.
12 CFR 212.8 Enforcement.
The Board of Governors of the Federal Reserve System administers and
enforces the Interlocks Act with respect to State member banks, bank
holding companies, and their affiliates, and may refer the case of a
prohibited interlocking relationship involving any such organization,
regardless of the nature of any other organization involved in the
prohibited relationship, to the Attorney General of the United States to
enforce compliance with the Interlocks Act and this part. If an
affiliate of a State member bank or bank holding company is primarily
subject to the regulation of another Federal supervisory agency, then
the Board does not administer and enforce the Interlocks Act with
respect to that affiliate.
12 CFR 212.8 PART 213 -- CONSUMER LEASING
Sec.
213.1 General provisions.
213.2 Definitions and rules of construction.
213.3 Exempted transactions.
213.4 Disclosures.
213.5 Advertising.
213.6 Preservation and inspection of evidence of compliance.
213.7 Inconsistent state requirements.
213.8 Exemption of certain state regulated transactions.
Appendix A to Part 213 -- Procedures and Criteria for State
Exemptions From the Consumer Leasing Act
Appendix B to Part 213 -- Procedures and Criteria for Board
Determination Regarding Preemption
Appendix C to Part 213 -- Model Forms
Appendix D to Part 213 -- Federal Enforcement Agencies
Supplement I-CL-1 to Part 213 -- Official Staff Commentary to
Regulation M
Authority: 15 U.S.C. 1604.
Source: Reg. M, 46 FR 20951, Apr. 7, 1981, unless otherwise noted.
12 CFR 213.1 General provisions.
(a) Authority. This regulation, known as Regulation M, is issued by
the Board of Governors of the Federal Reserve System to implement the
consumer leasing portions of the Truth in Lending Act, which is title I
of the Consumer Credit Protection Act, as amended (15 U.S.C. 1601 et
seq.).
(b) Purpose. The purpose of this regulation is to assure that
lessees of personal property are given meaningful disclosures of lease
terms, to delimit the ultimate liability of lessees in leasing personal
property and to require meaningful and accurate disclosures of lease
terms in advertising.
(c) Enforcement and liability. Section 108 of the Act contains the
administrative enforcement provisions. Sections 112, 130, 131, and 185
of the Act contain the liability provisions for failing to comply with
the requirements of the act and this regulation.
(d) Issuance of staff interpretations. (1) Officials in the Board's
Division of Consumer and Community Affairs are authorized to issue
official staff interpretations of this regulation. Official staff
interpretations provide the formal protection afforded under section
130(f) of the Act.
(2) A request for an official staff interpretation shall be in
writing and addressed to the Director, Division of Consumer and
Community Affairs, Board of Governors of the Federal Reserve System,
Washington, DC 20551. The request shall contain a complete statement of
all relevant facts concerning the issue, including copies of all
pertinent documents.
(3) No staff interpretations will be issued approving lessor's forms,
statements, calculation tools, or methods. This restriction does not
apply to forms, statements, tools, or methods whose use is required or
sanctioned by a government agency.
12 CFR 213.2 Definitions and rules of construction.
(a) Definitions. For the purposes of this regulation, unless the
context indicates otherwise, the following definitions apply:
(1) Act means the Truth in Lending Act (15 U.S.C. 1601 et seq.).
(2) Advertisement means any commercial message in any newspaper,
magazine, leaflet, flyer or catalog, on radio, television or public
address system, in direct mail literature or other printed material on
any interior or exterior sign or display, in any window display, in any
point-of-transaction literature or price tag which is delivered or made
available to a lessee or prospective lessee in any manner whatsoever.
(3) Agricultural purpose means a purpose related to the production,
harvest, exhibition, marketing, transportation, processing, or
manufacture of agricultural products by a natural person who cultivates,
plants, propagates, of nurtures those agricultural products, including
but not limited to the acquisition of personal property and services
used primarily in farming. Agricultural products includes agricultural,
horticultural, viticultural, and dairy products, livestock, wildlife,
poultry, bees, forest products, fish and shellfish, and any products
thereof, including processed and manufactured products, and any and all
products raised or produced on farms and any processed or manufactured
products thereof.
(4) Arrange for lease of personal property means to provide or offer
to provide a lease which is or will be extended by another person under
a business or other relationship pursuant to which the person arranging
such lease:
(i) Receives or will receive a fee, compensation, or other
consideration for such service; or
(ii) Has knowledge of the lease terms and participates in the
preparation of the contract documents required in connection with the
lease.
(5) Board refers to the Board of Governors of the Federal Reserve
System.
(6) Consumer lease means a contract in the form of a bailment or
lease for the use of personal property by a natural person primarily for
personal, family or household purposes, for a period of time exceeding
four months, for a total contractual obligation not exceeding $25,000,
whether or not the lessee has the option to purchase or otherwise become
the owner of the property at the expiration of the lease. It does not
include a lease which meets the definition of a credit sale in
Regulation Z, 12 CFR 226.2(a) nor does it include a lease for
agricultural, business or commercial purposes or one made to an
organization.
(7) Lessee means a natural person who leases under, or who is offered
a consumer lease.
(8) Lessor means a person who, in the ordinary course of business
regularly leases, offers to lease, or arranges for the leasing of
personal property under a consumer lease.
(9) Organization means a corporation, trust, estate, partnership,
cooperative, association, government, or governmental subdivision,
agency, or instrumentality.
(10) Period means a day, week, month, or other subdivision of a year.
(11) Person means a natural person or an organization.
(12) Personal property means any property which is not real property
under the law of the state where it is located at the time it is offered
or made available for lease.
(13) Real property means property which is real property under the
law of the state in which it is located.
(14) Realized value means (i) the price received by the lessor for
the leased property at disposition, (ii) the highest offer for
disposition, or (iii) the fair market value at the end of the lease
term.
(15) Security interest and security mean any interest in property
which secures payment or performance of an obligation. The terms
include, but are not limited to, security interests under the Uniform
Commercial Code, real property mortgages, deeds of trust, and other
consensual or confessed liens whether or not recorded, mechanic's,
materialman's, artisan's, and other similar liens, vendor's liens in
both real and personal property, any lien on property arising by
operation of law, and any interest in a lease when used to secure
payment or performance of an obligation.
(16) State means any state, the District of Columbia, the
Commonwealth of Puerto Rico, and any territory or possession of the
United States.
(17) Total lease obligation equals the total of (i) the scheduled
periodic payments under the lease, (ii) any nonrefundable cash payment
required of the lessee or agreed upon by the lessor and lessee or any
trade-in allowance made at consummation, and (iii) the estimated value
of the leased property at the end of the lease term.
(18) Value at consummation equals the cost to the lessor of the
leased property including, if applicable, any increase or markup by the
lessor prior to consummation.
(b) Rules of construction. For purposes of this regulation, the
following rules of construction apply:
(1) Unless the context indicates otherwise, lease shall be construed
to mean consumer lease.
(2) A transaction shall be considered consummated at the time a
contractual relationship is created between the lessor and lessee,
irrespective of the time of the performance of either party.
(3) Captions and catchlines are intended solely as aids to convenient
reference, and no inference as to the intent of any provisions may be
drawn from them.
(46 FR 20951, Apr. 7, 1981; 46 FR 29245, June 1, 1981)
12 CFR 213.3 Exempted transactions.
This regulation does not apply to lease transactions of personal
property which are incident to the lease of real property and which
provide that (a) the lessee has no liability for the value of the
property at the end of the lease term except for abnormal wear and tear,
and (b) the lessee has no option to purchase the leased property.
12 CFR 213.4 Disclosures.
(a) General requirements. (1) Any lessor shall, in accordance with
this regulation and to the extent applicable, make the disclosures
required by paragraph (g) of this section with respect to any consumer
lease. Such disclosures shall be made clearly, conspicuously, in
meaningful sequence, and in accordance with the further requirements of
this section. All numerical amounts and percentages shall be stated in
figures and shall be printed in not less than the equivalent of 10-point
type, .075 inch computer type, or elite size typewritten numerals, or
shall be legibly handwritten.
(2) Disclosures shall be made prior to the consummation of the lease
on a dated written statement which identifies the lessor and the lessee,
and a copy of the statement shall be given to the lessee at the time.
All of the disclosures shall be made together on either (i) the contract
or other instrument evidencing the lease on the same page and above the
place for the lessee's signature; or (ii) a separate statement which
identifies the lease transaction.
(3) In any lease of multiple items, the description required by
paragraph (g)(1) of this section may be provided on a separate statement
or statements which are incorporated by reference in the disclosure
statement required by paragraph (a) of this section.
(4) All disclosures required to be given by this regulation shall be
made in the English language except in the Commonwealth of Puerto Rico,
where disclosures may be made in the Spanish language with English
language disclosures provided upon the customer's request, either in
substitution for the Spanish disclosures or as additional information in
accordance with paragraph (b) of this section.
(b) Additional information. At the lessor's option, additional
information or explanations may be supplied with any disclosure required
by this regulation, but none shall be stated, utilized, or placed so as
to mislead or confuse the lessee or contradict, obscure, or detract
attention from the information required to be disclosed. Any lessor who
elects to make disclosures specified in any provision of State law
which, under 213.7 of this regulation, is inconsistent with the
requirements of the act and this regulation may --
(1) Make such inconsistent disclosures on a separate paper apart from
the disclosures made pursuant to this regulation; or
(2) Make such inconsistent disclosures on the same statement on which
disclosures required by this regulation are made, provided:
(i) All disclosures required by this regulation appear separately and
above any other disclosures,
(ii) Disclosures required by this regulation are identified by a
clear and conspicuous heading indicating that they are made in
compliance with federal law, and
(iii) All inconsistent disclosures appear separately and below a
conspicuous demarcation line, and are identified by a clear and
conspicuous heading indicating that the statements made thereafter are
inconsistent with the disclosure requirements of the federal Consumer
Leasing Act.
(c) Multiple lessors; multiple lessees. When a transaction involves
more than one lessor, only one lessor need make the disclosures required
by this regulation, and the one that discloses shall be the one chosen
by the lessors. When a lease involves more than one lessee, the
disclosures may be made to any lessee who is primarily liable on the
lease.
(d) Unknown information estimate. If, at the time disclosures must
be made, an amount or other item of information required to be
disclosed, or needed to determine a required disclosure, is unknown or
not available to the lessor and the lessor has made a reasonable effort
to ascertain it, the lessor may use an estimated amount or an
approximation of the information, provided the estimate or approximation
is clearly identified as such, is reasonable, is based on the best
information available to the lessor, and is not used for the purpose of
circumventing or evading the disclosure requirements of this regulation.
Notwithstanding the requirement of this paragraph that the estimate be
based on the best information available, a lessor is not precluded in a
purchase option lease from understating the estimated value of the
leased property at the end of the term in computing the total lease
obligation as required in paragraph (g)(15)(i) of this section.
(e) Effect of subsequent occurrence. If information required to be
disclosed in accordance with this regulation is subsequently rendered
inaccurate as a result of any act, occurrence, or agreement subsequent
to the delivery of the required disclosures, the inaccuracy resulting
therefrom does not constitute a violation of this regulation. 1
(f) Leap year. Any variance in any term required under this
regulation to be disclosed, or stated in any advertisement, which occurs
by reason of the addition of February 29 in each leap year, may be
disregarded, and such term may be disclosed or stated without regard to
such variance.
(g) Specific disclosure requirements. In any lease subject to this
section, the following items, as applicable, shall be disclosed:
(1) A brief description of the leased property, sufficient to
identify the property to the lessee and lessor.
(2) The total amount of any payment, such as a refundable security
deposit paid by cash, check or similar means, advance payment,
capitalized cost reduction or any trade-in allowance, appropriately
identified, to be paid by the lessee at consummation of the lease.
(3) The number, amount, and due dates or periods of payments
scheduled under the lease and the total amount of such periodic
payments.
(4) The total amount paid or payable by the lessee during the lease
term for official fees, registration, certificate of title, license
fees, or taxes.
(5) The total amount of all other charges, individually itemized,
payable by the lessee to the lessor, which are not included in the
periodic payments. This total includes the amount of any liabilities
the lease imposes upon the lessee at the end of the term, but excludes
the potential difference between the estimated and realized values,
required to be disclosed under paragraph (g)(13) of this section.
(6) A brief identification of insurance in connection with the lease
including (i) if provided or paid for by the lessor, the types and
amounts of coverages and cost to the lessee, or (ii) if not provided or
paid for by the lessor, the types and amounts of coverages required of
the lessee.
(7) A statement identifying any express warranties or guarantees
available to the lessee made by the lessor or manufacturer with respect
to the leased property.
(8) An identification of the party responsible for maintaining or
servicing the leased property together with a brief description of the
responsibility, and a statement of reasonable standards for wear and
use, if the lessor sets such standards.
(9) A description of any security interest, other than a security
deposit disclosed under paragraph (g)(2) of this section, held or to be
retained by the lessor in connection with the lease and a clear
identification of the property to which the security interest relates.
(10) The amount or method of determining the amount of any penalty or
other charge for delinquency, default, or late payments.
(11) A statement of whether or not the lessee has the option to
purchase the leased property and, if at the end of the lease term, at
what price, and, if prior to the end of the lease term, at what time,
and the price or method of determining the price.
(12) A statement of the conditions under which the lessee or lessor
may terminate the lease prior to the end of the lease term and the
amount or method of determining the amount of any penalty or other
charge for early termination.
(13) A statement that the lessee shall be liable for the difference
between the estimated value of the property and its realized value at
early termination or the end of the lease term, if such liability
exists.
(14) Where the lessee's liability at early termination or at the end
of the lease term is based on the estimated value of the leased
property, a statement that the lessee may obtain at the end of the lease
term or at early termination, at the lessee's expense, a professional
appraisal of the value which could be realized at sale of the leased
property by an independent third party agreed to by the lessee and the
lessor, which appraisal shall be final and binding on the parties.
(15) Where the lessee's liability at the end of the lease term is
based upon the estimated value of the leased property:
(i) The value of the property at consummation of the lease, the
itemized total lease obligation at the end of the lease term, and the
difference between them.
(ii) That there is a rebuttable presumption that the estimated value
of the leased property at the end of the lease term is unreasonable and
not in good faith to the extent that it exceeds the realized value by
more than three times the average payment allocable to a monthly period,
and that the lessor cannot collect the amount of such excess liability
unless the lessor brings a successful action in court in which the
lessor pays the lessee's attorney's fees, and that this provision
regarding the presumption and attorney's fees does not apply to the
extent the excess of estimated value over realized value is due to
unreasonable wear or use, or excessive use.
(iii) A statement that the requirements of paragraph (g)(15)(ii) of
this section do not preclude the right of a willing lessee to make any
mutually agreeable final adjustment regarding such excess liability.
(h) Renegotiations or extensions. If any existing lease is
renegotiated or extended, such renegotiation or extension shall be
considered a new lease subject to the disclosure requirements of this
regulation, except that the requirements of this paragraph shall not
apply to (1) a lease of multiple items where a new item(s) is provided
or a previously leased item(s) is returned, and the average payment
allocable to a monthly period is not changed by more than 25 per cent,
or (2) a lease which is extended for not more than 6 months on a
month-to-month basis or otherwise.
1Such acts, occurrences, or agreements include the failure of the
lessee to perform his obligations under the contract and such actions by
the lessor as may be proper to protect his interests in such
circumstances. Such failure may result in the liability of the lessee
to pay delinquency charges, collection costs, or expenses of the lessor
for perfection or acquisition of any security interest or amounts
advanced by the lessor on behalf of the lessee in connection with
insurance, repairs to, or preservation of leased property.
12 CFR 213.5 Advertising.
(a) General rule. No advertisement to aid, promote, or assist
directly or indirectly any consumer lease may state that a specific
lease of any property at specific amounts or terms is available unless
the lessor usually and customarily leases or will lease such property at
those amounts or terms.
(b) Catalogs and multi-page advertisements. If a catalog or other
multiple-page advertisement sets forth or gives information in
sufficient detail to permit determination of the disclosures required by
this section in a table or schedule of lease terms, such catalog or
multiple-page advertisement shall be considered a single advertisement
provided:
(1) The table or schedule and the disclosures made therein are set
forth clearly and conspicuously; and
(2) Any statement of lease terms appearing in any place other than in
that table or schedule of lease terms clearly and conspicuously refers
to the page or pages on which that table or schedule appears, unless
that statement discloses all of the lease terms required to be stated
under this section.
(c) Terms that require additional information. No advertisement to
aid, promote, or assist directly or indirectly any consumer lease shall
state the amount of any payment, the number of required payments, or
that any or no downpayment or other payment is required at consummation
of the lease unless the advertisement also states clearly and
conspicuously each of the following items of information as applicable.
(1) That the transaction advertised is a lease.
(2) The total amount of any payment such as a security deposit or
capitalized cost reduction required at the consummation of the lease, or
that no such payments are required.
(3) The number, amounts, due dates or periods of scheduled payments,
and the total of such payments under the lease.
(4) A statement of whether or not the lessee has the option to
purchase the leased property and at what price and time. The method of
determining the price may be substituted for disclosure of the price.
(5) A statement of the amount or method of determining the amount of
any liabilities the lease imposes upon the lessee at the end of the term
and a statement that the lessee shall be liable for the difference, if
any, between the estimated value of the leased property and its realized
value at the end of the lease term, if the lessee has such liability.
(d) Multiple item leases; merchandise tags. If a merchandise tag
for an item normally included in a multiple item lease sets forth
information which would require additional disclosures under paragraph
(c) of this section, such merchandise tag need not contain such
additional disclosures, provided it clearly and conspicuously refers to
a sign or display which is prominently posted in the lessor's showroom.
Such sign or display shall contain a table or schedule of those items of
information to be disclosed under paragraph (c) of this section.
(46 FR 20951, Apr. 7, 1981; 46 FR 29245, June 1, 1981)
12 CFR 213.6 Preservation and inspection of evidence of compliance.
(a) Evidence of compliance with the requirements imposed under this
regulation, other than advertising requirements under 213.5, shall be
preserved by the lessor for a period of not less than 2 years after the
date such disclosure is required to be made.
(b) Each lessor shall, when directed by the appropriate
administrative enforcement authority designated in section 108 of the
Act, permit that authority or its duly authorized representative to
inspect its relevant records and evidence of compliance with this
regulation.
12 CFR 213.7 Inconsistent state requirements.
(a) Preemption. A State law which is similar in nature, purpose,
scope, intent, effect, or requisites to a section of chapter 5 of the
Act is not inconsistent with the Act or this regulation within the
meaning of section 186(a) of the Act if the lessor can comply with the
State law without violating this regulation. If a lessor cannot comply
with a State law without violating a provision of this regulation which
implements a section of chapter 5 of the Act, such State law is
inconsistent with the requirements of the Act and this regulation within
the meaning of section 186(a) of the Act and is preempted.
(b) Procedures. A state, through its governor, attorney general, or
other appropriate official having primary enforcement or interpretative
responsibilities for its consumer leasing law, may apply to the Board
for a determination that the State law offers greater protection and
benefit to lessees than a comparable provision(s) of chapter 5 of the
Act and its implementing provision(s) in this regulation, or is
otherwise not inconsistent with chapter 5 of the Act and this
regulation, or for a determination with respect to any issues not
clearly covered by paragraph (a) of this section as to the consistency
or inconsistency of a State law with chapter 5 of the Act or its
implementing provisions in this regulation.
12 CFR 213.8 Exemption of certain state regulated transactions.
(a) Exemption for State regulated transactions. In accordance with
the provisions of appendix A to Regulation M, part 213, any state may
make application to the Board for exemption of any class of transactions
within the state from the requirements of chapter 5 of the Act and the
corresponding provisions of this regulation, provided that:
(1) The Board determines that under the law of that state, that class
of transactions is subject to requirements substantially similar to
those imposed under chapter 5 of the Act and the corresponding
provisions of this regulation; or the lessee is afforded greater
protection and benefit than is afforded under chapter 5 of the Act, and
(2) There is adequate provision for enforcement.
(b) Procedures and criteria. The procedures and criteria under which
a state may apply for the determination provided for in paragraph (a) of
this section are set forth in appendix A to Regulation M.
(c) Civil liability. In order to assure that the concurrent
jurisdiction of Federal and state courts created in sections 130(e) and
185(c) of the Act shall continue to have substantive provisions to which
such jurisdiction shall apply, and generally to aid in implementing the
Act with respect to any class of transactions exempted pursuant to
paragraph (a) of this section and appendix A, the Board pursuant to
sections 105 and 186(b) of the Act hereby prescribes that:
(1) No such exemptions shall be deemed to extend to the civil
liability provisions of sections 130, 131, and 185 of the Act; and
(2) After an exemption has been granted, the disclosure requirements
of the applicable state law shall constitute the disclosure requirements
of the Act, except to the extent that such state law imposes disclosure
requirements not imposed by the Act. Information required under such
state law with the exception of those provisions which impose disclosure
requirements not imposed by the Act shall, accordingly, constitute a
''requirement imposed'' under chapter 5 of the Act for the purpose of
section 130(a).
12 CFR 213.8 Pt. 213, App. A
12 CFR 213.8 Appendix A to Part 213 -- Procedures and Criteria for
State Exemptions From the Consumer Leasing Act
(a) Application. Any state may make application to the Board,
pursuant to the terms of this appendix and the Board's Rules of
Procedure (12 CFR part 262), for a determination that under the laws of
the state,1 ''consumer lease'' transactions as provided in section
181(1) of the Act and 213.2 of this regulation, within that state are
subject to requirements which are substantially similar to those imposed
under chapter 5 of the Act2 or which provide greater protection and
benefit to lessees than those provided under chapter 5, and that there
is adequate provision for enforcement of such requirements. Such
application shall be made by letter addressed to the Board signed by the
governor, the attorney general, or any official of the state having
responsibilities under the state laws which are applicable to the
relevant class of transactions.
(b) Supporting documents. The application shall be accompanied by:
(1) A copy of the full text of the laws of the state which are
claimed by the applicant to impose requirements substantially similar to
those imposed under chapter 5 or to provide greater protection and
benefit to lessees than does chapter 5 with respect to ''consumer
lease'' transactions as defined in 213.2 of this regulation.
(2) A comparison of each requirement of state law with the
corresponding requirement of chapter 5, together with reasons to support
the claim that the requirements of state law are substantially similar
to or provide greater protection and benefit to lessees than
requirements of chapter 5 with respect to the class of consumer lease
transactions. It shall also demonstrate that any differences are not
inconsistent with and do not result in a diminution in the protection
and benefit afforded lessees under chapter 5 and state that there are no
other state laws which, due to their relations to the state law under
consideration, should be considered by the Board in making its
determination.
(3) A copy of the full text of the laws of the state which provide
for enforcement of the state laws referred to in paragraph (b)(1) of
this appendix.
(4) A comparison of the provisions of state law with the provisions
of sections 108, 112, 130, 131, 183(a), 183(b), and 185 of the Act,
together with reasons to support the claim that such state laws provide
for
(i) Administrative enforcement of the state laws referred to in
paragraph (b)(1) of this appendix which is equivalent to the enforcement
provided under section 108 of the Act;
(ii) Criminal liability for willful and knowing violation of the
state law with penalties substantially similar to those prescribed under
section 112 of the Act, except that more severe penalties may be
provided;
(iii) Civil liability for failure to comply with the requirements of
the state law, including class action liability, which is substantially
similar to that provided under sections 130, 131, 185(b) of the Act,
except that more severe penalties may be provided;
(iv) In leases where the lessee's liability at the end of the lease
term is based on the estimated value of the leased property, a
limitation on the lessee's liability at the end of the lease term
substantially similar to that provided by section 183(a) of the Act,
except that a stricter limitation may be provided;
(v) A provision prescribing that all penalties and other charges for
delinquency, default or early termination specified in the lease must be
reasonable substantially similar to that provided in section 183(b) of
the Act, except that a stricter provision may be provided; and
(vi) A statute of limitations that prescribes a period in which to
institute civil actions of substantially similar duration as that
provided under section 185(c) of the Act, except that a longer period
may be provided.
(5) A statement identifying the office designated or to be designated
to administer the state laws referred to in paragraph (b)(1) of this
appendix, together with complete information regarding the fiscal
arrangements for administrative enforcement (including the amount of
funds available or to be provided), the number and qualifications of
personnel engaged therein, and a description of the procedures under
which such state laws are to be administratively enforced, including
administrative enforcement with respect to federally-chartered lessors.
3 The foregoing statement should include reasons to support the claim
that there is adequate provision for enforcement of such state laws.
(c) Criteria for determination. The Board will consider the
following criteria along with any other relevant information in making a
determination whether the laws of a state impose requirements
substantially similar to or provide greater protection and benefit to
lessees than under chapter 5, and whether there is adequate provision
for enforcement of such laws:
(1) In order for provisions of state law to be substantially similar
to or provide greater protection and benefit to lessees than the
provision of chapter 5, the provisions of state law4 shall require that
(i) Definitions and rules of construction import the same meaning and
have the same application as those prescribed under 213.2 of this
regulation;
(ii) Lessors make all of the applicable disclosures required by this
regulation and within the same (or more stringent) time periods as are
prescribed by this regulation;
(iii) Lessors abide by obligations substantially similar to those
prescribed by chapter 5, under conditions substantially similar to (or
more stringent than) those prescribed in chapter 5;
(iv) Lessors abide by the same (or more stringent) prohibitions as
are provided in chapter 5;
(v) Lessees need comply with no obligations or responsibilities which
are more costly or burdensome as a condition of exercising any of the
rights or gaining the benefits and protections in the state law which
correspond to those afforded by chapter 5, than those obligations or
responsibilities imposed upon lessees in chapter 5; and
(vi) Substantially similar or more favorable rights and protections
are provided to lessees under conditions substantially similar to or
more favorable (to lessees) than those afforded by chapter 5.
(2) In determining whether the provisions for enforcement of the
state law referred to in paragraph (b)(1) of this appendix are adequate,
consideration will be given to the extent to which, under the laws of
the state, provision is made for
(i) Administrative enforcement, including necessary facilities,
personnel and funding;
(ii) Criminal liability for willful and knowing violation with
penalties substantially similar to those prescribed under section 112 of
the Act, except that more severe criminal penalties may be prescribed;
(iii) Civil liability for failure to comply with the provisions of
the state law substantially similar to that provided under sections 130,
131 and 185(b) of the Act, except that more severe civil liability
penalties may be prescribed;
(iv) In leases where the lessee's liability at the end of the lease
term is based on the estimated value of the leased property, a
limitation on the lessee's liability at the end of the lease term
substantially similar to that provided in section 183(a) of the Act, and
a provison requiring that penalties be reasonable substantially similar
to that provided in section 183(b) of the Act, except that stricter
standards on end-term liability and penalty provisions may be
prescribed; and
(v) A statute of limitations with respect to civil liability of
substantially similar duration to that provided under section 185(c) of
the Act, except that a longer duration may be provided.
(d) Public notice of filing and proposed rulemaking. Following
initial review of an application filed in accordance with the
requirements of paragraphs (a) and (b) of this appendix, notice of such
filing and proposed rulemaking will be published by the Board in the
Federal Register, and a copy of such application will be made available
for examination by interested persons during business hours at the Board
and at the Federal Reserve Bank of each Federal Reserve District in
which any part of the state of the applicant is situated. A reasonable
period of time will be allowed from the date of such publication for the
Board to receive written comments from interested persons with respect
to that application.
(e) Exemption from requirements of chapter 5. If the Board
determines that under the law of a state consumer lease transactions are
subject to requirements which are substantially similar to or which
provide greater protection and benefit to lessees than those imposed
under chapter 5 and that there is adequate provision for enforcement,
the Board will exempt such class of transactions in that state from the
requirements of chapter 5 in the following manner and subject to the
following conditions:
(1) Notice of the exemption will be published in the Federal
Register, and the Board will furnish a copy of such notice to the
official who made application for such exemption and to each Federal
authority responsible for administrative enforcement of the requirements
of chapter 5.
(2) The appropriate official of any state which receives an exemption
shall inform the Board within 30 days of the occurrence of any change in
its related law (including regulations). The report of any such change
shall contain the full text of that change together with statements
setting forth the information and opinions with respect to that change
as specified in paragraphs (b) (2) and (4) of this appendix. The
official who has received an exemption shall file with the Board from
time to time such reports as the Board may require.
(3) The Board will inform the official of any subsequent amendments
to chapter 5 (including the implementing provisions of this regulation
and the Board's formal interpretations) which might call for amendment
of state law, regulations or formal interpretations thereof.
(f) Adverse determination. (1) If the Board denies the application
for exemption, it will notify the appropriate state official of the
facts upon which its decision is based and shall afford that state a
reasonable opportunity to demonstrate or achieve compliance.
(2) If, after giving the state an opportunity to demonstrate or
achieve compliance, the Board finds that it still cannot grant the
exemption, the Board will publish in the Federal Register a notice of
its decision and will furnish a copy of such notice to the official who
made application for such exemption.
(g) Revocation of exemption. (1) The Board reserves the right to
revoke any exemption if at anytime it determines that the state law does
not, in fact, impose requirements which are substantially similar to or
provide greater protection and benefit to lessees than those imposed
under chapter 5, or that there is not, in fact, adequate provision for
enforcement.
(2) Before revoking any state exemption, the Board will notify the
appropriate state official of the facts or conduct which in the opinion
of the Board warrants such revocation and shall afford that state such
opportunity as the Board deems appropriate to demonstrate or achieve
compliance.
(3) If, after having been afforded the opportunity to demonstrate or
achieve compliance, the Board determines that the state has not done so,
notice of the Board's intention to revoke such exemption shall be
published as a notice of proposed rulemaking in the Federal Register. A
period of time will be allowed from the date of such publication for the
Board to receive written comments from interested persons.
(4) In the event of revocation of such exemption, notice of such
revocation shall be published by the Board in the Federal Register, and
a copy of such notice shall also be furnished to the appropriate state
official and to the federal authorities responsible for enforcement of
requirements of chapter 5, and the class of transactions affected within
that state shall then be subject to the requirements of chapter 5, to
administrative enforcement as provided under section 108, to criminal
liability as provided under section 112, and to civil liability as
provided under sections 130, 131, and 185(b) of the Act.
(46 FR 20951, Apr. 7, 1981; 46 FR 29245, June 1, 1981)
1Any reference to state law in this appendix includes a reference to
any regulations which implement state law and formal interpretations
thereof by a court of competent jurisdiction or a duly authorized agency
of that state.
2Any reference in this appendix to chapter 5 of the Act or any
section thereof includes a reference to the implementing provisions of
this regulation and the Board's formal interpretations thereof.
3Transactions within a state in which a federally-chartered
institution is a lessor shall not be subject to the exemption, and such
federally-chartered lessors shall remain subject to the requirements of
the act and administative enforcement by the appropriate Federal
authority under section 108 of the Act, unless it is established to the
satisfaction of the Board that appropriate arrangements have been made
with such Federal authorities to assure effective enforcement of the
requirements of state laws with respect to such lessors.
4This paragraph is not to be construed as indicating that the Board
will consider adversely any additional requirements of state law which
are not inconsistent with the purpose of the Act or the requirements
imposed under chapter 5.
12 CFR 213.8 Pt. 213, App. B
12 CFR 213.8 Appendix B to Part 213 -- Procedures and Criteria for
Board Determination Regarding Preemption
Procedures and criteria under which any state may apply for a
determination that a state law1 is not inconsistent with and not
preempted by a provision of chapter 5 of the Act2 pursuant to 213.7 of
this regulation.
(a) Application. Any state may make application to the Board
pursuant to the terms of this appendix and the Board's Rules of
Procedure (12 CFR Part 262), for a determination that a law of such
state is consistent3 with a provision of chapter 5 of the Act, because
such state law provides greater protection and benefit to lessees than
does the provision of chapter 5, that such law is consistent with a
provision of chapter 5 for any other reason, or for a determination of
any issues not clearly covered by 213.7 of this regulation with regard
to the relationship of the federal law to the state law. Such
application shall be made by letter addressed to the Board signed by the
governor, attorney general or any official of the state having
responsibilities under the state law.
(b) Supporting documents. The application shall be accompanied by:
(1) A copy of the full text of the laws of the state which are
claimed by the applicant to be consistent with a provision of chapter 5
or whose relationship (with regard to consistency or inconsistency) to a
provision of chapter 5 is claimed by the applicant to be not clearly
covered by the standards and criteria for comparison set forth in 213.7
of this regulation.
(2) A comparison of each requirement of the state law with the
corresponding requirement of chapter 5, with reasons to support the
claim that the state law is consistent with a provision of chapter 5 or
that the relationship (with regard to consistency or inconsistency)
between the state law and chapter 5 is not clearly covered by the
standards and criteria set forth in 213.7 of this regulation.
(3) A copy of the full text of any provisions of state law
corresponding to sections 112, 130, 131, 183(a), 183(b), 185(b), and
185(c) of the Act (if applicable), together with reasons for the
applicant's claim that such state provisions are not inconsistent
(because they provide greater protection and benefit to lessees or for
other reasons) with the act.
(4) A statement that there are not state laws (including
administrative or judicial interpretations) other than those submitted
to the Board which have any bearing on whether or not the state law is
consistent with a provision of chapter 5.
(5) A statement identifying the office designated or to be designated
to administer the state laws referred to in paragraph (b)(1) of this
appendix. If no such administrative office exists, then a statement
identifying the office to which the Board can address any correspondence
regarding the request for such determination shall accompany the
application.
(c) Criteria for determination. The Board will consider the
following criteria along with any other relevant information, in
addition to the criteria set forth in 213.7 of this regulation, in
making a determination of whether or not state law is inconsistent with
a provision of chapter 5. In order for provisions of state law to be
determined to be consistent with a provision of chapter 5, the
provisions of state law4 shall, to the extent relevant to the
determination, require that
(1) Definitions and rules of construction import the same meaning and
have the same application as those prescribed by this regulation;
(2) Lessors make all of the applicable disclosures required by the
corresponding provision of chapter 5 and this regulation, and within the
same (or more stringent) time periods as those prescribed by this
regulation;
(3) Lessors abide by obligations substantially similar to those
prescribed by a provision of chapter 5 under conditions substantially
similar (or more stringent) to those in chapter 5;
(4) Lessors abide by the same (or more stringent) prohibitions as are
provided by chapter 5;
(5) Lessees need comply with no obligations or responsibilities which
are more costly or burdensome as a condition of exercising any of the
rights or gaining the benefits and protections provided in the state
law, which correspond to those afforded by chapter 5, than those
obligations or responsibilities imposed on lessees in chapter 5; and
(6) Lessees are to have rights and protections substantially similar
to or more favorable than those provided by the corresponding provisions
of chapter 5 under conditions and within time periods which are
substantially similar to or more favorable (to lessees) than those
prescribed by chapter 5. 5
(d) Public notice of filing and proposed rulemaking. In connection
with any application which has been filed in accordance with the
requirements of paragraphs (a) and (b) of this appendix, notice of such
filing and proposed rulemaking will be be published by the Board in the
Federal Register, and a copy of such application will be made available
for examination by interested persons during business hours at the Board
and at the Federal Reserve Bank of each Federal Reserve District in
which any part of the state of the applicant is situated. A period of
time will be allowed from the date of such publication for the Board to
receive written comments from interested persons with respect to the
application.
(e) Determination that a state law is consistent with chapter 5. If
the Board determines on the basis of the information before it that the
law of a state is consistent with a provision of chapter 5, notice of
such determination shall be published in the following manner and shall
be subject to the following conditions:
(1) Notice of the determination will be published in the Federal
Register, and the Board will furnish a copy of such notice to the
official who made application for such exemption and to each federal
authority responsible for administrative enforcement of the requirements
of chapter 5.
(2) The appropriate official of any state which receives such a
determination shall inform the Board within 30 days of the occurrence of
any change in its related law (or regulations). The report of any such
change shall contain copies of the full text of the law, as changed,
together with statements setting forth the information and opinions with
respect to that change as specified in paragraphs (b) (2) and (4) of
this appendix. The appropriate official of any state which has received
such a determination shall file with the Board from time to time such
reports as the Board may require.
(3) The Board will inform the appropriate official of any state which
receives such a determination of any subsequent amendments to chapter 5
(including the implementing provisions of this regulation and the
Board's formal interpretations) which might call for amendment of state
law, regulations, or formal interpretations.
(f) Adverse determination. (1) If, after publication of notice in
the Federal Register as provided under paragraph (d) of this appendix,
the Board finds that such state law is inconsistent with a provision of
chapter 5, it will notify the appropriate state official of the facts
upon which such finding is based and shall afford that state official a
reasonable opportunity to demonstrate further that such state law is not
inconsistent with the corresponding provisions of chapter 5, if such
state official desires to do so.
(2) If, after having afforded the state official such further
opportunity to demonstrate that the state law is consistent with a
provision of chapter 5, the Board finds that the state law is
inconsistent, it will publish in the Federal Register a notice of its
decision with respect to such application and will furnish a copy of
such notice to the official who made application for the determination.
(g) Reversal of determination. (1) The Board reserves the right to
reverse any determination made under this appendix to the effect that a
state law is consistent with a provision of chapter 5 because of
subsequently discovered facts, a change in the state or federal law (by
amendment or administrative or judicial interpretation or otherwise) or
for any other reason bearing on the coverage or impact of the state or
federal law.
(2) Before reversing any such determination, the Board will notify
the appropriate state official of the facts or conduct which, in the
opinion of the Board, warrants such reversal and shall afford that state
such opportunity as the Board deems appropriate under the circumstances
to demonstrate that the determination should not be reversed.
(3) If, after having been afforded the opportunity to demonstrate
that its law is consistent with a provision of chapter 5, the Board
determines that the state has not done so, notice of the Board's
intention to reverse such determination shall be published as a notice
of proposed rulemaking in the Federal Register. A reasonable period of
time will be allowed from the date of such publication for the Board to
receive written comments from interested persons.
(4) In the event of reversal of such determination, notice shall be
published by the Board in the Federal Register, and a copy of such
notice shall also be furnished to the appropriate state official and to
the Federal authorities responsible for enforcement of the requirements
of chapter 5, and the state law affected shall then be considered
inconsistent with and preempted by chapter 5 within the meaning of
section 186(a) of the Act.
(46 FR 20951, Apr. 7, 1981; 46 FR 29245-29246, June 1, 1981)
1Any reference to state law in this appendix includes a reference to
any regulations which implement state law and formal interpretations
thereof by a court of competent jurisdiction or a duly authorized agency
of that state.
2Any reference in this appendix to chapter 5 of the Act or any
section thereof includes a reference to the implementing provisions of
this regulation and the Board's formal interpretations thereof.
3For purposes of this appendix, the terms consistent and not
inconsistent shall convey the same meaning and shall involve the same
evidentiary showing.
4This paragraph is not to be construed as indicating that the Board
would consider adversely any additional requirements of state law which
are not inconsistent with the purposes of the Act or the requirements
imposed under chapter 5.
5A state may make a showing that in certain limited readily
identifiable circumstances a law which may otherwise be inconsistent
with a provision of chapter 5 is not inconsistent under the criteria set
forth in paragraph (c) of this appendix. The Board may determine such
state law to be consistent only under those circumstances but will make
no such determination if doing so would mislead or confuse lessees.
12 CFR 213.8 Pt. 213, App. C
12 CFR 213.8 Appendix C to Part 213 -- Model Forms
C-1 Model open-end or finance vehicle lease disclosures.
C-2 Model closed end or net vehicle lease disclosures.
C-3 Model furniture lease disclosures.
Insert illustration 270
Insert illustration 271
Insert illustration 272
Insert illustration 273
Insert illustration 274
Insert illustration 275
Insert illustration 276
Insert illustration 277
Insert illustration 278
Insert illustration 279
Insert illustration 280
Insert illustration 281
12 CFR 213.8 Pt. 213, App. D
12 CFR 213.8 Appendix D to Part 213 -- Federal Enforcement Agencies
The following list indicates which Federal agency enforces Regulation
M for particular classes of business. Any questions concerning
compliance by a particular business should be directed to the
appropriate enforcement agency.
National Banks: Consumer Community and Fair Lending Examination
Division, Comptroller of the Currency, Washington, DC 20219.
State Member Banks: Federal Reserve Bank serving the district in
which the state member bank is located.
Nonmember Insured Banks: Federal Deposit Insurance Corporation
Regional Director for the region in which the nonmember insured bank is
located.
Savings institutions insured under the Savings Association Insurance
Fund of the FDIC and federally chartered savings banks insured under the
Bank Insurance Fund of the FDIC (but not including state-chartered
savings banks insured under the Bank Insurance Fund). Office of Thrift
Supervision Regional Director for the region in which the institution is
located.
Federal Credit Unions: Regional office of the National Credit Union
Administration serving the area in which the Federal credit union is
located.
Air Carriers: Assistant General Counsel for Aviation Enforcement and
Proceedings, Department of Transportation, 400 Seventh Street, SW.,
Washington, DC 20590.
Those Subject to Packers and Stockyards Act: Nearest Packers and
Stockyards Administration area supervisor.
Federal Land Banks, Federal Land Bank Associations, Federal
Intermediate Credit Banks, and Production Credit Associations: Farm
Credit Administration, 490 L'Enfant Plaza, SW., Washington, DC 20578.
All Other Lessors (Lessors operating on a local or regional basis
should use the address of the FTC Regional Office in which they
operate): Division of Credit Practices, Bureau of Consumer Protection,
Federal Trade Commission, Washington, DC 20580.
(46 FR 20951, Apr. 7, 1981, as amended at 50 FR 8708, Mar. 5, 1985;
54 FR 53539, Dec. 29, 1989; 56 FR 51322, Oct. 11, 1991)
12 CFR 213.8 Pt. 213, Supp. I
12 CFR 213.8 Supplement I-CL-1 to Part 213 -- Official Staff Commentary
to Regulation M
1. Official status. This commentary is the vehicle by which the
staff of the Division of Consumer and Community Affairs of the Federal
Reserve Board issues official staff interpretations of Regulation M,
effective April 1, 1981. Good faith compliance with this commentary
affords protection from liability under section 130(f) of the Truth in
Lending Act (15 U.S.C. 1640). Section 130(f) protects lessors from civil
liability for any act done or omitted in good faith in conformity with
any interpretation issued by a duly authorized official or employee of
the Federal Reserve System.
2. Procedures for requesting interpretations. Under 213.1(d) of the
regulation, anyone may request an official staff interpretation.
Interpretations that are adopted will be incorporated in this commentary
following publication in the Federal Register. No official staff
interpretations are expected to be issued other than by means of this
commentary.
3. Status of previous interpretations. All statements and opinions
issued by the Federal Reserve Board and its staff interpreting previous
Regulation Z remain effective until October 1, 1982, only insofar as
they interpret that regulation. When compliance with Regulation M
becomes mandatory on October 1, 1982, the Board and staff
interpretations of the previous Regulation Z leasing provisions will be
entirely superseded by Regulation M and this commentary, except with
regard to liability under the previous regulation.
4. Rules of construction. (a) Lists that appear in the commentary
may be exhaustive or illustrative; the appropriate construction should
be clear from the context. In most cases, illustrative lists are
introduced by phrases such as ''including, but not limited to,'' ''among
other things,'' ''for example,'' or ''such as.''
(b) Throughout the commentary and regulation, reference to the
regulation should be construed to refer to Regulation M, unless the
context indicates that a reference to previous Regulation Z (12 CFR part
226) is also intended.
(c) Throughout the commentary, reference to this section or this
paragraph means the section or paragraph in the regulation that is the
subject of the comment.
5. Comment designations. Each comment in the commentary is
identified by a number and the regulatory section or paragraph that it
interprets. The comments are designated with as much specificity as
possible according to the particular regulatory provision addressed.
For example, some of the comments to 213.4(a) are further divided by
subparagraph, such as comment 4(a)(1)-1 and comment 4(a)(1)-2. In other
cases, comments have more general application and are designated, for
example, as comment 4(a)-1. This introduction may be cited as comments
I-1 through I-6. The appendices may be cited as comments app. C-1 and
app. C-2.
6. Cross-references. The following cross-references to related
material appear at the end of each section of the commentary: (a)
Statute -- those sections of the Truth in Lending Act on which the
regulatory provision is based;
(b) Other sections -- other provisions in the regulation necessary to
understand that section;
(c) Previous regulation -- parallel provisions in previous Regulation
Z; and
(d) 1981 changes -- a brief description of the major regulatory
changes made when the leasing rules were moved from previous Regulation
Z to Regulation M.
1. Foreign applicability. Regulation M applies to all persons
(including branches of foreign banks or leasing companies located in the
United States) that offer consumer leases to residents (including
resident aliens) of any state as defined in 213.2(a)(16). The
regulation does not apply to a foreign branch of a U.S. bank or leasing
company leasing to a U.S. citizen residing or visiting abroad or to a
foreign national abroad.
2. Issuance of staff interpretations. This commentary is the method
by which the staff provides interpretations that afford formal
protection under section 130(f) of the act. This commentary may be
amended periodically.
Statute: Sections 102(b), 105, and 130(f).
Previous regulation: Section 226.1.
1981 changes: None.
2(a) Definitions.
2(a)(2) Advertisement
1. Coverage. Only commercial messages that promote consumer lease
transactions requiring disclosures are advertisements. Messages
inviting, offering, or otherwise announcing generally to prospective
customers the availability of consumer leases, whether in visual, oral,
or print media, are covered by the definition. The list of examples in
the definition is not exhaustive; telephone solicitations and letters
sent to customers as part of an organized solicitation of business, for
example, are also advertisements. The term does not include the
following:
Direct personal contacts, such as follow-up letters, cost estimates
for individual lessees, or oral or written communications relating to
the negotiation of a specific transaction.
Informational material distributed only to businesses.
Notices required by federal or state law, if the law mandates that
specific information be displayed and only the information so mandated
is included in the notice.
News articles, the use of which is controlled by the news medium.
Market research or educational materials that do not solicit
business.
2. Persons covered. See the commentary to 213.5(a).
2(a)(4) Arrange for lease of personal property
1. General. The definition of lessor in 213.2(a)(8) includes one
who, in the ordinary course of business, regularly arranges for the
leasing of personal property. For example:
An automobile dealer who, pursuant to a business relationship,
completes the necessary lease agreement before forwarding it to the
leasing company (to whom the obligation is payable on its face) for
execution is arranging for the lease.
An automobile dealer who, receiving no fee for the service, refers a
customer to a leasing company that will prepare all relevant contract
documents is not arranging for the lease.
2. Multiple lessors. See the commentary to 213.4(c).
3. Consideration. The term other consideration refers to an actual
payment corresponding to a fee or similar compensation. It does not
refer to intangible benefits, such as the advantage of increased
business, that may flow from the relationship between the parties.
2(a)(6) Consumer lease.
1. Primary purposes. A lessor must determine in each case if the
leased property will be used primarily for personal, family, or
household purposes. If some question exists as to the primary purpose
for a lease, the lessor is, of course, free to make the disclosures, and
the fact that disclosures are made in such circumstances is not
controlling on the question of whether the transaction was exempt. The
primary purpose of a lease is generally determined before or at
consummation and a subsequent change in primary usage is governed by
213.4(e).
2. Period of time. To be a consumer lease, the initial term of the
lease must be more than 4 months. Thus, a lease of personal property
for 4 months, 3 months or on a month-to-month or week-to-week basis
(even though the lease actually extends beyond 4 months) is not a
consumer lease and is not subject to the disclosure requirements of the
regulation. A lease with a penalty for cancelling during the first 4
months is considered to have a term of more than 4 months. A
month-to-month or week-to-week extension of a lease that was originally
for 4 months or less is not a consumer lease, even if the extension
actually lasts for more than 4 months. For example, a 3-month lease
extended on a month-to-month basis and terminated after 1 year does not
require consumer lease disclosures.
3. Organization. A consumer lease does not include a lease made to an
organization, as defined in 213.2(a)(9). A lease to an organization is
outside the requirements of the regulation even if the property is used
(by an employee, for example) primarily for personal, family or
household purposes. Likewise, a lease made to an organization is not a
consumer lease even if it is guaranteed by or subsequently assigned to a
natural person.
4. Credit sale. A lease that meets the definition of a credit sale
in Regulation Z, 12 CFR 226.2(a)(16), is not a consumer lease.
Regulation Z defines a credit sale, in part, as ''a bailment or lease
(unless terminable without penalty at any time by the consumer) under
which the consumer --
(i) Agrees to pay as compensation for use a sum substantially
equivalent to, or in excess of, the total value of the property and
services involved; and
(ii) Will become (or has the option to become), for no additional
consideration or for nominal consideration, the owner of the property
upon compliance with the agreement.''
5. Safe deposit boxes. A lease of a safe deposit box is not a
consumer lease for purposes of this regulation.
6. Leases of personal property incidental to a service. The
following leases of personal property that are incidental to services
are not consumer leases subject to the requirements of the regulation:
Home entertainment systems requiring the consumer to lease equipment
that enables a television to receive the transmitted programming.
Burglar alarm systems requiring the installation of leased equipment
that triggers a telephone call when a home is burglarized.
2(a)(7) Lessee.
1. Guarantors. Guarantors are not lessees for purposes of the
regulation.
2(a)(8) Lessor.
1. Assignees. An assignee may be a lessor for purposes of the
regulation in circumstances such as those described in ''Ford Motor
Credit Co. v. Cenance,'' 452 U.S. 155, 101 S.Ct. 2239 (1981). In that
case, the Supreme Court held that an assignee was a creditor for
purposes of previous Regulation Z because of its substantial involvement
in the credit transaction.
2(a)(9) Organization.
1. Coverage. The term includes joint ventures and persons operating
under a business name.
2(a)(12) Personal property.
1. Coverage. Whether property is considered personal property depends
on state or other applicable law. For example, a mobile home or
houseboat may be considered personal property in one state but real
property in another.
2(a)(14) Realized value.
1. General. Realized value is not a required disclosure. It refers
to the value of the property at early termination or at the end of the
lease term. It may be either the retail or wholesale value. Realized
value is relevant only to leases in which the lessee's liability at
early termination or at the end of the lease term is the difference
between the estimated value of the property and its realized value.
2. Options. Subject to the contract and to state or other applicable
law, the lessor may choose any of the 3 methods for calculating the
realized value in determining the lessee's liability at the end of the
lease term or at early termination. If the lessor sells the property
prior to making that determination, the price received for the property
is the realized value. If the lessor does not sell the property prior
to making that determination, the lessor may choose either the highest
offer or the fair market value as the realized value.
3. Exclusions. The realized value may exclude any amount attributable
to taxes.
4. Disposition charges. Disposition charges may not be subtracted in
determining the realized value. If the lessor charges the lessee a fee
to cover the disposition expenses, the fee must be disclosed at
consummation under 213.4(g)(5). Disposition charges may be estimated in
accordance with 213.4(d), and this does not prevent the lessor from
collecting the actual disposition costs incurred.
5. Offers. In determining the highest offer for disposition, the
lessor need not consider offers that the offeror has withdrawn or is
unable or unwilling to perform.
6. Appraisals. The lessor may obtain an appraisal of the leased
property to determine its realized value. Such an appraisal, however,
is not the one addressed in section 183(c) of the Act and 213.4(g)(14);
those provisions refer to the lessee's right to an independent
professional appraisal.
2(a)(15) Security interest.
1. Coverage. The list of security interests in the definition is not
exhaustive. Other than those listed, only interests that are security
interests under state or other applicable law are encompassed by the
definition. For example, any interest the lessor may have in the leased
property falls within this definition only if it is considered a
security interest under state or other applicable law.
2. Disclosable interests. For purposes of the regulation, a security
interest is an interest taken by the lessor to secure performance of the
lessee's obligation. For example, if a bank that is not a lessor makes
a loan to a leasing company and takes assignments of consumer leases
generated by that company to secure the loan, the bank's security
interest in the lessor's receivables is not a security interest for
purposes of this regulation.
3. Insurance. The lessor's right to insurance proceeds or unearned
insurance premiums is not a security interest for purposes of this
regulation.
2(a)(17) Total lease obligation.
1. Disclosure. The total lease obligation is disclosed under
213.4(g)(15)(i). It is relevant only to so-called open-end leases in
which the lessee's liability at the end of the lease term is based on
the difference between the estimated value of the leased property and
its realized value.
2. Periodic payments: disclosure distinguished. Certain items that
may be paid periodically are not part of the lessee's total lease
obligation. Therefore, the amount of the scheduled periodic payments
for purposes of calculating the total lease obligation may be less than
the amount of the periodic payments disclosed under 213.4(g)(3).
3. Periodic payments: inclusions and exclusions. The total of
scheduled periodic payments under the lease for purposes of calculating
the total lease obligation is composed of the following items:
Any portion of the periodic payments attributable to depreciation,
cost of money, and profit.
Taxes in some cases. See the commentary to 213.4(g)(15).
The capitalized cost of mechanical breakdown protection contracts.
The total of scheduled periodic payments under the lease for purposes
of calculating the total lease obligation does not include the
following:
Any amount not paid periodically.
Any portion of periodic payments attributable to official fees,
registration, certificate of title, or license fees.
Taxes in some cases. See the commentary to 213.4(g)(15).
At the lessor's option, the capitalized cost of service contracts and
insurance premiums may be either included or excluded from this
calculation.
4. Initial payments. The following amounts are not included among
the payments at consummation when calculating the total lease
obligation:
Refundable security deposits.
Official fees and charges disclosable under 213.4(g)(4).
Other charges disclosable under 213.4(g)(5).
The cost of a mechanical breakdown protection contract purchased at
consummation.
5. Estimated value. See the commentary to 213.4(d) regarding the
use of estimates and section 183(a) of the Act regarding the criteria
for estimating the value of the leased property at the end of the lease
term.
2(a)(18) Value at consummation.
1. Disclosure. The value at consummation is relevant only to
so-called open-end leases and is disclosed and subtracted from the total
lease obligation under 213.4(g)(15)(i).
2. Taxes. The value at consummation includes taxes paid by the lessor
in connection with the acquisition of leased property and amortized over
the lease term. See the commentary to 213.4(g)(15).
3. Other amounts. The definition of the value at consummation
explicitly permits the lessor to include a profit or markup (without
separate itemization). The lessor may include costs of doing business,
such as insurance that the lessor purchases on its own behalf. See the
commentary to 213.4(g)(6). The lessor may not include in this amount
other items (such as maintenance or extended warranty insurance) that
are purchased by the lessee.
2(b) Rules of construction.
1. Footnotes. Material that appears in a footnote has the same legal
weight as material in the body of the regulation.
2. Consummation. When a contractual relationship is created between
the lessor and the lessee is a matter to be determined under state or
other applicable law; the regulation does not make that determination.
Consummation does not occur merely because the lessee has made some
financial investment in the transaction (for example, by paying a
nonrefundable fee) unless, of course, applicable law holds otherwise.
Statute: Sections 103(g) and 181.
Previous regulation: Section 226.2.
1981 changes: Agricultural purpose has been slightly revised to
conform to the amended act.
Statute: Section 105(a).
Previous regulation: Section 226.3(f).
1981 changes: None.
4(a) General requirements.
1. Basis of disclosures. The regulation assumes that parties will
perform fully according to the lease terms. For example:
In a 3-year lease with a 1-year minimum term after which there is no
penalty for termination, disclosures should be based on the full 3-year
term of the lease. The 1-year minimum term is only relevant to the
early termination provisions of 213.4(g) (12), (13), and (14).
2. Minor variations. The lessor may disregard the effects of the
following in making calculations and disclosures:
That payments must be collected in whole cents.
That dates of scheduled payments may be changed because the scheduled
date is not a business day.
That months have different numbers of days.
3. Form of disclosures. In making disclosures lessors may
cross-reference rather than repeat items that are disclosed elsewhere in
the lease disclosure statement. In addition, when a required disclosure
consists of a single charge, lessors do not have to repeat the charge as
an itemization and a total amount. See the commentary to 213.4(g) (5)
and (15).
4. Number of transactions. Lessors have flexibility in handling
lease transactions that may be viewed as multiple transactions. For
example:
When a lessor leases two items to the same lessee on the same day,
the lessor may disclose the leases as either one or two lease
transactions.
When a lessor sells insurance or other incidental services in
connection with a lease, the lessor may disclose in one of two ways: a
single lease transaction or a lease and credit sale transaction.
5. Rebates. In a lease transaction, a seller's or manufacturer's
rebate may be offered to prospective lessees. At the lessor's option,
these rebates may be either reflected in or disregarded in the lease
disclosures required under the regulation. If the lessor chooses to
reflect the rebate in the leasing disclosures, it may be taken into
account in any manner as part of those disclosures.
Paragraph 4(a)(1).
1. Clearly, conspicuously and in meaningful sequence. This standard
requires that disclosures be in a reasonably understandable form. For
example, while the regulation requires no particular mathematical
progression or format, the disclosures must be presented in a way that
does not obscure the relationship of the terms to each other. Appendix
C contains model forms that meet this standard, although lessors are not
required to use these forms. The requirement that disclosures be made
clearly and conspicuously does not mean that they must be more
conspicuous than other terms in a combined contract-disclosure
statement, nor does it preclude the use of a multi-purpose disclosure
form that enables the lessor to designate the specific disclosures
applicable to a given transaction. See the commentary to appendix C.
2. Type size. The term point in the phrase 10-point type is a
printing term that refers to the size of the body of the type, as
distinguished from the size of the type face which may vary among
different print manufacturers.
Paragraph 4(a)(2).
1. Consummation. See the commentary to 213.2(b).
2. Identification of parties. While disclosures must always be made
clearly and conspicuously, it is not necessary to use the words lessor
or lessee when identifying those parties.
3. Multiple lessors and multiple lessees. In transactions involving
multiple lessors and lessees, the disclosure statement must identify all
the lessors and lessees; however, 213.4(c) permits a single lessor to
make all the disclosures to a single lessee.
4. Integrated lease/disclosure forms. Contract terms or disclosures
that are not required by the regulation may be added to the disclosure
statement so long as the required disclosures are made together on a
single page (which may include both sides) and above the place for the
lessee's signature. Generally, other terms and disclosures may precede,
follow, or be intermingled with the regulation's disclosures within the
limits of 213.4(b) governing the use of additional information and the
clear, conspicuous, and meaningful sequence disclosure standard in
213.4(a)(1).
5. Lessee's signature. The regulation does not require the lessee to
sign the disclosures but, if disclosures are combined with contract
terms, the lessor may require the lessee's signature for contract or
evidentiary purposes. In such a case, the disclosures must be made
above the place for the lessee's signature. When disclosures and
contract terms appear on both sides of a page, the consumer's signature
usually appears on the bottom of the second side. For purposes of the
regulation, the consumer's signature may appear on the bottom of the
first side if all the disclosures appear on that side.
Paragraph 4(a)(4).
1. Permissible uses. If the lessor chooses to provide
foreign-language translations of the disclosures or is required to do so
by state, federal, or local law, the translations are not inconsistent
per se with disclosures under the regulation and may be provided as
additional information under 213.4(b).
2. Advertisements in Puerto Rico. The requirement for providing
English disclosures upon request does not apply to advertisements
subject to 213.5 of the regulation.
4(b) Additional information.
1. State law disclosures. If state law disclosures are not
inconsistent with the act and regulation under 213.7, the lessor may
make those disclosures in accordance with the first sentence of this
paragraph. If state law disclosures are inconsistent under 213.7 and
the lessor elects to make them, it must do so in accordance with the
second sentence of this paragraph.
4(c) Multiple lessors; multiple lessees.
1. Multiple lessors. If a lease transaction involves more than one
lessor, the lessors may choose which of them will make the disclosures.
All disclosures for the transaction must be given, even if the
disclosing lessor would not otherwise have been obligated to make a
particular disclosure.
4(d) Unknown-information estimate.
1. Time of estimated disclosure. The lessor may use estimates to
make disclosures if necessary information is unknown or unavailable at
the time the disclosures are made. For example:
Section 213.4(g)(4) requires the lessor to disclose the total amount
payable by the lessee during the lease term for official fees,
registration, certificate of title, license fees, or taxes. If these
amounts are subject to indeterminable increases or decreases over the
course of the lease, the lessor may estimate its disclosures based on
the rates or charges in effect at the time of disclosure.
2. Basis of estimates. Estimates must be made on the basis of the
best information reasonably available at the time disclosures are made.
The reasonably available standard requires that the lessor, acting in
good faith, exercise due diligence in obtaining information. The lessor
normally may rely on the representations of other parties in obtaining
information. For example, the lessor might look to the consumer to
determine the purpose for which leased property will be used, to
insurance companies for the cost of insurance, or to an automobile
manufacturer or dealer for the date of delivery.
3. Estimated value of leased property at termination. When the
lessee's liability at the end of the lease term is based on the
estimated value of the leased property (see 213.4(g)(15)), the estimate
must be reasonable and based on the best information reasonably
available to the lessor. That standard permits a lessor to use a
generally accepted trade publication listing estimated current or future
market prices for the leased property, rather than investing in the most
sophisticated computer equipment to derive the estimated value at the
end of the lease term. The lessor should rely on other information, its
experience, or reasonable belief, if those sources provide the best
information. For example:
An automobile lessor offering a 3-year open-end lease intends to
assign a wholesale value to the vehicle at the end of the lease term.
The lessor may disclose as an estimated value a wholesale value derived
from a credible trade publication listing current wholesale values, if
the trade publication is the best information available.
Same facts as above, except that the lessor discloses an estimated
value derived by adjusting the value quoted in the trade publication
because, in its experience, the trade publication values either
understate or overstate the prices actually received in local used
vehicle markets. The lessor may adjust estimated values quoted in trade
publications based on the lessor's experience or reasonable belief that
such values will be understated or overstated.
4. Retail or wholesale value. The lessor may choose either a retail
or a wholesale value in estimating the value of the leased property at
termination, provided that choice is consistent with the lessor's
general practice or intention when determining the value of the property
at the end of the lease term.
5. Labelling estimates. Generally, only the particular disclosure
for which the exact information is unknown is labelled as an estimate.
However, when several disclosures are affected because of the unknown
information, the lessor has the option of labelling as an estimate
either every affected disclosure or only the disclosure primarily
affected.
6. Understating the estimated value. In non-purchase-option leases,
the lessor may not use a value lower than that indicated by the best
information available when disclosing the estimated value of leased
property at the end of the lease term under 213.4(g)(15).
4(e) Effect of subsequent occurrence.
1. Subsequent occurrences. Examples of subsequent occurrences
include:
A change from a monthly to a weekly payment schedule.
The addition of insurance or a security interest by the lessor
because the lessee has not performed obligations contracted for in the
lease.
An increase in official fees or taxes. See the commentary to
213.4(d).
An increase in insurance premium or coverage caused by a change in
law.
Late delivery of an automobile caused by a strike.
2. Redisclosure. When a disclosure becomes inaccurate because of a
subsequent occurrence, the lessor need not make new disclosures unless
new disclosures are required under 213.4(h).
4(g) Specific disclosure requirements.
1. Inapplicable disclosures. The disclosures required by this
section need be made only as applicable. Any disclosure not relevant to
a particular transaction may be eliminated entirely. For example, if
the lessor does not take a security interest, no disclosure is required
under 213.4(g)(9). See the commentary to appendix C.
2. Other required disclosures. The disclosure statement must include
the date and identify the lessor and the lessee. See the commentary to
213.4(a)(2). The lessor need only be identified by name; no address is
required.
Paragraph 4(g)(1).
1. Multiple-item lease. In a multiple-item lease, the property may
be described in separate statements as provided in 213.4(a)(3).
Paragraph 4(g)(2).
1. Itemization not required. The lessor must disclose one total
initial payment amount and identify the components of this one amount
(for example, capitalized cost reduction, mechanical breakdown
protection, registration fees). The lessor may, but need not, disclose
the dollar amount of each component.
2. Consummation. See the commentary to 213.2(b).
3. Fees payable upon delivery. This provision does not apply to fees
paid at delivery, when delivery occurs after consummation. For example:
The lessee agrees to pay registration fees, sales taxes, and a
delivery charge in one lump sum on the date the automobile is delivered,
some time after consummation. None of these charges is an initial
payment under 213.4(g)(2) because they are paid after consummation of
the lease. The registration fees and sales taxes are disclosed under
213.4(g)(4), and the delivery charge is disclosed as an other charge
under 213.4(g)(5).
Paragraph 4(g)(3).
1. Itemization not required. Section 213.4(g)(3) does not require
the lessor to itemize the components of the periodic payments. Some of
the components must be disclosed separately if their disclosure is
required by other provisions of the regulation, such as official fees
and lessee's insurance.
2. Periodic payments. The phrase number, amount, and due dates or
periods of payments requires the disclosure of all payments made
periodically. The disclosed payments must include all amounts, such as
maintenance and insurance charges, that are paid periodically. In
addition, the lessor must disclose the total of such periodic payments.
In an open-end lease, however, the lessor may disclose as the total of
periodic payments the sum of the scheduled periodic payments referred to
in 213.2(a)(17). See the commentary to 213.2(a)(17).
Paragraph 4(g)(4).
1. Taxes. Taxes that are included in the value at consummation are
not disclosed pursuant to this paragraph. See the commentary to
213.2(a)(18).
Paragraph 4(g)(5).
1. Coverage. Section 213.4(g)(5) requires the disclosure of charges
that are anticipated by the parties as incident to the normal operation
of the lease agreement. It does not require disclosure of charges that
are imposed when the lessee terminates early or fails to abide by the
lease agreement, such as charges for:
Late payment.
Default.
Early termination.
Deferral of payments.
Extension of the lease.
2. Form of disclosure. Although the disclosure of an other charge or
the total of all other charges must be clear and conspicuous, the lessor
need not use the specific terminology other charge. Moreover, the
regulation does not impose a location requirement for the disclosure of
other charges. For example:
A lessor has a single other charge, which is a disposition fee of
$100. The lessor may disclose the disposition fee with related
disclosures about early or scheduled termination. It may but need not
repeat the charge as a total with the label of other charge or show a
total of other charges.
3. Relationship to other provisions. The other charges mentioned in
213.4(g)(5) are charges that are not required to be disclosed under
another provision of 213.4(g). For example:
A delivery charge that is paid after consummation is disclosed as an
other charge. A delivery charge that is paid at consummation, however,
is disclosed as part of the total initial charges under 213.4(g)(2),
not as an other charge.
Occasionally, the price of a mechanical breakdown protection (MBP)
contract is disclosed as an other charge. More often, the price of MBP
is reflected in the periodic payment disclosure under 213.4(g)(3), in
which case it is not disclosed as an other charge. In states where MBP
is regarded as insurance, however, the cost should be disclosed in
accordance with 213.4(g)(6), not as an other charge. See the
commentary to 213.4(g)(6).
4. Lessee liabilties at the end of the lease term. Liabilities that
the lease imposes upon the lessee at the end of the scheduled lease term
and that must be disclosed include, but are not limited to, disposition
and pick-up charges.
Paragraph 4(g)(6).
1. Lessor's insurance. Insurance that is purchased by the lessor
primarily for its own benefit, and that is absorbed as a business
expense and not separately charged to the lessee, need not be disclosed
under 213.4(g)(6) even if it provides an incidental benefit to the
lessee.
2. Mechanical breakdown protection. Whether mechanical breakdown
protection (MBP) purchased in conjunction with a lease should be treated
as insurance is determined by state or other applicable law. In states
that do not treat MBP as insurance, the lessor need not make
213.4(g)(6) disclosures. The lessor may, however, disclose the
213.4(g)(6) information in such cases in accordance with the additional
information provision in 213.4(b).
Paragraph 4(g)(7).
1. Brief identification. The statement identifying warranties may be
brief. For example, manufacturer's warranties may be identified simply
by a reference to the standard manufacturer's warranty.
2. Warranty disclaimers. Although a disclaimer of warranties is not
required by the regulation, the lessor may give a disclaimer as
additional information in accordance with 213.4(b).
3. State law. Whether an express warranty or guaranty exists is
determined by state or other applicable law.
Paragraph 4(g)(8).
1. Standards for wear and use. The lessor is permitted, but not
required, to set standards for wear and use (such as excess mileage).
The disclosure may be omitted by lessors that do not set such standards.
See the commentary to 213.4(g)(15).
Paragraph 4(g)(9).
1. Disclosable security interests. See 213.2(a)(15) and
accompanying commentary to determine what security interests must be
disclosed.
Paragraph 4(g)(10).
1. Collection costs. The automatic imposition of collection costs or
attorney fees upon default must be disclosed under 213.4(g)(10).
Collection costs or attorney fees that are not imposed automatically,
but are contingent upon expenditure of amounts in conjunction with a
collection proceeding or upon the employment of an attorney to effect
collection, need not be disclosed.
2. Charges for early termination. When default is a condition for
early termination of a lease, default charges must also be disclosed
under 213.4(g)(12). The 213.4(g)(10) and (12) disclosures may be
combined. Examples of combined disclosures are provided in the model
lease disclosure forms in appendix C.
3. Simple-interest leases. In a simple-interest accounting lease,
the additional lease charge that accrues on the lease balance when a
periodic payment is made after the due date does not constitute a
penalty or other charge for late payment. Similarly, continued accrual
of the lease charge after termination of the lease because the lessee
fails to return the leased property does not constitute a default
charge. In either case, if the additional charge accrues at a rate
higher than the normal lease charge, the lessor must disclose the amount
of or the method of determining the additional charge under
213.4(g)(10).
4. Extension charges. Extension charges that exceed the lease charge
in a simple-interest accounting lease or that are added separately are
disclosed under 213.4(g)(10).
5. Reasonableness of charges. Penalties or other charges for
delinquency, default, or early termination may be specified in the lease
but only in an amount that is reasonable. Section 183(b) of the Act
sets forth the standards for determining a reasonable penalty or charge.
Paragraph 4(g)(11).
1. Mandatory disclosure of no purchase option. Although generally
the lessor need only make the specific required disclosures that apply
to a transaction, it must disclose affirmatively that the lessee has no
option to purchase the leased property when the purchase option is
inapplicable.
2. Existence of purchase option. Whether a purchase option exists is
determined by state or other applicable law. The lessee's right to
submit a bid to purchase property at termination of the lease is not an
option to purchase under 213.4(g)(11) if the lessor is not required to
accept the lessee's bid and the lessee does not receive preferential
treatment.
3. Purchase option fees. A purchase option fee must be disclosed
under this paragraph unless the lessor discloses the fee under
213.4(g)(5) as an other charge.
Paragraph 4(g)(12).
1. Default. When default is also a condition for early termination of
a lease, default charges must be disclosed under this paragraph. See
the commentary to 213.4(g)(10).
2. Lessee's liability at early termination. When the lessee is
liable for the difference between the unamortized capitalized cost and
the realized value at early termination, the amount or the method of
determining the amount of the difference must be disclosed under this
paragraph.
3. Reasonableness of charges. Penalties or other charges for
delinquency, default, or early termination may be specified in the lease
but only in an amount that is reasonable. Section 183(b) of the Act
sets forth the standards for determining a reasonable penalty or charge.
Paragraph 4(g)(14).
1. Disclosure inapplicable. When the lessee is liable at the end of
the lease term or at early termination for unreasonable wear or use but
not for the estimated value of the leased property, the lessor need not
disclose the lessee's right to an independent appraisal. For example:
The automobile lessor may reasonably expect a lessee to return an
undented car with four good tires at the end of the lease term. Even
though it holds the lessee liable for the difference between a dented
car with bald tires and the value of a car in reasonably good repair,
the lessor is not required to disclose the lessee's appraisal right.
2. Lessor's appraisal. The lessor may obtain an appraisal of the
leased property to determine its realized value. Such an appraisal,
however, is not the one addressed in section 183(c) of the Act, and the
lessor still must disclose the lessee's independent right to an
appraisal under 213.4(g)(14).
3. Time restriction on appraisal. Neither the Act nor the regulation
specifies any time period in which the lessee must exercise the
appraisal right. The lessor may require a lessee to obtain the
appraisal within a reasonable time after termination of the lease. The
regulation does not define what is a reasonable time.
Paragraph 4(g)(15).
1. Coverage. The disclosure under Paragraph 4(g)(15) limiting the
lessee's liability for the value of the leased property does not apply
at early termination.
2. Total lease obligation. The requirement that the total lease
obligation be itemized is satisfied by disclosing the 3 components in
the definition of total lease obligation in 213.2(a)(17) with their
corresponding amounts. The lessor may cross-reference the individual
components disclosed elsewhere in the lease disclosure statement, as
done in appendix C-1.
3. Taxes. Taxes included in the value at consummation are included in
the total lease obligation. Taxes not included in the value at
consummation may, but need not, be included in the total lease
obligation at the lessor's option. See the commentary to 213.2(a)(18).
4. Leases with a minimum term. If a lease has an alternative minimum
term, the 213.2(g)(15) disclosures governing the liability limitation
are not applicable for the minimum term. See the commentary to
213.4(a).
5. Average payment allocable to a monthly period. The phrase average
payment allocable to a monthly period is based on the periodic payment
used to compute the total lease obligation. See the commentary to
213.2(a)(17).
6. Charges not subject to rebuttable presumption. The limitation on
liability applies only to liability that is based on the estimated value
of the property at the end of the lease term. The lessor also may
recover additional charges from the lessee at the end of the lease term.
Examples of such additional charges include:
Disposition charges.
Excess mileage charges.
Late payment and default charges.
Amounts by which the unamortized capitalized cost exceeds the
estimated residual value that have accrued in simple interest accounting
leases because the lessee has made late payments.
4(h) Renegotiations or extensions.
1. General coverage. Section 213.4(h) applies only to existing
leases that were covered by the requirements of the regulation or
previous Regulation Z. It therefore does not apply to the renegotiation
or extension of leases with an initial term of 4 months or less, because
such leases are not covered by the definition of consumer lease in
213.2(a)(6).
2. Renegotiation defined. A renegotiation occurs when an existing
consumer lease is satisfied and replaced by a new lease undertaken by
the same lessee. A renegotiation is a new lease requiring new
disclosures. Whether and when a lease is satisfied and replaced by a
new lease is determined by state or other applicable law.
3. Renegotiation exceptions. The following events are not
renegotiations even if they are accomplished by satisfying and replacing
an existing lease:
A substitution of leased property in a multiple-item lease, provided
the average payment is not changed by more than 25 percent.
A reduction in the lease charge.
A substitution of leased property with property that has a
substantially equivalent or greater economic value, provided no other
lease terms are changed.
4. Extension defined. An extension is any continuation of an
existing consumer lease beyond the originally scheduled termination
date, but only if the continuation is not the result of a renegotiation.
The continuation must be agreed to by both the lessor and the lessee.
An extension that exceeds 6 months is a new lease requiring new
disclosures.
5. Time of extension disclosures. If a consumer lease is extended
for a specified term greater than 6 months, new disclosures are required
at the time the extension is agreed to. If the lease is extended on a
month-to-month basis and exceeds 6 months, new disclosures are required
at the commencement of the seventh month. If a consumer lease is
extended for several terms, one of which will exceed 6 months beyond the
originally scheduled termination date of the lease, new disclosures are
required at the commencement of the term that will exceed 6 months
beyond the originally scheduled termination date.
6. Inapplicable disclosures. Disclosures that are inapplicable to
the terms of a renegotiation or extension need not be given. For
example:
If the term for which extension disclosures are given is 1 month and
the lessee will pay no official fees and taxes during that month, no
disclosure of those amounts is necessary.
If a renegotiation involves no initial charges, no disclosure of
initial charges is necessary.
7. Court proceedings. No disclosures are required if a renegotiation
or extension results from an agreement involving a court proceeding.
8. Deferrals. No disclosures are required if one or more payments are
deferred, whether or not a fee is charged.
9. Assumptions. No disclosures are required when a consumer lease is
assumed by another person, whether or not an assumption fee is charged.
Statute: Sections 102(b), 121, 122, 124, 182, and 183.
Other sections: Sections 213.2, 213.5, and 213.7 and appendix C.
Previous regulation: Sections 226.6 and 226.15.
1981 changes: Although reorganized, the disclosure requirements are
substantially the same as the previous requirements. The sole amendment
implements section 121 of the Truth in Lending Act pertaining to
multiple lessors and lessees.
5(a) General rule.
1. Persons covered. All persons must comply with the advertising
provisions in this section, not just those that meet the definition of
lessor in 213.2(a)(8). Thus, automobile dealers, merchants, and others
who are not themselves lessors must comply with the advertising
provisions of the regulation if they advertise consumer lease
transactions. The owner and personnel of the medium in which an
advertisement appears or through which it is disseminated, however, are
not subject to civil liability for violations under section 184(b) of
the act.
2. Usually and customarily. Section 213.5(a) is not intended to
prohibit the advertising of a single item or the promotion of new
leasing programs, but to bar the advertising of terms that are not and
will not be available. Thus, an advertisment may state terms that will
be offered for only a limited period or terms that will become available
at a future date.
5(b) Catalogs and multipage advertisements.
1. General rule. The multiple-page advertisements to which 213.5(b)
refers are advertisements consisting of a numbered series of pages --
for example, a supplement to a newspaper. A mailing comprised of
several separate flyers or pieces of promotional material in a single
envelope is not a single multiple-page advertisement.
2. Cross-references. A multiple-page advertisement is a single
advertisement (requiring only one set of lease disclosures) if it
contains a table, chart, or schedule clearly stating sufficient
information for the reader to determine the disclosures required under
213.5(c) (1) through (5). If one of the triggering terms listed in
213.5(c) appears on another page of the catalog or multiple-page
advertisement, that page must clearly refer to the specific page where
the table, chart, or schedule begins.
5(c) Terms that require additional information.
1. Clear and conspicuous standard. Section 213.5(c) prescribes no
specific rules for the format of the necessary disclosures. The terms
need not be printed in a certain type size and need not appear in any
particular place in the advertisement.
2. Triggering terms. Whenever certain triggering terms appear in
lease advertisements, the additional terms enumerated in 213.5(c) (1)
through (5) must also appear. An example of one or more typical leases
with a statement of all the terms applicable to each may be used. The
additional terms must be disclosed even if the triggering term is not
stated explicitly, but is readily determinable from the advertisement.
For example, if an advertisement states a 5-year lease term with monthly
payments, the number of required payments -- a triggering term -- is
readily apparent.
5(d) Multiple-item leases; merchandise tags.
1. Merchandise tags. Section 213.5(d) provides a method for using
merchandise tags without including all the required disclosures on the
tags. As an alternative to this disclosure method, a merchandise tag
may state all the necessary terms on one or both sides of the tag. If
the terms are on both sides of the tag, both sides must be accessible to
the consumer.
Statute: Sections 105(a) and 184.
Other sections: Sections 213.2(a) (2) and (6).
Previous regulation: Sections 226.10 (a), (b), (g), and (h).
1981 changes: None.
1. Preservation methods. Lessors must retain evidence that they
performed required actions as well as made required disclosures.
Adequate evidence of compliance does not require actual paper copies of
disclosure statements or other business records. The evidence may be
retained on microfilm, microfiche, or by any other method designed to
reproduce records accurately (including computer programs). The lessor
need retain only enough information to reconstruct the required
disclosures or other records.
Statute: Section 105(a)
Previous regulation: Section 226.6(i)
1981 changes: A uniform 2-year record-retention rule replaces the
previous requirement that records be retained through at least one
compliance examination.
1. Procedures. Only states (through their authorized officials) may
request and receive determinations on inconsistency. The procedures for
requesting a Board determination on inconsistency are contained in
Appendix B.
2. Inconsistent state disclosures. A lessor that chooses to make
inconsistent state disclosures must do so in the manner prescribed by
213.4(b).
Statute: Sections 111(a)(1) and 186(a).
Other sections: Sections 213.2(a)(16) and 213.4(b) and appendix B.
Previous regulation: Section 226.6(b)(3).
1981 changes: None.
1. Classes eligible. The state determines the classes of
transactions for its exemption and makes its application for those
classes. Classes might be, for example, all automobile leases or all
leases in which the lessor is a bank.
2. Substantial similarity. The substantially similar standard
requires that state statutory or regulatory provisions and state
interpretations of those provisions must be generally the same as the
federal act and the regulation. A state will be eligible for an
exemption even if its law covers classes of transactions not covered by
the federal law. For example, if a state's law covers leases for
agricultural purposes, this will not prevent the Board from granting an
exemption for consumer leases, even though leases for agricultural
purposes are not covered by the federal law.
3. Adequate enforcement. The standard requiring adequate provision
for enforcement generally means that appropriate state officials are
authorized to enforce the state law through procedures and sanctions
comparable to those available to federal enforcement agencies.
Statute: Sections 111(a)(2) and 186(b).
Other sections: Sections 213.2(a)(16) and 213.4(b) and Appendix A.
Previous regulation: Section 226.6(b)(3).
1981 changes: None.
Statute: Section 186(b).
Other sections: Section 213.8.
Previous regulation: Section 226.80 (Supplement VI, Section I).
1981 changes: None.
Statute: Section 186(a).
Other sections: Section 213.7.
Previous regulation: Section 226.80 (Supplement VI, Section II).
1981 changes: None.
1. Permissible changes. Although use of the model forms is not
required, lessors using them properly will be deemed to be in compliance
with the regulation. Lessors may make certain changes in the format or
content of the forms and may delete any disclosures that are
inapplicable to a transaction without losing the act's protection from
liability. The changes to the model forms may not be so extensive as to
affect the substance, clarity, or meaningful sequence of the forms.
Examples of acceptable changes include:
Using the first person, instead of the second person, in referring to
the lessee.
Using lessee, lessor, or names instead of pronouns.
Rearranging the sequence of the disclosures.
Incorporating certain state plain English requirements.
Deleting inapplicable disclosures by whiting out, blocking out,
filling in N/A (not applicable) or O, crossing out, leaving blanks,
checking a box for applicable items, or circling applicable items.
(This should permit use of multi-purpose standard forms.)
Adding language or symbols to indicate estimates.
2. Model open-end or finance vehicle lease disclosures. Model C-1 is
designed for an open-end or finance lease of a vehicle. An open-end or
finance lease is one in which the lessee's liability at the end of the
lease term is based on the difference between the estimated value of the
leased property and its realized value. Section 213.4(g)(15)(i)
requires disclosure of an itemized total lease obligation for such
leases. To facilitate this disclosure, Model C-1 divides the initial
charges (item 3) into two categories: Those that are included in the
total lease obligation and those that are not. The amount of the
monthly payment (item 4) is similarly divided. This format permits the
components of the total lease obligation (item 11) to be disclosed
simply by cross-reference to the previous items. See the commentary to
213.2(a)(17). The inclusion of taxes in the basic monthly payment
disclosure (mentioned in the instructions to item 4(a)) is not mandatory
in all cases. See the commentary to 213.4(g)(15).
3. Model closed-end or net vehicle lease disclosures. Model C-2 is
designed for a closed-end or net lease of a vehicle. A closed-end or
net lease is one in which the lessee's liability at the end of the lease
term is not based on the difference between the estimated value of the
leased property and its realized value. Item 13(c) is included for
those closed-end vehicle leases in which the lessee's liability at early
termination is based on the vehicle's estimated value. See
213.4(g)(14).
4. Model furniture lease disclosures. Model C-3 is a closed-end
lease disclosure statement designed for a typical furniture lease. It
does not include a disclosure of the appraisal right at early
termination that is required under 213.4(g)(14) because few closed-end
furniture leases base the lessee's liability at early termination on the
estimated value of the leased property. The disclosure may be added, if
it is applicable, without loss of the form's protection from civil
liability.
Statute: Sections 105, 130, and 185.
Previous regulation: Sections 226.1501, 226.1502, and 226.1503.
1981 changes: References in the instructions to the previous
regulations have been deleted.
Statute: Section 108.
Previous regulation: Appendix E.
1981 changes: None.
(15 U.S.C. 1640(f))
(47 FR 20554, May 13, 1982)
12 CFR 213.8 PART 214 -- RELATIONS WITH FOREIGN BANKS AND BANKERS
Sec.
214.1 Scope of part.
214.2 Information to be furnished to the Board.
214.3 Conferences and negotiations with foreign banks, bankers, or
States.
214.4 Agreements with foreign banks, bankers, or States, and
participation in foreign accounts.
214.5 Accounts with foreign banks.
214.6 Amendments.
Authority: 12 U.S.C. 248, 348a, 358, 632.
Source: Reg. N, 8 FR 17290, Dec. 24, 1943, unless otherwise noted.
12 CFR 213.8 Regulations
12 CFR 214.1 Scope of part.
Pursuant to the authority conferred upon it by section 14 of the
Federal Reserve Act, as amended (40 Stat. 235, 48 Stat. 181; 12 U.S.C.
358, 348a), and by other provisions of law, the Board of Governors of
the Federal Reserve System prescribes the following regulations
governing relationships and transactions between Federal Reserve Banks
and foreign banks or bankers or groups of foreign banks, or bankers, or
a foreign State as defined in section 25(b) of the Federal Reserve Act
(55 Stat. 131; 12 U.S.C. 632).
12 CFR 214.2 Information to be furnished to the Board.
In order that the Board of Governors of the Federal Reserve System
may perform its statutory duty of exercising special supervision over
all relationships and transactions of any kind entered into by any
Federal Reserve Bank with any foreign bank or banker or with any group
of foreign banks or bankers or with any foreign State, each Federal
Reserve Bank shall promptly submit to the Board of Governors of the
Federal Reserve System in writing full information concerning all
existing relationships and transactions of any kind heretofore entered
into by such Federal Reserve Bank with any foreign bank or banker or
with any group of foreign banks or bankers or with any foreign State and
copies of all written agreements between it and any foreign bank or
banker or any group of foreign banks or bankers or any foreign State
which are now in force, unless copies have heretofore been furnished to
the Board. Each Federal Reserve Bank shall also keep the Board of
Governors of the Federal Reserve System promptly and fully advised of
all transactions with any foreign bank or banker or with any group of
foreign banks or bankers or with any foreign State, except transactions
of a routine character.
12 CFR 214.3 Conferences and negotiations with foreign banks, bankers,
or States.
(a) Without first obtaining the permission of the Board of Governors
of the Federal Reserve System, no officer or other representative of any
Federal Reserve Bank shall conduct negotiations of any kind with the
officers or representatives of any foreign bank or banker or any group
of foreign banks or bankers of any foreign State, except communications
in the ordinary course of business in connection with transactions
pursuant to agreements previously approved by the Board of Governors of
the Federal Reserve System. Any request for the Board's permission to
conduct any such negotiations shall be submitted in writting and shall
include a full statement of the occasion and objects of the proposed
negotiations.
(b) The Board of Governors of the Federal Reserve System reserves the
right, in its discretion, to be represented by such representatives as
it may designate in any negotiations between any officer or other
representative of any Federal Reserve Bank and any officers or
representatives of any foreign bank or banker or any group of foreign
banks or bankers or any foreign State; and the Board shall be given
reasonable notice in advance of the time and place of any such
negotiations; and may itself designate the time and place of any such
negotiations.
(c) A full report of all such conferences or negotiations and all
understandings or agreements arrived at or transactions agreed upon and
all other material facts appertaining to such conferences or
negotiations shall be filed with the Board of Governors of the Federal
Reserve System in writing by a duly authorized officer of each Federal
Reserve Bank which shall have participated in such conferences or
negotiations, including copies of all correspondence appertaining
thereto.
12 CFR 214.4 Agreements with foreign banks, bankers, or States, and
participation in foreign accounts.
(a) No Federal Reserve Bank shall enter into any agreement, contract,
or understanding with any foreign bank or banker or with any group of
foreign banks or bankers or with any foreign State without first
obtaining the permission of the Board of Governors of the Federal
Reserve System.
(b) When any Federal Reserve Bank, with the approval of the Board of
Governors of the Federal Reserve System, has opened an account for any
foreign bank or banker or group of foreign banks or bankers or for any
foreign State, or has entered into any agreement, contract, or
understanding with reference to opening or maintaining such an account,
or with reference to any other matter or matters, any other Federal
Reserve Bank may participate in such account, or in such agreement,
contract, or understanding, and in operations and transactions performed
therein or pursuant thereto, with the approval of the Board of Governors
of the Federal Reserve System.
12 CFR 214.5 Accounts with foreign banks.
(a) Any Federal Reserve Bank, with the consent of the Board, may open
and maintain accounts payable in foreign currencies with such foreign
banks as may be designated by the Board.
(b) Notwithstanding other provisions of this part, any officer or
other representatives of the Federal Reserve Bank which maintains an
account with a foreign bank may conduct such negotiations and enter into
such agreements, contracts, or understandings with such foreign bank as
may be authorized or directed by the Federal Open Market Committee in
order to effectuate the conduct of open market transactions of the
Federal Reserve Banks incident to the opening, maintenance, operation,
increase, reduction, or discontinuance of such account; and, in any
such case, such negotiations, agreements, contracts, or understandings
shall be subject to such authorizations, directions, regulations, and
limitations as may be prescribed by, or pursuant to authority of, the
Federal Open Market Committee.
(c) Any Federal Reserve Bank may, when authorized or directed so to
do by, or under the authority of, the Federal Open Market Committee,
carry on or conduct, through any other Federal Reserve Bank which
maintains an account with a foreign bank, any open market transactions
authorized by section 14 of the Federal Reserve Act. Transactions
authorized by section 14 which are not open market transactions may be
carried on or conducted through such other Federal Reserve Bank only
with the approval of the Board.
(d) Notwithstanding other provisions of this part, reports with
respect to any accounts opened and maintained, and negotiations,
agreements, contracts, and understandings entered into, pursuant to this
section shall be made to the Board at least quarterly, and more
frequently if so requested by the Board, by a duly authorized officer of
the Federal Reserve Bank involved.
(Reg. N, 27 FR 1719, Feb. 22, 1962)
12 CFR 214.6 Amendments.
The Board of Governors of the Federal Reserve System reserves the
right, in its discretion, to alter, amend or repeal these regulations
and to prescribe such additional regulations, conditions, and
limitations as it may deem desirable, respecting relationships and
transactions of any kind entered into by any Federal Reserve Bank with
any foreign bank or banker or with any group of foreign banks or bankers
or with any foreign State.
(Reg. N, 8 FR 17290, Dec. 24, 1943. Redesignated at 27 FR 1719, Feb.
22, 1962)
12 CFR 214.6 PART 215 -- LOANS TO EXECUTIVE OFFICERS, DIRECTORS, AND PRINCIPAL SHAREHOLDERS OF MEMBER BANKS
12 CFR 214.6 Subpart A -- Loans by Member Banks to Their Executive
Officers, Directors, and Principal Shareholders
Sec.
215.1 Authority, purpose, and scope.
215.2 Definitions.
215.3 Extension of credit.
215.4 General prohibitions.
215.5 Additional restrictions on loans to executive officers of
member banks.
215.6 Extensions of credit outstanding on March 10, 1979.
215.7 Records of member banks.
215.8 Reports by executive officers.
215.9 Report on credit to executive officers.
215.10 Disclosure of credit from member banks to executive officers
and principal shareholders.
215.11 Civil penalties.
Appendix -- Section 5200 of the Revised Statutes
12 CFR 214.6 Subpart B -- Reports on Indebtedness of Executive Officers
and Principal Shareholders to Correspondent Banks
215.20 Authority, purpose, and scope.
215.21 Definitions.
215.22 Report by executive officers and principal shareholders.
215.23 Disclosure of credit from correspondent banks to executive
officers and principal shareholders.
Authority: Secs. 11(i), 22(g) and 22(h), Federal Reserve Act (12
U.S.C. 248(i), 375a, 375b(7), and 12 U.S.C. 1817(k)(3) and
1972(2)(F)(vi).
Source: 44 FR 12964, Mar. 9, 1979, unless otherwise noted.
12 CFR 214.6 Subpart A -- Loans by Member Banks to Their Executive Officers, Directors, and Principal Shareholders
12 CFR 215.1 Authority, purpose, and scope.
(a) Authority. This subpart is issued pursuant to sections 11(i),
22(g) and 22(h) of the Federal Reserve Act (12 U.S.C. 248(i), 375a,
375b(7)) and 12 U.S.C. 1817(k)(3).
(b) Purpose and scope. This subpart governs any extension of credit
by a member bank to an executive officer, director, or principal
shareholder of (1) the member bank, (2) a bank holding company of which
the member bank is a subsidiary, and (3) any other subsidiary of that
bank holding company. It also applies to any extension of credit by a
member bank to (1) a company controlled by such a person and (2) a
political or campaign committee that benefits or is controlled by such a
person. This subpart also implements the reporting requirements of 12
U.S.C. 375a concerning extensions of credit by a member bank to its
executive officers and of 12 U.S.C. 1817(k) concerning extensions of
credit by a member bank to its executive officers and principal
shareholders.
(44 FR 67978, Nov. 28, 1979)
12 CFR 215.2 Definitions.
For the purposes of this subpart, the following definitions apply
unless otherwise specified:
(a) Company means any corporation, partnership, trust (business or
otherwise), association, joint venture, pool syndicate, sole
proprietorship, unincorporated organization, or any other form of
business entity not specifically listed herein. However, the term does
not include (1) an insured bank (as defined in 12 U.S.C. 1813(h)) or (2)
a corporation the majority of the shares of which are owned by the
United States or by any State.
(b)(1) Control of a company or bank means that a person directly or
indirectly, or acting through or in concert with one or more persons:
(i) Owns, controls, or has the power to vote 25 percent or more of
any class of voting securities of the company or bank;
(ii) Controls in any manner the election of a majority of the
directors of the company or bank; or
(iii) Has the power to exercise a controlling influence over the
management or policies of the company or bank.
(2) A person is presumed to have control, including the power to
exercise a controlling influence over the management or policies, of a
company or bank if:
(i) The person is (A) an executive officer or director of the company
or bank and (B) directly or indirectly owns, controls, or has the power
to vote more than 10 percent of any class of voting securities of the
company or bank; or
(ii) (A) The person directly or indirectly owns, controls, or has the
power to vote more than 10 percent of any class of voting securities of
the company or bank, and (B) no other person owns, controls, or has the
power to vote a greater percentage of that class of voting securities.
(3) An individual is not considered to have control, including the
power to exercise a controlling influence over the management or
policies, of a company or bank solely by virtue of the individual's
position as an officer or director of the company or bank.
(4) A person may rebut a presumption established by paragraph (b)(2)
of this section by submitting to the appropriate Federal banking agency
(as defined in 12 U.S.C. 1813(q)) written materials that, in the
agency's judgment, demonstrate an absence of control.
(c) Director of a member bank includes (1) any director of a member
bank, whether or not receiving compensation, (2) any director of a bank
holding company (as defined in 12 U.S.C. 1841(a)) of which the member
bank is a subsidiary, and (3) any director of any other subsidiary of
that bank holding company. An advisory director is not considered a
director if the advisory director (i) is not elected by the shareholders
of the company or bank, (ii) is not authorized to vote on matters before
the board of directors, and (iii) provides solely general policy advice
to the board of directors.
(d) Executive officer of a company or bank means a person who
participates or has authority to participate (other than in the capacity
of a director) in major policymaking functions of the company or bank,
whether or not: (1) The officer has an official title, (2) the title
designates the officer an assistant, or (3) the officer is serving
without salary or other compensation. 1 The chairman of the board, the
president, every vice president, the cashier, the secretary, and the
treasurer of a company or bank are considered executive officers, unless
(i) the officer is excluded, by resolution of the board of directors or
by the bylaws of the bank or company, from participation (other than in
the capacity of a director) in major policymaking functions of the bank
or company, and (ii) the officer does not actually participate therein.
For the purpose of 215.4 and 215.7 of this part, an executive officer
of a member bank includes an executive officer of (A) a bank holding
company (as defined in 12 U.S.C. 1841(a)) of which the member bank is a
subsidiary and (B) any other subsidiary of that bank holding company,
unless the executive officer of the subsidiary (1) is excluded (by name
or by title) from participation in major policymaking functions of the
member bank by resolutions of the boards of directors of both the
subsidiary and the member bank, and (2) does not actually participate in
such major policymaking functions.
(e) Immediate family means the spouse of an individual, the
individual's minor children, and any of the individual's children
(including adults) residing in the individual's home.
(f) The lending limit for a member bank is an amount equal to the
limit of loans to a single borrower established by section 5200 of the
Revised Statutes. 2 12 U.S.C. 84. This amount is 15 per cent of the
bank's unimpaired capital and unimpaired surplus in the case of loans
that are not fully secured, and and additional 10 per cent of the bank's
unimpaired capital and unimpaired surplus in the case of loans that are
fully secured by readily marketable collateral having a market value, as
determined by reliable and continuously available price quotations, at
least equal to the amount of the loan. The lending limit also includes
any higher amounts that are permitted by section 5200 of the Revised
Statutes for the types of obligations listed therein as exceptions to
the limit. A member bank's capital stock and unimpaired surplus equals
the sum of (1) the total equity capital of the member bank reported on
its most recent consolidated report of condition filed under 12 U.S.C.
1817(a)(3), (2) any subordinated notes and debentures approved as an
addition to the member bank's capital structure by the appropriate
Federal banking agency, and (3) any valuation reserves created by
charges to the member bank's income.
(g) Member bank means any banking institution that is a member of the
Federal Reserve System. The term does not include any foreign bank (as
defined in 12 U.S.C. 3101(b)(7)) that maintains a branch in the United
States, whether or not the branch is insured (within the meaning of 12
U.S.C. 1813(s)) and regardless of the operation of 12 U.S.C. 1813(h) and
12 U.S.C. 1828(j)(2).
(h) Pay an overdraft on an account means to pay an amount upon the
order of an account holder in excess of funds on deposit in the account.
(i) Person means an individual or a company.
(j) Principal shareholder means an individual or a company (other
than an insured bank) that directly or indirectly, or acting through or
in concert with one or more persons, owns, controls, or has the power to
vote more than 10 percent of any class of voting securities of a member
bank or company. However, for the purposes of 215.4(c) of this part,
this percentage shall be more than 18 percent if the member bank is
located in a city, town, or village with a population of less than
30,000. Shares owned or controlled by a member of an individual's
immediate family are considered to be held by the individual. A
principal shareholder of a member bank includes (1) a principal
shareholder of a bank holding company (as defined in 12 U.S.C. 1841(a))
of which the member bank is a subsidiary and (2) a principal shareholder
of any other other subsidiary of that bank holding company.
(k) Related interest means (1) a company that is controlled by a
person or (2) a political or campaign committee that is controlled by a
person or the funds or services of which will benefit a person.
(l) Subsidiary has the meaning given in 12 U.S.C. 1841(d), but does
not include a subsidiary of a member bank.
(44 FR 12964, Mar. 9, 1979, as amended at 44 FR 67979, Nov. 28, 1979;
48 FR 42805, Sept. 20, 1983)
1The term is not intended to include persons who may have official
titles and may exercise a certain measure of discretion in the
performance of their duties, including discretion in the making of
loans, but who do not participate in the determination of major policies
of the bank or company and whose decisions are limited by policy
standards fixed by the senior management of the bank or company. For
example, the term does not include a manager or assistant manager of a
branch of a bank unless that individual participates, or is authorized
to participate, in major policymaking functions of the bank or company.
2Where State law establishes a lending limit for a State member bank
that is lower than the amount permitted in section 5200 of the Revised
Statutes, the lending limit established by applicable State laws shall
be the lending limit for the State member bank.
12 CFR 215.3 Extension of credit.
(a) An extension of credit is a making or renewal of any loan, a
granting of a line of credit, or an extending of credit in any manner
whatsoever, and includes:
(1) A purchase under repurchase agreement of securities, other
assets, or obligations;
(2) An advance by means of an overdraft, cash item, or otherwise;
(3) Issuance of a standby letter of credit (or other similar
arrangement regardless of name or description) or an ineligible
acceptance, as those terms are defined in 208.8(d) of this chapter;
(4) An acquistion by discount, purchase, exchange, or otherwise of
any note, draft, bill of exchange, or other evidence of indebtedness
upon which a person may be liable as maker, drawer, endorser, guarantor,
or surety;
(5) A discount of promissory notes, bills of exchange, conditional
sales contracts, or similar paper, whether with or without recourse;
but the acquisition of such paper by a member bank from another bank,
without recourse, shall not be considered a discount by the member bank
for the other bank;
(6) An increase of an existing indebtedness, but not if the
additional funds are advanced by the bank for its own protection for (i)
accrued interest or (ii) taxes, insurance, or other expenses incidental
to the existing indebtedness;
(7) An advance of unearned salary or other unearned compensation for
a period in excess of 30 days; and
(8) Any other transaction as a result of which a person becomes
obligated to pay money (or its equivalent) to a bank, whether the
obligation arises directly or indirectly, or because of an endorsement
on an obligation or otherwise, or by any means whatsoever.
(b) An extension of credit does not include:
(1) An advance against accrued salary or other accrued compensation,
or an advance for the payment of authorized travel or other expenses
incurred or to be incurred on behalf of the bank;
(2) A receipt by a bank of a check deposited in or delivered to the
bank in the usual course of business unless it results in the carrying
of a cash item for or the granting of an overdraft (other than an
inadvertent overdraft in a limited amount that is promptly repaid, as
described in 215.4(d) of this part);
(3) An acquisition of a note, draft, bill of exchange, or other
evidence of indebtedness through (i) a merger or consolidation of banks
or a similar transaction by which a bank acquires assets and assumes
liabilities of another bank or similar organization or (ii) foreclosure
on collateral or similar proceeding for the protection of the bank:
Provided, That such indebtedness is not held for a period of more than
three years from the date of the acquisition, subject to extension by
the appropriate Federal banking agency for good cause;
(4)(i) An endorsement or guarantee for the protection of a bank of
any loan or other asset previously acquired by the bank in good faith or
(ii) any indebtedness to a bank for the purpose of protecting the bank
against loss or of giving financial assistance to it; or
(5) Indebtedness of $5,000 or less arising by reason of any general
arrangement by which a bank (i) acquires charge or time credit accounts
or (ii) makes payments to or on behalf of participants in a bank credit
card plan, check credit plan, interest bearing overdraft credit plan of
the type specified in 215.4(d) of this part, or similar openend credit
plan: Provided:
(A) The indebtedness does not involve prior individual clearance or
approval by the bank other than for the purposes of determining
authority to participate in the arrangement and compliance with any
dollar limit under the arrangement, and
(B) The indebtedness is incurred under terms that are not more
favorable than those offered to the general public.
(c) Non-interest-bearing deposits to the credit of a bank are not
considered loans, advances, or extensions of credit to the bank of
deposit; nor is the giving of immediate credit to a bank upon
uncollected items received in the ordinary course of business considered
to be a loan, advance or extension of credit to the depositing bank.
(d) For purposes of 215.4(b) and (c) of this part, an extension of
credit by a member bank is considered to have been made at the time the
bank enters into a binding commitment to make the extension of credit.
(e) A participation without recourse is considered to be an extension
of credit by the participating bank, not by the originating bank.
(f) An extension of credit is considered made to a person covered by
this part to the extent that the proceeds of the extension of credit are
used for the tangible economic benefit of, or are transferred to, such a
person.
12 CFR 215.4 General prohibitions.
(a) Terms and creditworthiness. No member bank may extend credit to
any of its executive officers, directors, or principal shareholders or
to any related interest of that person unless the extension of credit:
(1) Is made on substantially the same terms, including interest rates
and collateral, as those prevailing at the time for comparable
transactions by the bank with other persons that are not covered by this
part and who are not employed by the bank, and
(2) Does not involve more than the normal risk of repayment or
present other unfavorable features.
(b) Prior approval. (1) No member bank may extend credit (which term
includes granting a line of credit) to any of its executive officers,
directors, or principal shareholders or to any related interest of that
person in an amount that, when aggregated with the amount of all other
extensions of credit to that person and to all related interests of that
person, exceeds the higher of $25,000 or 5 percent of the member bank's
capital and unimpaired surplus, unless:
(i) The extension of credit has been approved in advance by a
majority of the entire board of directors of that bank, and (ii) the
interested party has abstained from participating directly or indirectly
in the voting. In no event may a member bank extend credit to any one
of its executive officers, directors, or principal shareholders, or to
any related interest of that person, in an amount that, when aggregated
with all other extensions of credit to that person, and all related
interests of that person, exceeds $500,000, except by complying with the
requirements of this paragraph.
(2) Approval by the board of directors under paragraph (b)(1) of this
section is not required for an extension of credit that is made pursuant
to a line of credit that was approved under paragraph (b)(1) of this
section within 14 months of the date of the extension of credit. The
extension of credit must also be in compliance with the requirements of
215.4(a) of this part.
(3) Participation in the discussion, or any attempt to influence the
voting, by the board of directors regarding an extension of credit
constitutes indirect participation in the voting by the board of
directors on an extension of credit.
(c) Aggregate lending limit. No member bank may extend credit to any
of its executive officers or principal shareholders or to any related
interest of that person3 in an amount that, when aggregated with the
amount of all other extensions of credit by the member bank to that
person and to all related interests of that person, exceeds the lending
limit of the member bank specified in 215.2(f) of this part. This
prohibition does not apply to an extension of credit by a member bank to
a bank holding company (as defined in 12 U.S.C. 1841(a)) of which the
member bank is a subsidiary or to any other subsidiary of that bank
holding company.
(d) Overdrafts. No member bank may pay an overdraft of an executive
officer or director of the bank4 on an account at the bank, unless the
payment of funds is made in accordance with (1) a written,
preauthorized, interest-bearing extension of credit plan that specifies
a method of repayment or (2) a written, preauthorized transfer of funds
from another account of the account holder at the bank. This
prohibition does not apply to payment of inadvertent overdrafts on an
account in an aggregate amount of $1,000 or less: Provided, (1) The
account is not overdrawn for more than 5 business days, and (2) the
member bank charges the executive officer or director the same fee
charged any other customer of the bank in similar circumstances.
(44 FR 12964, Mar. 9, 1979, as amended at 48 FR 42805, Sept. 20,
1983)
3This prohibition does not apply to member bank loans to a director
of the member bank or to a related interest of the director, unless the
director is also an executive officer or principal shareholder. See
also the definition of principal shareholder in 215.2(j) of this part,
in the case of a member bank located in a city, town or village with a
population of less than 30,000.
4This prohibition does not apply to the payment by a member bank of
an overdraft of a principal shareholder of the member bank, unless the
principal shareholder is also an executive officer or director. This
prohibition also does not apply to the payment by a member bank of an
overdraft of a related interest of an executive officer, director, or
principal shareholder of the member bank.
12 CFR 215.5 Additional restrictions on loans to executive officers of
member banks.
(a) No member bank may extend credit to any of its executive
officers,5 and no executive officer of a member bank shall borrow from
or otherwise become indebted to the bank, except in the amounts, for the
purposes, and upon the conditions specified in paragraphs (c) and (d) of
this section.
(b) No member bank may extend credit in an aggregate amount greater
than the amount permitted in paragraph (c)(3) of this section to a
partnership in which one or more of the bank's executive officers are
partners and, either individually or together, hold a majority interest.
For the purposes of paragraph (c)(3) of this section, the total amount
of credit extended by a member bank to such partnership is considered to
be extended to each executive officer of the member bank who is a member
of the partnership.
(c) A member bank is authorized to extend credit to any executive
officer of the bank:
(1) In any amount to finance the education of the executive officer's
children;
(2) In any amount to finance the purchase, construction, maintenance,
or improvement of a residence of the executive officer, if the extension
of credit is secured by a first lien on the residence and the residence
is owned (or expected to be owned after the extension of credit) by the
executive officer; and
(3) For any other purpose not specified in 215.5(c)(1) and (2), if
the aggregate amount of loans to that officer under this paragraph does
not exceed at any one time the higher of 2.5 per cent of the bank's
capital and unimpaired surplus or $25,000, but in no event more than
$100,000.
(d) Any extension of credit by a member bank to any of its executive
officers shall be: (1) Promptly reported to the member bank's board of
directors; (2) in compliance with the requirements of 215.4(a) of this
part; (3) preceded by the submission of a detailed current financial
statement of the executive officer; and (4) made subject to the
condition that the extension of credit will, at the option of the member
bank, become due and payable at any time that the officer is indebted to
any other bank or banks in an aggregate amount greater than the amount
specified for a category of credit in paragraph (c) of this section.
(44 FR 12964, Mar. 9, 1979, as amended at 48 FR 42805, Sept. 20,
1983)
5Sections 215.5, 215.8 and 215.9 of Regulation O implement section
22(g) of the Federal Reserve Act and do not apply to nonmember banks.
For the purposes of these sections, an executive officer of a member
bank does not include an executive officer of a bank holding company of
which the member bank is a subsidiary or any other subsidiary of that
bank holding company.
12 CFR 215.6 Extensions of credit outstanding on March 10, 1979.
(a) Any extension of credit that was outstanding on March 10, 1979,
and that would, if made on or after March 10, 1979, violate 215.4(c) of
this part, shall be reduced in amount by March 10, 1980, to be in
compliance with the lending limit in 215.4(c). Any renewal or extension
of such an extension of credit on or after March 10, 1979, shall be made
only on terms that will bring the extension of credit into compliance
with the lending limit of 215.4(c) by March 10, 1980. However, any
extension of credit made before March 10, 1979, that bears a specific
maturity date of March 10, 1980, or later, shall be repaid in accordance
with its repayment schedule in existence on or before March 10, 1979.
(b) If a member bank is unable to bring all extensions of credit
outstanding on March 10, 1979, into compliance as required by paragraph
(a) of this section, the member bank shall promptly report that fact to
the Comptroller of the Currency, in the case of a national bank, or to
the appropriate Federal Reserve Bank, in the case of a State member
bank, and explain the reasons why all the extensions of credit cannot be
brought into compliance. The Comptroller or the Reserve Bank, as the
case may be, is authorized, on the basis of good cause shown, to extend
the March 10, 1980, date for compliance for any extension of credit for
not more than two additional one-year periods.
12 CFR 215.7 Records of Member Banks.
Each member bank shall maintain records necessary for compliance with
the requirements of this part. These records shall (a) identify all
executive officers, directors, and principal shareholders of the member
bank and the related intetests of these persons and (b) specify the
amount and terms of each extension of credit by the member bank to these
persons and to their related interests. Each member bank shall request
at least annually that each executive officer, director, or principal
shareholder of the member bank identify the related interests of that
person.
12 CFR 215.8 Reports by executive officers.
Each executive officer6 of a member bank who becomes indebted to any
other bank or banks in an aggregate amount greater than the amount
specified for a category of credit in 215.5(c) of this part, shall,
within 10 days of the date the indebtedness reaches such a level, make a
written report to the board of directors of the officer's bank. The
report shall state the lender's name, the date and amount of each
extension of credit, any security for it, and the purposes for which the
proceeds have been or are to be used.
(44 FR 12964, Mar. 9, 1979, as amended at 48 FR 42805, Sept. 20,
1983)
6,7See Footnote 5 to 215.5(a).
12 CFR 215.9 Report on credit to executive officers.
Each member bank shall include with (but not as part of) each report
of condition (and copy thereof) filed pursuant to 12 U.S.C. 1817(a)(3)
a report of all extensions of credit made by the member bank to its
executive officers7 since the date of the bank's previous report of
condition.
(44 FR 12964, Mar. 9, 1979, as amended at 44 FR 67979, Nov. 28, 1979;
48 FR 42805, Sept. 20, 1983)
12 CFR 215.10 Disclosure of credit from member banks to executive
officers and principal shareholders.
(a) Definitions. For the purposes of this section, the following
definitions apply:
(1) Principal shareholder of a member bank means any person /8/ other
than an insured bank, or a foreign bank as defined in 12 U.S.C.
3101(7)), that, directly or indirectly, owns, controls, or has power to
vote more than 10 percent of any class of voting securities of the
member bank. The term includes a person that controls a principal
shareholder (e.g., a person that controls a bank holding company).
Shares of a bank (including a foreign bank), bank holding company, or
other company owned or controlled by a member of an individual's
immediate family are presumed to be owned or controlled by the
individual for the purposes of determining principal shareholder status.
(2) Related interest means: (i) Any company controlled by a person,
or (ii) any political or campaign committee the funds or services of
which will benefit a person or that is controlled by a person.
For the purpose of this section and Subpart B, a related interest
does not include a bank or a foreign bank (as defined in 12 U.S.C.
3101(7)).
(b) Public disclosure. (1) Upon receipt of a written request from
the public, a member bank shall make available the names of each of its
executive officers /9/ and each of its principal shareholders to whom,
or to whose related interests, the member bank had outstanding as of the
end of the latest previous quarter of the year, an extension of credit
that, when aggregated with all other outstanding extensions of credit at
such time from the member bank to such person and to all related
interests of such person, equaled or exceeded 5 percent of the member
bank's capital and unimpaired surplus of $500,000, whichever amount is
less. No disclosure under this paragraph is required if the aggregate
amount of all extensions of credit outstanding at such time from the
member bank to the executive officer or principal shareholder of the
member bank and to all related interests of such a person does not
exceed $25,000.
(2) A member bank is not required to disclose the specific amounts of
individual extensions of credit.
(c) Maintaining records. Each member bank shall maintain records of
all requests for the information described in paragraph (b) of this
section and the disposition of such requests. These records may be
disposed of after two years from the date of the request.
(48 FR 56936, Dec. 27, 1983; 49 FR 2902, Jan. 24, 1984)
/8/ The term stockholder of record appearing in 12 U.S.C. 1972(2)(G)
is synonymous with the term person.
/9/ For purposes of this section and Subpart B, an executive officer
of a member bank does not include an executive officer of a bank holding
company of which the member bank is a subsidiary or of any other
subsidiary of that bank holding company unless the executive officer is
also an executive officer of the member bank.
12 CFR 215.11 Civil penalties.
As specified in section 29 of the Federal Reserve Act (12 U.S.C.
504), any member bank, or any officer, director, employee, agent, or
other person participating in the conduct of the affairs of the bank,
that violates any provision of this subpart (other than 215.10) is
subject to a civil penalty of not more than $1,000 per day for each day
during which the violation continues.
(44 FR 67979, Nov. 28, 1979)
12 CFR 215.11 Pt. 215, Subpt. A, App.
12 CFR 215.11 Appendix -- Section 5200 of the Revised Statutes Total
Loans and Extensions of Credit
(a)(1) The total loans and extensions of credit by a national banking
association to a person outstanding at one time and not fully secured,
as determined in a manner consistent with paragraph (2) of this
subsection, by collateral having a market value at least equal to the
amount of the loan or extension of credit shall not exceed 15 per centum
of the unimpaired capital and unimpaired surplus of the association.
(2) The total loans and extensions of credit by a national banking
association to a person outstanding at one time and fully secured by
readily marketable collateral having a market value, as determined by
reliable and continuously available price quotations, at least equal to
the amount of the funds outstanding shall not exceed 10 per centum of
the unimpaired capital and unimpaired surplus of the association. This
limitation shall be separate from and in addition to the limitations
contained in paragraph (1) of this subsection.
(b) For the purposes of this section --
(1) The term loans and extensions of credit shall include all direct
or indirect advances of funds to a person made on the basis of any
obligation of that person to repay the funds or repayable from specific
property pledged by or on behalf of the person, and to the extent
specified by the Comptroller of the Currency, such term shall also
include any liability of a national banking association to advance funds
to or on behalf of a person pursuant to a contractual commitment; and
(2) The term person shall include an individual, sole proprietorship,
partnership, joint venture, association, trust, estate, business trust,
corporation, sovereign government, or agency, instrumentality, or
political subdivision thereof, or any similar entity or organization.
(c) The limitations contained in subsection (a) of this section shall
be subject to the following exceptions:
(1) Loans or extensions of credit arising from the discount of
commercial or business paper evidencing an obligation to the person
negotiating it with recourse shall not be subject to any limitation
based on capital and surplus.
(2) The purchase of bankers' acceptances of the kind described in
section 372 of this title and issued by other banks shall not be subject
to any limitation based on capital and surplus.
(3) Loans and extensions of credit secured by bills of lading,
warehouse receipts, or similar documents transferring or securing title
to readily marketable staples shall be subject to a limitation of 35 per
centum of capital and surplus in addition to the general limitations if
the market value of the staples securing each additional loan or
extension of credit at all times equals or exceeds 115 per centum of the
outstanding amount of such loan or extension of credit. The staples
shall be fully covered by insurance whenever it is customary to insure
such staples.
(4) Loans or extensions of credit secured by bonds, notes,
certificates of indebtedness, or Treasury bills of the United States or
by other such obligations fully guaranteed as to principal and interest
by the United States shall not be subject to any limitation based on
capital and surplus.
(5) Loans or extensions of credit to or secured by unconditional
takeout commitments or guarantees of any department, agency, bureau,
board, commission, or establishment of the United States or any
corporation wholly owned directly or indirectly by the United States
shall not be subject to any limitation based on capital and surplus.
(6) Loans or extensions of credit secured by a segregated deposit
account in the lending bank shall not be subject to any limitation based
on capital and surplus.
(7) Loans or extensions of credit to any financial institution or to
any receiver, conservator, superintendent of banks, or other agent in
charge of the business and property of such financial institution, when
such loans or extensions of credit are approved by the Comptroller of
the Currency, shall not be subject to any limitation based on capital
and surplus.
(8)(A) Loans and extensions of credit arising from the discount of
negotiable or nonnegotiable installment consumer paper which carries a
full recourse endorsement or unconditional guarantee by the person
transferring the paper shall be subject under this section to a maximum
limitation equal to 25 per centum of such capital and surplus,
notwithstanding the collateral requirements set forth in subsection
(a)(2) of this section.
(B) If the bank's files or the knowledge of its officers of the
financial condition of each maker of such consumer paper is reasonably
adequate, and an officer of the bank designated for that purpose by the
board of directors of the bank certifies in writing that the bank is
relying primarily upon the responsibility of each maker for payment of
such loans or extensions of credit and not upon any full or partial
recourse endorsement or guarantee by the transferor, the limitations of
this section as to the loans or extensions of credit of each such maker
shall be the sole applicable loan limitations.
(9)(A) Loans and extensions of credit secured by shipping documents
or instruments transferring or securing title covering livestock or
giving a lien on livestock when the market value of the livestock
securing the obligation is not at any time less than 115 per centum of
the face amount of the note covered, shall be subject under this section
notwithstanding the collateral requirements set forth in subsection
(a)(2) of this section, to a maximum limitation equal to 25 per centum
of such capital and surplus.
(B) Loans and extensions of credit which arise from the discount by
dealers in dairy cattle of paper given in payment for dairy cattle,
which paper carries a full recourse endorsement or unconditional
guarantee of the seller, and which are secured by the cattle being sold,
shall be subject under this section, notwithstanding the collateral
requirements set forth in paragraph (a)(2) of this section, to a
limitation of 25 per centum of such capital and surplus.
(10) Loans or extensions of credit to the Student Loan Marketing
Association shall not be subject to any limitation based on capital and
surplus.
(d)(1) The Comptroller of the Currency may prescribe rules and
regulations to administer and carry out the purposes of this section,
including rules or regulations to define or further define terms used in
this section and to establish limits or requirements other than those
specified in this section for particular classes or categories of loans
or extensions of credit.
(2) The Comptroller of the Currency also shall have authority to
determine when a loan putatively made to a person shall for purposes of
this section be attributed to another person.
(48 FR 42806, Sept. 20, 1983)
12 CFR 215.11 Subpart B -- Reports on Indebtedness of Executive Officers and Principal Shareholders to Correspondent Banks
12 CFR 215.20 Authority, purpose, and scope.
(a) Authority. This subpart is issued pursuant to section 11(i) of
the Federal Reserve Act (12 U.S.C. 248(i)) and 12 U.S.C.
1972(2)(F)(vi).
(b) Purpose and scope. This subpart implements the reporting
requirements of Title VIII of the Financial Institutions Regulatory and
Interest Rate Control Act of 1978 (FIRA) (Pub. L. 95-630) as amended by
the Garn-St Germain Depository Institutions Act of 1982 (Pub. L.
97-320), 12 U.S.C. 1972 (2)(g). Title VIII prohibits (1) preferential
lending by a bank to executive officers, directors, and principal
shareholders of another bank when there is a correspondent account
relationship between the banks, and (2) the opening of a correspondent
account relationship between banks where there is a preferential
extension of credit by one of the banks to an executive officer,
director, or principal shareholder of the other bank.
(44 FR 67979, Nov. 28, 1979, as amended at 48 FR 56936, Dec. 27,
1983)
12 CFR 215.21 Definitions.
For the purposes of this subpart, the following definitions apply
unless otherwise specified:
(a) Bank has the meaning given in 12 U.S.C. 1841(c), and includes a
branch or agency of a foreign bank, or a commercial lending company
controlled by a foreign bank or by a company that controls a foreign
bank, where the branch or agency is maintained in a State of the United
States or in the District of Columbia or the commercial lending company
is organized under State law.
(b) Company, control of a company or bank, executive officer,10
extension of credit, immediate family, and person have the meanings
provided in subpart A.
(c) Correspondent account is an account that is maintained by a bank
with another bank for the deposit or placement of funds. A
correspondent account does not include:
(1) Time deposits at prevailing market rates, and
(2) An account maintained in the ordinary course of business solely
for the purpose of effecting federal funds transactions at prevailing
market rates or making Eurodollar placements at prevailing market rates.
(d) Correspondent bank means a bank that maintains one or more
correspondent accounts for a member bank during a calendar year that in
the aggregate exceed an average daily balance during that year of
$100,000 or 0.5 per cent of such member bank's total deposits (as
reported in its first consolidated report of condition during that
calendar year), which ever amount is smaller.
(e) Principal shareholder and related interest have the meanings
provided in 215.10 of Subpart A.
(44 FR 67979, Nov. 28, 1979, as amended at 48 FR 42805, Sept. 20,
1983)
10For purposes of this section and Subpart B, executive officers of a
member bank do not include an executive officer of a bank holding
company of which the member bank is a subsidiary or of any other
subsidiary of that bank holding company unless, of course, the executive
officer is also an executive officer of the member bank.
12 CFR 215.22 Report by executive officers and principal shareholders.
(a) Annual report. If during any calendar year an executive officer
or principal shareholder of a member bank or a related interest of such
a person has outstanding an extension of credit from a correspondent
bank of the member bank, the executive officer or principal shareholder
shall, on or before January 31 of the following year, make a written
report to the board of directors of the member bank. 11
(b) Contents of report. The report required by this section shall
include the following information:
(1) The maximum amount of indebtedness of the executive officer or
principal shareholder and of each of that person's related interests to
each of the member bank's correspondent banks during the calendar year;
(2) The amount of indebtedness of the executive officer or principal
shareholder and of each of that person's related interests outstanding
to each of the member bank's correspondent banks as of ten business days
before the report required by this section is filed; 12 and
(3) A description of the terms and conditions (including the range of
interest rates, the original amount and date, maturity date, payment
terms, security, if any, and any other unusual terms or conditions) of
each extension of credit included in the indebtedness reported under
paragraph (b)(1) of this section.
(c) Definitions. For the purposes of this section:
(1) Indebtedness means an extension of credit, but does not include:
(i) Commercial paper, bonds, and debentures issued in the ordinary
course of business; and
(ii) Consumer credit (as defined in 12 CFR 226.2(p)) in an aggregate
amount of $5,000 or less from each of the member bank's correspondent
banks, provided the indebtedness is incurred under terms that are not
more favorable than those offered to the general public.
(2) Maximum amount of indebtedness means, at the option of the
reporting person, either (i) the highest outstanding indebtedness during
the calendar year for which the report is made, or (ii) the highest end
of the month indebtedness outstanding during the calendar year for which
the report is made.
(d) Retention of reports at member banks. The reports required by
this section shall be retained at the member bank for a period of three
years. The Reserve Bank or the Comptroller, as the case may be, may
require these reports to be retained by the bank for an additional
period of time. The reports filed under this section are not required
by this regulation to be made available to the public and shall not be
filed with the Reserve Bank or the Comptroller unless specifically
requested.
(e) Member bank's responsibility. Each member bank shall advise each
of its executive officers and each of its principal shareholders (to the
extent known by the bank) of the reports required by this section and
make available to each of these persons a list of the names and
addresses of the member bank's correspondent banks.
(44 FR 67979, Nov. 28, 1979, as amended at 48 FR 42805, Sept. 20,
1983)
11Persons reporting under this section are not required to include
information on extensions of credit that are fully described in a report
by a person they control or a person that controls them, provided they
identify their relationships with such other person.
12If the amount of indebtedness outstanding to a correspondent bank
ten days before the filing of the report is not available or cannot be
readily ascertained, an estimate of the amount of indebtedness may be
filed with the report, provided that the report is supplemented within
the next 30 days with the actual amount of indebtedness.
12 CFR 215.23 Disclosure of credit from correspondent banks to
executive officers and principal shareholders.
(a) Public disclosure. (1) Upon receipt of a written request from
the public, a member bank shall make available the names of each of its
executive officers and each of its principal shareholders to whom, or to
whose related interests, any correspondent bank of the member bank had
outstanding, at any time during the previous calendar year, an extension
of credit that, when aggregated with all other outstanding extensions of
credit at such time from all correspondent banks of the member bank to
such person and to all related interests of such person, equaled or
exceeded 5 percent of the member bank's capital and unimpaired surplus
or $500,000, whichever amount is less. No disclosure under this
paragraph is required if the aggregate amount of all extensions of
credit outstanding from all correspondent banks of the member bank to
the executive officer or principal shareholder of the member bank and to
all related interests of such a person does not exceed $25,000 at any
time during the previous calendar year.
(2) A member bank is not required to disclose the specific amounts of
individual extensions of credit.
(b) Maintaining records. Each member bank shall maintain records of
all requests for the information described in paragraph (a) of this
section and the disposition of such requests. These records may be
disposed of after two years from the date of the request.
(48 FR 56936, Dec. 27, 1983)
12 CFR 215.23 PART 216 -- SECURITY PROCEDURES
Sec.
216.1 Authority, purpose, and scope.
216.2 Designation of security officer.
216.3 Security program.
216.4 Report.
216.5 Federal Reserve Banks.
Authority: 12 U.S.C. 1881-1884.
Source: Reg. P, 56 FR 13071, Mar. 29, 1991, unless otherwise noted.
12 CFR 216.1 Authority, purpose, and scope.
(a) This regulation is issued by the Board of Governors of the
Federal Reserve System (the ''Board'') pursuant to section 3 of the Bank
Protection Act of 1968 (12 U.S.C. 1882). It applies to Federal Reserve
Banks and state banks that are members of the Federal Reserve System.
It requires each bank to adopt appropriate security procedures to
discourage robberies, burglaries, and larcenies, and to assist in the
identification and prosecution of persons who commit such acts.
(b) It is the responsibility of the member bank's board of directors
to comply with this regulation and ensure that a written security
program for the bank's main office and branches is developed and
implemented.
12 CFR 216.2 Designation of security officer.
Upon becoming a member of the Federal Reserve System, a state bank's
board of directors shall designate a security officer who shall have the
authority, subject to the approval of the board of directors to develop,
within a reasonable time, but no later than 180 days, and to administer
a written security program for each banking office.
12 CFR 216.3 Security program.
(a) Contents of security program. The security program shall:
(1) Establish procedures for opening and closing for business and for
the safekeeping of all currency, negotiable securities, and similar
valuables at all times;
(2) Establish procedures that will assist in identifying persons
committing crimes against the institution and that will preserve
evidence that may aid in their identification and prosecution. Such
procedures may include, but are not limited to:
(i) Maintaining a camera that records activity in the banking office;
(ii) Using identification devices, such as prerecorded
serial-numbered bills, or chemical and electronic devices; and
(iii) Retaining a record of any robbery, burglary, or larceny
committeed against the bank;
(3) Provide for initial and periodic training of officers and
employees in their responsibilities under the security program and in
proper employee conduct during and after a burglary, robbery, or
larceny; and
(4) Provide for selecting, testing, operating, and maintaining
appropriate security devices, as specified in paragraph (b) of this
section.
(b) Security devices. Each member bank shall have, at a minimum, the
following security devices:
(1) A means of protecting cash and other liquid assets, such as a
vault, safe, or other secure space;
(2) A lighting system for illuminating, during the hours of darkness,
the area around the vault, if the vault is visible from outside the
banking office;
(3) Tamper-resistent locks on exterior doors and exterior windows
that may be opened;
(4) An alarm system or other appropriate device for promptly
notifying the nearest responsible law enforcement officers of an
attempted or perpetrated robbery or burglary; and
(5) Such other devices as the security officer determines to be
appropriate, taking into consideration:
(i) The incidence of crimes against financial institutions in the
area;
(ii) The amount of currency and other valuables exposed to robbery,
burglary, or larcency;
(iii) The distance of the banking office from the nearest responsible
law enforcement officers;'
(iv) The cost of the security devices;
(v) Other security measures in effect at the banking office; and
(vi) The physical characteristics of the structure of the banking
office and its surroundings.
12 CFR 216.4 Report.
The security officer for each member bank shall report at least
annually to the bank's board of directors on the implementation,
administration, and effectiveness of the security program.
12 CFR 216.5 Federal Reserve Banks.
Each Reserve Bank shall develop and maintain a written security
program for its main office and branches subject to review and approval
of the Board.
12 CFR 216.5 PART 217 -- INTEREST ON DEPOSITS
Sec.
217.1 Authority, purpose, and scope.
217.2 Definitions.
217.3 Interest on demand deposits.
217.4 Miscellaneous.
217.6 Advertising of interest on deposits.
217.201 Repurchase agreements involving shares of a money market
mutual fund whose portfolio consists wholly of United States Treasury
and Federal agency securities.
217.301 Interest on time deposit falling due on holiday.
217.302 Premiums on deposits.
217.601 Time certificate of deposit with automatic renewal.
217.602 Information regarding computation of interest on deposits.
217.603 Payment and computation of interest on time and savings
deposits.
Authority: 12 U.S.C. 248, 371, 371a, 371b, 461, 1828, and 3105.
12 CFR 216.5 Regulations
Source: Sections 217.1 through 217.6 appear at Reg. Q, 51 FR 9637,
Mar. 20, 1986, unless otherwise noted.
12 CFR 217.1 Authority, purpose, and scope.
(a) Authority. This regulation is issued under the authority of
section 19 of the Federal Reserve Act (12 U.S.C. 371, 371a, 371b, 461),
section 7 of the International Banking Act of 1978 (12 U.S.C. 3105),
and section 11 of the Federal Reserve Act (12 U.S.C. 248), unless
otherwise noted.
(b) Purpose. This regulation prohibits the payment of interest on
demand deposits by member banks and other depository institutions within
the scope of this regulation and sets forth requirements concerning the
advertisement of interest on deposits by member banks and these other
institutions.
(c) Scope. (1) This regulation applies to state chartered banks that
are members of the Federal Reserve under section 9 of the Federal
Reserve Act (12 U.S.C. 321, et seq.) and to all national banks. The
regulation also applies to any Federal branch or agency of a foreign
bank and to a State uninsured branch or agency of a foreign bank in the
same manner and to the same extent as if the branch or agency were a
member bank, except as may be otherwise provided by the Board, if:
(i) Its parent foreign bank has total worldwide consolidated bank
assets in excess of $1 billion;
(ii) Its parent foreign bank is controlled by a foreign company which
owns or controls foreign banks that in the aggregate have total
worldwide consolidated bank assets in excess of $1 billion; or
(iii) Its parent foreign bank is controlled by a group of foreign
companies that own or control foreign banks that in the aggregate have
total worldwide consolidated bank assets in excess of $1 billion.
(2) For deposits held by a member bank or a foreign bank, this
regulation does not apply to ''any deposit that is payable only at an
office located outside of the United States'' (i.e., the States of the
United States and the District of Columbia) as defined in 204.2(t) of
the Board's Regulation D -- Reserve Requirements of Depository
Institutions (12 CFR 20.4).
12 CFR 217.2 Definitions.
For purposes of this part, the following definitions apply unless
otherwise specified;
(a) Demand deposit means any deposit that is considered to be a
demand deposit under 204.2(b) of the Board's Regulation D -- Reserve
Requirements of Depository Institutions (12 CFR part 204).
(b) Deposit means any liability of a member bank that is considered
to be a deposit under 204.2(a) of the Board's Regulation D -- Reserve
Requirements of Depository Institutions (12 CFR part 204).
(c) Foreign bank means any bank that is considered to be a foreign
bank under 204.2(o) of the Board's Regulation D -- Reserve Requirements
of Depository Institutions (12 CFR part 204).
(d) Interest means any payment to or for the account of any depositor
as compensation for the use of funds constituting a deposit. A member
bank's absorption of expenses incident to providing a normal banking
function or its forbearance from charging a fee in connection with such
a service is not considered a payment of interest.
12 CFR 217.3 Interest on demand deposits.
No member bank of the Federal Reserve System shall, directly or
indirectly, by any device whatsoever, pay any interest on any demand
deposit. /1/
/1/ A member bank may continue to pay interest on a time deposit for
not more than ten calendar days; (1) Where the member bank has provided
in the time deposit contract that, if the deposit or any portion thereof
is withdrawn not more than ten calendar days after a maturity date (one
business day for ''IBF time deposits'' as defined in 204.8(a)(2) of
Regulation D), interest will continue to be paid for such period; or
(2) for a period between a maturity date and the date of renewal of the
deposit, provided that such certificate is renewed within ten calendar
days after maturity.
12 CFR 217.4 Miscellaneous.
(a) Early withdrawal penalty. At the time a depositor enters into a
time deposit contract with a member bank, the bank shall provide a
written statement of the effect of any early withdrawal penalty which
shall (1) state clearly that the customer has contracted to keep the
funds on deposit for the stated maturity, and (2) describe fully and
clearly how such penalty provisions apply to time deposits in such bank,
in the event the bank, notwithstanding the contract provisions, permits
payment before maturity. Such statement shall be expressly called to
the attention of the customer.
(b) Payment of interest. On each automatically renewable
certificate, passbook, or other document representing a time deposit,
the bank shall have printed or stamped a conspicuous statement
indicating that the contract will be renewed automatically upon maturity
and indicating the terms of such renewal.
12 CFR 217.6 Advertising of interest on deposits.
Every advertisement, announcement, or solicitation relating to the
interest paid on deposits in member banks shall be governed by the
following rules:
(a) Annual rate of simple interest. Interest rates shall be stated
in terms of the annual rate of simple interest. In no case shall a rate
be advertised that is in excess of the applicable maximum rate for the
particular deposit.
(b) Percentage yields based on 1 year. Where a percentage yield
achieved by compounding interest during 1 year is advertised, the annual
rate of simple interest shall be stated with equal prominence, together
with a reference to the basis of compounding. No member bank shall
advertise a percentage yield based on the effect of grace periods
permitted in 217.3(d).
(c) Percentage yields based on periods in excess of 1 year. No
advertisement shall include any indication of a total percentage yield,
compounded or simple, based on a period in excess of a year, or an
average annual percentage yield achieved by compounding during a period
in excess of a year.
(d) Time or amount requirements. If an advertised rate is payable
only on deposits that meet time or amount requirements, such
requirements shall be clearly and conspicuously stated. Where the time
requirement for an advertised rate is in excess of a year, the required
number of years for the rate to apply shall be stated with equal
prominence, together with an indication of any lower rate or rates that
will apply if the deposit is withdrawn at an earlier maturity.
(e) Penalty for early withdrawals. Any advertisement, announcement,
or solicitation relating to interest paid by a member bank on time
deposits shall include clear and conspicuous notice that the bank is
prohibited from allowing payment of a time deposit before maturity
unless substantial interest is forfeited. Such notice may state that,
Substantial interest penalty is required for early withdrawal.
(f) Profit. The term profit shall not be used in referring to
interest paid on deposits.''
(g) Accuracy of advertising. No member bank shall make any
advertisement, announcement, or solicitation relating to the interest
paid on deposits that is inaccurate or misleading or that misrepresents
its deposit contracts.
(h) Solicitation of deposits for banks. Any person or organization
that solicits deposits for a member bank shall be bound by the rules
contained in this section with respect to any advertisement,
announcement, or solicitation relating to such deposits. No such person
or organization shall advertise a percentage yield on any deposit it
solicits for a member bank that is not authorized to be paid and
advertised by such bank.
(Reg. Q, 34 FR 9702, June 21, 1969, as amended at 35 FR 19662, Dec.
29, 1970; 38 FR 26109, Sept. 18, 1973; 44 FR 32648, June 7, 1979; 48
FR 45757, Oct. 7, 1983)
12 CFR 217.6 Interpretations
12 CFR 217.201 Repurchase agreements involving shares of a money market
mutual fund whose portfolio consists wholly of United States Treasury
and Federal agency securities.
Such a repurchase agreement is not a deposit for purposes of
Regulations D and Q. For the text of this interpretation, see the
interpretations of the Board's Regulation D at 12 CFR 204.124. A related
interpretation also appears in Regulation H -- Membership of State
Banking Institutions in the Federal Reserve System at 12 CFR 208.123.
(52 FR 47699, Dec. 16, 1987)
12 CFR 217.301 Interest on time deposit falling due on holiday.
(a) After the date of maturity of any time deposit, such deposit is a
demand deposit, and no interest may be paid thereon for any period
subsequent to the date of maturity unless the contract provides for an
extension of up to 10 calendar days as per footnote 1 to Regulation Q.
(b) The date on which an obligation is due and payable is, of course,
determined by the terms of the contract subject to State law, and in
most jurisdictions an obligation falling due on a Saturday, Sunday or a
holiday comes due on the next succeeding business day. Under Regulation
Q, the ''maturity'' of a time certificate is the day it is legally due
and payable; and the funds represented thereby do not become a demand
deposit until after that date. Accordingly, where a certificate by its
terms falls due on a Saturday, Sunday or a holiday and under State law
is due and payable on the next succeeding business day, this part 217
would not preclude payment of interest on the deposit until and
including the day on which it is so payable.
(52 FR 47698, Dec. 16, 1987)
12 CFR 217.302 Premiums on deposits.
(a) Section 19(i) of the Federal Reserve Act and 217.3 of Regulation
Q prohibits a member bank from paying interest on a demand deposit.
Premiums, whether in the form of merchandise, credit, or cash, given by
a member bank to a depositor will be regarded as an advertising or
promotional expense rather than a payment of interest if:
(1) The premium is given to a depositor only at the time of the
opening of a new account or an addition to, or renewal of, an existing
account;
(2) No more than two premiums per account are given within a 12-month
period; and
(3) The value of the premium or, in the case, of articles of
merchandise, the total cost (including taxes, shipping, warehousing,
packaging, and handling costs) does not exceed $10 for deposits of less
than $5,000 or $20 for deposits of $5,000 or more.
The costs of premiums may not be averaged. The member bank should
retain sufficient supporting documentation showing that the total cost
of a premium, including shipping, warehousing, packaging, and handling
costs, does not exceed the applicable $10/$20 limitations and that no
portion of the total cost of any premium has been attributed to
development, advertising, promotional, or other expenses. A member bank
is not permitted directly or indirectly to solicit or promote deposits
from customers on the basis that the funds will be divided into more
than one account by the institution for the purpose of providing more
than two premiums per deposit within a 12-month period.
(52 FR 47698, Dec. 16, 1987)
12 CFR 217.601 Time certificate of deposit with automatic renewal.
(a) The Board of Governors has been asked to consider whether a
proposed certificate which recites that the deposit evidenced thereby
would be payable to the depositor on return of the certificate 12 months
after date with interest at a certain per cent per annum payable
semi-annually, but which contains a legend on the face thereof which
states that it is ''continuous,'' that ''no renewal is necessary,'' and
refers to the reverse side of the certificate for ''further
provisions,'' complies with the provisions of this part.
(b) The reverse side of the certificate recites that it ''shall be
considered renewed automatically for an additional period of 6 months
beyond its original term and thereafter for additional periods each of 6
months; unless presented for redemption within 10 days after the end of
the original term or any subsequent term provided for herein, or unless
the depositor shall have given written notice to the bank of his desire
to redeem this Certificate 30 days prior to the original or any
subsequent maturity date.'' It is recited further that the bank retains
the right to redeem the certificate on the original or any subsequent
maturity date upon 30 days' prior written notice, and reserves the right
to change the interest rate for any subsequent renewal period from time
to time upon 30 days' written notice prior to the beginning of such
renewal.
(c) The Board would have no objection to the classification of the
proposed certificate as a ''time certificate of deposit'' merely because
it would be labeled as a ''Savings Certificate.'' However, for a
certificate to be classified as a ''time certificate of deposit'',
217.1(c) requires that the provisions of the certificate relating to the
manner and terms of payment appear ''on its face''. The provisions
which appears on the reverse side of the certificate with respect to
automatic renewal and redemption are of a kind that should appear on the
face of the certificate. Otherwise, the Board believes a certificate in
the form proposed would be properly classifiable as a ''time certificate
of deposit'' under this part.
(d) Such certificate in no event is payable prior to the expiration
of the original 12 months' period or one of the successive renewal
periods of 6 months each. Therefore, under the principle applicable to
time certificates of deposit with alternate fixed maturities stated in
217.112, it would be permissible for the certificate in question to bear
interest at a rate not to exceed 3 percent per annum. This conclusion
would not be affected by the fact that either the bank or the depositor
may prevent automatic renewal of the certificate by giving written
notice of intended withdrawal or redemption 30 days prior to an
automatic renewal date.
(e) The additional fact that the depositor may prevent automatic
renewal by presenting the certificate for payment within 10 days after
the end of the original term or any subsequent renewal period, would
not, in the Board's opinion, be objectionable in view of the principle
established by the interpretation published at 1936 Federal Reserve
Bulletin 419. Of course, payment of the certificate pursuant to
presentment within such 10-day period would preclude the bank from
paying interest for any part of such period.
(22 FR 2533, Apr. 13, 1957. Redesignated at 52 FR 47698, Dec. 16,
1987)
12 CFR 217.602 Information regarding computation of interest on
deposits.
Section 217.6(f) of the Board's Regulation Q, relating to payment of
interest on deposits, provides:
(f) Accuracy of advertising. No member bank shall make any
advertisement, announcement, or solicitation relating to the interest
paid on deposits that is inaccurate or misleading or that misrepresents
its deposit contracts.
Within the spirit of this provision and in order to avoid
misunderstandings on the part of its customers, every member bank should
inform the holder of a time or savings account at the time of the
opening of such account as to the method that will be used in computing
and paying interest on the account, including any provision for
nonpayment of interest on deposits made after the beginning of an
interest-payment period or withdrawn before the end of such period. In
addition, if the bank subsequently makes a change in such method that
will be less favorable to a depositor than the previous method, notice
of such change should be mailed to each depositor at his last known
address.
(35 FR 3751, Feb. 26, 1970. Redesignated at 52 FR 47698, Dec. 16,
1987)
12 CFR 217.603 Payment and computation of interest on time and savings
deposits.
The Board has expressed the following views relating to the payment
and computation of interest on deposits.
(a) The maximum rate of simple interest that a member bank may pay on
a deposit is established by 217.7 of Regulation Q. In January 1970,
the Board established certain rates on deposits with a maturity of ''1
year or more''. To qualify for a rate that may be paid on such a
deposit, the deposit must not mature before 1 full year -- 365 or 366
days as the case may be -- from the date of deposit. 1
(b) The formula for the computation of simple interest is A=P (1+RT)
where A is the final amount, P is the amount on which interest is
computed, R is the annual rate of simple interest and T is the time
period. Effective January 1, 1971, 217.3(e) of Regulation Q was
amended to authorize the use of 360 or 365 (or 366 in a leap year) as
the denominator of a fraction in which the numerator is the actual
number of days the deposit earns interest. For example, a bank would be
permitted to consider the time factor on a 295-day deposit as 295/365 or
295/360. On a 360-day deposit, the fraction could be 360/365 or
360/360; it could not be 365/360. Additionally, 217.3(e) authorizes
in the numerator of the time fraction the use of 30 days (or multiples
thereof) for deposits of 1 month (or corresponding multiples thereof).
For example, on a deposit made February 1 for 1 month, the time fraction
could be stated as 30/360 or 30/365, or 28/360 or 28/365.
(c) Section 217.3(a) provides that the effects of compounding may be
disregarded in determining whether a member bank is paying interest in
excess of the rates established in 217.7. The formula for continuous
compounding is A=PeRT where A is the final amount, P is the amount on
which interest is compounded, e is the base for Napierian or natural
logarithms, R is the annual rate of simple interest, and T is the time
period. T may be expressed as a fraction in which the numerator is the
actual number of days the funds earn interest and the denominator may be
either 360, or 365, or, in the case of a leap year, 366. As is
permitted in simple interest calculations, a bank may consider each
month as having 30 days.
(d) The formula for other than continuous compounding is A=P(1+R/M)N
where A is the final amount, P is the amount on which interest is
compounded, R is the annual rate of simple interest, M is the number of
compounding periods in a year, and N is the actual number of periods for
which interest is compounded. When compounding interest quarterly, M=4;
compounding monthly, M=12; and compounding daily, M=360, 365, or 366.
For example, a bank may compound 5 percent interest daily on a $10,000
deposit for 91 days in accordance with either of the following:
A=$10,000(1+(.05/360))91 or $10,127.18; or
A=$10,000(1+(.05/365))91 or $10,125.43.
(Interprets and applies 12 U.S.C. 371b and 461)
(35 FR 19663, Dec. 29, 1970. Redesignated at 52 FR 47698, Dec. 16,
1987)
1581In the area of consumer time deposits (deposits in denominations
of less than $100,000), under 217.7 in effect in December, 1970, a
member bank may pay 5 per cent interest on a deposit that matures 3
months from the date of deposit. If the date of deposit is in February,
such deposit will mature in 89 days. The Board regards this de minimis
departure from the 90-day interval required for payment of interest at 5
per cent (12 CFR 217.144) as justified on the grounds of mathematical
simplicity.
12 CFR 217.603 PART 218 -- RELATIONS WITH DEALERS IN SECURITIES UNDER
SECTION 32, BANKING ACT OF 1933
Sec.
218.1 Prohibitions.
218.2 Exemptions.
218.3 Amendments.
218.101 Service of open-end investment company.
218.102 Director serving member bank and closed-end investment
company being organized.
218.103 Service as officer, director, or employee of licensee
corporation under the Small Business Investment Act of 1958.
218.104 Service of member bank and real estate investment company.
218.105 Serving as director of member bank and corporation selling
own stock.
218.106 No exception granted a special or limited partner.
218.107 Serving member bank and investment advisor with mutual fund
affiliation.
218.108 Interlocking relationship involving securities affiliate of
brokerage firm.
218.109 Short-term negotiable notes of banks not securities under
section 32, Banking Act of 1933.
218.110 Investment for own account affects applicability of section
32.
218.111 Interlocking relationships between bank and its commingled
investment account.
218.112 Interlocking relationships between member bank and variable
annuity insurance company.
218.113 Interlocking relationships between member bank and insurance
company-mutual fund complex.
218.114 Interlocking service between securities companies and bank
holding companies.
Authority: Sec. 32, 48 Stat. 194, as amended; 12 U.S.C. 78, unless
otherwise noted. 218.101 to 218.114 also issued under sec. 11, 38
Stat. 262; 12 U.S.C. 248.
12 CFR 217.603 Regulations
12 CFR 218.1 Prohibitions.
Under section 32 of the Banking Act of 1933 (49 Stat. 709; 12 U.S.C.
78), except as stated in 218.2, no officer, director, or employee of
any corporation or unincorporated association, no partner or employee of
any partnership, and no individual, primarily engaged in the issue,
flotation, under writing, public sale, or distribution, at wholesale or
retail, or through syndicate participation, of stocks, bonds, or other
similar securities, can legally be at the same time an officer,
director, or employee of any member bank of the Federal Reserve System.
1
(Reg. R. Jan. 4, 1936)
1Therefore, by its terms, section 32 does not apply --
(a) To a person who is not an officer, director, or employee of a
member bank of the Federal Reserve System;
(b) To a person (1) who is not an officer, director, or employee of a
corporation or unincorporated association primarily engaged in the
issue, flotation, underwriting, public sale, or distribution, at
wholesale or retail, or through syndicate participation, of stocks,
bonds, or other similar securities, (2) who is not a partner or employee
of a partnership primarily so engaged, and (3) who is not, in his
individual capacity, primarily so engaged.
A broker who is engaged solely in executing orders for the purchase
and sale of securities on behalf of others in the open market is not
engaged in the business referred to in section 32.
12 CFR 218.2 Exemptions.
Pursuant to the authority vested in it by section 32, the Board of
Governors of the Federal Reserve System hereby grants permission2 for
any officer, director, or employee of any member bank of the Federal
Reserve System, unless otherwise prohibited,3 to be at the same time an
officer, director, or employee of any corporation or unincorporated
association, a partner or employee of any partnership, or an individual
engaged in the issue, flotation, underwriting, public sale, or
distribution, at wholesale or retail, or through syndicate
participation, of only such securities as national banks may lawfully
underwrite and deal in pursuant to paragraph Seventh of section 5136,
Revised Statutes (12 U.S.C. 24).4
(34 FR 18417, Nov. 19, 1969)
2Under section 32, as amended effective Jan. 1, 1936 (49 Stat. 709;
12 U.S.C. 78), the Board is authorized to except limited classes of
relationships from the prohibitions of the statute, under certain
conditions; but the Board can make such exceptions only by general
regulations and is not authorized to issue individual permits.
3Section 8 of the Clayton Act (38 Stat. 732, 49 Stat. 718; 15 U.S.C.
19) is applicable in certain circumstances to interlocking relationships
between member banks and private bankers, and other banks, banking
associations, savings banks and trust companies. See Part 212 of this
chapter.
Section 17(c) of the Public Utility Act of 1935 (49 Stat. 831; 15
U.S.C. 79q (c) is applicable in certain circumstances to interlocking
relationships between banks and private bankers (and corporations owned
by banks and private bankers), and public utility companies and public
utility holding companies. Inquiries regarding this section should be
addressed to the Securities and Exchange Commission and not to the Board
of Governors of the Federal Reserve System.
Section 10(c) of the Investment Company Act of 1940 (54 Stat. 806;
15 U.S.C. 80a-10 (c)) is applicable in certain circumstances to
interlocking relationships between banks and registered investment
companies. Inquiries regarding this section should be addressed to the
Securities and Exchange Commission and not to the Board of Governors of
the Federal Reserve System.
Section 305(b) of the Federal Power Act (49 Stat. 856; 16 U.S.C.
825d(b) is applicable in certain circumstances to interlocking
relationships between public utility companies and banks and bankers
that are authorized by law to underwrite or participate in the marketing
of securities of a public utility. Inquiries regarding this section
should be addressed to the Federal Power Commission and not to the Board
of Governors of the Federal Reserve System.
4Made applicable to State member banks by paragraph 20 of section 9
of the Federal Reserve Act (12 U.S.C. 335).
12 CFR 218.3 Amendments.
The right to alter, amend, or repeal this part, in whole or in part,
is expressly reserved.
(Reg. R. Jan. 4, 1936)
12 CFR 218.3 Interpretations
12 CFR 218.101 Service of open-end investment company.
An open-end investment company is defined in section 5(a)(1) of the
Investment Company Act of 1940 as a company ''which is offering for sale
or has outstanding any redeemable security of which it is the issuer.''
Section 2(a)(31) of said act provides that a redeemable security means
''any security, other than short-term paper, under the terms of which
the holder, upon its presentation to the issuer or to a person
designated by the issuer, is entitled (whether absolutely or only out of
surplus) to receive approximately his proportionate share of the
issuer's current net assets, or the cash equivalent thereof.''
It is customary for such companies to have but one class of
securities, namely, capital stock, and it is apparent that the more or
less continued process of redemption of the stock issued by such a
company would restrict and contract its activities if it did not
continue to issue its stock. Thus, the issuance and sale of its stock
is essential to the maintenance of the company's size and to the
continuance of operations without substantial contraction, and therefore
the issue and sale of its stock constitutes one of the primary
activities of such a company.
Accordingly, it is the opinion of the Board that if such a company is
issuing or offering its redeemable stock for sale, it is ''primarily
engaged in the issue * * * public sale, or distribution, * * * of
securities'' and that section 32 of the Banking Act of 1933, as amended,
prohibits an officer, director or employee of any such company from
serving at the same time as an officer, director or employee of any
member bank. It is the Board's view that this is true even though the
shares are sold to the public through independent organizations with the
result that the investment company does not derive any direct profit
from the sales.
If, however, the company has ceased to issue or offer any of its
stock for sale, the company would not be engaged in the issue or
distribution of its stock, and, therefore, the prohibition contained in
section 32 would be inapplicable unless the company were primarily
engaged in the underwriting, public sale or distribution of securities
other than its own stock.
(16 FR 4963, May 26, 1951)
12 CFR 218.102 Director serving member bank and closed-end investment
company being organized.
(a) The Board has previously expressed the opinion ( 218.101) that
section 32 of the Banking Act of 1933 (12 U.S.C. 78) is applicable to a
director of a member bank serving as a director of an open-end
investment company, because the more or less continued process of
redemption of the stock issued by such company makes the issuance and
sale of its stock essential to the maintenance of the company's size and
to the continuance of operations, with the result that the issuance and
sale of its stock constitutes one of the primary activities of such a
company. The Board also stated that if the company had ceased to issue
or offer any of its stock for sale, the company would not be engaged in
the issuance or distribution of its stock and therefore the prohibitions
of section 32 would not be applicable. Subsequently, the Board
expressed the opinion that section 32 would not be applicable in the
case of a closed-end investment company.
(b) The Board has recently stated that it believed that a closed-end
company which was in process of organization and was actively engaged in
issuing and selling its shares was in the same position relative to
section 32 as an open-end company, and that the section would be
applicable while this activity continued.
(25 FR 3464, Apr. 21, 1960)
12 CFR 218.103 Service as officer, director, or employee of licensee
corporation under the Small Business Investment Act of 1958.
(a) The Board of Governors has been requested to express an opinion
whether 218.1 would prohibit an officer, director, or employee of a
member bank from serving at the same time as an officer, director, or
employee of a Licensee corporation under the Small Business Investment
Act of 1958 (15 U.S.C. 661 et seq.). It is understood that a Licensee
would be authorized to engage only in the activities set forth in the
statute, namely, to provide capital and long-term loan funds to small
business concerns.
(b) In the opinion of the Board, a corporation engaged exclusively in
the enumerated activities would not be ''primarily engaged in the issue,
flotation, underwriting, public sale, or distribution, at wholesale or
retail, or through syndicate participation, of stocks, bonds, or other
similar securities.'' Accordingly, the prohibition of 218.1 would not
apply to serving as an officer, director, or employee of either a small
business investment company organized under the Small Business
Investment Act of 1958, or an investment company chartered under the
laws of a State solely for the purpose of operating under the Small
Business Investment Act of 1958.
(25 FR 4427, May 19, 1960)
12 CFR 218.104 Service of member bank and real estate investment
company.
(a) The Board recently considered two inquiries regarding the
question whether proposed real estate investment companies would be
subject to the provisions of sections 20 and 32 of the Banking Act of
1933 (12 U.S.C. 377 and 78). These sections relate to affiliations
between member banks and companies engaged principally in the issue,
flotation, underwriting, public sale or distribution of stocks, bonds,
or similar securities, and interlocking directorates between member
banks and companies primarily so engaged. In both instances the
companies, after their organization, would engage only in the business
of financing real estate development or investing in real estate
interests, and not in the type of business described in the statute.
However, each of the companies, in the process of its organization,
would issue its own stock. In one instance, it appeared that the stock
would be issued over a period of from 30 to 60 days; in the other
instance it was stated that the stock would be sold by a firm of
underwriters and that distribution was expected to be completed in not
more than a few days.
(b) On the basis of the facts stated, the Board concluded that the
companies involved would not be subject to sections 20 and 32 of the
Banking Act of 1933, since they would not be principally or primarily
engaged in the business of issuing or distributing securities but would
only be issuing their own stock for a period ordinarily required for
corporate organization. The Board stated, however, that if either of
the companies should subsequently issue additional shares frequently and
in substantial amounts relative to the size of the company's capital
structure, it would be necessary for the Board to reconsider the matter.
(c) Apart from the legal question, the Board noted that an
arrangement of the kind proposed could involve some dangers to an
affiliated bank because the relationship might tend to impair the
independent judgment that should be exercised by the bank in appraising
its credits and might cause the company to be so identified in the minds
of the public with the bank that any financial reverses suffered by the
company might affect the confidence of the public in the bank.
(d) Because of the foregoing conclusion that the companies would not
be subject to sections 20 and 32, it seems advisable to clarify
218.102, in which the Board took the position that a closed-end
investment company which was in process of organization and was actively
engaged in issuing and selling its shares was subject to section 32 as
long as this activity continued. That interpretation should be regarded
as applicable only where the circumstances are such as to indicate that
the issuance of the company's stock is a primary or principal activity
of the company. For example, such circumstances might exist where the
initial stock of a company is actively issued over a period of time
longer than that ordinarily required for corporate organization, or
where, subsequent to organization, the company issues its own stock
frequently and in substantial amounts relative to the total amount of
shares outstanding.
(26 FR 868, Jan. 28, 1961)
12 CFR 218.105 Serving as director of member bank and corporation
selling own stock.
(a) The Board recently considered the question whether section 32 of
the Banking Act of 1933 (12 U.S.C. 78) would be applicable to the
service of a director of a corporation which planned to acquire or
organize, as proceeds from the sale of stock became available,
subsidiaries to operate in a wide variety of fields, including
manufacturing, foreign trade, leasing of heavy equipment, and real
estate development. The corporation had a paid-in capital of about
$60,000 and planned to sell additional shares at a price totaling $10
million, with the proviso that if less than $3 million worth were sold
by March 1962, the funds subscribed would be refunded. It thus appeared
to be contemplated that the sale of stock would take at least a year,
and there appeared to be no reason for believing that, if the venture
proved successful, additional shares would not be offered so that the
corporation could continue to expand.
(b) The Board concluded that section 32 would be applicable, stating
that although 218.102, as clarified by 218.104, related to closed-end
investment companies, the rationale of that interpretation is applicable
to corporations generally.
(26 FR 2456, Mar. 23, 1961)
12 CFR 218.106 No exception granted a special or limited partner.
(a) The Board has been asked on several occasions whether section 32
of the Banking Act of 1933 (12 U.S.C. 78) is applicable to a director,
officer, or employee of a member bank who is a special or limited
partner in a firm primarily engaged in the business described in that
section.
(b) Since the Board cannot issue an individual permit, it can exempt
a limited or special partner only by amending part 218 (Regulation R).
After the statute was amended in 1935 so as to make it applicable to a
partner, the Board carefully considered the desirability of making such
an exception. On several subsequent occasions it has reconsidered the
question. In each instance the Board has decided that in view of a
limited partner's interest in the underwriting and distributing
business, it should not make the exception.
(27 FR 7954, Aug. 10, 1962)
12 CFR 218.107 Serving member bank and investment advisor with mutual
fund affiliation.
(a) The opinion of the Board of Governors of the Federal Reserve
System has been requested with respect to service as vice president of a
corporation engaged in supplying investment advice and management
services to mutual funds and others (''Manager'') and as director of a
member bank.
(b) Section 32 of the Banking Act of 1933 (12 U.S.C. 78), forbids any
officer, director, or employee of any corporation ''primarily engaged in
the issue, flotation, underwriting, public sale, or distribution, at
wholesale or retail, or through syndicate participation, of stocks,
bonds, or other similar securities * * *'' to serve at the same time as
an officer, director, or employee of a member bank.
(c) Manager has for several years served a number of different
open-end or mutual funds, as well as individuals, institutions, and
other clients, as an investment advisor and manager. However, it
appears that Manager has a close relationship with two of the mutual
funds which it serves. A wholly owned subsidiary of Manager
(''Distributors''), serves as distributor for the two mutual funds and
has no other function. In addition, the chairman and treasurer of
Manager, as well as the president, assistant treasurer, and a director
of Manager, are officers and directors of Distributors and trustees of
both funds. It appears also that a director of Manager is president and
director of Distributors, while the clerk of Manager is also clerk of
Distributors. Manager, Distributors and both funds are listed at the
same address in the local telephone directory.
(d) While the greater part of the total annual income of Manager
during the past five years has derived from ''individuals, institutions,
and other clients'', it appears that a substantial portion has been
attributable to the involvement with the two funds in question. During
each of the last four years, that portion has exceeded a third of the
total income of Manager, and in 1962 it reached nearly 40 percent.
(e) The Board has consistently held that an open-end or mutual fund
is engaged in the activities described in section 32, so long as it is
issuing its securities for sale, since it is apparent that the more or
less continued process of redemption of the stock issued by such a
company would restrict and contract its activities if it did not
continue to issue the stock. Clearly, a corporation that is engaged in
underwriting or selling open-end shares, is so engaged.
(f) In connection with incorporated manager-advisors to open-end or
mutual funds, the Board has expressed the view in a number of cases that
where the corporation served a number of different clients, and the
corporate structure was not interlocked with that of mutual fund and
underwriter in such a way that it could be regarded as being controlled
by or substantially one with them, it should not be held to be
''primarily engaged'' in section 32 activities. On the other hand,
where a manager-advisor was created for the sole purpose of serving a
particular fund, and its activities were limited to that function, the
Board has regarded the group as a single entity for purposes of section
32.
(g) In the present case, the selling organization is a wholly-owned
subsidiary of the advisor-manager, hence subject to the parent's
control. Stock of the subsidiary will be voted according to decisions
by the parent's board of directors, and presumably will be voted for a
board of directors of the subsidiary which is responsive to policy lines
laid down by the parent. Financial interests of the parent are
obviously best served by an aggressive selling policy, and, in fact,
both the share and the absolute amount of the parent's income provided
by the two funds have shown a steady increase over recent years. The
fact that dividends from Distributors have represented a relatively
small proportion of the income of Manager, and that there were, indeed,
no dividends in 1961 or 1962, does not support a contrary argument, in
view of the steady increase in total income of Manager from the funds
and Distributors taken as a whole.
(h) In view of all these facts, the Board has concluded that the
separate corporate entities of Manager and Distributors should be
disregarded and Distributors viewed as essentially a selling arm of
Manager. As a result of this conclusion, section 32 would forbid
interlocking service as an officer of Manager and a director of a member
bank.
(28 FR 13437, Dec. 12, 1963)
12 CFR 218.108 Interlocking relationship involving securities affiliate
of brokerage firm.
(a) The Board of Governors was asked recently whether section 32 of
the Banking Act of 1933 (''section 32''), 12 U.S.C. 78, prohibits the
interlocking service of X as a director of a member bank of the Federal
Reserve System and as a partner in a New York City brokerage firm
(''Partnership'') having a corporation affiliate (''Corporation'')
engaged in business of the kinds described in section 32 (''section 32
business'').
(b) Section 32, subject to an exception not applicable here, provides
that
No officer, director, or employee of any corporation or
unincorporated association, no partner or employee of any partnership,
and no individual, primarily engaged in the issue, flotation,
underwriting, public sale, or distribution, at wholesale or retail, or
through syndicate participation, of stocks, bonds, or other similar
securities, shall serve the same time as an officer, director, or
employee of any member bank * * *.
(c) From the information submitted it appears that Partnership, a
member firm of the New York Stock Exchange, is the successor of two
prior partnerships, in one of which X had been a partner. This prior
partnership had been found not to be ''primarily engaged'' in section 32
business. The other prior partnership, however, had been so engaged.
By arrangement between the two prior firms, Corporation was formed
chiefly for the purpose of carrying on the section 32 business of the
prior firm that had been ''primarily engaged'' in that business, which
business was transferred to Corporation. The two prior firms were then
merged and the stock of Corporation was acquired by all the partners of
Partnership, other than X, in proportion to the respective partnership
interests of the stockholding partners. The information submitted
indicated also that two of the three directors and ''some'' of the
principal officers of Corporation are partners in Partnership, although
X is not a director or officer of Corporation.
(d) It is understood that the practice of forming corporate
affiliates of brokerage firms, in order that the affiliate may carry on
the securities business (such as section 32 business) with limited
liability and other advantages, has become rather widespread in recent
years. Accordingly, other cases may arise where a partner in such a
firm may desire to serve at the same time as director of a member bank.
(e) On the basis of the information presented the Board concluded
that X in his capacity as an ''individual'', was not engaged in section
32 business. However, as that information showed Corporation to be
''primarily engaged'' in section 32 business, the Board stated that a
finding that Partnership and Corporation were one entity for the
purposes of the statute would mean that X would be forbidden to serve
both the member bank and Partnership, if the one entity were so engaged.
(f) Paragraph .15 of Rule 321 of the New York Stock Exchange
governing the formation and conduct of affiliated companies of member
organizations states that:
Since Rule 314 provides that each member and allied member in a
member organization must have a fixed interest in its entire business,
it follows that the fixed interest of each member and allied member must
extend to the member organization's corporate affiliate. When any of
the corporate affiliate's participating stock is owned by the members
and allied members in the member organization, such holdings must at all
times be distributed among such members and allied members in
approximately the same proportions as their respective interests in the
profits of the member organization. When a member or allied member's
interest in the member organization is changed, a corresponding change
must be made in his participating interest in the affiliate.
(g) Although it was understood that X had received special permission
from the Exchange not to own any of the stock of Corporation, it
appeared to the Board that Rule 321.15 would apply to the remaining
partners. Moreover, other paragraphs of the rule forbid transfers of
the stock, except under certain circumstances to limited classes of
persons, such as employees of the organization or estates of decedent
partners, without permission of the Exchange.
(h) The information supplied to the Board clearly indicated that
Corporation was formed in order to provide Partnership with an
''underwriting arm''. Under Rule 321 of the Exchange, the partners
(other than X) are required to own stock in Corporation because of their
partnership interest, would be required to surrender that stock on
leaving the partnership, and incoming partners would be required to
acquire such stock. Furthermore, Rule 321 speaks of a corporate
affiliate, such as Corporation, as a part of the ''entire business'' of
a member organization.
(i) On the basis of the foregoing, the Board concluded that
Partnership and Corporation must be regarded as a single entity or
enterprise for purposes of section 32.
(j) The remaining question was whether the enterprise, as a whole,
should be regarded as ''primarily engaged'' in section 32 business. The
Information presented stated that the total dollar volume of section 32
business of Corporation during the first eleven months of its operation
was $89 million. The gross income from section 32 business was less
than half a million, and represented about 7.9 percent of the income of
Partnership. The Board was advised that the relatively low amount of
income from section 32 business of Corporation as due to special costs,
and to the condition of the market for municipal and State bonds during
the past year, a field in which Corporation specializes. Corporation is
listed in a standard directory of securities dealers, and holds itself
out as having separate departments to deal with the principal
underwriting areas in which it functions.
(k) In view of the above information, the Board concluded that the
enterprise consisting of Partnership and Corporation was ''primarily
engaged'' in section 32 business. Accordingly, the Board stated that
the partners in Partnership, including X, were forbidden by that section
and by this part 218 (Reg. R), issued pursuant to the statute, to serve
as officers, directors, or employees of any member banks.
(29 FR 5315, Apr. 18, 1964)
12 CFR 218.109 Short-term negotiable notes of banks not securities
under section 32, Banking Act of 1933.
(a) The Board of Governors has been asked whether short-term
unsecured negotiable notes of the kinds issued by some of the large
banks in this country as a means of obtaining funds are ''other similar
securities'' within the meaning of section 32, Banking Act of 1933 (12
U.S.C. 78) and this part.
(b) Section 32 forbids certain interlocking relationships between
banks which are members of the Federal Reserve System and individuals or
organizations ''primarily engaged in the issue, flotation, underwriting,
public sale, or distribution, at wholesale or retail, or through
syndicate participation, of stocks, bonds, or other similar securities *
* *.'' Therefore, if such notes are securities similar to stocks or
bonds, any dealing therein would be an activity covered in section 32
and would have to be taken into consideration in determining whether the
individual or organization involved was ''primarily engaged'' in such
activities.
(c) The Board has concluded that such short-term notes of the kind
described above are not ''other similar securities'' within the meaning
of section 32 and this part.
(29 FR 16065, Dec. 2, 1964)
12 CFR 218.110 Investment for own account affects applicability of
section 32.
(a) The Board of Governors has been presented with the question
whether a certain firm is primarily engaged in the activities described
in section 32 of the Banking Act of 1933. If the firm is so engaged,
then the prohibitions of section 32 forbids a limited partner to serve
as employee of a member bank.
(b) The firm describes the bulk of its business, producing roughly 60
percent of its income, as ''investing for its own account.'' However, it
has a seat on the local stock exchange, and acts as specialist and
odd-lot dealer on the floor of the exchange, an activity responsible for
some 30 percent of its volume and profits. The firm's ''off-post
trading,'' apart from the investment account, gives rise to about 5
percent of its total volume and 10 percent of its profits. Gross volume
has risen from $4 to $10 million over the past 3 years, but underwriting
has accounted for no more than one-half of 1 percent of that amount.
(c) Section 32 provides that
No officer, director, or employee of any corporation or
unincorporated association, no partner, or employee of any partnership,
and no individual, primarily engaged in the issue, flotation,
underwriting, public sale, or distribution, at wholesale, or retail, or
through syndicate participation, of stocks, bonds, or other similar
securities, shall serve the same time (sic) as an officer, director, or
employee of any member bank * * *
(d) In interpreting this language, the Board has consistently held
that underwriting, acting as a dealer, or generally speaking, selling,
or distributing securities as a principal, is covered by the section,
while acting as broker or agent is not.
(e) In one type of situation, however, although a firm was engaged in
selling securities as principal, on its own behalf, the Board held that
section 32 did not apply. In these cases, the firm alleged that it
bought and sold securities purely for investment purposes. Typically,
those cases involved personal holding companies or small family
investment companies. Securities had been purchased only for members of
a restricted family group, and had been held for relatively long periods
of time.
(f) The question now before the Board is whether a similar exception
can apply in the case of the investment account of a professional
dealer. In order to answer this question, it is necessary to analyze,
in the light of applicable principles under the statute, the three main
types of activity in which the firm has been engaged, (1) acting as
specialist and odd-lot dealer, (2) off-post trading as an ordinary
dealer, and (3) investing for its own account.
(g) On several occasions, the Board has held that, to the extent the
trading of a specialist or odd-lot dealer is limited to that required
for him to perform his function on the floor of the exchange, he is
acting essentially in an agency capacity. In a letter of September 13,
1934, the Board held that the business of a specialist was not of the
kind described in the (unamended) section on the understanding that
* * * in acting as specialists on the New York Curb Exchange, it is
necessary for the firm to buy and sell odd lots and * * * in order to
protect its position after such transactions have been made, the firm
sells or buys shares in lots of 100 or multiples thereof in order to
reduce its position in the stock in question to the smallest amount
possible by this method. It appears therefore that, in connection with
these transactions, the firm is neither trading in the stock in question
or taking a position in it except to the extent made necessary by the
fact that it deals in odd lots and cannot complete the transactions by
purchases and sales on the floor of the exchange except to the nearest
100 share amount.
(h) While subsequent amendments to section 32 to some extent changed
the definition of the kinds of securities business that would be covered
by the section, the amendments were designed so far as is relevant to
the present question, to embody existing interpretations of the Board.
Accordingly, to the extent that the firm's business is described by the
above letter of the Board, it should not be considered to be of a kind
described in section 32.
(i) Turning to the firm's off-post trading, the Board is inclined to
agree with the view that this is sufficient to make the case a
borderline one under the statute. In the circumstances, the Board might
prefer to postpone making a determination until figures for 1965 could
be reviewed, particularly in the light of the recent increase in total
volume, if it were not for the third category, the firm's own investment
account.
(j) While this question has not been squarely presented to it in the
past, the Board is of the opinion that when a firm is doing any
significant amount of business as a dealer or underwriter, then
investments for the firm's own account should be taken into
consideration in determining whether the firm is ''primarily engaged''
in the activities described in section 32. The division into dealing
for one's own account, and dealing with customers, is a highly
subjective one, and although a particular firm or individual may be
quite scrupulous in separating the two, the opportunity necessarily
exists for the kind of abuse at which the statute is directed. The Act
is designed to prevent situations from arising in which a bank director,
officer, or employee could influence the bank or its customers to invest
in securities in which his firm has an interest, regardless of whether
he, as an individual, is likely to do so. In the present case, when
these activities are added to the firm's ''off-post trading'', the firm
clearly falls within the statutory definition.
(k) For the reasons just discussed, the Board concludes that the firm
must be considered to be primarily engaged in activities described in
section 32, and that the prohibitions of the section forbid a limited
partner in that firm to serve as employee of a member bank.
(12 U.S.C. 248(i))
(30 FR 7743, June 16, 1965)
12 CFR 218.111 Interlocking relationships between bank and its
commingled investment account.
(a) The Board of Governors was asked recently whether the
establishment of a proposed ''Commingled Investment Account''
(''Account'') by a national bank would involve a violation of section 32
of the Banking Act of 1933 in view of the interlocking relationships
that would exist between the bank and Account.
(b) From the information submitted, it was understood that Account
would comprise a commingled fund, to be operated under the effective
control of the bank, for the collective investment of sums of money that
might otherwise be handled individually by the bank as managing agent.
It was understood further that the Comptroller of the Currency had taken
the position that Account would be an eligible operation for a national
bank under his Regulation 9, ''Fiduciary Powers of National Banks and
Collective Investment Funds'' (part 9 of this title). The bank had
advised the Board that the Securities and Exchange Commission was of the
view that Account would be a ''registered investment company'' within
the meaning of the Investment Company Act of 1940, and that
participating interests in Account would be ''securities'' subject to
the registration requirements of the Securities Act of 1933.
(c) The information submitted showed also that the minimum individual
participation that would be permitted in Account would be $10,000, while
the maximum acceptable individual investment would be half a million
dollars; that there would be no ''load'' or payment by customers for
the privilege of investing in Account; and that:
The availability of the Commingled Account would not be given
publicity by the Bank except in connection with the promotion of its
fiduciary services in general and the Bank would not advertise or
publicize the Commingled Account as such. Participations in the
Commingled Account are to be made available only on the premises of the
Bank (including its branches), or to persons who are already customers
of the Bank in other connections, or in response to unsolicited
requests.
(d) Such information indicated further that participations would be
received by the bank as agent, under a broad authorization signed by the
customer, substantially equivalent to the power of attorney under which
customers currently deposit their funds for individual investment, and
that the participations would not be received ''in trust.''
(e) The Board understood that Account would be required to comply
with certain requirements of the Federal securities laws not applicable
to an ordinary common trust fund operated by a bank. In particular,
supervision of Account would be in the hands of a committee to be
initially appointed by the bank, but subsequently elected by
participants having a majority of the units of participation in Account.
At least one member of the committee would be entirely independent of
the bank, but the remaining members would be officers in the trust
department of the bank.
(f) The committee would make a management agreement with the bank
under which the bank would be responsible for managing Account's
investments, have custody of its assets, and maintain its books and
records. The management agreement would be renewed annually if approved
by the committee, including a ''majority'' of the independent members,
or by a vote of participants having a majority of the units of
participation. The agreement would be terminable on 60 days' notice by
the committee, by such a majority of the participants, or by the bank,
and would terminate automatically if assigned by the bank.
(g) It was understood also that the bank would receive as annual
compensation for its services one-half of one percent of Account's
average net assets. Account would also pay for its own independent
professional services, including legal, auditing, and accounting
services, as well as the cost of maintaining its registration and
qualification under the Federal securities laws.
(h) Initially, the assets of Account would be divided into units of
participation of an arbitrary value, and each customer would be credited
with a number of units proportionate to his investment. Subsequently,
the assets of Account would be valued at regular intervals, and divided
by the number of units outstanding. New investors would receive units
at their current value, determined in this way, according to the amount
invested. Each customer would receive a receipt evidencing the number
of units to which he was entitled. The receipts themselves would be
nontransferable, but it would be possible for a customer to arrange with
Account for the transfer of his units to someone else. A customer could
terminate his participation at any time and withdraw the current value
of his units.
(i) Section 32 of the Banking Act of 1933 provides in relevant part
that:
No officer, director, or employee of any corporation or
unincorporated association, no partner or employee of any partnership,
and no individual, primarily engaged in the issue, flotation,
underwriting, public sale, or distribution, at wholesale or retail, or
through syndicate participation, of stocks, bonds, or other similar
securities, shall serve (at) the same time as an officer, director, or
employee of any member bank * * *.
(j) The Board concluded, based on its understanding of the proposal
and on the general principles that have been developed in respect to the
application of section 32, that the bank and Account would constitute a
single entity for the purposes of section 32, at least so long as the
operation of Account conformed to the representations made by the bank
and outlined herein. Accordingly, the Board said that section 32 would
not forbid officers of the bank to serve on Account's committee, since
Account would be regarded as nothing more than an arm or department of
the bank.
(k) In conclusion, the Board called attention to section 21 of the
Banking Act of 1933 which, briefly, forbids a securities firm or
organization to engage in the business of receiving deposits, subject to
certain exceptions. However, since section 21 is a criminal statute,
the Board has followed the policy of not expressing views as to its
meaning. (1934 Federal Reserve Bulletin 41, 543.) The Board, therefore,
expressed no position with respect to whether the section might be held
applicable to the establishment and operation of the proposed
''Commingled Investment Account.''
(12 U.S.C. 248(i))
(30 FR 12836, Oct. 8, 1965)
12 CFR 218.112 Interlocking relationships between member bank and
variable annuity insurance company.
(a) The Board has recently been asked to consider whether section 32
of the Banking Act of 1933 (12 U.S.C. 78) and this part prohibit
interlocking service between member banks and (1) the board of managers
of an accumulation fund, registered under the Investment Company Act of
1940 (15 U.S.C. 80), that sells variable annuities and (2) the board of
directors of the insurance company, of which the accumulation fund is a
''separate account,'' but as to which the insurance company is the
sponsor, investment advisor, underwriter, and distributor. Briefly, a
variable annuity is one providing for annuity payment varying in
accordance with the changing values of a portfolio of securities.
(b) Section 32 provides in relevant part that:
No officer, director, or employee of any corporation or
unincorporated association, no partner or employee of any partnership,
and no individual, primarily engaged in the issue, flotation,
underwriting, public sale, or distribution, at wholesale or retail, or
through syndicate participation, of stocks, bonds, or other similar
securities, shall serve (at) the same time as an officer, director, or
employee of any member bank * * *.
(c) For many years, the Board's position has been that an open-end
investment company (or mutual fund) is ''primarily engaged in the issue
* * * public sale, or distribution * * * of securities'' since the
issuance and sale of its stock is essential to the maintenance of the
company's size and to the continuance of its operations without
substantial contraction, and that section 32 of the Banking Act of 1933
prohibits an officer, director, or employee of any such company from
serving at the same time as an officer, director, or employee of any
member bank. (1951 Federal Reserve Bulletin 645; 218.101.)
(d) For reasons similar to those stated by the U.S. Supreme Court in
Securities and Exchange Commission v. Variable Annuity Life Insurance
Company of America, 359 U.S. 65 (1959), the Board concluded that there
is no meaningful basis for distinguishing a variable annuity interest
from a mutual fund share for section 32 purposes and that, therefore,
variable annuity interests should also be regarded as ''other similar
securities'' within the prohibition of the statute and regulation.
(e) The Board concluded also that, since the accumulation fund, like
a mutual fund, must continually issue and sell its investment units in
order to avoid the inevitable contraction of its activities as it makes
annuity payments or redeems variable annuity units, the accumulation
fund is ''primarily engaged'' for section 32 purposes. The Board
further concluded that the insurance company was likewise ''primarily
engaged'' for the purposes of the statute since it had no significant
revenue producing operations other than as underwriter and distributor
of the accumulation fund's units and investment advisor to the fund.
(f) Although it was clear, therefore, that section 32 prohibits any
officers, directors, and employees of member banks from serving in any
such capacity with the insurance company or accumulation fund, the Board
also considered whether members of the board of managers of the
accumulation fund are ''officers, directors, or employees'' within such
prohibition. The functions of the board of managers, who are elected by
the variable annuity contract owners, are, with the approval of the
variable annuity contract owners, to select annually an independent
public accountant, execute annually an agreement providing for
investment advisory services, and recommend any changes in the
fundamental investment policy of the accumulation fund. In addition,
the Board of managers has sole authority to execute an agreement
providing for sales and administrative services and to authorize all
investments of the assets of the accumulation fund in accordance with
its fundamental investment policy. In the opinion of the Board of
Governors, the board of managers of the accumulation fund performs
functions essentially the same as those performed by classes of persons
as to whom the prohibition of section 32 was specifically directed and,
accordingly, are within the prohibitions of the statute.
(12 U.S.C. 248(i))
(33 FR 12886, Sept. 12, 1968)
12 CFR 218.113 Interlocking relationships between member bank and
insurance company-mutual fund complex.
(a) The Board has been asked whether section 32 of the Banking Act of
1933 and this part prohibited interlocking service between member banks
and (1) the advisory board of a newly organized open-end investment
company (mutual fund), (2) the fund's incorporated investment
manager-advisor, (3) the insurance company sponsoring and apparently
controlling the fund.
(b) X Fund, Inc. (''Fund''), the mutual fund, was closely related to
X Life Insurance Company (''Insurance Company''), as well as to the
incorporated manager and investment advisor to Fund (''Advisors''), and
the corporation serving as underwriter for Fund (''Underwriters''). The
same persons served as principal officers and directors of Insurance
Company, Fund, Advisors, and Underwriters. In addition, several
directors of member banks served as directors of Insurance Company and
of Advisors and as members of the Advisory Board of Fund, and additional
directors of member banks had been named only as members of the Advisory
Board. All outstanding shares of Advisors and of Underwriters were
apparently owned by Insurance Company.
(c) Section 32 provides in relevant part that:
No officer, director, or employee of any corporation * * * primarily
engaged in the issue, flotation, underwriting, public sale, or
distribution at wholesale or retail, or through syndicate participation,
of stocks, bonds, or other similar securities, shall serve (at) the same
time as an officer, director, or employee of any member bank * * *.
(d) The Board of Governors reaffirmed its earlier position that an
open-end investment company is ''primarily engaged'' in activities
described in section 32 ''even though the shares are sold to the public
through independent organizations with the result that the investment
company does not derive any direct profit from the sales.'' (1951
Federal Reserve Bulletin 654, 218.101.) Accordingly, the Board
concluded that Fund must be regarded as so engaged, even though its
shares were underwritten and distributed by Underwriters.
(e) As directors of the member banks involved in the inquiry were not
officers, directors, or employees of either Fund or Underwriters, the
relevant questions were whether -- (1) Advisors, and (2) Insurance
Company, should be regarded as being functionally and structurally so
closely allied with Fund that they should be treated as one with it in
determining the applicability of section 32. An additional question was
whether members of the Advisory Board are ''officers, directors, or
employees'' of Fund within the prohibition of the statute.
(f) Interlocking service with Advisory Board: The function of the
Advisory Board was merely to make suggestions and to counsel with Fund's
Board of Directors in regard to investment policy. The Advisory Board
had no authority to make binding recommendations in any area, and it did
not serve in any sense as a check on the authority of the Board of
Directors. Indeed, the Fund's bylaws provided that the Advisory Board
''shall have no power or authority to make any contract or incur any
liability whatever or to take any action binding upon the Corporation,
the Officers, the Board of Directors or the Stockholders.'' Members of
the Advisory Board were appointed by the Board of Directors of Fund,
which could remove any member of the Advisory Board at any time. None
of the principal officers of Fund or of Underwriters were members of the
Advisory Board; and the compensation of its members was expected to be
nominal.
(g) The Board of Governors concluded that members of the Advisory
Board need not be regarded as ''officers, directors, or employees'' of
Fund or of Underwriters for purposes of section 32, and that the
statute, therefore, did not prohibit officers, directors, or employees
of member banks from serving as members of the Advisory Board.
(h) Interlocking service with Advisors: The principal officers and
several of the directors of Advisors were identical with both those of
Fund and of Underwriters. Entire management and investment
responsibility for Fund had been placed, by contract, with Advisors,
subject only to a review authority in the Board of Directors of Fund.
Advisors also supplied office space for the conduct of Fund's affairs,
and compensated members of the Advisory Board who are also officers or
directors of Advisors. Moreover, it appeared that Advisors was created
for the sole purpose of servicing Fund, and its activities were to be
limited to that function.
(i) In the view of the Board of Governors, the structural and
functional identity of Fund and Advisors was such that they were to be
regarded as a single entity for purposes of section 32, and,
accordingly, officers, directors, and employees of member banks were
prohibited by section 32 from serving in any such capacity with such
entity.
(j) Interlocking service with Insurance Company: It was clear that
Insurance Company was not as yet ''primarily engaged'' in business of a
kind described in section 32 with respect to the shares of the newly
created Fund sponsored by Insurance Company, since the issue and sale of
such shares had not yet commenced. Nor did it appear that Insurance
Company would be so engaged in the preliminary stages of Fund's
existence, when the disproportion between the insurance business of
Insurance Company and the sale of Fund shares would be very great.
However, it was also clear that if Fund was successfully launched, its
activities would rather quickly reach a stage where a serious question
would arise as to the applicability of the section 32 prohibition.
(k) An estimate supplied to the Board indicated that 100,000 shares
of Fund might be sold annually to produce, based on then current values,
annual gross sales receipts of over $1 million. Insurance Company's
total gross income for its last fiscal year was almost $10 million. On
this basis, about one-tenth of the annual gross income of the Insurance
Company-Fund complex (more than one-tenth, if income from investments of
Insurance Company was eliminated) would be derived from sales of Fund
shares. Although total sales of shares of Fund during the first year
might not approximate expectations, it was assumed that if the estimate
or projection was correct, the annual rate of sale might well rise to
that level before the end of the first year of operation.
(l) It appeared that net income of Insurance Company from Fund's
operations would be minimal for the foreseeable future. However, it was
understood that Insurance Company's chief reason for launching Fund was
to provide salesmen for Insurance Company (who were to be the only
sellers of shares of Fund, and most of whom, Insurance Company hoped,
would qualify to sell those shares), with a ''package'' of mutual fund
shares and life insurance policies that would provide increased
competitive strength in a highly competitive field.
(m) The Board concluded that Insurance Company would be ''primarily
engaged'' in issuing or distributing shares of Fund within the meaning
of section 32 by not later than the time of realization of the
aforementioned estimated annual rate of sale, and possibly before. As
indicated in Board of Governors v. Agnew, 329 U.S. 441 at 446, the
prohibition of the statute applies if the section 32 business involved
is a ''substantial'' activity of the company.
(n) This, the Board observed, was not to suggest that officers,
directors, or employees of Insurance Company who are also directors of
member banks would be likely, as individuals, to use their positions
with the banks to further sales of Fund's shares. However, as the
Supreme Court pointed out in the Agnew case, section 32 is a
''preventive or prophylactic measure.'' The fact that the individuals
involved ''have been scrupulous in their relationships'' to the banks in
question ''is immaterial.''
(12 U.S.C. 248(i))
(33 FR 13001, Sept. 14, 1968)
12 CFR 218.114 Interlocking service between securities companies and
bank holding companies.
(a) The Board has recently considered whether section 32 of the
Banking Act of 1933 (12 U.S.C. 78) and this part (Regulation R) prohibit
a person primarily engaged in securities activities described in section
32, or associated with an organization so engaged, from serving as an
officer, director, or employee of a holding company proposed to be
organizd by a member bank to own all the stock of such bank.
(b) Section 32 provides in relevant part that:
No officer, director, or employee of any corporation or
unincorporated association, no partner or employee of any partnership,
and no individual, primarily engaged in the issue, flotation,
underwriting, public sale, or distribution, at wholesale or retail, or
through syndicate participation, of stocks, bonds, or other similar
securities, shall serve (at) the same time as an officer, director, or
employee of any member bank * * *.
(c) As the U.S. Supreme Court observed in Board of Governors v.
Agnew, 329 U.S. 441 (1946),
Section 32 is directed to the probability or likelihood, based on the
experience of the 1920's, that a bank director interested in the
underwriting business may use his influence in the bank to involve it or
its customers in securities which his underwriting house has in its
portfolio or has committed itself to take. * * * It (section 32) is a
preventive or prophylactic measure.
(d) In an earlier interpretation, the Board had concluded that
section 32 did not prohibit a partner of a securities firm from serving
as a director of a long-established holding company, with seven nonbank
subsidiaries, that recently had acquired the controlling stock of a
member bank. In distinguishing that situation from the present matter,
the Board observed that the predominant -- in fact, almost the sole --
function of the proposed bank holding company would be to hold the stock
of the bank. It therefore appeared to the Board that the affairs of the
member bank and the holding company would be so closely identified and
functionally related that the same possibilities of abuse which section
32 was designed to guard against would be present in the case of a
director of the holding company as in the case of a director of the
member bank. To give cognizance to the separate corporate entities in
such a situation, would, in the Board's opinion, partially frustrate
Congressional purpose in enacting the statute.
(e) The Board concluded that where the principal activity of a
holding company is the ownership and control of banks, including one or
more member banks, the holding company and each member bank subsidiary
should be considered as constituting together a single entity for
section 32 purposes, so that a person who is primarily engaged in
section 32 business or associated with an organization so engaged is
prohibited by that law from serving as an officer, director, or employee
of such a holding company.
(12 U.S.C. 248(i))
(34 FR 57, Jan. 3, 1969) PART 219 -- REIMBURSEMENT TO FINANCIAL
INSTITUTIONS FOR ASSEMBLING OR PROVIDING FINANCIAL RECORDS
Sec.
219.1 Authority, purpose and scope.
219.2 Definitions.
219.3 Cost reimbursement.
219.4 Exceptions.
219.5 Conditions for payment.
219.6 Payment procedures.
219.7 Effective date.
Authority: 12 U.S.C. 3415.
Source: 44 FR 55813, Sept. 28, 1979, unless otherwise noted.
12 CFR 219.1 Authority, purpose and scope.
This part is issued by the Board of Governors of the Federal Reserve
System under section 1115 of the Right to Financial Privacy Act of 1978
(the ''Act'') (12 U.S.C. 3415). It establishes the rates and conditions
for reimbursement of reasonably necessary costs directly incurred by
financial institutions in assembling or providing customer financial
records to a government authority.
12 CFR 219.2 Definitions.
For the purposes of this part, the following definitions shall apply:
(a) Financial institution means any office of a bank, savings bank,
card issuer as defined in section 103 of the Consumers Credit Protection
Act (15 U.S.C. 1602(n)), industrial loan company, trust company, savings
and loan, building and loan, or homestead association (including
cooperative banks), credit union, or consumer finance institution,
located in any State or territory of the United States, the District of
Columbia, Puerto Rico, Guam, American Samoa, or the Virgin Islands.
(b) Financial record means an original of, a copy of, or information
known to have been derived from, any record held by a financial
institution pertaining to a customer's relationship with the financial
institution.
(c) Government authority means any agency or department of the United
States, or any officer, employee or agent thereof.
(d) Person means an individual or a partnership of five or fewer
individuals.
(e) Customer means any person or authorized representative of that
person who utilized or is utilizing any service of a financial
institution, or for whom a financial institution is acting or has acted
as a fiduciary, in relation to an account maintained in the person's
name. Customer does not include corporations or partnerships comprised
of more than five persons.
(f) Directly incurred costs means costs incurred solely and
necessarily as a consequence of searching for, reproducing or
transporting books, papers, records, or other data, in order to comply
with legal process or a formal written request or a customer's
authorization to produce a customer's financial records. The term does
not include any allocation of fixed costs (overhead, equipment,
depreciation, etc.). If a financial institution has financial records
that are stored at an independent storage facility that charges a fee to
search for, reproduce, or transport particular records requested, these
costs are considered to be directly incurred by the financial
institution.
12 CFR 219.3 Cost reimbursement.
Except as hereinafter provided, a government authority requiring or
requesting access to financial records pertaining to a customer shall
pay to the financial institution that assembles or provides the
financial records a fee for reimbursement of reasonably necessary costs
which have been directly incurred according to the following schedule:
(a) Search and processing costs. (1) Reimbursement of search and
processing costs shall be the total amount of personnel direct time
incurred in locating and retrieving, reproducing, packaging and
preparing financial records for shipment.
(2) The rate for search and processing costs is $10 per hour per
person, computed on the basis of $2.50 per quarter hour or fraction
thereof, and is limited to the total amount of personnel time spent in
locating and retrieving documents or information or reproducing or
packaging and preparing documents for shipment where required or
requested by a government authority. Specific salaries of such persons
shall not be included in search costs. In addition, search and
processing costs do not include salaries, fees, or similar costs for
analysis of material or for managerial or legal advice, expertise,
research, or time spent for any of these activities. If itemized
separately, search and processing costs may include the actual cost of
extracting information stored by computer in the format in which it is
normally produced, based on computer time and necessary supplies;
however, personnel time for computer search may be paid for only at the
rate specified in this paragraph.
(b) Reproduction costs. (1) Reimbursement for reproduction costs
shall be for costs incurred in making copies of documents required or
requested.
(2) The rate for reproduction costs for making copies of required or
requested documents is 15 cents for each page, including copies produced
by reader/printer reproduction processes. Photographs, films, and other
materials are reimbursed at actual cost.
(c) Transportation costs. Reimbursement for transportation costs
shall be for (1) necessary costs, directly incurred, to transport
personnel to locate and retrieve the information required or requested;
and (2) necessary costs, directly incurred solely by the need to convey
the required or requested material to the place of examination.
12 CFR 219.4 Exceptions.
A financial institution is not entitled to reimbursement under the
Act for costs incurred in assembling or providing the following
financial records or information:
(a) Security interests, bankruptcy claims, debt collection. Any
financial records provided as an incident to perfecting a security
interest, proving a claim in bankruptcy, or otherwise collecting on a
debt owing either to the financial institution itself or in its role as
a fiduciary.
(b) Government loan programs. Financial records provided in
connection with a government authority's consideration or administration
of assistance to a customer in the form of a government loan, loan
guaranty, or loan insurance program; or as an incident to processing an
application for assistance to a customer in the form of a government
loan, loan guaranty, or loan insurance agreement; or as an incident to
processing a default on, or administering, a government-guaranteed or
insured loan, as necessary to permit a responsible government authority
to carry out its responsibilities under the loan, loan guaranty, or loan
insurance agreement.
(c) Nonidentifiable information. Financial records that are not
identified with or identifiable as being derived from the financial
records of a particular customer.
(d) Financial supervisory agencies. Financial records disclosed to a
financial supervisory agency in the exercise of its supervisory,
regulatory, or monetary functions with respect to a financial
institution.
(e) Internal Revenue summons. Financial records disclosed in
accordance with procedures authorized by the Internal Revenue Code.
(f) Federally required reports. Financial records required to be
reported in accordance with any federal statute or rule promulgated
thereunder (such as the Bank Secrecy Act).
(g) Government civil or criminal litigation. Financial records
sought by a government authority under the Federal Rules of Civil or
Criminal Procedure or comparable rules of other courts in connection
with litigation to which the government authority and the customer are
parties.
(h) Administrative agency subpoenas. Financial records sought by a
government authority pursuant to an administrative subpoena issued by an
administrative law judge in an adjudicatory proceeding subject to
section 554 of title 5, United States Code, and to which the government
authority and the customer are parties.
(i) Identity of accounts in limited circumstances. Financial
information sought by a government authority, in accordance with the
Right to Financial Privacy Act procedures and for a legitimate law
enforcement inquiry, and limited only to the name, address, account
number and type of account of any customer or ascertainable group of
customers associated (1) with a financial transaction or class of
financial transactions, or (2) with a foreign country or subdivision
thereof in the case of a government authority exercising financial
controls over foreign accounts in the United States under section 5(b)
of the Trading With the Enemy Act (50 U.S.C. App. 5(b)); the
International Emergency Economic Powers Act (title II, Pub. L. 95-223);
or section 5 of the United Nations Participation Act (22 U.S.C. 287(c).
(j) Investigation of a financial institution or its noncustomers.
Financial records sought by a government authority in connection with a
lawful proceeding, investigation, examination, or inspection directed at
the financial institution in possession of such records or at a legal
entity which is not a customer.
(k) General Accounting Office requests. Financial records sought by
the General Accounting Office pursuant to an authorized proceeding,
investigation, examination or audit directed at a government authority.
(l) Securities and Exchange Commission requests. Until November 10,
1980, financial records sought by the Securities and Exchange
Commission.
12 CFR 219.5 Conditions for payment.
(a) Limitations. Payment for reasonably necessary, directly incurred
costs to financial institutions shall be limited to material required or
requested.
(b) Separate consideration of component costs. Payment shall be made
only for costs that are both directly incurred and reasonably necessary.
In determining whether costs are reasonably necessary, search and
processing, reproduction, and transportation costs shall be considered
separately.
(c) Compliance with legal process, request, or authorization. No
payment shall be made until the financial institution satisfactorily
complies with the legal process or formal written request, or customer
authorization, except that in the case where the legal process or formal
written request is withdrawn, or the customer authorization is revoked,
or where the customer successfully challenges access by or disclosure to
a government authority, the financial institution shall be reimbursed
for reasonably necessary costs directly incurred in assembling financial
records required or requested to be produced prior to the time that the
government authority notifies the institution that the legal process or
request is withdrawn or defeated, or that the customer has revoked his
or her authorization.
(d) Itemized bill or invoice. No payment shall be made unless the
financial institution submits an itemized bill or invoice showing
specific details concerning the search and processing, reproduction, and
transportation costs.
12 CFR 219.6 Payment procedures.
(a) Notice to submit invoice. Promptly following a government
authority's service of legal process or request, the government
authority shall notify the financial institution that an itemized bill
or invoice must be submitted for payment and shall furnish an office
address for this purpose.
(b) Special notice. If a government authority withdraws the legal
process or formal written request, or if the customer revokes his or her
authorization, or if the legal process or request has been successfully
challenged by the customer, the government authority shall promptly
notify the financial institution of these facts, and shall also notify
the financial institution that the itemized bill or invoice must be
submitted for payment of costs incurred prior to the time that the
financial institution receives this notice.
12 CFR 219.7 Effective date.
This regulation shall become effective October 1, 1979.
12 CFR 219.7 FINDING AIDS
A list of CFR titles, subtitles, chapters, subchapters and parts and
an alphabetical list of agencies publishing in the CFR are included in
the CFR Index and Finding Aids volume to the Code of Federal Regulations
which is published separately and revised annually.
Table of CFR Titles and Chapters
Alphabetical List of Agencies Appearing in the CFR
List of CFR Sections Affected
Chap.
12 CFR 219.7 Table of CFR Titles and Chapters
12 CFR 219.7 Title 1 -- General Provisions
I Administrative Committee of the Federal Register (Parts 1 -- 49)
II Office of the Federal Register (Parts 50 -- 299)
III Administrative Conference of the United States (Parts 300 -- 399)
IV Miscellaneous Agencies (Parts 400 -- 500)
12 CFR 219.7 Title 2 -- (Reserved)
12 CFR 219.7 Title 3 -- The President
I Executive Office of the President (Parts 100 -- 199)
12 CFR 219.7 Title 4 -- Accounts
I General Accounting Office (Parts 1 -- 99)
II Federal Claims Collection Standards (General Accounting Office --
Department of Justice) (Parts 100 -- 299)
III General Accounting Office (CASB) (Parts 300 -- 499)
12 CFR 219.7 Title 5 -- Administrative Personnel
I Office of Personnel Management (Parts 1 -- 1199)
II Merit Systems Protection Board (Parts 1200 -- 1299)
III Office of Management and Budget (Parts 1300 -- 1399)
IV Advisory Committee on Federal Pay (Parts 1400 -- 1499)
V The International Organizations Employees Loyalty Board (Parts 1500
-- 1599)
VI Federal Retirement Thrift Investment Board (Parts 1600 -- 1699)
VII Advisory Commission on Intergovernmental Relations (Parts 1700 --
1799)
VIII Office of Special Council (Parts 1800 -- 1899)
IX Appalachian Regional Commission (Parts 1900 -- 1999)
XI United States Soldiers' and Airmen's Home (Parts 2100 -- 2199)
XIV Federal Labor Relations Authority, General Counsel of the Federal
Labor Relations Authority and Federal Service Impasses Panel (Parts 2400
-- 2499)
XV Office of Administration, Executive Office of the President (Parts
2500 -- 2599)
XVI Office of Government Ethics (Parts 2600 -- 2699)
12 CFR 219.7 Title 6 -- (Reserved)
12 CFR 219.7 Title 7 -- Agriculture
Subtitle A -- Office of the Secretary of Agriculture (Parts 0 -- 26)
Subtitle B -- Regulations of the Department of Agriculture
I Agricultural Marketing Service (Standards, Inspections, Marketing
Practices), Department of Agriculture (Parts 27 -- 209)
II Food and Nutrition Service, Department of Agriculture (Parts 210
-- 299)
III Animal and Plant Health Inspection Service, Department of
Agriculture (Parts 300 -- 399)
IV Federal Crop Insurance Corporation, Department of Agriculture
(Parts 400 -- 499)
V Agricultural Research Service, Department of Agriculture (Parts 500
-- 599)
VI Soil Conservation Service, Department of Agriculture (Parts 600 --
699)
VII Agricultural Stabilization and Conservation Service (Agricultural
Adjustment), Department of Agriculture (Parts 700 -- 799)
VIII Federal Grain Inspection Service, Department of Agriculture
(Parts 800 -- 899)
IX Agricultural Marketing Service (Marketing Agreements and Orders;
Fruits, Vegetables, Nuts), Department of Agriculture (Parts 900 -- 999)
X Agricultural Marketing Service (Marketing Agreements and Orders;
Milk), Department of Agriculture (Parts 1000 -- 1199)
XI Agricultural Marketing Service (Marketing Agreements and Orders;
Miscellaneous Commodities), Department of Agriculture (Parts 1200 --
1299)
XIV Commodity Credit Corporation, Department of Agriculture (Parts
1400 -- 1499)
XV Foreign Agricultural Service, Department of Agriculture (Parts
1500 -- 1599)
XVI Rural Telephone Bank, Department of Agriculture (Parts 1600 --
1699)
XVII Rural Electrification Administration, Department of Agriculture
(Parts 1700 -- 1799)
XVIII Farmers Home Administration, Department of Agriculture (Parts
1800 -- 2099)
XXI Foreign Economic Development Service, Department of Agriculture
(Parts 2100 -- 2199)
XXII Office of International Cooperation and Development, Department
of Agriculture (Parts 2200 -- 2299)
XXV Office of the General Sales Manager, Department of Agriculture
(Parts 2500 -- 2599)
XXVI Office of Inspector General, Department of Agriculture (Parts
2600 -- 2699)
XXVII Office of Information Resources Management, Department of
Agriculture (Parts 2700 -- 2799)
XXVIII Office of Operations, Department of Agriculture (Parts 2800 --
2899)
XXIX Office of Energy, Department of Agriculture (Parts 2900 -- 2999)
XXX Office of Finance and Management, Department of Agriculture
(Parts 3000 -- 3099)
XXXI Office of Environmental Quality, Department of Agriculture
(Parts 3100 -- 3199)
XXXII Office of Grants and Program Systems, Department of Agriculture
(Parts 3200 -- 3299)
XXXIII Office of Transportation, Department of Agriculture (Parts
3300 -- 3399)
XXXIV Cooperative State Research Service, Department of Agriculture
(Parts 3400 -- 3499)
XXXVI National Agricultural Statistics Service, Department of
Agriculture (Parts 3600 -- 3699)
XXXVII Economic Research Service, Department of Agriculture (Parts
3700 -- 3799)
XXXVIII World Agricultural Outlook Board, Department of Agriculture
(Parts 3800 -- 3899)
XXXIX Economic Analysis Staff, Department of Agriculture (Parts 3900
-- 3999)
XL Economics Management Staff, Department of Agriculture (Parts 4000
-- 4099)
XLI National Agricultural Library, Department of Agriculture (Part
4100)
12 CFR 219.7 Title 8 -- Aliens and Nationality
I Immigration and Naturalization Service, Department of Justice
(Parts 1 -- 499)
12 CFR 219.7 Title 9 -- Animals and Animal Products
I Animal and Plant Health Inspection Service, Department of
Agriculture (Parts 1 -- 199)
II Packers and Stockyards Administration, Department of Agriculture
(Parts 200 -- 299)
III Food Safety and Inspection Service, Meat and Poultry Inspection,
Department of Agriculture (Parts 300 -- 399)
12 CFR 219.7 Title 10 -- Energy
I Nuclear Regulatory Commission (Parts 0 -- 199)
II Department of Energy (Parts 200 -- 699)
III Department of Energy (Parts 700 -- 999)
X Department of Energy (General Provisions) (Parts 1000 -- 1099)
XV Office of the Federal Inspector for the Alaska Natural Gas
Transportation System (Parts 1500 -- 1599)
XVII Defense Nuclear Facilities Safety Board (Parts 1700 -- 1799)
12 CFR 219.7 Title 11 -- Federal Elections
I Federal Election Commission (Parts 1 -- 9099)
12 CFR 219.7 Title 12 -- Banks and Banking
I Comptroller of the Currency, Department of the Treasury (Parts 1 --
199)
II Federal Reserve System (Parts 200 -- 299)
III Federal Deposit Insurance Corporation (Parts 300 -- 399)
IV Export-Import Bank of the United States (Parts 400 -- 499)
V Office of Thrift Supervision, Department of The Treasury (Parts 500
-- 599)
VI Farm Credit Administration (Parts 600 -- 699)
VII National Credit Union Administration (Parts 700 -- 799)
VIII Federal Financing Bank (Parts 800 -- 899)
IX Federal Housing Finance Board (Parts 900 -- 999)
XI Federal Financial Institutions Examination Council (Parts 1100 --
1199)
XIII Farm Credit System Assistance Board (Parts 1300 -- 1399)
XIV Farm Credit System Insurance Corporation (Parts 1400 -- 1499)
XV Oversight Board (Parts 1500 -- 1599)
XVI Resolution Trust Corporation (Parts 1600 -- 1699)
12 CFR 219.7 Title 13 -- Business Credit and Assistance
I Small Business Administration (Parts 1 -- 199)
III Economic Development Administration, Department of Commerce
(Parts 300 -- 399)
12 CFR 219.7 Title 14 -- Aeronautics and Space
I Federal Aviation Administration, Department of Transportation
(Parts 1 -- 199)
II Office of the Secretary, Department of Transportation (Aviation
Proceedings) (Parts 200 -- 399)
III Office of Commercial Space Transportation, Department of
Transportation (Parts 400 -- 499)
V National Aeronautics and Space Administration (Parts 1200 -- 1299)
12 CFR 219.7 Title 15 -- Commerce and Foreign Trade
Subtitle A -- Office of the Secretary of Commerce (Parts 0 -- 29)
Subtitle B -- Regulations Relating to Commerce and Foreign Trade
I Bureau of the Census, Department of Commerce (Parts 30 -- 199)
II National Institute of Standards and Technology, Department of
Commerce (Parts 200 -- 299)
III International Trade Administration, Department of Commerce (Parts
300 -- 399)
IV Foreign-Trade Zones Board (Parts 400 -- 499)
VII Bureau of Export Administration, Department of Commerce (Parts
700 -- 799)
VIII Bureau of Economic Analysis, Department of Commerce (Parts 800
-- 899)
IX National Oceanic and Atmospheric Administration, Department of
Commerce (Parts 900 -- 999)
XI Technology Administration, Department of Commerce (Parts 1100 --
1199)
XII United States Travel and Tourism Administration, Department of
Commerce (Parts 1200 -- 1299)
XIII East-West Foreign Trade Board (Parts 1300 -- 1399)
XIV Minority Business Development Agency (Parts 1400 -- 1499)
Subtitle C -- Regulations Relating to Foreign Trade Agreements
XX Office of the United States Trade Representative (Parts 2000 --
2099)
Subtitle D -- Regulations Relating to Telecommunications and
Information
XXIII National Telecommunications and Information Administration,
Department of Commerce (Parts 2300 -- 2399)
12 CFR 219.7 Title 16 -- Commercial Practices
I Federal Trade Commission (Parts 0 -- 999)
II Consumer Product Safety Commission (Parts 1000 -- 1799)
12 CFR 219.7 Title 17 -- Commodity and Securities Exchanges
I Commodity Futures Trading Commission (Parts 1 -- 199)
II Securities and Exchange Commission (Parts 200 -- 399)
IV Department of the Treasury (Parts 400 -- 499)
12 CFR 219.7 Title 18 -- Conservation of Power and Water Resources
I Federal Energy Regulatory Commission, Department of Energy (Parts 1
-- 399)
III Delaware River Basin Commission (Parts 400 -- 499)
VI Water Resources Council (Parts 700 -- 799)
VIII Susquehanna River Basin Commission (Parts 800 -- 899)
XIII Tennessee Valley Authority (Parts 1300 -- 1399)
12 CFR 219.7 Title 19 -- Customs Duties
I United States Customs Service, Department of the Treasury (Parts 1
-- 199)
II United States International Trade Commission (Parts 200 -- 299)
III International Trade Administration, Department of Commerce (Parts
300 -- 399)
12 CFR 219.7 Title 20 -- Employees' Benefits
I Office of Workers' Compensation Programs, Department of Labor
(Parts 1 -- 199)
II Railroad Retirement Board (Parts 200 -- 399)
III Social Security Administration, Department of Health and Human
Services (Parts 400 -- 499)
IV Employees' Compensation Appeals Board, Department of Labor (Parts
500 -- 599)
V Employment and Training Administration, Department of Labor (Parts
600 -- 699)
VI Employment Standards Administration, Department of Labor (Parts
700 -- 799)
VII Benefits Review Board, Department of Labor (Parts 800 -- 899)
VIII Joint Board for the Enrollment of Actuaries (Parts 900 -- 999)
IX Office of the Assistant Secretary for Veterans' Employment and
Training, Department of Labor (Parts 1000 -- 1099)
12 CFR 219.7 Title 21 -- Food and Drugs
I Food and Drug Administration, Department of Health and Human
Services (Parts 1 -- 1299)
II Drug Enforcement Administration, Department of Justice (Parts 1300
-- 1399)
12 CFR 219.7 Title 22 -- Foreign Relations
I Department of State (Parts 1 -- 199)
II Agency for International Development, International Development
Cooperation Agency (Parts 200 -- 299)
III Peace Corps (Parts 300 -- 399)
IV International Joint Commission, United States and Canada (Parts
400 -- 499)
V United States Information Agency (Parts 500 -- 599)
VI United States Arms Control and Disarmament Agency (Parts 600 --
699)
VII Overseas Private Investment Corporation, International
Development Cooperation Agency (Parts 700 -- 799)
IX Foreign Service Grievance Board Regulations (Parts 900 -- 999)
X Inter-American Foundation (Parts 1000 -- 1099)
XI International Boundary and Water Commission, United States and
Mexico, United States Section (Parts 1100 -- 1199)
XII United States International Development Cooperation Agency (Parts
1200 -- 1299)
XIII Board for International Broadcasting (Parts 1300 -- 1399)
XIV Foreign Service Labor Relations Board; Federal Labor Relations
Authority; General Counsel of the Federal Labor Relations Authority;
and the Foreign Service Impasse Disputes Panel (Parts 1400 -- 1499)
XV African Development Foundation (Parts 1500 -- 1599)
XVI Japan-United States Friendship Commission (Parts 1600 -- 1699)
12 CFR 219.7 Title 23 -- Highways
I Federal Highway Administration, Department of Transportation (Parts
1 -- 999)
II National Highway Traffic Safety Administration and Federal Highway
Administration, Department of Transportation (Parts 1200 -- 1299)
III National Highway Traffic Safety Administration, Department of
Transportation (Parts 1300 -- 1399)
12 CFR 219.7 Title 24 -- Housing and Urban Development
Subtitle A -- Office of the Secretary, Department of Housing and
Urban Development (Parts 0 -- 99)
Subtitle B -- Regulations Relating to Housing and Urban Development
I Office of Assistant Secretary for Equal Opportunity, Department of
Housing and Urban Development (Parts 100 -- 199)
II Office of Assistant Secretary for Housing-Federal Housing
Commissioner, Department of Housing and Urban Development (Parts 200 --
299)
III Government National Mortgage Association, Department of Housing
and Urban Development (Parts 300 -- 399)
V Office of Assistant Secretary for Community Planning and
Development, Department of Housing and Urban Development (Parts 500 --
599)
VI Office of Assistant Secretary for Community Planning and
Development, Department of Housing and Urban Development (Parts 600 --
699)
VII Office of the Secretary, Department of Housing and Urban
Development (Section 8 Housing Assistance Programs and Public and Indian
Housing Programs) (Parts 700 -- 799)
VIII Office of the Assistant Secretary for Housing -- Federal Housing
Commissioner, Department of Housing and Urban Development (Section 8
Housing Assistance Programs and Section 202 Direct Loan Program) (Parts
800 -- 899)
IX Office of Assistant Secretary for Public and Indian Housing,
Department of Housing and Urban Development (Parts 900 -- 999)
X Office of Assistant Secretary for Housing -- Federal Housing
Commissioner, Department of Housing and Urban Development (Interstate
Land Sales Registration Program) (Parts 1700 -- 1799)
XI Solar Energy and Energy Conservation Bank, Department of Housing
and Urban Development (Parts 1800 -- 1899)
XII Office of Inspector General, Department of Housing and Urban
Development (Parts 2000 -- 2099)
XV Mortgage Insurance and Loan Programs under the Emergency
Homeowners' Relief Act, Department of Housing and Urban Development
(Parts 2700 -- 2799)
XX Office of Assistant Secretary for Housing -- Federal Housing
Commissioner, Department of Housing and Urban Development (Parts 3200 --
3699)
XXV Neighborhood Reinvestment Corporation (Parts 4100 -- 4199)
12 CFR 219.7 Title 25 -- Indians
I Bureau of Indian Affairs, Department of the Interior (Parts 1 --
299)
II Indian Arts and Crafts Board, Department of the Interior (Parts
300 -- 399)
III National Indian Gaming Commission (Parts 500 -- 599)
IV Office of Navajo and Hopi Indian Relocation (Parts 700 -- 799)
12 CFR 219.7 Title 26 -- Internal Revenue
I Internal Revenue Service, Department of the Treasury (Parts 1 --
799)
12 CFR 219.7 Title 27 -- Alcohol, Tobacco Products and Firearms
I Bureau of Alcohol, Tobacco and Firearms, Department of the Treasury
(Parts 1 -- 299)
12 CFR 219.7 Title 28 -- Judicial Administration
I Department of Justice (Parts 0 -- 199)
III Federal Prison Industries, Inc., Department of Justice (Parts 300
-- 399)
V Bureau of Prisons, Department of Justice (Parts 500 -- 599)
VI Offices of Independent Counsel, Department of Justice (Parts 600
-- 699)
VII Office of Independent Counsel (Parts 700 -- 799)
12 CFR 219.7 Title 29 -- Labor
Subtitle A -- Office of the Secretary of Labor (Parts 0 -- 99)
Subtitle B -- Regulations Relating to Labor
I National Labor Relations Board (Parts 100 -- 199)
II Bureau of Labor-Management Relations and Cooperative Programs,
Department of Labor (Parts 200 -- 299)
III National Railroad Adjustment Board (Parts 300 -- 399)
IV Office of Labor-Management Standards, Department of Labor (Parts
400 -- 499)
V Wage and Hour Division, Department of Labor (Parts 500 -- 899)
IX Construction Industry Collective Bargaining Commission (Parts 900
-- 999)
X National Mediation Board (Parts 1200-1299)
XII Federal Mediation and Conciliation Service (Parts 1400-1499)
XIV Equal Employment Opportunity Commission (Parts 1600-1699)
XVII Occupational Safety and Health Administration, Department of
Labor (Parts 1900 -- 1999)
XX Occupational Safety and Health Review Commission (Parts 2200 --
2499)
XXV Pension and Welfare Benefits Administration, Department of Labor
(Parts 2500 -- 2599)
XXVI Pension Benefit Guaranty Corporation (Parts 2600 -- 2699)
XXVII Federal Mine Safety and Health Review Commission (Parts 2700 --
2799)
12 CFR 219.7 Title 30 -- Mineral Resources
I Mine Safety and Health Administration, Department of Labor (Parts 1
-- 199)
II Minerals Management Service, Department of the Interior (Parts 200
-- 299)
III Board of Surface Mining and Reclamation Appeals, Department of
the Interior (Parts 300 -- 399)
IV Geological Survey, Department of the Interior (Parts 400 -- 499)
VI Bureau of Mines, Department of the Interior (Parts 600 -- 699)
VII Office of Surface Mining Reclamation and Enforcement, Department
of the Interior (Parts 700 -- 999)
12 CFR 219.7 Title 31 -- Money and Finance: Treasury
Subtitle A -- Office of the Secretary of the Treasury (Parts 0 -- 50)
Subtitle B -- Regulations Relating to Money and Finance
I Monetary Offices, Department of the Treasury (Parts 51 -- 199)
II Fiscal Service, Department of the Treasury (Parts 200 -- 399)
IV Secret Service, Department of the Treasury (Parts 400 -- 499)
V Office of Foreign Assets Control, Department of the Treasury (Parts
500 -- 599)
VI Bureau of Engraving and Printing, Department of the Treasury
(Parts 600 -- 699)
VII Federal Law Enforcement Training Center, Department of the
Treasury (Parts 700 -- 799)
VIII Office of International Investment, Department of the Treasury
(Parts 800 -- 899)
12 CFR 219.7 Title 32 -- National Defense
Subtitle A -- Department of Defense
I Office of the Secretary of Defense (Parts 1 -- 399)
V Department of the Army (Parts 400 -- 699)
VI Department of the Navy (Parts 700 -- 799)
VII Department of the Air Force (Parts 800 -- 1099)
Subtitle B -- Other Regulations Relating to National Defense
XII Defense Logistics Agency (Parts 1200-1299)
XVI Selective Service System (Parts 1600-1699)
XIX Central Intelligence Agency (Parts 1900 -- 1999)
XX Information Security Oversight Office (Parts 2000 -- 2099)
XXI National Security Council (Parts 2100 -- 2199)
XXIV Office of Science and Technology Policy (Parts 2400 -- 2499)
XXVII Office for Micronesian Status Negotiations (Parts 2700 -- 2799)
XXVIII Office of the Vice President of the United States (Parts 2800
-- 2899)
12 CFR 219.7 Title 33 -- Navigation and Navigable Waters
I Coast Guard, Department of Transportation (Parts 1 -- 199)
II Corps of Engineers, Department of the Army (Parts 200 -- 399)
IV Saint Lawrence Seaway Development Corporation, Department of
Transportation (Parts 400 -- 499)
12 CFR 219.7 Title 34 -- Education
Subtitle A -- Office of the Secretary, Department of Education (Parts
1 -- 99)
Subtitle B -- Regulations of the Offices of the Department of
Education
I Office for Civil Rights, Department of Education (Parts 100 -- 199)
II Office of Elementary and Secondary Education, Department of
Education (Parts 200 -- 299)
III Office of Special Education and Rehabilitative Services,
Department of Education (Parts 300 -- 399)
IV Office of Vocational and Adult Education, Department of Education
(Parts 400 -- 499)
V Office of Bilingual Education and Minority Languages Affairs,
Department of Education (Parts 500 -- 599)
VI Office of Postsecondary Education, Department of Education (Parts
600 -- 699)
VII Office of Educational Research and Improvement, Department of
Education (Parts 700 -- 799)
12 CFR 219.7 Title 35 -- Panama Canal
I Panama Canal Regulations (Parts 1 -- 299)
12 CFR 219.7 Title 36 -- Parks, Forests, and Public Property
I National Park Service, Department of the Interior (Parts 1 -- 199)
II Forest Service, Department of Agriculture (Parts 200 -- 299)
III Corps of Engineers, Department of the Army (Parts 300 -- 399)
IV American Battle Monuments Commission (Parts 400 -- 499)
V Smithsonian Institution (Parts 500 -- 599)
VII Library of Congress (Parts 700 -- 799)
VIII Advisory Council on Historic Preservation (Parts 800 -- 899)
IX Pennsylvania Avenue Development Corporation (Parts 900-999)
XI Architectural and Transportation Barriers Compliance Board (Parts
1100 -- 1199)
XII National Archives and Records Administration (Parts 1200 -- 1299)
12 CFR 219.7 Title 37 -- Patents, Trademarks, and Copyrights
I Patent and Trademark Office, Department of Commerce (Parts 1 --
199)
II Copyright Office, Library of Congress (Parts 200 -- 299)
III Copyright Royalty Tribunal (Parts 300 -- 399)
IV Assistant Secretary for Technology Policy, Department of Commerce
(Parts 400-499)
V Under Secretary for Technology, Department of Commerce (Parts 500
-- 599)
12 CFR 219.7 Title 38 -- Pensions, Bonuses, and Veterans' Relief
I Department of Veterans Affairs (Parts 0 -- 99)
12 CFR 219.7 Title 39 -- Postal Service
I United States Postal Service (Parts 1-999)
III Postal Rate Commission (Parts 3000 -- 3099)
12 CFR 219.7 Title 40 -- Protection of Environment
I Environmental Protection Agency (Parts 1 -- 799)
V Council on Environmental Quality (Parts 1500-1599)
12 CFR 219.7 Title 41 -- Public Contracts and Property Management
Subtitle B -- Other Provisions Relating to Public Contracts
50 Public Contracts, Department of Labor (Parts 50-1 -- 50-999)
51 Committee for Purchase from the Blind and Other Severely
Handicapped (Parts 51-1 -- 51-99)
60 Office of Federal Contract Compliance Programs, Equal Employment
Opportunity, Department of Labor (Parts 60-1 -- 60-999)
61 Office of the Assistant Secretary for Veterans Employment and
Training, Department of Labor (Parts 61-1 -- 61-999)
Subtitle C -- Federal Property Management Regulations System
101 Federal Property Management Regulations (Parts 101-1 -- 101-99)
105 General Services Administration (Parts 105-1 -- 105-999)
109 Department of Energy Property Management Regulations (Parts 109-1
-- 109-99)
114 Department of the Interior (Parts 114-1 -- 114-99)
115 Environmental Protection Agency (Parts 115-1 -- 115-99)
128 Department of Justice (Parts 128-1 -- 128-99)
132 Department of the Air Force (Parts 132-1 -- 132-99)
Subtitle D -- Other Provisions Relating to Property Management
(Reserved)
Subtitle E -- Federal Information Resources Management Regulations
System
201 Federal Information Resources Management Regulation (Parts 201-1
-- 201-99)
Subtitle F -- Federal Travel Regulation System
301 Travel Allowances (Parts 301-1 -- 301-99)
302 Relocation Allowances (Parts 302-1 -- 302-99)
303 Payment of Expenses Connected with the Death of Certain Employees
(Parts 303-1 -- 303-2)
304 Payment from a non-Federal source for travel expenses (Parts
304-1 -- 304-99)
12 CFR 219.7 Title 42 -- Public Health
I Public Health Service, Department of Health and Human Services
(Parts 1 -- 199)
IV Health Care Financing Administration, Department of Health and
Human Services (Parts 400 -- 499)
V Office of Inspector General-Health Care, Department of Health and
Human Services (Parts 1000 -- 1999)
12 CFR 219.7 Title 43 -- Public Lands: Interior
Subtitle A -- Office of the Secretary of the Interior (Parts 1 --
199)
Subtitle B -- Regulations Relating to Public Lands
I Bureau of Reclamation, Department of the Interior (Parts 200 --
499)
II Bureau of Land Management, Department of the Interior (Parts 1000
-- 9999)
12 CFR 219.7 Title 44 -- Emergency Management and Assistance
I Federal Emergency Management Agency (Parts 0 -- 399)
IV Department of Commerce and Department of Transportation (Parts 400
-- 499)
12 CFR 219.7 Title 45 -- Public Welfare
Subtitle A -- Department of Health and Human Services, General
Administration (Parts 1 -- 199)
Subtitle B -- Regulations Relating to Public Welfare
II Office of Family Assistance (Assistance Programs), Family Support
Administration, Department of Health and Human Services (Parts 200 --
299)
III Office of Child Support Enforcement (Child Support Enforcement
Program), Family Support Administration, Department of Health and Human
Services (Parts 300 -- 399)
IV Office of Refugee Resettlement, Family Support Administration,
Department of Health and Human Services (Parts 400 -- 499)
V Foreign Claims Settlement Commission of the United States,
Department of Justice (Parts 500 -- 599)
VI National Science Foundation (Parts 600 -- 699)
VII Commission on Civil Rights (Parts 700 -- 799)
VIII Office of Personnel Management (Parts 800 -- 899)
X Office of Community Services, Family Support Administration,
Department of Health and Human Services (Parts 1000 -- 1099)
XI National Foundation on the Arts and the Humanities (Parts 1100 --
1199)
XII ACTION (Parts 1200 -- 1299)
XIII Office of Human Development Services, Department of Health and
Human Services (Parts 1300 -- 1399)
XVI Legal Services Corporation (Parts 1600 -- 1699)
XVII National Commission on Libraries and Information Science (Parts
1700 -- 1799)
XVIII Harry S. Truman Scholarship Foundation (Parts 1800 -- 1899)
XX Commission on the Bicentennial of the United States Constitution
(Parts 2000 -- 2099)
XXI Commission on Fine Arts (Parts 2100 -- 2199)
XXII Christopher Columbus Quincentenary Jubilee Commission (2200 --
2299)
12 CFR 219.7 Title 46 -- Shipping
I Coast Guard, Department of Transportation (Parts 1 -- 199)
II Maritime Administration, Department of Transportation (Parts 200
-- 399)
III Coast Guard (Great Lakes Pilotage), Department of Transportation
(Parts 400 -- 499)
IV Federal Maritime Commission (Parts 500 -- 599)
12 CFR 219.7 Title 47 -- Telecommunication
I Federal Communications Commission (Parts 0 -- 199)
II Office of Science and Technology Policy and National Security
Council (Parts 200 -- 299)
III National Telecommunications and Information Administration,
Department of Commerce (Parts 300 -- 399)
12 CFR 219.7 Title 48 -- Federal Acquisition Regulations System
1 Federal Acquisition Regulation (Parts 1 -- 99)
2 Department of Defense (Parts 200 -- 299)
3 Department of Health and Human Services (Parts 300 -- 399)
4 Department of Agriculture (Parts 400 -- 499)
5 General Services Administration (Parts 500 -- 599)
6 Department of State (Parts 600 -- 699)
7 Agency for International Development (Parts 700 -- 799)
8 Department of Veterans Affairs (Parts 800 -- 899)
9 Department of Energy (Parts 900 -- 999)
10 Department of the Treasury (Parts 1000 -- 1099)
12 Department of Transportation (Parts 1200 -- 1299)
13 Department of Commerce (Parts 1300 -- 1399)
14 Department of the Interior (Parts 1400 -- 1499)
15 Environmental Protection Agency (Parts 1500 -- 1599)
16 Office of Personnel Management Federal Employees Health Benefits
Acquisition Regulation (Parts 1600 -- 1699)
17 Office of Personnel Management (Parts 1700 -- 1799)
18 National Aeronautics and Space Administration (Parts 1800 -- 1899)
19 United States Information Agency (Parts 1900 -- 1999)
22 Small Business Administration (Parts 2200 -- 2299)
24 Department of Housing and Urban Development (Parts 2400 -- 2499)
25 National Science Foundation (Parts 2500 -- 2599)
28 Department of Justice (Parts 2800 -- 2899)
29 Department of Labor (Parts 2900 -- 2999)
34 Department of Education Acquisition Regulation (Parts 3400 --
3499)
35 Panama Canal Commission (Parts 3500 -- 3599)
44 Federal Emergency Management Agency (Parts 4400 -- 4499)
51 Department of the Army Acquisition Regulations (Parts 5100 --
5199)
52 Department of the Navy Acquisition Regulations (Parts 5200 --
5299)
53 Department of the Air Force Federal Acquisition Regulation
Supplement (Parts 5300 -- 5399)
57 African Development Foundation (Parts 5700 -- 5799)
61 General Services Administration Board of Contract Appeals (Parts
6100 -- 6199)
63 Department of Transportation Board of Contract Appeals (Parts 6300
-- 6399)
99 Cost Accounting Standards Board, Office of Federal Procurement
Policy, Office of Management and Budget (Parts 9900-9999)
12 CFR 219.7 Title 49 -- Transportation
Subtitle A -- Office of the Secretary of Transportation (Parts 1 --
99)
Subtitle B -- Other Regulations Relating to Transportation
I Research and Special Programs Administration, Department of
Transportation (Parts 100 -- 199)
II Federal Railroad Administration, Department of Transportation
(Parts 200 -- 299)
III Federal Highway Administration, Department of Transportation
(Parts 300 -- 399)
IV Coast Guard, Department of Transportation (Parts 400 -- 499)
V National Highway Traffic Safety Administration, Department of
Transportation (Parts 500 -- 599)
VI Urban Mass Transportation Administration, Department of
Transportation (Parts 600 -- 699)
VII National Railroad Passenger Corporation (AMTRAK) (Parts 700 --
799)
VIII National Transportation Safety Board (Parts 800 -- 899)
X Interstate Commerce Commission (Parts 1000 -- 1399)
12 CFR 219.7 Title 50 -- Wildlife and Fisheries
I United States Fish and Wildlife Service, Department of the Interior
(Parts 1 -- 199)
II National Marine Fisheries Service, National Oceanic and
Atmospheric Administration, Department of Commerce (Parts 200 -- 299)
III International Regulatory Agencies (Fishing and Whaling) (Parts
300 -- 399)
IV Joint Regulations (United States Fish and Wildlife Service,
Department of the Interior and National Marine Fisheries Service,
National Oceanic and Atmospheric Administration, Department of
Commerce); Endangered Species Committee Regulations (Parts 400 -- 499)
V Marine Mammal Commission (Parts 500 -- 599)
VI Fishery Conservation and Management, National Oceanic and
Atmospheric Administration, Department of Commerce (Parts 600 -- 699)
12 CFR 219.7 CFR Index and Finding Aids Subject/Agency Index List
of Agency Prepared Indexes Parallel Tables of Statutory Authorities and
Rules Acts Requiring Publication in the Federal Register List of CFR
Titles, Chapters, Subchapters, and Parts
12 CFR 219.7 Alphabetical List of Agencies Appearing in the CFR
CFR Title, Subtitle or
Agency
Chapter
ACTION 45, XII
Administrative Committee of the Federal Register 1, I
Administrative Conference of the United States 1, III
Advisory Commission on Intergovernmental Relations 5, VII
Advisory Committee on Federal Pay 5, IV
Advisory Council on Historic Preservation 36, VIII
African Development Foundation 22, XV; 48, 57
Agency for International Development 22, II; 48, 7
Agricultural Marketing Service 7, I, IX, X, XI
Agricultural Research Service 7, V
Agricultural Stabilization and Conservation Service 7, VII
Agriculture Department
Agricultural Marketing Service 7, I, IX, X, XI
Agricultural Research Service 7, V
Agricultural Stabilization and Conservation Service 7, VII
Animal and Plant Health Inspection Service 7, III; 9, I
Commodity Credit Corporation 7, XIV
Cooperative State Research Service 7, XXXIV
Economic Analysis Staff 7, XXXIX
Economic Research Service 7, XXXVII
Economics Management Staff 7, XL
Energy, Office of 7, XXIX
Environmental Quality, Office of 7, XXXI
Farmers Home Administration 7, XVIII
Federal Acquisition Regulation 48, 4
Federal Crop Insurance Corporation 7, IV
Federal Grain Inspection Service 7, VIII
Finance and Management, Office of 7, XXX
Food and Nutrition Service 7, II
Food Safety and Inspection Service 9, III
Foreign Agricultural Service 7, XV
Foreign Economic Development Service 7, XXI
Forest Service 36, II
General Sales Manager, Office of 7, XXV
Grants and Program Systems, Office of 7, XXXII
Information Resources Management, Office of 7, XXVII
Inspector General, Office of 7, XXVI
International Cooperation and Development Office 7, XXII
National Agricultural Library 7, XLI
National Agricultural Statistics Service 7, XXXVI
Operations Office 7, XXVIII
Packers and Stockyards Administration 9, II
Rural Electrification Administration 7, XVII
Rural Telephone Bank 7, XVI
Secretary of Agriculture, Office of 7, Subtitle A
Soil Conservation Service 7, VI
Transportation, Office of 7, XXXIII
World Agriculture Outlook Board 7, XXXVIII
Air Force Department 32, VII; 41, Subtitle C, Ch. 132
Federal Acquisition Regulation Supplement 48, 53
Alaska Natural Gas Transportation System, Office of the Federal
Inspector 10, XV
Alcohol, Tobacco and Firearms, Bureau of 27, I
AMTRAK 49, VII
American Battle Monuments Commission 36, IV
Animal and Plant Health Inspection Service 7, III; 9, I
Appalachian Regional Commission 5, IX
Architectural and Transportation Barriers Compliance Board 36, XI
Arms Control and Disarmament Agency, U.S. 22, VI
Army Department 32, V
Engineers, Corps of 33, II; 36, III
Federal Acquisition Regulation 48, 51
Assistant Secretary for Technology Policy, Department of Commerce 37,
IV
Benefits Review Board 20, VII
Bicentennial of the United States Constitution, Commission on the 45,
XX
Bilingual Education and Minority Languages Affairs, Office of 34, V
Blind and Other Severely Handicapped, Committee for Purchase from 41,
51
Board for International Broadcasting 22, XIII
Budget, Office of Management and 5, III
Census Bureau 15, I
Central Intelligence Agency 32, XIX
Child Support Enforcement, Office of 45, III
Christopher Columbus Quincentenary Jubilee Commission 45, XXII
Civil Rights Commission 45, VII
Civil Rights, Office for (Education Department) 34, I
Claims Collection Standards, Federal 4, II
Coast Guard 33, I; 46, I, III; 49, IV
Commerce Department 44, IV
Census Bureau 15, I
Assistant Secretary for Technology Policy 37, IV
Economic Affairs, Under Secretary 37, V
Economic Analysis, Bureau of 15, VIII
Economic Development Administration 13, III
Endangered Species Committee 50, IV
Export Administration Bureau 15, VII
Federal Acquisition Regulation 48, 13
Fishery Conservation and Management 50, VI
International Trade Administration 15, III; 19, III
National Institute of Standards and Technology 15, II
National Marine Fisheries Service 50, II, IV
National Oceanic and Atmospheric Administration 15, IX; 50, II, III,
IV, VI
National Telecommunications and Information Administration 15, XXIII;
47, III
Patent and Trademark Office 37, I
Productivity, Technology and Innovation, Assistant Secretary for 37,
IV
Secretary of Commerce, Office of 15, Subtitle A
Technology Administration 15, XI
Under Secretary for Technology 37, V
United States Travel and Tourism Administration 15, XII
Commercial Space Transportation, Office of, Department of
Transportation 14, III
Commission on the Bicentennial of the United States Constitution 45,
XX
Committee for Purchase from the Blind and Other Severely Handicapped
41, 51
Commodity Credit Corporation 7, XIV
Commodity Futures Trading Commission 17, I
Community Planning and Development, Office of Assistant Secretary for
24, V, VI
Community Services, Office of 45, X
Comptroller of the Currency 12, I
Construction Industry Collective Bargaining Commission 29, IX
Consumer Product Safety Commission 16, II
Contract Appeals, Board of 7, XXIV
Cooperative State Research Service 7, XXXIV
Copyright Office 37, II
Copyright Royalty Tribunal 37, III
Cost Accounting Standards Board, Office of Federal Procurement Policy
48, 99
Council on Environmental Quality 40, V
Customs Service, United States 19, I
Defense Department 32, Subtitle A
Air Force Department 32, VII; 41, Subtitle C, Ch. 132
Army Department 32, V; 33, II; 36, III, 48, 51
Engineers, Corps of 33, II; 36, III
Federal Acquisition Regulation 48, 2
Navy Department 32, VI; 48, 52
Secretary of Defense, Office of 32, I
Defense Logistics Agency 32, XII
Defense Nuclear Facilities Safety Board 10, XVII
Delaware River Basin Commission 18, III
Drug Enforcement Administration 21, II
East-West Foreign Trade Board 15, XIII
Economic Affairs, Under Secretary (Commerce) 37, V
Economic Analysis, Bureau of 15, VIII
Economic Analysis Staff, Department of Agriculture 7, XXXIX
Economic Development Administration 13, III
Economics Management Staff 7, XL
Economic Research Service 7, XXXVII
Education, Department of
Bilingual Education and Minority Languages Affairs, Office of 34, V
Civil Rights, Office for 34, I
Educational Research and Improvement, Office of 34, VII
Elementary and Secondary Education, Office of 34, II
Federal Acquisition Regulation 48, 34
Postsecondary Education, Office of 34, VI
Secretary of Education, Office of 34, Subtitle A
Special Education and Rehabilitative Services, Office of 34, III
Vocational and Adult Education, Office of 34, IV
Educational Research and Improvement, Office of 34, VII
Elementary and Secondary Education, Office of 34, II
Employees' Compensation Appeals Board 20, IV
Employees Loyalty Board, International Organizations 5, V
Employment and Training Administration 20, V
Employment Standards Administration 20, VI
Endangered Species Committee 50, IV
Energy, Department of 10, II, III, X; 41, 109
Federal Acquisition Regulation 48, 9
Federal Energy Regulatory Commission 18, I
Energy, Office of, Department of Agriculture 7, XXIX
Engineers, Corps of 33, II; 36, III
Engraving and Printing, Bureau of 31, VI
Environmental Protection Agency 40, I; 41, 115; 48, 15
Environmental Quality, Office of (Agriculture Department) 7, XXXI
Equal Employment Opportunity Commission 29, XIV
Equal Opportunity, Office of Assistant Secretary for 24, I
Executive Office of the President 3, I
Administration, Office of 5, XV
Export Administration Bureau 15, VII
Export-Import Bank of the United States 12, IV
Family Assistance, Office of 45, II
Family Support Administration 45, II, III, IV, X
Farm Credit Administration 12, VI
Farm Credit System Assistance Board 12, XIII
Farm Credit System Insurance Corporation 12, XIV
Farmers Home Administration 7, XVIII
Federal Acquisition Regulation 48, 1
Federal Aviation Administration 14, I
Federal Claims Collection Standards 4, II
Federal Communications Commission 47, I
Federal Contract Compliance Programs, Office of 41, 60
Federal Crop Insurance Corporation 7, IV
Federal Deposit Insurance Corporation 12, III
Federal Election Commission 11, I
Federal Emergency Management Agency 44, I; 48, 44
Federal Energy Regulatory Commission 18, I
Federal Financial Institutions Examination Council 12, XI
Federal Financing Bank 12, VIII
Federal Grain Inspection Service 7, VIII
Federal Highway Administration 23, I, II; 49, III
Federal Home Loan Mortgage Corporation 1, IV
Federal Housing Finance Board 12, IX
Federal Information Resources Management Regulations 41, Subtitle E,
Ch. 201
Federal Inspector for the Alaska Natural Gas Transportation System,
Office of 10, XV
Federal Labor Relations Authority, and General Counsel of the Federal
Labor Relations Authority 5, XIV; 22, XIV
Federal Law Enforcement Training Center 31, VII
Federal Maritime Commission 46, IV
Federal Mediation and Conciliation Service 29, XII
Federal Mine Safety and Health Review Commission 29, XXVII
Federal Pay, Advisory Committee on 5, IV
Federal Prison Industries, Inc. 28, III
Federal Procurement Policy Office 48, 99
Federal Property Management Regulations 41, 101
Federal Property Management Regulations System 41, Subtitle C
Federal Railroad Administration 49, II
Federal Register, Administrative Committee of 1, I
Federal Register, Office of 1, II
Federal Reserve System 12, II
Federal Retirement Thrift Investment Board 5, VI
Federal Service Impasses Panel 5, XIV
Federal Trade Commission 16, I
Federal Travel Regulation System 41, Subtitle F
Finance and Management, Department of Agriculture 7, XXX
Fine Arts Commission 45, XXI
Fiscal Service 31, II
Fish and Wildlife Service, United States 50, I, IV
Fishery Conservation and Management 50, VI
Fishing and Whaling, International Regulatory Agencies 50, III
Food and Drug Administration 21, I
Food and Nutrition Service 7, II
Food Safety and Inspection Service 9, III
Foreign Agricultural Service 7, XV
Foreign Assets Control, Office of 31, V
Foreign Claims Settlement Commission of United States 45, V
Foreign Economic Development Service 7, XXI
Foreign Service Grievance Board 22, IX
Foreign Service Impasse Disputes Panel 22, XIV
Foreign Service Labor Relations Board 22, XIV
Foreign-Trade Zones Board 15, IV
Forest Service 36, II
General Accounting Office 4, I, II, III
General Sales Manager, Office of 7, XXV
General Services Administration
Contract Appeals Board 48, 61
Federal Acquisition Regulation 48, 5
Federal Information Resources Management Regulations 41, Subtitle E,
Ch. 201
Federal Property Management Regulations System 41, 101, 105
Federal Travel Regulation System 41, Subtitle F
Payment of Expenses Connected With the Death of Certain Employees 41,
303
Reduction in Meeting and Training Allowance Payments 41, 304
Relocation Allowances 41, 302
Travel Allowances 41, 301
Geological Survey 30, IV
Government Ethics, Office of 5, XVI
Government National Mortgage Association 24, III
Grants and Program Systems, Office of 7, XXXII
Great Lakes Pilotage 46, III
Harry S. Truman Scholarship Foundation 45, XVIII
Health and Human Services, Department of 45, Subtitle A
Child Support Enforcement, Office of 45, III
Community Services, Office of 45, X
Family Assistance, Office of 45, II
Family Support Administration 45, II, III, IV, X
Federal Acquisition Regulation 48, 3
Food and Drug Administration 21, I
Health Care Financing Administration 42, IV
Human Development Services Office 45, XIII
Inspector General, Office of 42, V
Public Health Service 42, I
Refugee Resettlement, Office of 45, IV
Social Security Administration 20, III; 45, IV
Health Care Financing Administration 42, IV
Housing and Urban Development, Department of
Community Planning and Development, Office of Assistant Secretary for
24, V, VI
Equal Opportunity, Office of Assistant Secretary for 24, I
Federal Acquisition Regulation 48, 24
Government National Mortgage Association 24, III
Housing -- Federal Housing Commissioner, Office of Assistant
Secretary for 24, II, VIII, X, XX
Inspector General, Office of 24, XII
Mortgage Insurance and Loan Programs Under Emergency Homeowners'
Relief Act 24, XV
Public and Indian Housing, Office of Assistant Secretary for 24, IX
Secretary, Office of 24, Subtitle B, VII
Solar Energy and Energy Conservation Bank 24, XI
Housing -- Federal Housing Commissioner, Office of Assistant
Secretary for 24, II, VIII, X, XX
Human Development Services Office 45, XIII
Immigration and Naturalization Service 8, I
Indian Affairs, Bureau of 25, I
Indian Arts and Crafts Board 25, II
Information Agency, United States 22, V; 48, 19
Information Resources Management, Office of, Agriculture Department
7, XXVII
Information Security Oversight Office 32, XX
Inspector General, Office of, Agriculture Department 7, XXVI
Inspector General, Office of, Health and Human Services Department
42, V
Inspector General, Office of, Housing and Urban Development
Department 24, XII
Inter-American Foundation 22, X
Intergovernmental Relations, Advisory Commission on 5, VII
Interior Department
Endangered Species Committee 50, IV
Federal Acquisition Regulation 48, 14
Federal Property Management Regulations System 41, 114
Fish and Wildlife Service, United States 50, I, IV
Geological Survey 30, IV
Indian Affairs, Bureau of 25, I
Indian Arts and Crafts Board 25, II
Land Management Bureau 43, II
Minerals Management Service 30, II
Mines, Bureau of 30, VI
National Park Service 36, I
Reclamation Bureau 43, I
Secretary of the Interior, Office of 43, Subtitle A
Surface Mining and Reclamation Appeals, Board of 30, III
Surface Mining Reclamation and Enforcement, Office of 30, VII
United States Fish and Wildlife Service 50, I, IV
Internal Revenue Service 26, I
International Boundary and Water Commission, United States and Mexico
22, XI
International Cooperation and Development Office, Department of
Agriculture 7, XXII
International Development, Agency for 22, II
International Development Cooperation Agency 22, XII
International Development, Agency for 22, II
Overseas Private Investment Corporation 22, VII
International Joint Commission, United States and Canada 22, IV
International Organizations Employees Loyalty Board 5, V
International Regulatory Agencies (Fishing and Whaling) 50, III
International Trade Administration 15, III; 19, III
International Trade Commission, United States 19, II
Interstate Commerce Commission 49, X
Japan-United States Friendship Commission 22, XVI
Joint Board for the Enrollment of Actuaries 20, VIII
Justice Department 28, I; 41, 128
Drug Enforcement Administration 21, II
Federal Acquisition Regulation 48, 28
Federal Claims Collection Standards 4, II
Federal Prison Industries, Inc. 28, III
Foreign Claims Settlement Commission of the United States 45, V
Immigration and Naturalization Service 8, I
Offices of Independent Counsel 28, VI
Prisons, Bureau of 28, V
Labor Department
Benefits Review Board 20, VII
Employees' Compensation Appeals Board 20, IV
Employment and Training Administration 20, V
Employment Standards Administration 20, VI
Federal Acquisition Regulation 48, 29
Federal Contract Compliance Programs, Office of 41, 60
Federal Procurement Regulations System 41, 50
Labor-Management Relations and Cooperative Programs, Bureau of 29, II
Labor-Management Standards, Office of 29, IV
Mine Safety and Health Administration 30, I
Occupational Safety and Health Administration 29, XVII
Pension and Welfare Benefits Administration 29, XXV
Public Contracts 41, 50
Secretary of Labor, Office of 29, Subtitle A
Veterans' Employment and Training, Office of the Assistant Secretary
for 41, 61; 20, IX
Wage and Hour Division 29, V
Workers' Compensation Programs, Office of 20, I
Labor-Management Relations and Cooperative Programs, Bureau of 29, II
Labor-Management Standards, Office of 29, IV
Land Management, Bureau of 43, II
Legal Services Corporation 45, XVI
Library of Congress 36, VII
Copyright Office 37, II
Management and Budget, Office of 5, III; 48, 99
Marine Mammal Commission 50, V
Maritime Administration 46, II
Merit Systems Protection Board 5, II
Micronesian Status Negotiations, Office for 32, XXVII
Mine Safety and Health Administration 30, I
Minerals Management Service 30, II
Mines, Bureau of 30, VI
Minority Business Development Agency 15, XIV
Miscellaneous Agencies 1, IV
Monetary Offices 31, I
Mortgage Insurance and Loan Programs Under the Emergency Homeowners'
Relief Act, Department of Housing and Urban Development 24, XV
National Aeronautics and Space Administration 14, V; 48, 18
National Agricultural Library 7, XLI
National Agricultural Statistics Service 7, XXXVI
National Archives and Records Administration 36, XII
National Bureau of Standards 15, II
National Capital Planning Commission 1, IV
National Commission for Employment Policy 1, IV
National Commission on Libraries and Information Science 45, XVII
National Credit Union Administration 12, VII
National Foundation on the Arts and the Humanities 45, XI
National Highway Traffic Safety Administration 23, II, III; 49, V
National Indian Gaming Commission 25, III
National Institute of Standards and Technology 15, II
National Labor Relations Board 29, I
National Marine Fisheries Service 50, II, IV
National Mediation Board 29, X
National Oceanic and Atmospheric Administration 15, IX; 50, II, III,
IV, VI
National Park Service 36, I
National Railroad Adjustment Board 29, III
National Railroad Passenger Corporation (AMTRAK) 49, VII
National Science Foundation 45, VI; 48, 25
National Security Council 32, XXI
National Security Council and Office of Science and Technology Policy
47, II
National Telecommunications and Information Administration 15, XXIII;
47, III
National Transportation Safety Board 49, VIII
Office of Navajo and Hopi Indian Relocation 25, IV
Navy Department 32, VI; 48, 52
Neighborhood Reinvestment Corporation 24, XXV
Nuclear Regulatory Commission 10, I
Occupational Safety and Health Administration 29, XVII
Occupational Safety and Health Review Commission 29, XX
Office of Independent Counsel 28, VII
Offices of Independent Counsel, Department of Justice 28, VI
Operations Office, Department of Agriculture 7, XXVIII
Overseas Private Investment Corporation 22, VII
Oversight Board 12, XV
Packers and Stockyards Administration 9, II
Panama Canal Commission 48, 35
Panama Canal Regulations 35, I
Patent and Trademark Office 37, I
Payment of Expenses Connected With the Death of Certain Employees 41,
303
Peace Corps 22, III
Pennsylvania Avenue Development Corporation 36, IX
Pension and Welfare Benefits Administration, Department of Labor 29,
XXV
Pension Benefit Guaranty Corporation 29, XXVI
Personnel Management, Office of 5, I; 45, VIII; 48, 17
Federal Employees Health Benefits Acquisition Regulation 48, 16
Postal Rate Commission 39, III
Postal Service, United States 39, I
Postsecondary Education, Office of 34, VI
President's Commission on White House Fellowships 1, IV
Presidential Documents 3
Prisons, Bureau of 28, V
Productivity, Technology and Innovation, Assistant Secretary
(Commerce) 37, IV
Property Management Regulations System, Federal 41, Subtitle C
Public Contracts, Department of Labor 41, 50
Public Health Service 42, I
Railroad Retirement Board 20, II
Reclamation Bureau 43, I
Reduction in Meeting and Training Allowance Payments 41, 304
Refugee Resettlement, Office of 45, IV
Regional Action Planning Commissions 13, V
Relocation Allowances 41, 302
Research and Special Programs Administration 49, I
Resolution Trust Corporation 12, XVI
Rural Electrification Administration 7, XVII
Rural Telephone Bank 7, XVI
Saint Lawrence Seaway Development Corporation 33, IV
Science and Technology Policy, Office of 32, XXIV
Science and Technology Policy, Office of, and National Security
Council 47, II
Secret Service 31, IV
Securities and Exchange Commission 17, II
Selective Service System 32, XVI
Small Business Administration 13, I; 48, 22
Smithsonian Institution 36, V
Social Security Administration 20, III; 45, IV
Soil Conservation Service 7, VI
Solar Energy and Energy Conservation Bank, Department of Housing and
Urban Development 24, XI
Soldiers' and Airmen's Home, United States 5, XI
Special Counsel, Office of 5, VIII
Special Education and Rehabilitative Services, Office of 34, III
State Department 22, I
Federal Acquisition Regulation 48, 6
Surface Mining and Reclamation Appeals, Board of 30, III
Susquehanna River Basin Commission 18, VIII
Technology Administration 15, XI
Tennessee Valley Authority 18, XIII
Thrift Supervision Office, Department of the Treasury 12, V
Trade Representative, United States, Office of 15, XX
Transportation, Department of 44, IV
Coast Guard 33, I; 46, I, III; 49, IV
Commercial Space Transportation, Office of 14, III
Contract Appeals Board 48, 63
Federal Acquisition Regulation 48, 12
Federal Aviation Administration 14, I
Federal Highway Administration 23, I, II; 49, III
Federal Railroad Administration 49, II
Maritime Administration 46, II
National Highway Traffic Safety Administration 23, II, III; 49, V
Research and Special Programs Administration 49, I
Saint Lawrence Seaway Development Corporation 33, IV
Secretary of Transportation, Office of 14, II; 49, Subtitle A
Urban Mass Transportation Administration 49, VI
Transportation, Office of, Department of Agriculture 7, XXXIII
Travel Allowance 41, 301
Travel and Tourism Administration, United States 15, XII
Treasury Department 17, IV
Alcohol, Tobacco and Firearms, Bureau of 27, I
Comptroller of the Currency 12, I
Customs Service, United States 19, I
Engraving and Printing, Bureau of 31, VI
Federal Acquisition Regulation 48, 10
Federal Law Enforcement Training Center 31, VII
Fiscal Service 31, II
Foreign Assets Control, Office of 31, V
Internal Revenue Service 26, I
Monetary Offices 31, I
Secret Service 31, IV
Secretary of the Treasury, Office of 31, Subtitle A
Thrift Supervision Office 12, V
United States Customs Service 19, I
Truman, Harry S. Scholarship Foundation 45, XVIII
Under Secretary for Technology, Department of Commerce 37, V
United States and Canada, International Joint Commission 22, IV
United States Arms Control and Disarmament Agency 22, VI
United States Customs Service 19, I
United States Fish and Wildlife Service 50, I, IV
United States Information Agency 22, V; 48, 19
United States International Development Cooperation Agency 22, XII
United States International Trade Commission 19, II
United States Postal Service 39, I
United States Soldiers' and Airmen's Home 5, XI
United States Trade Representative, Office of 15, XX
United States Travel and Tourism Adminstration 15, XII
Urban Mass Transportation Administration 49, VI
Veterans Affairs Department 38, I; 48, 8
Veterans' Employment and Training, Office of the Assistant Secretary
for 41, 61; 20, IX
Vice President of the United States, Office of 32, XXVIII
Vocational and Adult Education, Office of 34, IV
Wage and Hour Division 29, V
Water Resources Council 18, VI
Workers' Compensation Programs, Office of 20, I
World Agriculture Outlook Board 7, XXXVIII
12 CFR 219.7 12 CFR Ch. II (1-1-92 Edition)
12 CFR 219.7 List of CFR Sections Affected
12 CFR 219.7 List of CFR Sections Affected
All changes in this volume of the Code of Federal Regulations which
were made by documents published in the Federal Register since January
1, 1986, are enumerated in the following list. Entries indicate the
nature of the changes effected. Page numbers refer to Federal Register
pages. The user should consult the entries for chapters and parts as
well as sections for revisions.
For the period before January 1, 1986, see the ''List of CFR Sections
Affected, 1949-1963, 1964-1972, and 1973-1985'' published in seven
separate volumes.
12 CFR 219.7 1986
12 CFR
51 FR
Page
Chapter II
201 Authority citation revised 11903, 16673
201.51 Revised 11903,
16673, 26543, 30847
201.52 Revised 11903,
16673, 26543, 30847
201.53 Removed 11904
204 Authority citation revised 43176
204.2 Introductory text, (b) through (e), (f)(1) (i), (ii), and (v)
revised; (f)(3) added 9632
(h)(1)(ii)(A) first footnote 1, (h)(2)(ii) second footnote 1, and
(t)(1) footnote 2 redesignated as footnotes 10, 11, and 12; new
(h)(2)(ii) footnote 11 revised 9635
204.3 (a)(3)(i) and (h) revised 9635
204.4 (a) amended; (b) and (c) removed; (d) through (g)
redesignated as (b) through (e); new (b), (c)(2)(ii), (d)(2), and
(e)(1) and (2) (i) and (iii) amended 9636
204.8 (a)(2)(i)(B)(5) and (3)(v) and (e) amended 9636
204.9 (a) revised 43176
205 Supplement II amended 13485
207 OTC margin stock list 3939,
15757, 27519, 39643
207.112 Added 1781
210.2 Text amended; footnote 1 revised 21744
210.3 (e) added 21744
210.5 (a)(2), (b), and (c) revised 21745
210.6 (a)(1) revised; (c) added; eff. in part 1-1-90 21745
210.9 (a)(2) amended; eff. 1-1-87 21745
210.12 (c)(10) revised; (c)(11) added 21745
210.38 (b) revised and redesignated as (b)(1); (b)(2) added; eff.
in part 1-1-90 21745
211.5 (c)(2) amended 25359
217 Authority citation revised 9637
217.0 Redesignated as 217.1 and revised 9637
217.1 Redesignated as 217.2; new 217.1 redesignated from 217.0 and
revised 9637
217.2 Redesignated as 217.3; new 217.2 redesignated from 217.1 9637
Revised 9638
217.3 Removed; new 217.3 redesignated from 217.2 9637
Revised 9638
217.4 (d) temporarily suspended in part 8478
Removed 9637
Added 9638
217.5 Removed 9637
217.7 Removed 9637
12 CFR 219.7 1987
12 CFR
52 FR
Page
Chapter II
201.51 Revised 37436
201.52 Revised 37436
202 Determination 35537
202 Supplement I and Appendix B amended 10733
203 Exemption terminated 10365
204 Authority citation revised 2215, 46451
204.2 -- 204.4 Authority citations removed 2215
204.2 (a)(1)(v) and (vii)(C) amended 47694
(c)(1)(iv)(E), footnote 4 amended 47695
204.9 Authority citation removed 2215
(a) (1) and (2) revised 46451
204.122 (b) revised 47694
204.123 Amended 47695
204.124 (a) amended 47695
204.125 Redesignated from 217.126 and revised 47695
204.126 Redesignated from 217.137 and revised 47695
204.127 Redesignated from 217.138 and revised 47695
204.128 Redesignated from 217.146 and revised 47696
204.129 Redesignated from 217.153 and revised 47696
204.130 Redesignated from 217.157 and revised 47696
204.131 Redesignated from 217.159 and revised 47697
205.14 (a)(2) and (b) revised 30911
205 Supplement II amended 10734
Appendix A amended 30912
206 Removed 49375
207 OTC margin stock list 3218,
15941, 28538, 41963
208 Authority citation revised 2859, 42090, 49375
208.14 Added 2860
208.15 Added 42090
Addition comment time extended 46984
208.16 Added 49376
211 Authority citation revised 30914
211.5 (f) added 30914
217.101 Removed 47698
217.103 Removed 47698
217.105 -- 217.112 Removed 47698
217.113 Redesignated as 217.601 47698
217.114 -- 217.121 Removed 47698
217.124 Removed 47698
217.126 Redesignated as 204.125 and revised 47695
217.131 -- 217.133 Removed 47698
217.134 Redesignated as 217.301 and revised 47698
217.135 -- 217.136 Removed 47698
217.137 Redesignated as 204.126 and revised 47695
217.138 Redesignated as 204.127 and revised 47695
217.139 -- 217.141 Removed 47698
217.144 Removed 47698
217.146 Redesignated as 204.128 and revised 47696
217.147 Redesignated as 217.302 and revised 47698
217.148 Redesignated as 217.602 47698
217.150 Removed 47698
217.151 Redesignated as 217.603 47698
217.152 Removed 47698
217.153 Redesignated as 204.129 and revised 47696
217.155 -- 217.156 Removed 47698
217.157 Redesignated as 204.130 and revised 47696
217.158 Removed 47698
217.159 Redesignated as 204.131 and revised 47697
217.160 Removed 47698
217.161 Redesignated as 217.201 and revised 47699
217.201 Redesignated from 217.161 and revised 47699
217.301 Redesignated from 217.134 and revised 47698
217.302 Redesignated from 217.147 and revised 47698
217.601 Redesignated from 217.113 47698
217.602 Redesignated from 217.148 47698
217.603 Redesignated from 217.151 47698
12 CFR 219.7 1988
12 CFR
53 FR
Page
Chapter II
201.51 Revised 32603
201.52 Revised 32603
202 Determination 26987, 45756
202 Supplement I amended 11045
203 Revised 31687
Data reporting 47662
203 Appendix A revised 52657
204.9 (a) revised 49116
204.132 Added 24931
205 Supplement II amended 11046
205.6 (c) revised 52653
206 Supplemental notice 492
207 OTC margin stock list 2999,
15195, 28189, 43679
OTC margin stock list at 53 FR 15195 corrected 17689
208 Authority citation revised; section authority citations removed
20811
208.15 (a)(1)(iv) and (2), (b)(1), (d)(3), (e)(4), (f)(1) and (2)(vi)
revised; (a)(4) added 20812
208.16 Supplemental notice 492
210 Heading and authority citation revised 21984
210.1 -- 210.15 (Subpart A) Heading revised 21984
210.1 Revised 21984
210.2 (e), (f), (g) undesignated flush text and (j) revised; (g)
footnote 2 removed; (k) and (l) redesignated as (l) and (m); new (k)
added; new (l) introductory text and undesignated flush text revised
21984
210.3 (b) revised 21984
210.6 (a)(1) revised 21984
210.7 (b) revised 21985
210.9 (e) amended; footnote 3 redesignated as footnote 2 21985
210.10 Revised 21985
210.12 Revised 21985
210.13 (a) revised 21986
211.5 (f) revised 5363
12 CFR 219.7 1989
12 CFR
54 FR
Page
Chapter II
201.51 Revised 10270
201.52 Revised 10271
202 Authority citation revised 50485
202.2 (g) revised 50485
202.3 (d) removed; (e) redesignated as (d) 50485
202.9 (a) (1) and (2) republished; (a)(3) added 50485
202.12 (b)(1) introductory text and (2) through (4) revised; (b)(5)
added 50486
202.14 (a)(1) amended 53539
202 Appendix C amended 50486
Appendix A amended 53539
202 Supplement I amended 9416
203 Revised; eff. 1-1-90 51362
204.9 (a)(1) revised 51012
205.13 (a)(1) amended 53539
205 Supplement II amended 9416
207 OTC margin stock list 4254,
16357, 31647, 43952
208.10 (a)(3) amended; (a)(4) revised; (b)(2) and (3) amended 7183
208.13 Revised 4198
208.17 Added 6117
208.123 Removed 7181
208.124 Added 7181
(b), (c)(8)(ii) and (d) footnote 1 corrected 10482
208 Appendix A added 4198
Appendix A corrected 12531
213 Appendix D amended 53539
12 CFR 219.7 1990
12 CFR
55 FR
Page
Chapter II
202 Preemption determination 29565
Supplement I amended 12472
Supplement I corrected 14830
203 Order 5444, 34218
203.4 (d)(4) corrected 695
203 Appendix A corrected 695, 2481
204.2 (c)(1)(i) introductory text footnote 2 revised 50541
204.3 (a)(3)(i)(A) and (B) amended; (a)(3)(i)(C) removed; (c)(2)
revised 50541
204.9 (a)(1) revised 49994
Regulation at 55 FR 49994 withdrawn; (a) revised 50541
(a)(1) table corrected 53100
205 Supplement II amended 12635
207 OTC margin stock list 2631, 18591, 31367, 46040
208 Authority citation revised 27771
208.13 Revised 32831
208.18 Added 27771
208.19 Added; (a) eff. 1-25-91 52986
208.125 -- 208.127 Redesignated from 250.101 -- 250.103 52987
208 Appendix A amended 32831
Appendix B added 32831
210 Heading and authority citation revised 40801
Authority citation corrected 47428
210.25 -- 210.32 (Subpart B) Revised 40801
210.25 (b)(3) corrected 47428
210.26 (e) and (f) corrected 47428
210.29 (b) corrected 47428
210.25 -- 210.32 (Subpart B) Appendix A corrected 47428
Appendix B corrected 47428
12 CFR 219.7 1991
12 CFR
56 FR
Page
Chapter II
201.51 Revised 1567, 6556, 22641, 48731, 58303
201.52 Revised 1567, 6556, 22641, 48731, 58303
202 Appendix A amended 51322
Supplement I amended 14462, 16265
203 Order 5746
203.2 (c)(2) and (e)(2) amended 59857
203.4 (a) introductory text revised 59857
(a) introductory text corrected 66343
203.6 (a) revised 59857
203 Appendix A revised 59857
204.2 (b)(3)(ii)(A), (c)(1)(i) footnote 1, (d)(2), (e)(2), and (f)(2)
revised; (e)(4) amended; (b)(3)(iv) removed; (b)(3)(v) and (vi)
redesignated as (b)(3)(iv) and (v) 15494
204.7 (a) revised 15495
204.8 (a)(2)(i)(B)(5) footnote 14 revised 15495
204.9 (a)(1 and (2) revised 60055
204.121 -- 204.132 Undesignated center heading added 15495
204.125 Heading and introductory text revised; list amended 15495
207 OTC margin stock list 3773, 19548, 35807, 55442
207.1 (b) redesignated as (b)(1); (b)(2) added 46110
207.3 (l)(1)(i), (ii) and (3) revised 46111
207.13 Added 46228
208.125 Regulation at 55 FR 52987 effective date corrected 627
208.126 Regulation at 55 FR 52987 effective date corrected 627
208.127 Regulation at 55 FR 52987 effective date corrected 627
208.128 Added 63407
208 Appendix A amended 51156
211 Authority citation revised 19565
211.1 -- 211.7 (Subpart A) Revised 19565
Regulation at 56 FR 19565 effective date corrected 23010
211.21 Revised 19574
Regulation at 56 FR 19574 effective date corrected 23010
211.22 (a)(2) and (5) revised 19574
Regulation at 56 FR 19574 effective date corrected 23010
211.23 (d), (e), (f)(4), (5), (g) and (h) revised; (i) added 19574
Regulation at 56 FR 19574 effective date corrected 23010
211.31 -- 211.34 (Subpart C) Revised 19575
Regulation at 56 FR 19575 effective date corrected 23010
211.603 Added 63408
213 Authority citation revised 51322
Appendix D amended 51322
Authority citation corrected 65130
216 Revised 13071
12
Banks and Banking
PARTS 200 TO 219
Revised as of January 1, 1992
CONTAINING
A CODIFICATION OF DOCUMENTS
OF GENERAL APPLICABILITY
AND FUTURE EFFECT
AS OF JANUARY 1, 1992
With Ancillaries
Published by
the Office of the Federal Register
National Archives and Records
Administration
as a Special Edition of
the Federal Register
12 CFR 219.7 Table of Contents
Page
Explanation v
Title 12:
Chapter II -- Federal Reserve System
Finding Aids:
Table of CFR Titles and Chapters
Alphabetical List of Agencies Appearing in the CFR
List of CFR Sections Affected
12 CFR 219.7
12 CFR 219.7 Explanation
The Code of Federal Regulations is a codification of the general and
permanent rules published in the Federal Register by the Executive
departments and agencies of the Federal Government. The Code is divided
into 50 titles which represent broad areas subject to Federal
regulation. Each title is divided into chapters which usually bear the
name of the issuing agency. Each chapter is further subdivided into
parts covering specific regulatory areas.
Each volume of the Code is revised at least once each calendar year
and issued on a quarterly basis approximately as follows:
Title 1 through Title 16 as of January 1
Title 17 through Title 27 as of April 1
Title 28 through Title 41 as of July 1
Title 42 through Title 50 as of October 1
The appropriate revision date is printed on the cover of each volume.
LEGAL STATUS
The contents of the Federal Register are required to be judicially
noticed (44 U.S.C. 1507). The Code of Federal Regulations is prima facie
evidence of the text of the original documents (44 U.S.C. 1510).
HOW TO USE THE CODE OF FEDERAL REGULATIONS
The Code of Federal Regulations is kept up to date by the individual
issues of the Federal Register. These two publications must be used
together to determine the latest version of any given rule.
To determine whether a Code volume has been amended since its
revision date (in this case, January 1, 1992), consult the ''List of CFR
Sections Affected (LSA),'' which is issued monthly, and the ''Cumulative
List of Parts Affected,'' which appears in the Reader Aids section of
the daily Federal Register. These two lists will identify the Federal
Register page number of the latest amendment of any given rule.
EFFECTIVE AND EXPIRATION DATES
Each volume of the Code contains amendments published in the Federal
Register since the last revision of that volume of the Code. Source
citations for the regulations are referred to by volume number and page
number of the Federal Register and date of publication. Publication
dates and effective dates are usually not the same and care must be
exercised by the user in determining the actual effective date. In
instances where the effective date is beyond the cut-off date for the
Code a note has been inserted to reflect the future effective date. In
those instances where a regulation published in the Federal Register
states a date certain for expiration, an appropriate note will be
inserted following the text.
OMB CONTROL NUMBERS
The Paperwork Reduction Act of 1980 (Pub. L. 96-511) requires Federal
agencies to display an OMB control number with their information
collection request. Many agencies have begun publishing numerous OMB
control numbers as amendments to existing regulations in the CFR. These
OMB numbers are placed as close as possible to the applicable
recordkeeping or reporting requirements.
OBSOLETE PROVISIONS
Provisions that become obsolete before the revision date stated on
the cover of each volume are not carried. Code users may find the text
of provisions in effect on a given date in the past by using the
appropriate numerical list of sections affected. For the period before
January 1, 1986, consult either the List of CFR Sections Affected,
1949-1963, 1964-1972, or 1973-1985, published in seven separate volumes.
For the period beginning January 1, 1986, a ''List of CFR Sections
Affected'' is published at the end of each CFR volume.
CFR INDEXES AND TABULAR GUIDES
A subject index to the Code of Federal Regulations is contained in a
separate volume, revised annually as of January 1, entitled CFR Index
and Finding Aids. This volume contains the Parallel Table of Statutory
Authorities and Agency Rules (Table I), and Acts Requiring Publication
in the Federal Register (Table II). A list of CFR titles, chapters, and
parts and an alphabetical list of agencies publishing in the CFR are
also included in this volume.
An index to the text of ''Title 3 -- The President'' is carried
within that volume.
The Federal Register Index is issued monthly in cumulative form.
This index is based on a consolidation of the ''Contents'' entries in
the daily Federal Register.
A List of CFR Sections Affected (LSA) is published monthly, keyed to
the revision dates of the 50 CFR titles.
REPUBLICATION OF MATERIAL
There are no restrictions on the republication of material appearing
in the Code of Federal Regulations.
INQUIRIES AND SALES
For a summary, legal interpretation, or other explanation of any
regulation in this volume, contact the issuing agency. Inquiries
concerning editing procedures and reference assistance with respect to
the Code of Federal Regulations may be addressed to the Director, Office
of the Federal Register, National Archives and Records Administration,
Washington, DC 20408 (telephone 202-523-3517). All mail order sales are
handled exclusively by the Superintendent of Documents, Attn: New
Orders, P.O. Box 371954, Pittsburgh, PA 15250-7954. Charge orders may
be telephoned to the Government Printing Office order desk at
202-783-3238.
Martha L. Girard,
Director,
Office of the Federal Register.
January 1, 1992.
12 CFR 219.7 THIS TITLE
Title 12 -- Banks and Banking is composed of six volumes. The parts
in these volumes are arranged in the following order: Parts 1-199,
200-219, 220-299, 300-499, 500-599, and part 600-End. The first volume
containing parts 1-199 is comprised of Chapter I -- Comptroller of the
Currency, Department of the Treasury. The second and third volumes
containing parts 200-299 are comprised of Chapter II -- Federal Reserve
System. The fourth volume containing parts 300-499 is comprised of
Chapter III -- Federal Deposit Insurance Corporation and Chapter IV --
Export-Import Bank of the United States. The fifth volume containing
part 500-599 is comprised of Chapter V -- Office of Thrift Supervision,
Department of the Treasury. The sixth volume containing part 600-End is
comprised of Chapter VI -- Farm Credit Administration, Chapter VII --
National Credit Union Administration, Chapter VIII -- Federal Financing
Bank, Chapter IX -- Federal Housing Finance Board, Chapter XI -- Federal
Financial Institutions Examination Council, Chapter XIII -- Farm Credit
System Assistance Board, Chapter XIV -- Farm Credit System Insurance
Corporation, Chapter XV -- Oversight Board, and Chapter XVI --
Resolution Trust Corporation. The contents of these volumes represent
all of the current regulations codified under this title of the CFR as
of January 1, 1992.
Redesignation tables appear in the volumes containing parts 1-199,
parts 300-499, parts 500-599, and part 600-end.
For this volume, Gertrude E. Belton was Chief Editor. The Code of
Federal Regulations publication program is under the direction of
Richard L. Claypoole, assisted by Alomha S. Morris.
12 CFR 0.0 12 CFR Ch. II (1-1-92 Edition)
12 CFR 0.0 Federal Reserve System
12 CFR 0.0 Title 12 -- Banks and Banking
12 CFR 0.0 (This book contains Parts 220 to 299)
Part
chapter ii -- Federal Reserve System 220
Cross References: Farmers Home Administration: See Agriculture, 7
CFR, chapter XVIII.
Office of Assistant Secretary for Housing -- Federal Housing
Commissioner, Department of Housing and Urban Development: See Housing
and Urban Development, 24 CFR, chapter II.
Fiscal Service: See Money and Finance: Treasury, 31 CFR, chapter
II.
Monetary Offices: See Money and Finance: Treasury, 31 CFR, chapter
I.
Commodity Credit Corporation: See Agriculture, 7 CFR, chapter XIV.
Small Business Administration: See Business Credit and Assistance,
13 CFR, chapter I.
Rural Electrification Administration: See Agriculture, 7 CFR,
chapter XVII.
12 CFR 0.0 12 CFR Ch. II (1-1-92 Edition)
12 CFR 0.0 Federal Reserve System
12 CFR 0.0 CHAPTER II -- FEDERAL RESERVE SYSTEM
12 CFR 0.0 SUBCHAPTER A -- BOARD OF GOVERNORS OF THE FEDERAL RESERVE
SYSTEM
Part
Page
220 Credit by brokers and dealers
221 Credit by banks for the purpose of purchasing or carrying margin
stock
224 Borrowers of securities credit
225 Bank holding companies and change in bank control
226 Truth in lending
227 Unfair or deceptive acts or practices
228 Community reinvestment
229 Availability of funds and collection of checks
245 Loan guarantees for defense production
250 Miscellaneous interpretations
261 Rules regarding availability of information
261a Rules regarding access to and review of personal information in
systems of records
261b Rules regarding public observation of meetings.
262 Rules of procedure
263 Rules of practice for hearings
264 Employee responsibilities and conduct
264a Reserve Bank directors -- actions and responsibilities
264b Rules regarding foreign gifts and decorations
265 Rules regarding delegation of authority
266 Limitations on activities of former members and employees of the
Board
267 Rules of organization and procedure of the Consumer Advisory
Council
268 Rules regarding equal opportunity.
269 Policy on labor relations for the Federal Reserve banks
269a Definitions
269b Charges of unfair labor practices
12 CFR 0.0
12 CFR 0.0 SUBCHAPTER B -- FEDERAL OPEN MARKET COMMITTEE
270 Open market operations of Federal Reserve banks
271 Rules regarding availability of information
272 Rules of procedure
281 Statements of policy
12 CFR 0.0
12 CFR 0.0 SUBCHAPTER C -- FEDERAL RESERVE SYSTEM LABOR RELATIONS
PANEL
290-299 (Reserved)
Supplemental Publications: The Federal Reserve Act, as amended
through December 31, 1976, with an Appendix containing provisions of
certain other statutes affecting the Federal Reserve System. Rules of
Organization and Procedure -- Board of Governors of the Federal Reserve
System. Regulations of the Board of Governors of the Federal Reserve
System. The Federal Reserve System -- Purposes and Functions. Annual
Report. Federal Reserve Bulletin. Monthly. Federal Reserve Chart Book
Quarterly; Historical Chart Book issued in September.
12 CFR 0.0 12 CFR Ch. II (1-1-92 Edition)
12 CFR 0.0 Federal Reserve System
12 CFR 0.0 SUBCHAPTER A -- BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM
12 CFR 0.0 PART 220 -- CREDIT BY BROKERS AND DEALERS
Sec.
220.1 Authority, purpose, and scope.
220.2 Definitions.
220.3 General provisions.
220.4 Margin account.
220.5 Margin account exceptions and special provisions.
220.6 Special memorandum account.
220.7 Arbitrage account.
220.8 Cash account.
220.9 Nonsecurities credit and employee stock ownership account.
220.10 Omnibus account.
220.11 Broker-dealer credit account.
220.12 Market functions account.
220.13 Arranging for loans by others.
220.14 Clearance of securities, options, and futures.
220.15 Borrowing by creditors.
220.16 Borrowing and lending securities.
220.17 Requirements for the list of marginable OTC stocks and the
list of foreign margin stocks.
220.18 Supplement: Margin requirements.
220.101 Transactions of customers who are brokers or dealers.
220.102 (Reserved)
220.103 Borrowing of securities.
220.104 (Reserved)
220.105 Ninety-day rule in special cash account.
220.106 Designation of New York Stock Exchange for purposes of
specialists transactions.
220.107 Transactions in undermargined accounts.
220.108 International Bank Securities.
220.109 Arrangement for credit by brokers or dealers.
220.110 Assistance by Federal credit union to its members.
220.111 Arranging for extensions of credit to be made by a bank.
220.112 Arranging loan to purchase open-end investment company
shares.
220.113 Necessity for prompt payment and delivery in special cash
accounts.
220.114 Transactions in restricted accounts under amended withdrawal
rules.
220.115 Short sales made prior to recent amendments, but covered
subsequent thereto.
220.116 Simultaneous long and short positions in same margin account
where short position is taken first.
220.117 Exception to 90-day rule in special cash account.
220.118 Time of payment for mutual fund shares purchased in a special
cash account.
220.119 Applicability of margin requirements to credit extended to
corporation in connection with retirement of stock.
220.120 Loan value of securities used to make required deposit.
220.121 Applicability of margin requirements to joint account between
two creditors.
220.122 ''Deep in the money put and call options'' as extensions of
credit.
220.123 Partial delayed issue contracts covering nonconvertible
bonds.
220.124 Installment sale of tax-shelter programs as ''arranging'' for
credit.
220.125 Extending, maintaining or arranging credit on mutual fund
shares having portfolio of exempted securities.
220.126 Put and call options.
220.127 Independent broker/dealers arranging credit in connection
with the sale of insurance premium funding programs.
220.128 Treatment of simultaneous long and short positions in the
same margin account when put or call options or combinations thereof on
such stock are also outstanding in the account.
220.129 Applicability of same-day substitution rule to accounts
subject to section 220.8(g).
220.130 Escrow receipts for option transactions.
220.131 Application of the arranging section to broker-dealer
activities under SEC Rule 144A.
Authority: Secs. 3, 7, 8, 17 and 23 of the Securities Exchange Act
of 1934, as amended (15 U.S.C. 78c, 78g, 78h, 78q and 78w).
Source: Regulation T, 220.1 through 220.18 appear at 48 FR 23165,
May 24, 1983, unless otherwise noted.
Editorial Notes: (1) A copy of each form referred to in this part is
filed as a part of the original document. Copies are available upon
request to the Board of Governors of the Federal Reserve System or any
Federal Reserve Bank.
(2) See the List of CFR Sections Affected in the Finding Aids section
of this volume for FR citations to part 220 OTC Margin Stocks changes.
12 CFR 220.1 Authority, purpose, and scope.
(a) Authority and purpose. Regulation T (this part) is issued by the
Board of Governors of the Federal Reserve System (the Board) pursuant to
the Securities Exchange Act of 1934 (the Act) (15 U.S.C. 78a et seq.).
Its principal purpose is to regulate extensions of credit by and to
brokers and dealers; it also covers related transactions within the
Board's authority under the Act. It imposes, among other obligations,
initial margin requirements and payment rules on securities
transactions.
(b) Scope. (1) This part provides a margin account and seven special
purpose accounts in which to record all financial relations between a
customer and a creditor. Any transaction not specifically permitted in
a special account shall be recorded in a margin account.
(2) This part does not preclude any exchange, national securities
association, or creditor from imposing additional requirements or taking
action for its own protection.
12 CFR 220.2 Definitions.
The terms used in this part have the meanings given them in section
3(a) of the Act or as defined in this section.
(a) Credit balance means the cash amount due the customer in a margin
account after debiting amounts transferred to the special memorandum
account.
(b) Creditor means any broker or dealer (as defined in sections
3(a)(4) and 3(a)(5) of the Act), any member of a national securities
exchange, or any person associated with a broker or dealer (as defined
in section 3(a)(18) of the Act), except for business entities
controlling or under common control with the creditor.
(c) Customer includes: (1) Any person or persons acting jointly:
(i) To or for whom a creditor extends, arranges, or maintains any
credit; or (ii) who would be considered a customer of the creditor
according to the ordinary usage of the trade;
(2) Any partner in a firm who would be considered a customer of the
firm absent the partnership relationship; and
(3) Any joint venture in which a creditor participates and which
would be considered a customer of the creditor if the creditor were not
a participant.
(d) Debit balance means the cash amount owed to the creditor in a
margin account after debiting amounts transferred to the special
memorandum account.
(e) Delivery against payment, Payment against delivery, or a C.O.D.
transaction refers to an arrangement under which a creditor and a
customer agree that the creditor will deliver to, or accept from, the
customer, or the customer's agent, a security against full payment of
the purchase price.
(f) Equity means the total current market value of security positions
held in the margin account plus any credit balance less the debit
balance in the margin account.
(g) Escrow agreement means any agreement issued in connection with a
call or put option under which a bank, holding the underlying security,
foreign currency, certificate of deposit, or required cash, is obligated
to deliver to the creditor (in the case of a call option) or accept from
the creditor (in the case of a put option) the underlying security,
foreign currency, or certificate of deposit against payment of the
exercise price upon exercise of the call or put.
(h) Examining authority means: (1) The national securities exchange
or other self-regulatory organization of which a creditor is a member;
or
(2) If not a member of any such self-regulatory organization, the
Regional Office of the Securities and Exchange Commission (SEC) where
the creditor has its principal place of business; or
(3) If a member of more than one self-regulatory organization, the
organization designated by the SEC as the examining authority for the
creditor.
(i) Foreign margin stock means: (1) A foreign security that is an
equity security and that appears on the Board's periodically published
List of Foreign Margin Stocks based on information submitted by a
self-regulatory organization under procedures approved by the Board; or
(2) A foreign security that is a debt security convertible into a
margin security.
(j) Foreign security means a security issued in a jurisdiction other
than the United States.
(k) Good faith margin means the amount of margin which a creditor,
exercising sound credit judgment, would customarily require for a
specified security position and which is established without regard to
the customer's other assets or securities positions held in connection
with unrelated transactions.
(l) In or at the money means the current market price of the
underlying security is not more than one standard exercise interval
below (with respect to a call option) or above (with respect to a put
option) the exercise price of the option.
(m) In the money means the current market price of the underlying
security is not below (with respect to a call option) or above (with
respect to a put option) the exercise price of the option.
(n) Margin call means a demand by a creditor to a customer for a
deposit of additional cash or securities to eliminate or reduce a margin
deficiency as required under this part.
(o) Margin deficiency means the amount by which the required margin
exceeds the equity in the margin account.
(p) Margin excess means the amount by which the equity in the margin
account exceeds the required margin. When the margin excess is
represented by securities, the current value of the securities is
subject to the percentages set forth in 220.18 (the Supplement).
(q) Margin security means:
(1) Any registered security;
(2) Any OTC margin stock;
(3) Any OTC margin bond;
(4) Any OTC security designated as qualified for trading in the
National Market System under a designation plan approved by the
Securities and Exchange Commission (NMS security);
(5) Any security issued by either an open-end investment company or
unit investment trust which is registered under section 8 of the
Investment Company Act of 1940 (15 U.S.C. 80a-8)
(6) Any foreign margin stock.
(r) Nonexempted security means any security other than an exempted
security (as defined in section 3(a)(12) of the Act).
(s) Nonmember bank means a bank that is not a member of the Federal
Reserve System.
(t) OTC margin bond means: (1) A debt security not traded on a
national securities exchange which meets all of the following
requirements:
(i) At the time of the original issue, a principal amount of not less
than $25,000,000 of the issue was outstanding;
(ii) The issue was registered under section 5 of the Securities Act
of 1933 (15 U.S.C. 77e) and the issuer either files periodic reports
pursuant to section 13(a) or 15(d) of the Act or is an insurance company
which meets all of the conditions specified in section 12(g)(2)(G) of
the Act; and
(iii) At the time of the extension of credit, the creditor has a
reasonable basis for believing that the issuer is not in default on
interest or principal payments; or
(2) A private mortgage pass-through security (not guaranteed by an
agency of the U.S. government) meeting all of the following
requirements:
(i) An aggregate principal amount of not less than $25,000,000 (which
may be issued in series) was issued pursuant to a registration statement
filed with the SEC under section 5 of the Securities Act of 1933;
(ii) Current reports relating to the issue have been filed with the
SEC; and
(iii) At the time of the credit extension, the creditor has a
reasonable basis for believing that mortgage interest, principal
payments and other distributions are being passed through as required
and that the servicing agent is meeting its material obligations under
the terms of the offering; or
(3) A mortgage related security as defined in section 3(a)(41) of the
Act; or
(4) A debt security issued or guaranteed as a general obligation by
the government of a foreign country, its provinces, states, or cities,
or a supranational entity, if at the time of the extension of credit one
of the following is rated in one of the two highest rating categories by
a nationally recognized statistical rating organization:
(i) The issue,
(ii) The issuer or guarantor (implicitly), or
(iii) Other outstanding unsecured long-term debt securities issued or
guaranteed by the government or entity; or
(5) A foreign security that is a nonconvertible debt security that
meets all of the following requirements:
(i) At the time of original issue, a principal amount of at least
$100,000,000 was outstanding;
(ii) At the time of the extension of credit, the creditor has a
reasonable basis for believing that the issuer is not in default on
interest or principal payments; and
(iii) At the time of the extension of credit, the issue is rated in
one of the two highest rating categories by a nationally recognized
statistical rating organization, except that an issue that has not been
rated as of the effective date of this provision shall be considered an
OTC margin bond if a subsequent unsecured issue of at least $100,000,000
of the same issuer is rated in one of the two highest rating categories
by a nationally recognized statistical rating organization.
(u) OTC margin stock means any equity security not traded on a
national securities exchange that the Board has determined has the
degree of national investor interest, the depth and breadth of market,
the availability of information respecting the security and its issuer,
and the character and permanence of the issuer to warrant being treated
like an equity security traded on a national securities exchange. An
OTC stock is not considered to be an OTC margin stock unless it appears
on the Board's periodically published list of OTC margin stocks.
(v) Overlying option means: (1) A put option purchased or a call
option written against a long position in an underlying security in the
specialist record in 220.12(b); or
(2) A call option purchased or a put option written against a short
position in an underlying security in the specialist record in
220.12(b).
(w) Purpose credit means credit for the purpose of: (1) Buying,
carrying, or trading in securities; or
(2) Buying or carrying any part of an investment contract security
which shall be deemed credit for the purpose of buying or carrying the
entire security.
(x) Registered security means any security that: (1) Is registered
on a national securities exchange; or
(2) Has unlisted trading privileges on a national securities
exchange.
(y) Short call or short put means a call option or a put option that
is issued, endorsed, or guaranteed in or for an account.
(1) A short call obligates the customer to sell the underlying
security, foreign currency, or certificate of deposit at the exercise
price upon receipt of an exercise notice at any time prior to the
expiration date of the option.
(2) A short put obligates the customer to purchase the underlying
security, foreign currency, or certificate of deposit at the exercise
price upon receipt of an exercise notice at any time prior to the
expiration date of the option.
(3) A short call or a short put on stock index options obligates the
customer to pay the holder of an in the money long put or call who has
exercised the option the cash difference between the exercise price and
the current assigned value of the index as established by the option
contract.
(z) Specialist joint account means an account which, by written
agreement, provides for the commingling of the security positions of the
participants and a sharing of profits and losses from the account on
some predetermined ratio.
(aa) Underlying security means the security that will be delivered
upon exercise of an option.
(48 FR 23165, May 24, 1983; 48 FR 34945, Aug. 2, 1983, as amended at
49 FR 35758, Sept. 12, 1984; 52 FR 32292, Aug. 27, 1987; 53 FR 30831,
Aug. 16, 1988; 55 FR 11159, Mar. 27, 1990)
12 CFR 220.3 General provisions.
(a) Records. The creditor shall maintain a record for each account
showing the full details of all transactions.
(b) Separation of accounts. Except as provided for in the margin
account and the special memorandum account, the requirements of an
account may not be met by considering items in any other account. If
withdrawals of cash or securities are permitted under the regulation,
written entries shall be made when cash or securities are used for
purposes of meeting requirements in another account.
(c) Maintenance of credit. Except as prohibited by this part, any
credit initially extended in compliance with this part may be maintained
regardless of:
(1) Reductions in the customer's equity resulting from changes in
market prices;
(2) Any security in an account ceasing to be margin or exempted; or
(3) Any change in the margin requirements prescribed under this part.
(d) Guarantee of accounts. No guarantee of a customer's account
shall be given any effect for purposes of this part.
(e) Receipt of funds or securities. (1) A creditor, acting in good
faith, may accept as immediate payment:
(i) Cash or any check, draft, or order payable on presentation; or
(ii) Any security with sight draft attached.
(2) A creditor may treat a security, check or draft as received upon
written notification from another creditor that the specified security,
check, or draft has been sent.
(3) Upon notification that a check, draft, or order has been
dishonored or when securities have not been received within a reasonable
time, the creditor shall take the action required by this part when
payment or securities are not received on time.
(4) A creditor may accept, in lieu of securities, a properly executed
exercise notice for a stock option issued by the customer's employer and
instructions to the issuer to deliver the resulting stock to the
creditor. Prior to acceptance, the creditor must verify that the issuer
will deliver the securities promptly and the customer must designate the
account into which the securities are to be deposited.
(f) Exchange of securities. (1) To enable a customer to participate
in an offer to exchange securities which is made to all holders of an
issue of securities, a creditor may submit for exchange any securities
held in a margin account, without regard to the other provisions of this
part, provided the consideration received is deposited into the account.
(2) If a nonmargin, nonexempted security is acquired in exchange for
a margin security, its retention, withdrawal, or sale within 60 days
following its acquisition shall be treated as if the security is a
margin security.
(g) Valuing securities. The current market value of a security shall
be determined as follows:
(1) Throughout the day of the purchase or sale of a security, the
creditor shall use the security's total cost of purchase or the net
proceeds of its sale including any commissions charged.
(2) At any other time, the creditor shall use the closing sale price
of the security on the preceding business day, as shown by any regularly
published reporting or quotation service. If there is no closing price,
the creditor may use any reasonable estimate of the market value of the
security as of the close of business on the preceding business day.
(h) Innocent mistakes. If any failure to comply with this part
results from a mistake made in good faith in executing a transaction or
calculating the amount of margin, the creditor shall not be deemed in
violation of this part if, promptly after the discovery of the mistake,
the creditor takes appropriate corrective action.
(i) Variable annuity contracts issued by insurance companies. Any
insurance company that issues or sells variable annuity contracts or
engages in a general securities business as a broker or dealer shall be
subject to this part only for transactions in connection with those
activities. Extensions of credit associated with conventional lending
practices of insurance companies are subject to part 207 of this
chapter.
(48 FR 23165, May 24, 1983, as amended at 52 FR 48805, Dec. 28, 1987)
12 CFR 220.4 Margin account.
(a) Margin transactions. (1) All transactions not specifically
authorized for inclusion in another account shall be recorded in the
margin account.
(2) A creditor may establish separate margin accounts for the same
person to:
(i) Clear transactions for other creditors where the transactions are
introduced to the clearing creditor by separate creditors; or
(ii) Clear transactions through other creditors if the transactions
are effected by separate creditors; or
(iii) Provided one or more accounts over which the creditor or a
third party investment adviser has investment discretion.
(b) Required margin. The required margin for each position in
securities is set forth in 220.18 (the Supplement) and is subject to
the exceptions and special provisions contained in 220.5 (Margin
Account Exceptions and Special Provisions).
(c) When additional margin is required -- (1) Computing deficiency.
All transactions on the same day shall be combined to determine whether
additional margin is required by the creditor. For the purpose of
computing equity in an account, security positions are established or
eliminated and a credit or debit created on the trade date of a security
transaction. Additional margin is required on any day when the day's
transactions create or increase a margin deficiency in the account and
shall be for the amount of the margin deficiency so created or
increased. To the extent that debits in a margin account are
denominated in foreign currency secured by specifically identified
foreign margin securities as provided in 220.5(g), each foreign
currency debit position shall be considered separately for purposes of
computing a deficiency and no credit shall be given to such specifically
identified foreign margin securities for purposes of computing equity in
the margin account either in United States dollars or in any other
specific foreign currency.
(2) Satisfaction of deficiency. The additional required margin may
be satisfied by a transfer from the special memorandum account or by a
deposit of cash, margin securities, exempted securities, or any
combination thereof.
(3) Time limits. (i) A margin call shall be satisfied within 7
business days after the margin deficiency was created or increased.
(ii) The 7 day period may be extended for one or more limited periods
upon application by the creditor to a self-regulatory organization or
national securities association unless the organization or association
believes that the creditor is not acting in good faith or that the
creditor has not sufficiently determined that exceptional circumstances
warrant such action. Applications shall be filed and acted upon prior
to the end of the 7 day period or the expiration of any subsequent
extension. However, applications filed by firms having no direct
electronic access to the organization or association may be accepted as
timely filed if postmarked by midnight of the last day of the 7 day
period or any subsequent extension.
(4) Satisfaction restriction. Any transaction, position, or deposit
that is used to satisfy one requirement under this part shall be
unavailable to satisfy any other requirement.
(d) Liquidation in lieu of deposit. If any margin call is not met in
full within the required time, the creditor shall liquidate securities
sufficient to meet the margin call or to eliminate any margin deficiency
existing on the day such liquidation is required, whichever is less. If
the margin deficiency created or increased is $500 or less, no action
need be taken by the creditor.
(e) Withdrawals of cash or securities. (1) Cash or securities may be
withdrawn from an account, except if:
(i) Additional cash or securities are required to be deposited into
the account for a transaction on the same or a previous day; or
(ii) The withdrawal, together with other transactions, deposits, and
withdrawals on the same day, would create or increase a margin
deficiency.
(2) Margin excess may be withdrawn or may be transferred to the
special memorandum account ( 220.6) by making a single entry to that
account which will represent a debit to the margin account and a credit
to the special memorandum account.
(3) If a creditor does not receive a distribution of cash or
securities which is payable with respect to any security in a margin
account on the day it is payable and withdrawal would not be permitted
under this paragraph, a withdrawal transaction shall be deemed to have
occurred on the day the distribution is payable.
(f) Interest, service charges, etc. (1) Without regard to the other
provisions of this section, the creditor, in its usual practice, may
debit the following items to a margin account if they are considered in
calculating the balance of such account:
(i) Interest charged on credit maintained in the margin account;
(ii) Premiums on securities borrowed in connection with short sales
or to effect delivery;
(iii) Dividends, interest, or other distributions due on borrowed
securities;
(iv) Communication or shipping charges with respect to transactions
in the margin account; and
(v) Any other service charges which the creditor may impose.
(2) A creditor may permit interest, dividends, or other distributions
credited to a margin account to be withdrawn from the account if:
(i) The withdrawal does not create or increase a margin deficiency in
the account; or
(ii) The current market value of any securities withdrawn does not
exceed 10 percent of the current market value of the security with
respect to which they were distributed.
(48 FR 23165, May 24, 1983, as amended at 55 FR 11159, Mar. 27, 1990)
12 CFR 220.5 Margin account exceptions and special provisions.
(a) Unissued securities (1) The required margin on a net long or net
short commitment in an unissued security is the margin that would be
required if the security were an issued margin security, plus any
unrealized loss on the commitment or less any unrealized gain.
(2) Margin is not required on a net short commitment in unissued
securities when the account contains the related issued securities, nor
for any net short or net long position in unissued exempted securities.
(b) Short sales -- (1) The required margin for the short sale of a
security shall be the amount set forth in 220.18 (the Supplement).
(2) A short sale ''against the box'' shall be treated as a long sale
for the purpose of computing the equity and the required margin.
(c) Options -- (1) Margin or cover for options on exempted debt
securities, certificates of deposit, stock indices, or securities
exchange traded options on foreign currencies. The required margin for
each transaction involving any short put or short call on an exempted
debt security, certificate of deposit, stock index, or foreign currency
(if the option is traded on a securities exchange), shall be the amount
or positions in lieu of margin set forth in 220.18 (the Supplement).
(2) Margin for options on equity securities. The required margin for
each transaction involving any short put or short call on an equity
security shall be the amount set forth in 220.18 (the Supplement).
(3) Cover or positions in lieu of margin. No margin is required for
an option written on an equity security position when the account holds
any of the following:
(i) The underlying security in the case of a short call, or a short
position in the underlying security in the case of a short put;
(ii) Securities immediately convertible into or exchangeable for the
underlying security without the payment of money in the case of a short
call, if the right to convert or exchange does not expire on or before
the expiration date of the short call;
(iii) An escrow agreement for the underlying security or foreign
exhange (in the case of a short call) or cash (in the case of a short
put);
(iv) A long call on the same number of shares of the same underlying
security if the long call does not expire before the expiration date of
the short call, and if the amount (if any), by which the exercise price
of the long call exceeds the exercise price of the short call is
deposited in the account;
(v) A long put on the same number of shares of the same underlying
security if the long put does not expire before the expiration date of
the short put, and if the amount (if any), by which the exercise price
of the short put exceeds the exercise price of the long put is deposited
in the account;
(vi) A warrant to purchase the underlying security, in the case of a
short call, if the warrant does not expire on or before the expiration
date of the short call, and if the amount (if any), by which the
exercise price of the warrant exceeds the exercise price of the short
call is deposited in the account. A warrant used in lieu of the
required margin under this provision shall contribute no equity to the
account.
(4) Adjustments. (i) When a short position held in the account
serves in lieu of the required margin for a short put, the amount
prescribed by paragraph (c)(2) of this section as the amount to be added
to the required margin in respect of short sales shall be increased by
any unrealized loss on the position.
(ii) When a security held in the account serves in lieu of the
required margin for a short call, the security shall be valued at no
greater than the exercise prices of the short call.
(5) Straddles. When both a short put and a short call are in a
margin account on the same number of shares of the same underlying
security, the required margin shall be the margin on either the short
put or the short call, whichever is greater, plus any unrealized loss on
the other option.
(6) Exclusive designation. The customer may designate at the time
the option order is entered which security position held in the account
is to serve in lieu of the required margin, if such service is offered
by the creditor; or the customer may have a standing agreement with the
creditor as to the method to be used for determining on any given day
which security position will be used in lieu of the margin to support an
option transaction. Only security held in the account which serves in
lieu of the required margin for a short put or a short call shall be
unavailable to support any other option transaction in the account.
(d) Accounts of partners. If a partner of the creditor has a margin
account with the creditor, the creditor shall disregard the partner's
financial relations with the firm (as shown in the partner's capital and
ordinary drawing accounts) in calculating the margin or equity of the
partner's margin account.
(e) Contribution to joint venture. If a margin account is the
account of a joint venture in which the creditor participates, any
interest of the creditor in the joint account in excess of the interest
which the creditor would have on the basis of its right to share in the
profits shall be treated as an extension of credit to the joint account
and shall be margined as such.
(f) Transfer of accounts. (1) A margin account that is transferred
from one creditor to another may be treated as if it had been maintained
by the transferee from the date of its origin, if the transferee
accepts, in good faith, a signed statement of the transferor (or, if
that is not practicable, of the customer), that any margin call issued
under this part has been satisfied.
(2) A margin account that is transferred from one customer to another
as part of a transaction, not undertaken to avoid the requirements of
this part, may be treated as if it had been maintained for the
transferee from the date of its origin, if the creditor accepts in good
faith and keeps with the transferee account a signed statement of the
transferor describing the circumstances for the transfer.
(g) Credit denominated in foreign currency. A creditor may extend
credit denominated in a foreign currency secured by foreign margin
securities denominated or traded in the same foreign currency and
specifically identified on the creditor's books and records as securing
the foreign currency debit.
(48 FR 23165, May 24, 1983, as amended at 50 FR 26355, June 26, 1985;
55 FR 11159, Mar. 27, 1990)
12 CFR 220.6 Special memorandum account.
(a) A special memorandum account (SMA) may be maintained in
conjunction with a margin account. A single entry amount may be used to
represent both a credit to the SMA and a debit to the margin account. A
transfer between the two accounts may be effected by an increase or
reduction in the entry. When computing the equity in a margin account,
the single entry amount shall be considered as a debit in the margin
account. A payment to the customer or on the customer's behalf or a
transfer to any of the customer's other accounts from the SMA reduces
the single entry amount.
(b) The SMA may contain the following entries:
(1) Dividend and interest payments;
(2) Cash not required by this part, including cash deposited to meet
a maintenance margin call or to meet any requirement of a
self-regulatory organization that is not imposed by this part;
(3) Proceeds of a sale of securities or cash no longer required on
any expired or liquidated security position that may be withdrawn under
220.4(e) of this part; and
(4) Margin excess transferred from the margin account under
220.4(e)(2) of this part.
12 CFR 220.7 Arbitrage account.
In an arbitrage account a creditor may effect and finance for any
customer bona fide arbitrage transactions. For the purpose of this
section, the term ''bona fide arbitrage'' means:
(a) A purchase or sale of a security in one market together with an
offsetting sale or purchase of the same security in a different market
at as nearly the same time as practicable for the purpose of taking
advantage of a difference in prices in the two markets, or
(b) A purchase of a security which is, without restriction other then
the payment of money, exchangeable or convertible within 90 calendar
days of the purchase into a second security together with an offsetting
sale of the second security at or about the same time, for the purpose
of taking advantage of a concurrent disparity in the prices of the two
securities.
12 CFR 220.8 Cash account.
(a) Permissible transactions. In a cash account, a creditor, may:
(1) Buy for or sell to any customer any security if: (i) There are
sufficient funds in the accounts; or (ii) the creditor accepts in good
faith the customer's agreement that the customer will promptly make full
cash payment for the security before selling it and does not contemplate
selling it prior to making such payment;
(2) Buy from or sell for any customer any security if: (i) The
security is held in the account; or (ii) the creditor accepts in good
faith the customer's statement that the security is owned by the
customer or the customer's principal, and that it will be promptly
deposited in the account;
(3) Issue, endorse, or guarantee an option for any customer if:
(i) In the case of a call option, the underlying security (or a
security immediately convertible into the underlying security, without
the payment of money) is held in or purchased for the account on the
same day, and the option premium is held in the account until cash
payment for the underlying or convertible security is received; or
(ii) In the case of a put option, the creditor obtains cash in an
amount equal to the exercise price or holds in the account any of the
following instruments with a current market value at least equal to the
exerecise price and with one year or less to maturity: securities
issued or guaranteed by the United States or its agencies, negotiable
bank certificates of deposit, or bankers acceptances issued by banking
institutions in the United States and payable in the United States.
(4) Use an escrow agreement in lieu of the cash or underlying
security position if:
(i) In the case of a call or a put, the creditor is advised by the
customer that the required securities or cash are held by a bank and the
creditor independently verifies that an appropriate escrow agreement
will be delivered by the bank promptly; or
(ii) In the case of a call issued, endorsed, or guaranteed on the
same day the underlying security is purchased in the account and the
underlying security is to be delivered to a bank, the creditor verifies
that an appropiate escrow agreement will be delivered by the bank
promptly.
(b) Time periods for payment; cancellation or liquidation -- (1)
Full cash payment. A creditor shall obtain full cash payment for
customer purchases --
(i) Within seven business days of the date:
(A) Any nonexempted security was purchased;
(B) Any unissued security was made available by the issuer for
delivery to purchasers;
(C) Any ''when distributed'' security was distributed under a
published plan;
(D) A security owned by the customer has matured or has been redeemed
and a new refunding security of the same issuer has been purchased by
the customer, provided:
(1) The customer purchased the new security no more than 35 calendar
days prior to the date of maturity or redemption of the old security;
(2) The customer is entitled to the proceeds of the redemption; and
(3) The delayed payment does not exceed 103 percent of the proceeds
of the old security.
(ii) In the case of the purchase of a foreign security, within seven
business days of the trade date or the date on which settlement is
required to occur by the rules of the foreign securities market,
provided this period does not exceed the maximum time permitted by this
part for delivery against payment transactions.
(2) Delivery against payment. If a creditor purchases for or sells
to a customer a security in a delivery against payment transaction, the
creditor shall have up to 35 calendar days to obtain payment if delivery
of the security is delayed due to the mechanics of the transaction and
is not related to the customer's willingness or ability to pay.
(3) Shipment of securities, extension. If any shipment of securities
is incidental to consummation of a transaction, a creditor may extend
the 7 business day period by the number of days required for shipment,
but not by more than 7 business days.
(4) Cancellation; liquidation; minimum amount. A creditor shall
promptly cancel or otherwise liquidate a transaction or any part of a
transaction for which the customer has not made full cash payment within
the required time. A creditor may, at its option, disregard any sum due
from the customer not exceeding $500.
(c) 90 day freeze. (1) If a nonexempted security in the account is
sold or delivered to another broker or dealer without having been
previously paid for in full by the customer, the privilege of delaying
payment beyond the trade date shall be withdrawn for 90 calendar days
following the date of sale of the security. Cancellation of the
transaction other than to correct an error shall constitute a sale.
(2) The 90 day freeze shall not apply if: (i) Within 7 business days
of the trade date, full payment is received or any check or draft in
payment has cleared and the proceeds from the sale are not withdrawn
prior to such payment or check clearance; or (ii) the purchased
security was delivered to another broker or dealer for deposit in a cash
account which holds sufficient funds to pay for the security. The
creditor may rely on a written statement accepted in good faith from the
other broker or dealer that sufficient funds are held in the other cash
account.
(d) Extension of time periods; transfers. (1) Unless a
self-regulatory organization or association believes that the creditor
is not acting in good faith or that the creditor has not sufficiently
determined that exceptional circumstances warrant such action, it may,
upon application by the creditor:
(i) Extend any period specified in paragraph (b) of this section;
(ii) Authorize transfer to another account of any transaction
involving the purchase of a margin or exempted security; or
(iii) Grant a waiver from the 90 day freeze.
(2) Applications shall be filed and acted upon prior to the end of
the 7 day period or the expiration of any subsequent extension.
However, an application filed from firms having no direct electronic
access to the exchange or association may be accepted as timely filed if
it is postmarked no later than midnight of the last day of the 7 day
period or any subsequent extension.
(48 FR 23165, May 24, 1983, as amended at 55 FR 11159, Mar. 27, 1990)
12 CFR 220.9 Nonsecurities credit and employee stock ownership account.
(a) In a nonsecurities credit account a creditor may:
(1) Effect and carry transactions in commodities;
(2) Effect and carry transactions in foreign exchange;
(3) Extend and maintain secured or unsecured nonpurpose credit,
subject to the requirements of paragraph (b) of this section.
(4) Extend and maintain credit to employee stock ownership plans
without regard to the other sections of this part.
(b) Every extension of credit, except as provided in paragraphs (a)
(1) and (2) of this section, shall be deemed to be purpose credit
unless, prior to extending the credit, the creditor accepts in good
faith from the customer a written statement that it is not purpose
credit. The statement shall conform to the requirements established by
the Board. To accept the customer's statement in good faith, the
creditor shall be aware of the circumstances surrounding the extension
of credit and shall be satisfied that the statement is truthful.
(48 FR 23165, May 24, 1983, as amended at 50 FR 26356, June 26, 1985)
12 CFR 220.10 Omnibus account.
(a) In an omnibus account, a creditor may effect and finance
transactions for a broker or dealer who is registered with the SEC under
section 15 of the Act and who gives the creditor written notice that:
(1) All securities will be for the account of customers of the broker
or dealer; and
(2) Any short sales effected will be short sales made on behalf of
the customers of the broker or dealer other than partners.
(b) The written notice required by paragraph (a) shall conform to any
SEC rule on the hypothecation of customers' securities by brokers or
dealers.
12 CFR 220.11 Broker-dealer credit account.
(a) Permissible transactions. In a broker-dealer credit account, a
creditor may:
(1) Purchase any security from or sell any security to another
creditor under a good faith agreement to promptly deliver the security
against full payment of the purchase price.
(2) Effect or finance transactions of any of its owners if the
creditor is a clearing and servicing broker or dealer owned jointly or
individually by other creditors.
(3) Extend and maintain credit to any partner or stockholder of the
creditor for the purpose of making a capital contribution to, or
purchasing stock of, the creditor, affiliated corporation or another
creditor.
(4) Extend and maintain, with the approval of the appropriate
examining authority:
(i) Credit to meet the emergency needs of any creditor; or
(ii) Subordinated credit to another creditor for capital purposes, if
the other creditor:
(A) Is an affiliated corporation; or
(B) Will not use the proceeds of the loan to increase the amount of
dealing in securities for the account of the creditor, its firm or
corporation or an affiliated corporation.
(b) For purposes of paragraphs (a) (3) and (4) of this section
affiliated corporation means a corporation all the common stock of which
is owned directly or indirectly by the firm or general partners and
employees of the firm, or by the corporation or holders of the
controlling stock and employees of the corporation and the affiliation
has been approved by the creditor's examining authority.
12 CFR 220.12 Market functions account.
(a) Requirements. In a market functions account, a creditor may
effect or finance the transactions of market participants in accordance
with the following provisions. A separate record shall be kept for the
transactions specified for each category described in paragraphs (b)
through (e) of this section. Any position in a separate record shall
not be used to meet the requirements of any other category.
(b) Specialists -- (1) Applicability. A creditor may clear or
finance specialist transactions for any specialist, or any specialist
joint account, in which all participants, or all participants other than
the creditor, are registered as specialists on a national securities
exchange that requires regular reports on the use of specialist credit
from the registered specialists.
(2) Permitted offset positions. A specialist in options may
establish, on a share-for-share basis, a long or short position in the
securities underlying the options in which the specialist makes a
market, and a specialist in securities other than options may purchase
or write options overlying the securities in which the specialist makes
a market, if the account holds the following permitted offset positions:
(i) A short option position which is ''in or at the money'' and is
not offset by a long or short option position for an equal or greater
number of shares of the same underlying security which is ''in the
money'';
(ii) A long option position which is ''in or at the money'' and is
not offset by a long or short option position for an equal or greater
number of shares of the same underlying security which is ''in the
money'';
(iii) A short option position against which an exercise notice was
tendered;
(iv) A long option position which was exercised;
(v) A net long position in a security (other than an option) in which
the specialist makes a market; or
(vi) A net short position in a security (other than an option) in
which the specialist makes a market.
(3) Required margin. The required margin for a specialist's
transactions shall be:
(i) Good faith margin for any long or short position in a security in
which the specialist makes a market;
(ii) Good faith margin for any wholly-owned margin security or
exempted security;
(iii) The margin prescribed by 220.18 (the Supplement) when a
security purchased or sold short in the account does not qualify as a
specialist or permitted offset position.
(4) Additional margin; restriction on ''free-riding.'' (i) Except as
required by paragraph (b)(5) of this section, the creditor shall issue a
margin call on any day when additional margin is required as a result of
specialist transactions. The creditor may allow the specialist a
maximum of 7 business days to satisfy a margin call.
(ii) If a specialist fails to satisfy a margin call within the period
specified in this paragraph (and the creditor is required to liquidate
securities to satisfy the call), the creditor shall be prohibited for a
15 calendar day period from extending any further credit to the
specialist to finance transactions in nonspecialty securities.
(iii) The restriction on ''free-riding'' shall not apply to:
(A) Any specialist on a national securities exchange that has an
SEC-approved rule on ''free-riding'' by specialists; or (B) the
acquisition or liquidation of a permitted offset position.
(5) Deficit status. On any day when a specialist's separate record
would liquidate to a deficit, the creditor shall not extend any further
specialist credit in the account and shall issue a margin call at least
as large as the deficit. If the call is not met by noon of the
following business day, the creditor shall liquidate positions in the
specialist's account.
(6) Withdrawals. Withdrawals may be permitted to the extent that the
equity exceeds the margin requirements specified in paragraph (b)(3) of
this section.
(c) Underwritings and distributions. A creditor may effect or
finance for any dealer or group of dealers transactions for the purpose
of facilitating the underwriting or distribution of all or a part of an
issue of securities with a good faith margin.
(d) OTC Marketmakers and Third Marketmakers. (1) A creditor may
clear or finance with a good faith margin, marketmaking transactions for
an OTC marketmaker or a third marketmaker who:
(i) Is in compliance with any applicable SEC rule, including minimum
net capital rules;
(ii) Regularly submits bona fide competitive bid and offer quotations
to a recognized inter-dealer quotation system;
(iii) Is ready, willing, and able to effect transactions in
reasonable amounts with other brokers and dealers at the quoted prices;
and
(iv) Has a reasonable average rate of inventory turnover.
(2) If the credit extended to a marketmaker ceases to be for the
purpose of marketmaking, or the dealer ceases to be a marketmaker for an
issue of securities for which credit was extended, the credit shall be
subject to the margin specified in 220.18 (the Supplement).
(e) Odd-lot dealers. A creditor may clear and finance odd-lot
transactions for any creditor who is registered as an odd-lot dealer on
a national securities exchange with a good faith margin.
(48 FR 23165, May 24, 1983; 48 FR 26590, June 9, 1983)
12 CFR 220.13 Arranging for loans by others.
A creditor may not arrange for the extension or maintenance of credit
to or for any customer by any person upon terms and conditions other
than those upon which the creditor may itself extend or maintain credit
under the provisions of this part, except that this limitation shall not
apply to credit arranged for a customer which does not violate parts 207
and 221 of this chapter and results solely from:
(a) Investment banking services, provided by the creditor to the
customer, including, but not limited to, underwritings, private
placements, and advice and other services in connection with exchange
offers, mergers, or acquisitions, except for underwritings that involve
the public distribution of an equity security with installment or other
deferred payment provisions;
(b) The sales of nonmargin securities (including securities with
installment or other deferred payment provisions) if the sale is
exempted from the registration requirements of the Securities Act of
1933 under section 4(2) of section 4(6) of the Act;
(c) A subsequent loan or advance on a face-amount certificate as
permitted under 15 U.S.C. 80a-28(d); or
(d) Credit extended by a foreign person to purchase foreign
securities.
(50 FR 10934, Mar. 19, 1985, as amended at 55 FR 11160, Mar. 27,
1990)
12 CFR 220.14 Clearance of securities, options, and futures.
(a) Credit for clearance of securities. The provisions of this part
shall not apply to the extension or maintenance of any credit that is
not for more than one day if it is incidental to the clearance of
transactions in securities directly between members of a national
securities exchange or association or through any clearing agency
registered with the SEC.
(b) Deposit of securities with a clearing agency. The provisions of
this part shall not apply to the deposit of securities with an options
or futures clearing agency for the purpose of meeting the deposit
requirements of the agency if:
(1) The clearing agency:
(i) Issues, guarantees performance on, or clears transactions in, any
security (including options on any security, certificate of deposit,
securities index or foreign currency); or
(ii) Guarantees performance of contracts for the purchase or sale of
a commodity for future delivery or options on such contracts;
(2) The clearing agency is registered with the Securities and
Exchange Commission or is the clearing agency for a contract market
regulated by the Commodity Futures Trading Commission; and
(3) The deposit consists of any margin security and complies with the
rules of the clearing agency that have been approved by the Securities
and Exchange Commission or the Commodity Futures Trading Commission.
(48 FR 23165, May 24, 1983, as amended at 56 FR 46110, Sept. 10,
1991)
12 CFR 220.15 Borrowing by creditors.
(a) Restrictions on borrowing. A creditor may not borrow in the
ordinary course of business as a broker or dealer using as collateral
any registered nonexempted security, except:
(1) From or through a member bank of the Federal Reserve System; or
(2) From any nonmember bank that has filed with the Board an
agreement as prescribed in paragraph (b) of this section, which
agreement is still in effect; or
(3) From another creditor if the loan is permissible under this part.
(b) Agreements of nonmember banks. (1) A nonmember bank shall file
an agreement that conforms to the requirements of section 8(a) of the
Act (See Form F.R. T-2) if:
(i) Its principal place of business is in a territory or insular
possession of the United States; or
(ii) It has an office or agency in the United States and its
principal place of business is outside the United States.
(2) Any other nonmember bank shall file an agreement that conforms to
the requirements of section 8(a) of the Act (See From F.R. T-1).
(3) Any nonmember bank may terminate its agreement if it obtains the
written consent of the Board.
12 CFR 220.16 Borrowing and lending securities.
Without regard to the other provisions of this part, a creditor may
borrow or lend securities for the purpose of making delivery of the
securities in the case of short sales, failure to receive securities
required to be delivered, or other similar situations. Each borrowing
shall be secured by a deposit of one or more of the following: cash,
securities issued or guaranteed by the United States or its agencies,
negotiable bank certificates of deposit and bankers acceptances issued
by banking institutions in the United States and payable in the United
States, or irrevocable letters of credit issued by a bank insured by the
Federal Deposit Insurance Corporation or a foreign bank that has filed
an agreement with the Board on Form F.R. T-2. Such deposit made with
the lender of the securities shall have at all times a value at least
equal to 100 percent of the market value of the securities borrowed,
computed as of the close of the preceding business day.
12 CFR 220.17 Requirements for the list of marginable OTC stocks and
the list of foreign margin stocks.
(a) Requirements for inclusion on the list of marginable OTC stocks.
Except as provided in paragraph (f) of this section, OTC margin stock
shall meet the following requirements:
(1) Four or more dealers stand willing to, and do in fact, make a
market in such stock and regularly submit bona fide bids and offers to
an automated quotations system for their own accounts;
(2) The minimum average bid price of such stock, as determined by the
Board, is at least $5 per share.
(3) The stock is registered under section 12 of the Act, is issued by
an insurance company subject to section 12(g)(2)(G) of the Act, is
issued by a closed-end investment management company subject to
registration pursuant to section 8 of the Investment Company Act of 1940
(15 U.S.C. 80a-8), is an American Depository Receipt (ADR) of a foreign
issuer whose securities are registered under section 12 of the Act, or
is a stock of an issuer required to file reports under section 15(d) of
the Act;
(4) Daily quotations for both bid and asked prices for the stock are
continuously available to the general public;
(5) The stock has been publicly traded for at least six months;
(6) The issuer has at least $4 million of capital, surplus, and
undivided profits;
(7) There are 400,000 or more shares of such stock outstanding in
addition to shares held beneficially by officers, directors or
beneficial owners of more than 10 percent of the stock;
(8) There are 1,200 or more holders of record, as defined in SEC Rule
12g5-1 (17 CFR 240.12g5-1), of the stock who are not officers, directors
or beneficial owners of 10 percent or more of the stock, or the average
daily trading volume of such stock as determined by the Board, is at
least 500 shares; and
(9) The issuer or a predecessor in interest has been in existence for
at least three years.
(b) Requirements for continued inclusion on the list of marginable
OTC stocks. Except as provided in paragraph (f) of this section, OTC
margin stock shall meet the following requirements:
(1) Three or more dealers stand willing to, and do in fact, make a
market in such stock and regularly submit bona fide bids and offers to
an automated quotations system for their own accounts;
(2) The minimum average bid price of such stocks, as determined by
the Board, is at least $2 per share;
(3) The stock is registered as specified in paragraph (a)(3) of this
section;
(4) Daily quotations for both bid and asked prices for the stock are
continuously available to the general public;
(5) The issuer has at least $1 million of capital, surplus, and
undivided profits;
(6) There are 300,000 or more shares of such stock outstanding in
addition to shares held beneficially by officers, directors, or
beneficial owners of more than 10 percent of the stock; and
(7) There continue to be 800 or more holders of record, as defined in
SEC Rule 12g5-1 (17 CFR 240.12g5-1), of the stock who are not officers,
directors, or beneficial owners of 10 percent or more of the stock, or
the average daily trading volume of such stock, as determined by the
Board, is at least 300 shares.
(c) Requirements for inclusion on the list of foreign margin stocks.
Except as provided in paragraph (f) of this section, a foreign margin
stock shall meet the following requirements:
(1) The security is listed for trading on or through the facilities
of a foreign securities exchange or a recognized foreign securities
market and has been trading on such exchange or market for at least six
months;
(2) Daily quotations for both bid and asked or last sale prices for
the security provided by the foreign securities exchange or foreign
securities market on which the security is traded are continuously
available to creditors in the United States pursuant to an electronic
quotation system;
(3) The aggregate market value of shares, the ownership of which is
unrestricted, is not less than $1 billion;
(4) The average weekly trading volume of such security during the
preceding six months is either at least 200,000 shares or $1 million;
and
(5) The issuer or a predecessor in interest has been in existence for
at least five years.
(d) Requirements for continued inclusion on the list of foreign
margin stocks. Except as provided in paragraph (f) of this section, a
foreign margin stock shall meet the following requirements:
(1) The security continues to meet the requirements specified in
paragraphs (c) (1) and (2) of this section;
(2) The aggregate market value of shares, the ownership of which is
unrestricted, is not less than $500 million; and
(3) The average weekly trading volume of such security during the
preceding six months is either at least 100,000 shares or $500,000.
(e) Removal from the lists. The Board shall periodically remove from
the lists any stock that:
(1) Ceases to exist or of which the issuer ceases to exist, or
(2) No longer substantially meets the provisions of paragraphs (b) or
(d) of this section or 220.2(u).
(f) Discretionary authority of Board. Without regard to other
paragraphs of this section, the Board may add to, or omit or remove from
the list of marginable OTC stocks and the list of foreign margin stocks
and equity security, if in the judgment of the Board, such action is
necessary or appropriate in the public interest.
(g) Unlawful representations. It shall be unlawful for any creditor
to make, or cause to be made, any representation to the effect that the
inclusion of a security on the list of marginable OTC stocks or the list
of foreign margin stocks is evidence that the Board or the SEC has in
any way passed upon the merits of, or given approval to, such security
or any transactions therein. Any statement in an advertisement or other
similar communication containing a reference to the Board in connection
with the lists or stocks on those lists shall be an unlawful
representation.
(48 FR 23165, May 24, 1983; 48 FR 34945, Aug. 2, 1983, as amended at
55 FR 11160, Mar. 27, 1990)
12 CFR 220.18 Supplement: Margin Requirements.
The required margin for each security position held in a margin
account shall be as follows:
(a) Margin equity security, except for an exempted security or a long
position in an option: 50 percent of the current market value of the
security or the percentage set by the regulatory authority where the
trade occurs, whichever is greater.
(b) Exempted security, registered nonconvertible debt security or OTC
margin bond: The margin required by the creditor in good faith or the
percentage set by the regulatory authority where the trade occurs,
whichever is greater.
(c) Short sale of nonexempted security: 150 percent of the current
market value of the security, or 100 percent of the current market value
if a security exchangeable or convertible within 90 calendar days
without restriction other than the payment of money into the security
sold short is held in the account.
(d) Short sale of an exempted security: 100 percent of the current
market value of the security plus the margin required by the creditor in
good faith.
(e) Nonmargin, nonexempted security or a long position in any option:
100 percent of the current market value.
(f) Short put or short call on a security, certificate of deposit,
securities index or foreign currency:
(1) In the case of puts and calls issued by a registered clearing
corporation and listed or traded on a registered national securities
exchange or a registered securities association, the amount, or other
position (except in the case of an option on an equity security),
specified by the rules of the registered national securities exchange or
the registered securities association authorized to trade the option,
provided that all such rules have been approved or amended by the SEC;
or
(2) In the case of all other puts and calls, the amount, or other
position (except in the case of an option on an equity security),
specified by the maintenance rules of the creditor's self-regulatory
organization.
(50 FR 26356, June 26, 1985, as amended at 55 FR 11160, Mar. 27,
1990)
12 CFR 220.18 Interpretations
12 CFR 220.101 Transactions of customers who are brokers or dealers.
The Board has recently considered certain questions regarding
transactions of customers who are brokers or dealers.
(a) The first question was whether delivery and payment under
220.4(f)(3) must be exactly simultaneous (such as in sight draft
shipments), or whether it is sufficient if the broker-dealer customer,
''as promptly as practicable in accordance with the ordinary usage of
the trade,'' mails or otherwise delivers to the creditor a check in
settlement of the transaction, the check being accompanied by
instructions for transfer or delivery of the security. The Board ruled
that the latter method of setting the transaction is permissible.
(b) The second question was, in effect, whether the limitations of
220.4(c)(8) apply to the account of a customer who is himself a broker
or dealer. The answer is that the provision applies to any ''special
cash account,'' regardless of the type of customer.
(c) The third question was, in effect, whether a purchase and a sale
of an unissued security under 220.4(f)(3) may be offset against each
other, or whether each must be settled separately by what would amount
to delivery of the security to settle one transaction and its redelivery
to settle the other. The answer is that it is permissible to offset the
transactions against each other without physical delivery and redelivery
of the security.
(11 FR 14155, Dec. 7, 1946)
220.102 (Reserved)
12 CFR 220.103 Borrowing of securities.
(a) The Board of Governors has been asked for a ruling as to whether
220.6(h), which deals with borrowing and lending of securities, applies
to a borrower of securities if the lender is a private individual, as
contrasted with a member of a national securities exchange or a broker
or dealer.
(b) Section 220.6(h) does not require that the lender of the
securities in such a case be a member of a national securities exchange
or a broker or dealer. Therefore, a borrowing of securities may be able
to qualify under the provision even though the lender is a private
individual, and this is true whether the security is registered on a
national securities exchange or is unregistered. In borrowing
securities from a private individual under 220.6(h), however, it
becomes especially important to bear in mind two limitations that are
contained in the section.
(c) The first limitation is that the section applies only if the
broker borrows the securities for the purpose specified in the
provision, that is, ''for the purpose of making delivery of such
securities in the case of short sales, failure to receive securities he
is required to deliver, or other similar cases''. The present language
of the provision does not require that the delivery for which the
securities are borrowed must be on a transaction which the borrower has
himself made, either as agent or as principal; he may borrow under the
provision in order to relend to someone else for the latter person to
make such a delivery. However, the borrowing must be related to an
actual delivery of the type specified -- a delivery in connection with a
specific transaction that has already occurred or is in immediate
prospect. The provision does not authorize a broker to borrow
securities (or make the related deposit) merely in order that he or some
other broker may have the securities ''on hand'' or may anticipate some
need that may or may not arise in the future.
(d) The ruling in the 1940 Federal Reserve Bulletin, at page 647, is
an example of a borrowing which, on the facts as given, did not meet the
requirement. There, the broker wished to borrow stocks with the
understanding that he ''would offer to lend this stock in the 'loan
crowd' on a national securities exchange.'' There was no assurance that
the stocks would be used for the purpose specified in 220.6(h); they
might be, or they might merely be held idle while the person lending the
stocks had the use of the funds deposited against them. The ruling held
in effect that since the borrowing could not qualify under 220.6(h) it
must comply with other applicable provisions of the regulation.
(e) The second requirement is that the deposit of cash against the
borrowed securities must be ''bona fide.'' This requirement naturally
cannot be spelled out in detail, but it requires at least that the
purpose of the broker in making the deposit should be to obtain the
securities for the specified purpose, and that he should not use the
arrangement as a means of accommodating a customer who is seeking to
obtain more funds than he could get in a general account.
(f) The Board recognizes that even with these requirements there is
still some possibility that the provision may be misapplied. The Board
is reluctant to impose additional burdens on legitimate transactions by
tightening the provision. If there should be evidence of abuses
developing under the provision, however, it would become necessary to
consider making it more restricted.
(12 FR 5278, Aug. 2, 1947)
220.104 (Reserved)
12 CFR 220.105 Ninety-day rule in special cash account.
(a) Section 220.4(c)(8) places a limitation on a special cash account
if a security other than an exempted security has been purchased in the
account and ''without having been previously paid for in full by the
customer * * * has been * * * delivered out to any broker or dealer.''
The limitation is that during the succeeding 90 days the customer may
not purchase a security in the account other than an exempted security
unless funds sufficient for the purpose are held in the account. In
other words, the privilege of delayed payment in such an account is
withdrawn during the 90-day period.
(b) The Board recently considered a question as to whether the
following situation makes an account subject to the 90-day
disqualification: A customer purchases registered security ABC in a
special cash account. The broker executes the order in good faith as a
bona fide cash transaction, expecting to obtain full cash payment
promptly. The next day, the customer sells registered security XYZ in
the account, promising to deposit it promptly in the account. The
proceeds of the sale are equal to or greater than the cost of security
ABC. After both sale and purchase have been made, the customer requests
the broker to deliver security ABC to a different broker, to receive
security XYZ from that broker at about the same time, and to settle with
the other broker -- such settlement to be made either by paying the cost
of security XYZ to the other broker and receiving from him the cost of
security ABC, or by merely settling any difference between these
amounts.
(c) The Board expressed the view that the account becomes subject to
the 90-day disqualification in 220.4(c)(8). In the instant case, unlike
that described at 1940 Federal Reserve Bulletin 772, the security sold
is not held in the account and is not to be deposited in it
unconditionally. It is to be obtained only against the delivery to the
other broker of the security which had been purchased. Hence payment
can not be said to have been made prior to such delivery; the purchased
security has been delivered out to a broker without previously having
been paid for in full, and the account becomes subject to the 90-day
disqualification.
(13 FR 2368, May 1, 1948)
12 CFR 220.106 Designation of New York Stock Exchange for purposes of
specialists transactions.
As amended effective July 29, 1949, 220.4(g) removes the margin
requirements applicable to credit for financing the functions of
''specialists'' on an exchange designated by the Board of Governors of
the Federal Reserve System.
Effective July 20, 1949, the Board of Governors of the Federal
Reserve System has designated the New York Stock Exchange pursuant to
220.4(g), as amended, this designation to be effective until further
notice.
(14 FR 4665, July 27, 1949)
12 CFR 220.107 Transactions in undermargined accounts.
(a) In an interpretation published at 220.104 (13 FR 1791), the
Board considered two questions in connection with the rules applicable
at that time to withdrawals of cash or securities from an undermargined
general account under this part.
(b) One question related to the purchase of an unregistered
nonexempted security in the account. The other concerned a case in
which a security held in the account was sold, delivery was delayed by
borrowing a security rather than delivering the security held in the
account, and the security held in the account was used later to settle
the short position.
(c) The conclusions on both points were based on the provisions of
this part in effect at the time regarding withdrawals from such
accounts. Those withdrawal provisions were changed by an amendment,
effective May 1, 1949 ( 220.4(c)(7) and (8)), and the Board has been
asked regarding the application of the new withdrawal rules to such
situations. It has expressed the following views:
Note: Without reference to the preceding language or to paragraph
(d) of this section, the amendment of Regulation T at 24 FR 4697
superseded the following subparagraphs (1) and (2):
(1) Unregistered securities cannot be carried on margin and
accordingly a deposit equal to the full cost of any unregistered
securities purchased in the account must, of course, be obtained.
However, a purchase of unregistered securities in the general account
may now be treated as a transaction other than a withdrawal, and
accordingly the deposit equal to such cost may be obtained within the
three-day period specified in 220.3(b) and (e).
(2) With respect to the case in which a customer wishes to sell a
security that is held in the account and to delay delivery by borrowing
a security rather than delivering the one held in the account, the
present withdrawal rules permit the sale to be treated as a short sale
against which margin is not required and permit the transaction to be
treated as completed when the security held in the account is delivered
later to close out the short position. Accordingly, it is now
permissible for an offsetting transaction to take place on the date when
the delivery is so made.
(d) This supersedes the ruling referred to above at 220.104. (That
ruling also pointed out that the ''good faith loan value'' specified for
an exempted security means the amount which the broker would customarily
lend on the security, and that the figure can not be arbitrarily reduced
merely for the purpose of permitting a later substitution of registered
securities for exempted securities. That principle is still correct, but
is of limited application in view of the provisions now contained in
this part for withdrawals and substitutions of securities.)
(14 FR 4857, Aug. 5, 1949)
12 CFR 220.108 International Bank Securities.
(a) Section 2 of the Act of June 29, 1949 (Pub. L. 142 -- 81st
Congress), amended the Bretton Woods Agreements Act by adding a new
section numbered 15 providing, in part, that --
Any securities issued by International Bank for Reconstruction and
Development (including any guaranty by the bank, whether or not limited
in scope), and any securities guaranteed by the bank as to both
principal and interest, shall be deemed to be exempted securities within
the meaning of * * * paragraph (a)(12) of section 3 of the (Securities
Exchange) Act of June 6, 1934, as amended (15 U.S.C. 78c). * * *.
(b) In response to inquiries with respect to the applicability of the
margin requirements of this part to securities issued or guaranteed by
the International Bank for Reconstruction and Development, the Board has
replied that, as a result of this enactment, securities issued by the
Bank are now classified as exempted securities under 220.2(e). Such
securities are now in the same category under this part as are United
States Government, State and municipal bonds. Accordingly, the specific
percentage limitations prescribed by this part with respect to maximum
loan value and margin requirements are no longer applicable thereto.
(14 FR 5505, Sept. 7, 1949)
12 CFR 220.109 Arrangement for credit by brokers or dealers.
(a) The Securities Exchange Act of 1934 and this part issued
thereunder, provide in substance that any broker or dealer who is
subject to this part shall not extend or maintain any credit on
unregistered securities (i.e., securities not registered on a national
securities exchange). The act (section 7(c)) and 220.7(a) also
provides in substance that any such broker or dealer shall not arrange
for any extension or maintenance of credit on unregistered securities.
There are certain exceptions to these prohibitions, but they are not
relevant to the present question.
(b) The Board has been asked whether there would be a violation of
the above-mentioned prohibition against arranging credit on unregistered
securities if a broker or dealer who is subject to this part 220
participated in a certain financing plan which a national bank has under
consideration. The proposed plan would finance the purchase of shares
which are issued by so-called open-end investment trusts and which are
not registered on any national securities exchange.
(c) The shares are on continuous sale and can be acquired by periodic
cash purchases without the need for any bank financing. However, the
bank proposes to make loans to prospective purchasers for the purpose of
financing the purchase of larger amounts of the investment trust shares.
The shares would be pledged to secure the loan, and the borrower would
undertake to pay the principal and interest on the loan in monthly
installments.
(d) The bank would furnish forms of a credit application and note to
security dealers and their salesmen, who would then make them available
to the customers to whom they are selling or contemplate selling the
investment trust shares. When the forms had been completed and
executed, the dealers would return them to the bank.
(e) The bank would have complete discretion as to whether or not to
approve any such application. The bank would not pay any fees or
commissions to the security dealers, although the dealers would, of
course, get the benefit of increased security sales that might result
from operation of the plan.
(f) Upon consideration of the various aspects of the proposed plan,
the Board of Governors is of the opinion that if any broker or dealer
who is subject to this part participated in the plan in the manner
contemplated, there would be an arranging for the extension or
maintenance of credit on unregistered securities in violation of section
7(c) of the Securities Exchange Act of 1934 and 220.7(a).
(17 FR 9584, Oct. 22, 1952)
12 CFR 220.110 Assistance by Federal credit union to its members.
(a) An inquiry was presented recently concerning the application of
this part or part 221 of this subchapter, to a plan proposed by a
Federal credit union to aid its members in purchasing stock of a
corporation whose subsidiary apparently was the employer of all the
credit union's members.
(b) From the information submitted, the plan appeared to contemplate
that the Federal credit union would accept orders from its members for
registered common stock of the parent corporation in multiples of 5
shares; that whenever orders had been so received for a total of 100
shares, the credit union, as agent for such members, would execute the
orders through a brokerage firm with membership on a national securities
exchange; that the brokerage firm would deliver certificates for the
stock, registered in the names of the individual purchasers, to the
credit union against payment by the credit union; that the credit union
would prorate the total amount so paid, including the brokerage fee,
among the individual purchasers according to the number of shares
purchased by them; and that a savings in brokerage fee resulting from
the 100-lot purchases would be passed on by the credit union to the
individual purchasers of the stock. However, amounts of the stock less
than 100 shares would be purchased by the credit union through the
brokerage firm for any members willing to forego such savings.
(c) It appeared further that the Federal credit union members for
whom stock was so purchased would reimburse the credit union (1) by cash
payment, (2) by the proceeds of withdrawn shares of the credit union,
(3) by the proceeds of an installment loan from the credit union
collateraled by the stock purchased, or by (4) by a combination of two
or more of the above methods. To assist the collection of any such
loan, the employer of the credit union members would provide payroll
deductions. Apparently, sales by the credit union of any of the stock
purchased by one of its members would occur only in satisfaction of a
delinquent loan balance. In no case did it appear that the credit union
would make a charge for arranging the execution of transactions in the
stock for its members.
(d) The Board was of the view that, from the facts as presented, it
did not appear that the Federal credit union should be regarded as the
type of institution to which part 221 of this subchapter, in its present
form, applied.
(e) With respect to this part, the question was whether the
activities of the Federal credit union under the proposal, or otherwise,
might be such as to bring it within the meaning of the terms ''broker''
or ''dealer'' as used in the part and the Securities Exchange Act of
1934. The Board observed that this, of course, was a question of fact
that necessarily depended upon the circumstances of the particular case,
including the manner in which the arrangement in question might be
carried out in practice.
(f) On the basis of the information submitted, however, it did not
appear to the Board that the Federal credit union should be regarded as
being subject to this part as a ''broker or dealer who transacts a
business in securities through the medium of'' a member firm solely
because of its activities as contemplated by the proposal in question.
The Board stated that the part rather clearly would not apply if there
appeared to be nothing other than loans by the credit union to its
members to finance purchases made directly by them of stock of the
parent corporation of the employer of the member-borrowers. The
additional fact that the credit union, as agent, would purchase such
stock for its members (even though all such purchases might not be
financed by credit union loans) was not viewed by the Board as
sufficient to make the regulation applicable where, as from the facts
presented, it did not appear that the credit union in any case was to
make any charge or receive any compensation for assisting in such
purchases or that the credit union otherwise was engaged in securities
activities. However, the Board stated that matters of this kind must be
examined closely for any variations that might suggest the
inapplicability of the foregoing.
(18 FR 4592, Aug. 5, 1953)
12 CFR 220.111 Arranging for extensions of credit to be made by a bank.
(a) The Board has recently had occasion to express opinions regarding
the requirements which apply when a person subject to this part (for
convenience, called here simply a broker) arranges for a bank to extend
credit.
(b) The matter is treated generally in 220.7(a) and is also subject
to the general rule of law that any person who aids or abets a violation
of law by another is himself guilty of a violation. It may be stated as
a general principle that any person who arranges for credit to be
extended by someone else has a responsibility so to conduct his
activities as not to be a participant in a violation of this part, which
applies to brokers, or part 221 of this subchapter, which applies to
banks.
(c) More specifically, in arranging an extension of credit that may
be subject to part 221 of this subchapter, a broker must act in good
faith and, therefore, must question the accuracy of any non-purpose
statement (i.e., a statement that the loan is not for the purpose of
purchasing or carrying registered stocks) given in connection with the
loan where the circumstances are such that the broker from any source
knows or has reason to know that the statement is incomplete or
otherwise inaccurate as to the true purpose of the credit. The
requirement of ''good faith'' is of vital importance. While the
application of the requirement will necessarily vary with the facts of
the particular case, the broker, like the bank for whom the loan is
arranged to be made, must be alert to the circumstances surrounding the
loan. Thus, for example, if a broker or dealer is to deliver registered
stocks to secure the loan or is to receive the proceeds of the loan, the
broker arranging the loan and the bank making it would be put on notice
that the loan would probably be subject to part 221 of this subchapter.
In any such circumstances they could not in good faith accept or rely
upon a statement to the contrary without obtaining a reliable and
satisfactory explanation of the situation. The foregoing, of course,
applies the principles contained in 221.101 of this subchapter.
(d) In addition, when a broker is approached by another broker to
arrange extensions of credit for customers of the approaching broker,
the broker approached has a responsibility not to arrange any extension
of credit which the approaching broker could not himself arrange.
Accordingly, in such cases the statutes and regulations forbid the
approached broker to arrange extensions of credit on unregistered
securities for the purpose of purchasing or carrying either registered
or unregistered securities. The approaching broker would also be
violating the applicable requirements if he initiated or otherwise
participated in any such forbidden transactions.
(e) The expression of views, set forth in this section, to the effect
that certain specific transactions are forbidden, of course, should not
in any way be understood to indicate approval of any other transactions
which are not mentioned.
(18 FR 5505, Sept. 15, 1953)
12 CFR 220.112 Arranging loan to purchase open-end investment company
shares.
(a) The Board was recently asked whether a creditor subject to this
part may arrange for a customer a loan from a bank subject to part 221
on unregistered, redeemable shares of an open-end investment company for
the purpose of purchasing such shares.
(b) This matter was the subject of the Board's interpretation
contained in 220.109 which stated, in substance, that a creditor
subject to this part may not arrange for the extension or maintenance of
credit on unregistered, redeemable shares of an open-end investment
company in view of the provisions of section 7(c) of the Securities
Exchange Act of 1934 and 220.7(a). The shares of most open-end
investment companies, of course, are not registered on any national
securities exchange.
(c) It was suggested, however, that the interpretation just referred
to might now be inapplicable because of amendment to 221.3(b) and (c)
of this subchapter, effective August 1, 1953. Under that amendment,
loans by banks for the purpose of purchasing or carrying redeemable
shares of open-end investment companies, whose assets customarily
include registered securities, shall be deemed to be loans for the
purpose of purchasing or carrying registered stocks. Therefore, any
such loan, if secured directly or indirectly by any stock, is subject to
part 221 of this subchapter although the shares of the company are not
themselves registered shares.
(d) In announcing the amendment mentioned in paragraph (c) of this
section, the Board in 18 FR 3409 stated, among other things, that such
amendment ''does not affect part 220.'' In addition, the Board's
interpretation contained in 220.111 stated that a creditor subject to
this part may not arrange extensions of credit on unregistered
securities for the purpose of purchasing or carrying either registered
or unregistered securities.
(e) Accordingly, the Board stated that its interpretation contained
in 220.109, referred to in this section, is still effective, and that a
creditor subject to this part may not arrange for a customer a bank loan
on unregistered, redeemable shares of an open-end investment company for
the purpose of purchasing or carrying such shares.
(20 FR 1642, Mar. 18, 1955)
12 CFR 220.113 Necessity for prompt payment and delivery in special
cash accounts.
(a) The Board of Governors recently received an inquiry concerning
whether purchases of securities by certain municipal employees'
retirement or pension systems on the basis of arrangements for delayed
delivery and payment, might properly be effected by a creditor subject
to this part in a special cash account under 220.4(c).
(b) It appears that in a typical case the supervisors of the
retirement system meet only once or twice each month, at which times
decisions are made to purchase any securities wished to be acquired for
the system. Although the securities are available for prompt delivery
by the broker-dealer firm selected to effect the system's purchase, it
is arranged in advance with the firm that the system will not accept
delivery and pay for the securities before some date more than seven
business days after the date on which the securities are purchased.
Apparently, such an arrangement is occasioned by the monthly or
semimonthly meetings of the system's supervisors. It was indicated that
a retirement system of this kind may be supervised by officials who
administer it as an incidental part of their regular duties, and that
meetings requiring joint action by two or more supervisors may be
necessary under the system's rules and procedures to authorize issuance
of checks in payment for the securities purchased. It was indicated
also that the purchases do not involve exempted securities, securities
of the kind covered by 220.4(c)(3), or any shipment of securities as
described in 220.4(c).
(c) This part provides that a creditor subject thereto may not effect
for a customer a purchase in a special cash account under 220.4(c)
unless the use of the account meets the limitations of 220.4(a) and the
purchase constitutes a ''bona fide cash transaction'' which complies
with the eligibility requirements of 220.4(c)(1)(i). One such
requirement is that the purchase be made ''in reliance upon an agreement
accepted by the creditor (broker-dealer) in good faith'' that the
customer will ''promptly make full cash payment for the security, if
funds sufficient for the purpose are not already in the account; and,
subject to certain exceptions, 220.4(c)(2) provides that the creditor
shall promptly cancel or liquidate the transaction if payment is not
made by the customer within seven business days after the date of
purchase. As indicated in the Board's interpretation at 1940 Federal
Reserve Bulletin 1172, a necessary part of the customer's undertaking
pursuant to 220.4(c)(1)(i) is that he ''should have the necessary means
of payment readily available when he purchases a security in the special
cash account. He should expect to pay for it immediately or in any
event within the period (of not more than a very few days) that is as
long as is usually required to carry through the ordinary securities
transaction.''
(d) The arrangements for delayed delivery and payment in the case
presented to the Board and outlined above clearly would be inconsistent
with the requirement of 220.4(c)(1)(i) that the purchase be made in
reliance upon an agreement accepted by the creditor in good faith that
the customer will ''promptly'' make full cash payment for the security.
Accordingly, the Board said that transactions of the kind in question
would not qualify as a ''bona fide cash transaction'' and, therefore,
could not properly be effected in a special cash account, unless a
contrary conclusion would be justified by the exception in 220.4(c)(5).
(e) Section 220.4(c)(5) provides that if the creditor, ''acting in
good faith in accordance with'' 220.4(c)(1), purchases a security for a
customer ''with the understanding that he is to deliver the security
promptly to the customer, and the full cash payment is to be made
promptly by the customer is to be made against such delivery'', the
creditor may at his option treat the transaction as one to which the
period applicable under 220.4(c)(2) is not the seven days therein
specified but 35 days after the date of such purchase. It will be
observed that the application of 220.4 (c)(5) is specifically
conditioned on the creditor acting in good faith in accordance with
220.4(c)(1). As noted above, the existence of the arrangements for
delayed delivery and payment in the case presented would prevent this
condition from being met, since the customer could not be regarded as
having agreed to make full cash payment ''promptly''. Furthermore, such
arrangements clearly would be inconsistent with the requirement of
220.4(c)(5) that the creditor ''deliver the security promptly to the
customer''.
(f) Section 220.4(c)(5) was discussed in the Board's published
interpretation, referred to above, which states that ''it is not the
purpose of ( 220.4 (c)(5)) to allow additional time to customers for
making payment. The 'prompt delivery' described in ( 220.4 (c)(5)) is
delivery which is to be made as soon as the broker or dealer can
reasonably make it in view of the mechanics of the securities business
and the bona fide usages of the trade. The provision merely recognizes
the fact that in certain circumstances it is an established bona fide
practice in the trade to obtain payment against delivery of the security
to the customer, and the further fact that the mechanics of the trade,
unrelated to the customer's readiness to pay, may sometimes delay such
delivery to the customer''.
(g) In the case presented, it appears that the only reason for the
delay is related solely to the customer's readiness to pay and is in no
way attributable to the mechanics of the securities business.
Accordingly, it is the Board's view that the exception in 220.4(c)(5)
should not be regarded as permitting the transactions in question to be
effected in a special cash account.
(22 FR 5954, July 27, 1957)
12 CFR 220.114 Transactions in restricted accounts under amended
withdrawal rules.
(a) Amendments to part 220, effective June 15, 1959 (24 FR 3866),
deal with withdrawals of collateral from a ''restricted account'', i.e.,
a general account in which the adjusted debit balance exceeds the
maximum loan value of the securities. In that connection, an inquiry
has been received regarding the application of the amended part to a
purchase of unregistered nonexempted securities in such a ''restricted
account''.
(b) Unregistered nonexempted securities have no loan value under the
part, are not subject to the restrictions of the withdrawal rules, and
are not referred to in those rules. Purchase of an unregistered
security without a deposit of a sum equal to the cost would amount to a
withdrawal of the cost of the security.
(c) This supersedes paragraph (c)(1) of 220.107 dealing with a
similar question.
(d) Section 220.107 also dealt with two other points. One was the
treatment of certain transactions as short sales. Paragraph (c)(2) of
220.107 was superseded by the June 15, 1959 amendment to paragraph (g)
of 220.3. The other point was that the ''good faith loan value''
specified for an exempted security means the amount which the broker
would customarily lend on the security, and that the figure cannot be
arbitrarily reduced merely for the purpose of permitting a later
substitution of registered securities for exempted securities. That
principle continues to apply and is of increased significance under the
amendments.
(24 FR 4697, June 10, 1959)
12 CFR 220.115 Short sales made prior to recent amendments, but covered
subsequent thereto.
(a) The Board of Governors of the Federal Reserve System has been
requested to consider the following situation relative to 220.3(g) as
amended June 15, 1959.
(b) Certain securities have been held ''long'' in a margin account,
at least since early 1958. Subsequently, at various times in 1958 and
on January 13, 1959, short sales of this same stock were executed in the
account. The total shares involved in the short sales did not exceed
the shares held in the ''long'' position. It is now desired to close
out the short position by covering purchases.
(c) The applicable provision of 220.3(g) reads as follows:
For the purposes of this part (Regulation T), if a security has
maximum loan value in the account under paragraph (c)(1) of this
section, a sale of the same security (even though not the same
certificate) in the account shall be deemed to be a long sale and shall
not be deemed to be or treated as a short sale.
Under this provision, a short sale at the present time against a
''long'' position in the same security must be treated as a ''long''
sale. The subsequent covering transaction would therefore be treated as
any other regular purchase and could not be executed as a covering
purchase requiring no further margin. However, where the short sale
against the ''long'' position was executed prior to June 15, 1959, the
effective date of the above noted amendment to 220.3(g), the sale would
not lose its character as a ''short'' sale. The covering transactions,
even if effected after June 15, 1959, could be treated as such, and
under the provisions of this part, could be completed without obtaining
further margin.
(d) This interpretation is expressly limited to the facts here
presented. Any variation or addition to the circumstances might well
alter the result expressed herein.
(e) Attention is further directed to 220.7(e) which provides that
nothing in this part shall prevent an exchange or a creditor from
''further restricting'' or requiring ''additional security'' in the
extension or maintenance of any credit.
(24 FR 7496, Sept. 17, 1959)
12 CFR 220.116 Simultaneous long and short positions in same margin
account where short position is taken first.
(a) The Board has been asked whether the last sentence of 220.3(g)
applies when a customer first sells a registered security short in an
undermargined account, then subsequently purchases the same security,
instructing the broker to maintain long and short positions in that
security.
(b) The last sentence of 220.3(g) prohibits the concurrent carrying
of long and short positions in the same registered security for the
purposes of this part, regardless of which position is taken first.
This result follows because the word ''sale'' is equivalent where the
sense of the regulation requires it, to ''sale position''. Accordingly,
where a security is purchased ''long'' in a margin account, and there is
an existing short position in the same security in the account, the two
positions must be ''netted out'' for purposes of the regulation.
(26 FR 794, Jan. 26, 1961)
12 CFR 220.117 Exception to 90-day rule in special cash account.
(a) The Board of Governors has recently interpreted certain of the
provisions of 220.4(c)(8), with respect to the withdrawal of proceeds
of a sale of stock in a ''special cash account'' when the stock has been
sold out of the account prior to payment for its purchase.
(b) The specific factual situation presented may be summarized as
follows:
Customer purchased stock in a special cash account with a member firm
on Day 1. On Day 3 customer sold the same stock at a profit. On Day 8
customer delivered his check for the cost of the purchase to the
creditor (member firm). On Day 9 the creditor mailed to the customer a
check for the proceeds of the sale.
(c) Section 220.4(c)(8) prohibits a creditor, as a general rule, from
effecting a purchase of a security in a customer's special cash account
if any security has been purchased in that account during the preceding
90 days and has then been sold in the account or delivered out to any
broker or dealer without having been previously paid for in full by the
customer. One exception to this general rule reads as follows:
* * * The creditor may disregard for the purposes of this
subparagraph ( 220.4(c) (8)) a sale without prior payment provided full
cash payment is received within the period described by subparagraph (2)
of this paragraph (seven days after the date of purchase) and the
customer has not withdrawn the proceeds of sale on or before the day on
which such payment (and also final payment of any check received in that
connection) is received. * * *
(d) Final payment of customer's check: (1) The first question is:
When is the creditor to be regarded as having received ''final payment
of any check received'' in connection with the purchase?
(2) The clear purpose of 220.4(c) (8) is to prevent the use of the
proceeds of sale of a stock by a customer to pay for its purchase --
i.e., to prevent him from trading on the creditor's funds by being able
to deposit the sale proceeds prior to presentment of his own check to
the drawee bank. Thus, when a customer undertakes to pay for a purchase
by check, that check does not constitute payment for the purchase,
within the language and intent of the above-quoted exception in
220.4(c)(8), until it has been honored by the drawee bank, indicating
the sufficiency of his account to pay the check.
(3) The phrase ''final payment of any check'' is interpreted as above
notwithstanding 220.6(f), which provides that:
For the purposes of this part (Regulation T), a creditor may, at his
option (1) treat the receipt in good faith of any check or draft drawn
on a bank which in the ordinary course of business is payable on
presentation, * * * as receipt of payment of the amount of such check,
draft or order; * * *
This is a general provision substantially the same as language found
in section 4(f) of Regulation T as originally promulgated in 1934. The
language of the subject exception to the 90-day rule of 220.4(c)(8),
i.e., the exception based expressly on final ''payment of any check,''
was added to the regulation in 1949 by an amendment directed at a
specific type of situation. Because the exception is a special, more
recent provision, and because 220.6(f), if controlling, would permit
the exception to undermine, to some extent, the effectiveness of the
90-day rule, sound principles of construction require that the phrase
''final payment of any check'' be given its literal and intended effect.
(4) There is no fixed period of time from the moment of receipt by
the payee, or of deposit, within which it is certain that any check will
be paid by the drawee bank. Therefore, in the rare case where the
operation of the subject exception to 220.4(c)(8) is necessary to avoid
application of the 90-day rule, a creditor should ascertain (from his
bank of deposit or otherwise) the fact of payment of a customer's check
given for the purchase. Having so determined the day of final payment,
the creditor can permit withdrawal on any subsequent day.
(e) Mailing as ''withdrawal'': (1) Also presented is the question
whether the mailing to the customer of the creditor's check for the sale
proceeds constitutes a withdrawal of such proceeds by the customer at
the time of mailing so that, if the check for the sale proceeds is
mailed on or before the day on which the customer's check for the
purchase is finally paid, the 90-day rule applies. It may be that a
check mailed one day will not ordinarily be received by the customer
until the next. The Board is of the view, however, that when the check
for sale proceeds is issued and released into the mails, the proceeds
are to be regarded as withdrawn by the customer; a more liberal
interpretation would open a way for circumvention. Accordingly, the
creditor's check should not be mailed nor the sale proceeds otherwise
released to the customer ''on or before the day'' on which payment for
the purchase, including final payment of any check given for such
payment, is received by the creditor, as determined in accordance with
the principles stated herein.
(2) Applying the above principles to the schedule of transactions
described in the second paragraph of this interpretation, the mailing of
the creditor's check on ''Day 9'' would be consistent with the subject
exception to 220.4(c)(8), as interpreted herein, only if the customer's
check was paid by the drawee bank on ''Day 8''.
(27 FR 3511, Apr. 12, 1962)
12 CFR 220.118 Time of payment for mutual fund shares purchased in a
special cash account.
(a) The Board has recently considered the question whether, in
connection with the purchase of mutual fund shares in a ''special cash
account'' under the provisions of this part 220, the 7-day period with
respect to liquidation for nonpayment is that described in 220.4(c)(2)
or that described in 220.4(c)(3).
(b) Section 220.4(c)(2) provides as follows:
In case a customer purchases a security (other than an exempted
security) in the special cash account and does not make full cash
payment for the security within 7 days after the date on which the
security is so purchased, the creditor shall, except as provided in
subparagraphs (3)-(7) of this paragraph, promptly cancel or otherwise
liquidate the transaction or the unsettled portion thereof.
Section 220.4(c)(3), one of the exceptions referred to, provides in
relevant part as follows:
If the security when so purchased is an unissued security, the period
applicable to the transaction under subparagraph (2) of this paragraph
shall be 7 days after the date on which the security is made available
by the issuer for delivery to purchasers.
(c) In the case presented, the shares of the mutual fund (open-end
investment company) are technically not issued at the time they are sold
by the underwriter and distributor. Several days may elapse from the
date of sale before a certificate can be delivered by the transfer
agent. The specific inquiry to the Board was, in effect, whether the
7-day period after which a purchase transaction must be liquidated or
cancelled for nonpayment should run, in the case of mutual fund shares,
from the time when a certificate for the purchased shares is available
for delivery to the purchaser, instead of from the date of the purchase.
(d) Under the general rule of 220.4 (c)(2) that is applicable to
purchases of outstanding securities, the 7-day period runs from the date
of purchase without regard to the time required for the mechanical acts
of transfer of ownership and delivery of a certificate. This rule is
based on the principles governing the use of special cash accounts in
accordance with which, in the absence of special circumstances, payment
is to be made promptly upon the purchase of securities.
(e) The purpose of 220.4(c)(3) is to recognize the fact that, when
an issue of securities is to be issued at some fixed future date, a
security that is a part of such issue can be purchased on a
''when-issued'' basis and that payment may reasonably be delayed until
after such date of issue, subject to other basic conditions for
transactions in a special cash account. Thus, unissued securities
should be regarded as ''made available for delivery to purchasers'' on
the date when they are substantially as available as outstanding
securities are available upon purchase, and this would ordinarily be the
designated date of issuance or, in the case of a stock dividend, the
''payment date''. In any case, the time required for the mechanics of
transfer and delivery of a certificate is not material under
220.4(c)(3) any more than it is under 220.4(c)(2).
(f) Mutual fund shares are essentially available upon purchase to the
same extent as outstanding securities. The mechanics of their issuance
and of the delivery of certificates are not significantly different from
the mechanics of transfer and delivery of certificates for shares of
outstanding securities, and the issuance of mutual fund shares is not a
future event in a sense that would warrant the extension of the time for
payment beyond that afforded in the case of outstanding securities.
Consequently, the Board has concluded that a purchase of mutual fund
shares is not a purchase of an ''unissued security'' to which
220.4(c)(3) applies, but is a transaction to which 220.4(c)(2) applies.
(27 FR 10885, Nov. 8, 1962)
12 CFR 220.119 Applicability of margin requirements to credit extended
to corporation in connection with retirement of stock.
(a) The Board of Governors has been asked whether part 220 was
violated when a dealer in securities transferred to a corporation 4,161
shares of the stock of such corporation for a consideration of $33,288,
of which only 10 percent was paid in cash.
(b) If the transaction was of a kind that must be included in the
corporation's ''general account'' with the dealer ( 220.3), it would
involve an excessive extension of credit in violation of 220.3 (b)(1).
However, the transaction would be permissible if the transaction came
within the scope of 220.4(f)(8), which permits a ''creditor'' (such as
the dealer) to ''Extend and maintain credit to or for any customer
without collateral or on any collateral whatever for any purpose other
than purchasing or carrying or trading in securities.'' Accordingly, the
crucial question is whether the corporation, in this transaction, was
''purchasing'' the 4,161 shares of its stock, within the meaning of that
term as used in this part.
(c) Upon first examination, it might seem apparent that the
transaction was a purchase by the corporation. From the viewpoint of
the dealer the transaction was a sale, and ordinarily, at least a sale
by one party connotes a purchase by the other. Furthermore, other
indicia of a sale/purchase transaction were present, such as a transfer
of property for a pecuniary consideration. However, when the underlying
objectives of the margin regulations are considered, it appears that
they do not encompass a transaction of this nature, where securities are
transferred on credit to the issuer thereof for the purpose of
retirement.
(d) Section 7(a) of the Securities Exchange Act of 1934 requires the
Board of Governors to prescribe margin regulations ''For the purpose of
preventing the excessive use of credit for the purchase or carrying of
securities.'' Accordingly, the provisions of this part are not intended
to prevent the use of credit where the transaction will not have the
effect of increasing the volume of credit in the securities markets.
(e) It appears that the instant transaction would have no such
effect. When the transaction was completed, the equity interest of the
dealer was transmuted into a dollar-obligation interest; in lieu of its
status as a stockholder of the corporation, the dealer became a creditor
of that corporation. The corporation did not become the owner of any
securities acquired through the use of credit; its outstanding stock
was simply reduced by 4,161 shares.
(f) The meaning of ''sale'' and ''purchase'' in the Securities
Exchange Act has been considered by the Federal courts in a series of
decisions dealing with corporate ''insiders'' profits under section
16(b) of that Act. Although the statutory purpose sought to be
effectuated in those cases is quite different from the purpose of the
margin regulations, the decisions in question support the propriety of
not regarding a transaction as a ''purchase'' where this accords with
the probable legislative intent, even though, literally, the statutory
definition seems to include the particular transaction. See Roberts v.
Eaton (CA 2 1954) 212 F. 2d 82, and cases and other authorities there
cited. The governing principle, of course, is to effectuate the purpose
embodied in the statutory or regulatory provision being interpreted,
even where that purpose may conflict with the literal words. U.S. v.
Amer. Trucking Ass'ns, 310 U.S. 534, 543 (1940); 2 Sutherland,
Statutory Construction (3d ed. 1943) ch. 45.
(g) There can be little doubt that an extension of credit to a
corporation to enable it to retire debt securities would not be for the
purpose of ''purchasing * * * securities'' and therefore would come
within 220.4(f)(8), regardless of whether the retirement was obligatory
(e.g., at maturity) or was a voluntary ''call'' by the issuer. This is
true, it is difficult to see any valid distinction, for this purpose,
between (1) voluntary retirement of an indebtedness security and (2)
voluntary retirement of an equity security.
(h) For the reasons indicated above, it is the opinion of the Board
of Governors that the extension of credit here involved is not of the
kind which the margin requirements are intended to regulate and that the
transaction described does not involve an unlawful extension of credit
as far as this part is concerned.
(i) The foregoing interpretation relates, of course, only to cases of
the type described. It should not be regarded as governing any other
situations; for example, the interpretation does not deal with cases
where securities are being transferred to someone other than the issuer,
or to the issuer for a purpose other than immediate retirement. Whether
the margin requirements are inapplicable to any such situations would
depend upon the relevant facts of actual cases presented.
(27 FR 12346, Dec. 13, 1962)
12 CFR 220.120 Loan value of securities used to make required deposit.
(a) The Board of Governors of the Federal Reserve System has received
a number of inquiries resulting from the upward change in the level of
margin requirements that became effective November 6, 1963, as to what
loan value applies to securities used to make the deposit required by
paragraph (b)(1) of 220.3 with respect to transactions in general
accounts which occur before an increase in margin requirements, if such
deposit is made after the higher margin requirements become effective.
(b) In the case of such deposits, the loan value (on the occasion of
that deposit only) is that which was in effect when the transaction in
question was executed on the floor of the exchange. Thus, where the
customer's order was executed before the recent increase from 50 percent
of 70 percent margin became effective, he would still make his deposit
at the lower margin, even though the securities used to satisfy the
deposit requirement were not delivered to his broker until after the new
margin requirements came into force.
(28 FR 12311, Nov. 21, 1963)
12 CFR 220.121 Applicability of margin requirements to joint account
between two creditors.
(a) The Board has recently been asked whether extensions of credit in
a joint account between two brokerage firms, a member of a national
securities exchange (''Firm X'') and a member of the National
Association of Securities Dealers (''Firm Y'') are subject to the margin
requirements of this part (Regulation T). It is understood that similar
joint accounts are not uncommon, and it appears that the margin
requirements of the regulation are not consistently applied to
extensions of credit in the accounts.
(b) When the account in question was opened, Firm Y deposited $5,000
with Firm X and has made no further deposit in the account, except for
the monthly settlement described below. Both firms have the privilege
of buying and selling specified securities in the account, but it
appears that Firm X initiates most of the transactions therein. Trading
volume may run from half a million to a million dollars a month. Firm X
carries the ''official'' ledger of the account and sends Firm Y a
monthly statement with a complete record of all transactions effected
during the month. Settlement is then made in accordance with the
agreement between the two firms, which provides that profits and losses
shall be shared equally on a fifty-fifty basis. However, all
transactions are confirmed and reconfirmed between the two on a daily
basis.
(c) Section 220.3(a) provides that
All financial relations between a creditor and a customer, whether
recorded in one record or in more than one record, shall be included in
and be deemed to be part of the customer's general account with the
creditor, * * *.
and 220.2(c) defines the term ''customer'' to include
* * * any person, or any group of persons acting jointly, * * * to or
for whom a creditor is extending or maintaining any credit * * *
In the course of a normal month's operations, both Firm X and Firm Y
are at one time or another extending credit to the joint account, since
both make purchases for the account that are not ''settled'' until the
month's end. Consequently, the account would be a ''customer'' within
the above definition.
(d) Section 220.6(b) provides, with respect to the account of a joint
adventure in which a creditor participates, that
* * * the adjusted debit balance of the account shall include, in
addition to the items specified in 220.3(d), any amount by which the
creditor's contribution to the joint adventure exceeds the contribution
which he would have made if he had contributed merely in proportion to
his right to share in the profits of the joint adventure.
In addition, the final paragraph of 220.2(c) states that the
definition of ''customer''
* * * includes any joint adventure in which a creditor participates
and which would be considered a customer of the creditor if the creditor
were not a participant.
(e) The above provisions clearly evince the Board's intent that the
regulation shall cover trading accounts in which a creditor
participates. If additional confirmation were needed, it is supplied by
the fact that the Board found it needful specifically to exempt from
ordinary margin requirements credit extended to certain joint accounts
in which a creditor participates. These include the account in which
transactions of odd-lot dealers may be financed under 220.4(f) (4), and
the specialist's account under 220.4(g). Accordingly, the Board
concluded that the joint account between Firm X and Firm Y is a
''customer'' within the meaning of the regulation, and that extensions
of credit in the account are subject to margin requirements.
(31 FR 7169, May 17, 1966)
12 CFR 220.122 ''Deep in the money put and call options'' as extensions
of credit.
(a) The Board of Governors has been asked to determine whether the
business of selling instruments described as ''deep in the money put and
call options'' would involve an extension of credit for the purposes of
the Board's regulations governing margin requirements for securities
transactions. Most of such options would be of the ''call'' type, such
as the following proposal that was presented to the Board for its
consideration:
If X stock is selling at $100 per share, the customer would pay about
$3,250 for a contract to purchase 100 shares of X at $70 per share
within a 30-day period. The contract would be guaranteed by an exchange
member, as are standard ''puts'' and ''calls''. When the contract is
made with the customer, the seller, who will also be the writer of the
contract, will immediately purchase 100 shares of X at $100 per share
through the guarantor member firm in a margin account. If the customer
exercises the option, the shares will be delivered to him; if the
option is not exercised, the writer will sell the shares in the margin
account to close out the transaction. As a practical matter, it is
anticipated that the customer will exercise the option in almost every
case.
(b) An ordinary ''put'' is an option given to a person to sell to the
writer of the put a specified amount of securities at a stated price
within a certain time. A ''call'' is an option given to a person to buy
from the writer a specified amount of securities at a stated price
within a certain time. To be freely saleable, options must be indorsed,
or guaranteed, by a member firm of the exchange on which the security is
registered. The guarantor charges a fee for this service.
(c) The option embodied in the normal put or call is exercisable
either at the market price of the security at the time the option is
written, or some ''points away'' from the market. The price of a normal
option is modest by comparison with the margin required to take a
position. Writers of normal options are persons who are satisfied with
the current price of a security, and are prepared to purchase or sell at
that price, with the small profit provided by the fee. Moreover, since
a large proportion of all options are never exercised, a person who
customarily writes normal options can anticipate that the fee would be
clear profit in many cases, and he will not be obligated to buy or sell
the stock in question.
(d) The stock exchanges require that the writer of an option deposit
and maintain in his margin account with the indorser 30 percent of the
current market price in the case of a call (unless he has a long
position in the stock) and 25 percent in the case of a put (unless he
has a short position in the stock). Many indorsing firms in fact
require larger deposits. Under 220.3(a) of Regulation T, all financial
relations between a broker and his customer must be included in the
customer's general account, unless specifically eligible for one of the
special accounts authorized by 220.4. Accordingly, the writer, as a
customer of the member firm, must make a deposit, which is included in
his general account.
(e) In order to prevent the deposit from being available against
other margin purchases, and in effect counted twice, 220.3(d)(5)
requires that in computing the customer's adjusted debit balance, there
shall be included ''the amount of any margin customarily required by the
creditor in connection with his endorsement or guarantee of any put,
call, or other option''. No other margin deposit is required in
connection with a normal put or call option under Regulation T.
(f) Turning to the ''deep in the money'' proposed option contract
described above, the price paid by the buyer can be divided into (1) a
deposit of 30 percent of the current market value of the stock, and (2)
an additional fixed charge, or fee. To the extent that the price of the
stock rose during the 30 ensuing days the proposed instrument would
produce results similar to those in the case of an ordinary profitable
call, and the contract right would be exercised. But even if the price
fell, unlike the situation with a normal option, the buyer would still
be virtually certain to exercise his right to purchase before it
expired, in order to minimize his loss. The result would be that the
buyer would not have a genuine choice whether or not to buy. Rather,
the instrument would have made it possible for him, in effect, to
purchase stock as of the time the contract was written by depositing 30
percent of the stock's current market price.
(g) It was suggested that the proposed contract is not unusual, since
there are examples of ordinary options selling at up to 28 percent of
current market value. However, such examples are of options running for
12 months, and reflect expectations of changes in the price of the stock
over that period. The 30-day contracts discussed above are not
comparable to such 12-month options, because instances of true
expectations of price changes of this magnitude over a 30-day period
would be exceedingly rare. And a contract that does not reflect such
true expectations of price change, plus a reasonable fee for the
services of the writer, is not an option in the accepted meaning of the
term.
(h) Because of the virtual certainty that the contract right would be
exercised under the proposal described above, the writer would buy the
stock in a margin account with an indorsing firm immediately on writing
the contract. The indorsing firm would extend credit in the amount of
20 percent of the current market price of the stock, the maximum
permitted by the current 220.8 (supplement to Regulation T). The
writer would deposit the 30 percent supplied by the buyer, and furnish
the remaining 50 percent out of his own working capital. His account
with the indorsing firm would thus be appropriately margined.
(i) As to the buyer, however, the writer would function as a broker.
In effect, he would purchase the stock for the account, or use, of the
buyer, on what might be described as a deferred payment arrangement.
Like an ordinary broker, the writer of the contract described above
would put up funds to pay for the difference between the price of
securities the customer wished to purchase and the customer's own
contribution. His only risk would be that the price of the securities
would decline in excess of the customer's contribution. True, he would
be locked in, and could not liquidate the customer's collateral for 30
days even if the market price should fall in excess of 30 percent, but
the risk of such a decline is extremely slight.
(j) Like any other broker who extends credit in a margin account, the
writer who was in the business of writing and selling such a contract
would be satisfied with a fixed predetermined amount of return on his
venture, since he would realize only the fee charged. Unlike a writer
of ordinary puts and calls, he would not receive a substantial part of
his income from fees on unexercised contract rights. The similarity of
his activities to those of a broker, and the dissimilarity to a writer
of ordinary options, would be underscored by the fact that his fee would
be a fixed predetermined amount of return similar to an interest charge,
rather than a fee arrived at individually for each transaction according
to the volatility of the stock and other individual considerations.
(k) The buyer's general account with the writer would in effect
reflect a debit for the purchase price of the stock and, on the credit
side, a deposit of cash in the amount of 30 percent of that price, plus
an extension of credit for the remaining 70 percent, rather than the
maximum permissible 20 percent.
(l) For the reasons stated above, the Board concluded that the
proposed contracts would involve extensions of credit by the writer as
broker in an amount exceeding that permitted by the current supplement
to Regulation T. Accordingly, the writing of such contracts by a
brokerage firm is presently prohibited by such regulation, and any
brokerage firm that indorses such a contract would be arranging for
credit in an amount greater than the firm itself could extend, a
practice that is prohibited by 220.7(a).
(35 FR 3280, Feb. 21, 1970)
12 CFR 220.123 Partial delayed issue contracts covering nonconvertible
bonds.
(a) During recent years, it has become customary for portions of new
issues of nonconvertible bonds and preferred stocks to be sold subject
to partial delayed issue contracts, which have customarily been referred
to in the industry as ''delayed delivery'' contracts, and the Board of
Governors has been asked for its views as to whether such transactions
involve any violations of the Board's margin regulations.
(b) The practice of issuing a portion of a debt (or equivalent)
security issue at a date subsequent to the main underwriting has arisen
where market conditions made it difficult or impossible, in a number of
instances, to place an entire issue simultaneously. In instances of
this kind, institutional investors (e.g., insurance companies or pension
funds) whose cash flow is such that they expect to have funds available
some months in the future, have been willing to subscribe to a portion,
to be issued to them at a future date. The issuer has been willing to
agree to issue the securities in two or more stages because it did not
immediately need the proceeds to be realized from the deferred portion,
because it could not raise funds on better terms, or because it
preferred to have a certain portion of the issue taken down by an
investor of this type.
(c) In the case of such a delayed issue contract, the underwriter is
authorized to solicit from institutional customers offers to purchase
from the issuer, pursuant to contracts of the kind described above, and
the agreement becomes binding at the underwriters' closing, subject to
specified conditions. When securities are issued pursuant to the
agreement, the purchase price includes accrued interest or dividends,
and until they are issued to it, the purchaser does not, in the case of
bonds, have rights under the trust indenture, or, in the case of
preferred stocks, voting rights.
(d) Securities sold pursuant to such arrangements are high quality
debt issues (or their equivalent). The purchasers buy with a view to
investment and do not resell or otherwise dispose of the contract prior
to its completion. Delayed issue arrangements are not acceptable to
issuers unless a substantial portion of an issue, not less than 10
percent, is involved.
(e) Sections 3(a) (13) and (14) of the Securities Exchange Act of
1934 provide that an agreement to purchase is equivalent to a purchase,
and an agreement to sell to a sale. The Board has hitherto expressed
the view that credit is extended at the time when there is a firm
agreement to extend such credit (1968 Federal Reserve Bulletin 328; 12
CFR 207.101; 6800 Published Interpretations of the Board of
Governors). Accordingly, in instances of the kind described above, the
issuer may be regarded as extending credit to the institutional
purchaser at the time of the underwriters' closing, when the obligations
of both become fixed.
(f) Section 220.7(a) of the Board's Regulation T (12 CFR 220.7(a)),
with an exception not applicable here, forbids a creditor subject to
that regulation to arrange for credit on terms on which the creditor
could not itself extend the credit. Sections 220.4(c) (1) and (2) (12
CFR 220.4(c) (1) and (2)) provide that a creditor may not sell
securities to a customer except in good faith reliance upon an agreement
that the customer will promptly, and in no event in more than 7 full
business days, make full cash payment for the securities. Since the
underwriters in question are creditors subject to the regulation, unless
some specific exception applies, they are forbidden to arrange for the
credit described above. This result follows because payment is not made
until more than 7 full business days have passed from the time the
credit is extended.
(g) However, 220.4(c)(3) provides that:
If the security when so purchased is an unissued security, the period
applicable to the transaction under subparagraph (2) of this paragraph
shall be 7 days after the date on which the security is made available
by the issuer for delivery to purchasers.
(h) In interpreting 220.4(c)(3), the Board has stated that the
purpose of the provision:
* * * is to recognize the fact that, when an issue of securities is
to be issued at some future fixed date, a security that is part of such
issue can be purchased on a ''when-issued'' basis and that payment may
reasonably be delayed until after such date of issue, subject to other
basic conditions for transactions in a special cash account. (1962
Federal Reserve Bulletin 1427; 12 CFR 220.118; 5996, Published
Interpretations of the Board of Governors.)
In that situation, the Board distinguished the case of mutual fund
shares, which technically are not issued until the certificate can be
delivered by the transfer agent. The Board held that mutual fund shares
must be regarded as issued at the time of purchase because they are:
* * * essentially available upon purchase to the same extent as
outstanding securities. The mechanics of their issuance and of the
delivery of certificates are not significantly different from the
mechanics of transfer and delivery of certificates for shares of
outstanding securities, and the issuance of mutual fund shares is not a
future event in the sense that would warrant the extension of the time
for payment beyond that afforded in the case of outstanding securities.
(ibid.)
The issuance of debt securities subject to delayed issue contracts,
by contrast with that of mutual fund shares, which are in a status of
continual underwriting, is a specific single event taking place at a
future date fixed by the issuer with a view to its need for funds and
the availability of those funds under current market conditions.
(i) For the reasons stated above the Board concluded that the
nonconvertible debt and preferred stock subject to delayed issue
contracts of the kind described above should not be regarded as having
been issued until delivered, pursuant to the agreement, to the
institutional purchaser. This interpretation does not apply, of course,
to fact situations different from that described in this section.
(36 FR 2777, Feb. 10, 1971)
12 CFR 220.124 Installment sale of tax-shelter programs as
''arranging'' for credit.
(a) The Board has been asked whether the sale by brokers and dealers
of tax-shelter programs containing a provision that payment for the
program may be made in installments would constitute ''arranging'' for
credit in violation of this part 220. For the purposes of this
interpretation, the term ''tax-shelter program'' means a program which
is required to be registered pursuant to section 5 of the Securities Act
of 1933 (15 U.S.C. section 77e), in which tax benefits, such as the
ability to deduct substantial amounts of depreciation or oil exploration
expenses, are made available to a person investing in the program. The
programs may take various legal forms and can relate to a variety of
industries including, but not limited to, oil and gas exploration
programs, real estate syndications (except real estate investment
trusts), citrus grove developments and cattle programs.
(b) The most common type of tax-shelter program takes the form of a
limited partnership. In the case of the programs under consideration,
the investor would commit himself to purchase and the partnership would
commit itself to sell the interests. The investor would be entitled to
the benefits, and become subject to the risks of ownership at the time
the contract is made, although the full purchase price is not then
required to be paid. The balance of the purchase price after the
downpayment usually is payable in installments which range from 1 to 10
years depending on the program. Thus, the partnership would be
extending credit to the purchaser until the time when the latter's
contractual obligation has been fulfilled and the final payment made.
(c) With an exception not applicable here, 220.7(a) of Regulation T
provides that:
A creditor (broker or dealer) may arrange for the extension or
maintenance of credit to or for any customer of such creditor by any
person upon the same terms and conditions as those upon which the
creditor, under the provisions of this part, may himself extend or
maintain such credit to such customer, but only such terms and
conditions * * *
(d) In the case of credit for the purpose of purchasing or carrying
securities (purpose credit), 220.8 of the regulation (the Supplement to
Regulation T) does not permit any loan value to be given securities that
are not registered on a national securities exchange, included on the
Board's OTC Margin List, or exempted by statute from the regulation.
(e) The courts have consistently held investment programs such as
those described above to be ''securities'' for purpose of both the
Securities Act of 1933 and the Securities Exchange Act of 1934. The
courts have also held that the two statutes are to be construed
together. Tax-shelter programs, accordingly, are securities for
purposes of Regulation T. They also are not registered on a national
securities exchange, included on the Board's OTC Margin List, or
exempted by statute from the regulation.
(f) Accordingly, the Board concludes that the sale by a broker/dealer
of tax-shelter programs containing a provision that payment for the
program may be made in installments would constitute ''arranging'' for
the extension of credit to purchase or carry securities in violation of
the prohibitions of 220.7(a) and 220.8 of Regulation T.
(37 FR 6568, Mar. 31, 1972)
12 CFR 220.125 Extending, maintaining or arranging credit on mutual
fund shares having portfolio of exempted securities.
(a) The Board of Governors has been asked whether a broker or dealer
may extend, maintain, or arrange for credit in a special bond account
subject to 220.4 (i) on collateral consisting of shares of registered
open-end investment companies whose portfolios are made up entirely or
in part of exempted securities.
(b) The term ''exempted securities'' is defined in section 3(a)(12)
of the Securities Exchange Act of 1934 (15 U.S.C. 78c(a)(12)) and
generally includes federal, state, and municipal securities. Such
securities are eligible as collateral for extensions of credit in
220.4(i) and are entitled to good faith loan value in an account carried
pursuant to that section, under 220.8(b).
(c) This Part 220 (Regulation T) provides that brokers and dealers
may not extend, maintain, or arrange for credit to purchase any
securities unless the collateral for such credit consists of exempted
securities or securities that are registered on a national securities
exchange or appear on the Board's OTC Margin List. Shares in registered
open-end investment companies are not ''exempted'' securities,
irrespective of the composition of the portfolio of the company, nor are
they registered on national securities exchanges, or included on the OTC
Margin List. Accordingly, such shares do not have loan value for
purposes of this part 220, nor may brokers or dealers extend credit
against such shares to purchase or carry any securities under 220.4(i).
(d) The above-stated opinion is in conformity with the Board's views
expressed previously in its interpretations announced in 1952 Bulletin
1105 ( 220.109) and 1955 Bulletin 267 ( 220.112) to the effect that
brokers or dealers are prohibited from arranging credit to purchase
unlisted shares issued by open-end investment companies.
(37 FR 6831, Apr. 5, 1972)
12 CFR 220.126 Put and call options.
(a) The Board has been asked several questions about the treatment of
put and call options and combinations thereof (puts and calls) under
Regulation T (Part 220). These questions involve 220.3(d) Adjusted
debit balance, 220.3(h) Unissued securities, 220.4(c) Special cash
account and 220.4(d) Special arbitrage account.
(b) The special cash account under 220.4(c) may be used only for
those bona fide transactions in securities in which the creditor accepts
in good faith the customer's agreement, if he is a purchaser, that (if
he does not already have sufficient funds in the account) he will
promptly make full cash payment for the security and does not
contemplate selling it prior to making such payment, and if he is a
seller, that he or his principal owns the security and (if it is not
already held in the account) it will be promptly deposited therein. It
is the Board's view that subject to these requirements, a creditor may
effect in a special cash account --
(1) The purchase or sale for cash of a put or call;
(2) The exercise of a call, provided that full cash payment for the
purchased stock is deposited in the account promptly and in any event
prior to the release of the proceeds of any resale of such security;
and
(3) The endorsement, guarantee or issuance of a put or call if (in
the case of a put) sufficient funds to purchase the underlying stock or
(in the case of a call) the underlying stock itself are held in the
account.
(c) Generally a put or call option refers to an agreement to sell a
security or to purchase a security, at some future time. Although the
agreement may itself be deemed to be a security, it cannot be an
''unissued'' security, under 220.3(h) or 220.4(c)(3), for the reasons
set forth by the Board in discussing a similar question in regard to
mutual fund shares (1962 Bulletin 1427; 12 CFR 220.118). Accordingly,
in respect of a transaction involving puts or calls, payment is required
within the period of time provided by 220.3(b)(1) if the transaction
occurs in the general account (or if the transaction occurs in a special
cash account, by 220.4(c)(2)) without regard to whether there has been
a delay in obtaining the endorsement, or for any other reason the option
has not yet technically been issued.
(d) A question has been asked whether puts and calls may be
considered to be securities which are exchangeable or convertible into
other securities within 90 calendar days, without restriction other than
the payment of money. If held in a general account, such exchangeable
or convertible securities are acceptable in lieu of the margin required
in respect of a short sale under 220.3(d)(3). If held in a special
arbitrage account under 220.4 (d), exchangeable or convertible
securities will support the sale, for purposes of bona fide arbitrage,
of the security into which they are so exchangeable or convertible. The
Board concludes that puts and calls may not be considered, for either
purpose, as securities that are exchangeable or convertible into other
securities. The Board's view stems from the policies underlying the
sections in question.
(e) The margin restrictions in respect of short sales were imposed in
order that:
* * * traders on the short side of the market should not be in a
position, with a given amount of funds, to exert a greater influence on
the market than they could with the same amount of funds if they were
trading on the long side. (Annual Report, Board of Governors, 1937, p.
208.)
Permitting call options to be used in lieu of the margin required in
respect of a short sale would be inconsistent with that general policy
(parallel considerations would apply in the case of puts).
(f) The use of the special arbitrage account under 220.4(d) is
limited to the simultaneous purchase and sale of the same or equivalent
securities for the purpose of taking advantage of a difference in price.
Arbitrage is permitted to be carried on without additional deposit of
margin because it tends to equalize prices between markets and between
equivalent securities. Because the relatively high initial cost of a
put or call option must be deducted from the potential profit due to the
disparity in price between the two securities, it is not likely that
true arbitrage would take place between an option and an underlying
security. Such options would be used, rather, for purposes of
''hedging,'' that is to say, to protect an investor against loss while
he holds a security in the hope of profiting by changes in its price.
Such market strategies may be beneficial to individual investors.
However, they do not perform a comparable market function.
(g) Section 221.2 of this chapter provides that ''a bank may extend
and may maintain any credit for the purpose specified in 221.1, without
regard to the limitations prescribed therein, or in 221.3(t), if the
credit comes within any of the following descriptions.'' Paragraph (j)
contains the following description: ''Any credit extended to a member
of a national securities exchange for the purpose of financing his or
his customers' bona fide arbitrage transactions in securities.'' The
Board has concluded that a purchase of a put or call is not embraced
within the term in 220.4(d) ''a purchase of a security which is,
without restriction other than the payment of money exchangeable or
convertible * * * into a second security'' so as to qualify such
purchase, when effected together with an offsetting sale of the second
security, as a bona fide arbitrage transaction, and the Board's
conclusion is also applicable to paragraph (j) of 221.2.
(38 FR 5237, Feb. 27, 1973)
12 CFR 220.127 Independent broker/dealers arranging credit in
connection with the sale of insurance premium funding programs.
(a) The Board's September 5, 1972, clarifying amendment to 220.4(k)
set forth that creditors who arrange credit for the acquisition of
mutual fund shares and insurance are also permitted to sell mutual fund
shares without insurance under the provisions of the special cash
account. It should be understood, of course, that such account provides
a relatively short credit period of up to 7 business days even with
so-called cash transactions. This amendment was in accordance with the
Board's understanding in 1969, when the insurance premium funding
provisions were adopted in 220.4(k), that firms engaged in a general
securities business would not also be engaged in the sale and arranging
of credit in connection with such insurance premium funding programs.
(b) The 1972 amendment eliminated from 220.4(k) the requirement
that, to be eligible for the provisions of the section, a creditor had
to be the issuer, or a subsidiary or affiliate of the issuer, of
programs which combine the acquisition of both mutual fund shares and
insurance. Thus the amendment permits an independent broker/dealer to
sell such a program and to arrange for financing in that connection. In
reaching such decision, the Board again relied upon the earlier
understanding that independent broker/dealers who would sell such
programs would not be engaged in transacting a general securities
business.
(c) In response to a specific view recently expressed, the Board
agrees that under Regulation T:
* * * a broker/dealer dealing in special insurance premium funding
products can only extend credit in connection with such products or in
connection with the sale of shares of registered investment companies
under the cash accounts * * * (and) cannot engage in the general
securities business or sell any securities other than shares * * * (in)
registered investment companies through a cash account or any other
manner involving the extension of credit.
(d) There is a way, of course, as has been indicated, that an
independent broker/dealer might be able to sell other than shares of
registered investment companies without creating any conflict with the
regulation. Such sales could be executed on a ''funds on hand'' basis
and in the case of payment by check, would have to include the
collection of such check. It is understood from industry sources,
however, that few if any independent broker/dealers engage solely in a
''fund on hand'' type of operation.
(38 FR 11066, May 4, 1973)
12 CFR 220.128 Treatment of simultaneous long and short positions in
the same margin account when put or call options or combinations thereof
on such stock are also outstanding in the account.
(a) The Board was recently asked whether under Regulation T, ''Credit
by Brokers and Dealers'' (12 CFR part 220), if there are simultaneous
long and short positions in the same security in the same margin account
(often referred to as a short sale ''against the box''), such positions
may be used to supply the place of the deposit of margin ordinarily
required in connection with the guarantee by a creditor of a put or call
option or combination thereof on such stock.
(b) The applicable provisions of regulation T are 220.3(d)(3) and
(5) and 220.3(g)(4) and (5) which provide as follows:
(d) * * * the adjusted debit balance of a general account * * * shall
be calculated by taking the sum of the following items:
(3) The current market value of any securities (other than unissued
securities) sold short in the general account plus, for each security
(other than an exempted security), such amount as the board shall
prescribe from time to time in 220.8(d) (the supplement to regulation
T) as the margin required for such short sales, except that such amount
so prescribed in such 220.8(d) need not be included when there are held
in the general account * * * the same securities or securities
exchangeable or convertible within 90 calendar days, without restriction
other than the payment of money, into such securities sold short;
(5) The amount of any margin customarily required by the creditor in
connection with his endorsement or guarantee of any put, call, or other
option;
(g) * * * (4) Any transaction which serves to meet the requirements
of paragraph (e) of this section or otherwise serves to permit any
offsetting transaction in an account shall, to that extent, be
unavailable to permit any other transaction in such account.
(5) For the purposes of this part (regulation T), if a security has
maximum loan value under paragraph (c)(1) of this section in a general
account, or under 220.4(j) in a special convertible debt security
account, a sale of the same security (even though not the same
certificate) in such account shall be deemed to be a long sale and shall
not be deemed to be or treated as a short sale.
(c) Rule 431 of the New York Stock Exchange requires that a creditor
obtain a minimum deposit of 25 percent of the current market value of
the optioned stock in connection with his issuance or guarantee of a
put, and at least 30 percent in the case of a call (and that such
position be ''marked to the market''), but permits a short position in
the stock to serve in lieu of the required deposit in the case of a put
and a long position to serve in the case of a call. Thus, where the
appropriate position is held in an account, that position may serve as
the margin required by 220.3(d)(5).
(d) In a short sale ''against the box,'' however, the customer is
both long and short the same security. He may have established either
position, properly margined, prior to taking the other, or he may have
deposited fully paid securities in his margin account on the same day he
makes a short sale of such securities. In either case, he will have
directed his broker to borrow securities elsewhere in order to make
delivery on the short sale rather than using his long position for this
purpose (see also 17 CFR 240.3b-3).
(e) Generally speaking, a customer makes a short sale ''against the
box'' for tax reasons. Regulation T, however, provides in 220.3(g)
that the two positions must be ''netted out'' for the purposes of the
calculations required by the regulation. Thus, the board concludes that
neither position would be available to serve as the deposit of margin
required in connection with the endorsement by the creditor of an
option.
(f) A similar conclusion obtains under 220.3(d)(3). That section
provides, in essence, that the margin otherwise required in connection
with a short sale need not be included in the account if the customer
has in the account a long position in the same security. In 220.3(g)
(4), however, it is provided that ''(A)ny transaction which * * * serves
to permit any offsetting transaction in an account shall, to that
extent, be unavailable to permit any other transaction in such
account.'' Thus, if a customer has, for example, a long position in a
security and that long position has been used to supply the margin
required in connection with a short sale of the same security, then the
long position is unavailable to serve as the margin required in
connection with the creditor's endorsement of a call option on such
security.
(g) A situation was also described in which a customer has purported
to establish simultaneous offsetting long and short positions by
executing a ''cross'' or wash sale of the security on the same day. In
this situation, no change in the beneficial ownership of stock has taken
place. Since there is no actual ''contra'' party to either transaction,
and no stock has been borrowed or delivered to accomplish the short
sale, such fictitious positions would have no value for purposes of the
Board's margin regulations. Indeed, the adoption of such a scheme in
connection with an overall strategy involving the issuance, endorsement,
or guarantee of put or call options or combinations thereof appears to
be manipulative and may have been employed for the purpose of
circumventing the requirements of the regulations.
(38 FR 12098, May 9, 1973)
12 CFR 220.129 Applicability of same-day substitution rule to accounts
subject to section 220.8(g).
(a) The Board has been asked numerous questions regarding the use of
the same-day substitution privilege in 220.3(b) of Regulation T in
connection with accounts subject to 220.8(g), generally, accounts
having less than 40 percent equity. Prior to the Board's amendments,
effective September 18, 1972 (37 FR 13972, 13973, 13974, July 15, 1972),
a customer whose account was undermargined to any extent was allowed to
substitute one security for another on the same day, usually through a
sale and purchase for like amounts, without being required to improve
his equity in the account. The 1972 amendments limit this privilege to
accounts with an equity of 40 percent or more; as presently set by the
Board. Accordingly, if a customer's equity is below 40 percent, he is
not eligible for the same-day substitution privilege, but is required to
put up margin on any new commitment, and retention requirements are
applied to any liquidation, even though the transactions are effected on
the same day.
(b) The questions raised with the Board touch upon other provisions
of Regulation T as well that are affected by the September 1972
amendment to the same-day substitution rule and the impact of the
amendment on these provisions is also reflected in the examples stated
below. In making computations in similar situations it should be borne
in mind that the examples are based on a current loan value of 35
percent for margin securities (margin requirements of 65 percent), and
50 percent loan value for exchange-listed convertible bonds, while the
retention requirement for all accounts is 70 percent (release 30
percent).
Based on margin requirements as of November 24, 1972 of 65 percent
(35 percent loan value) in the general account and 50 percent (50
percent loan value) in the special convertible debt security account,
and retention requirements with respect to withdrawals in each account
of 70 percent (30 percent release).
1. Q. Customer is long $10,000 margin securities in his general
account, which has an adjusted debit balance of $7,000. Customer has an
$8,000 balance in his special miscellaneous account. The general
account is subject to section 8(g). The customer wishes to purchase
margin securities worth $1,000 and sell securities worth $1,000 on the
same day. What is the Regulation T margin call if any?
A. $350, the margin required on the purchase ($650) minus the margin
released on the sale ($300) (net $350). The call may be met by a debit
to the customer's special miscellaneous account.
2. Q. Customer is long $10,000 margin securities in his general
account which has an adjusted debit balance of $9,000. Customer has an
$8,000 balance in his special miscellaneous account. The general
account is subject to section 8(g). May the creditor reduce the special
miscellaneous account balance to a level at which time the general
account would no longer be subject to section 8(g)?
A. Yes; before such a debit to the special miscellaneous account is
made, however, the creditor may wish to obtain the written consent of
the customer. The customer should be fully aware of the procedure to be
followed by the creditor and that such an amount could not be
transferred back from the general account to the special miscellaneous
account at a later date, unless an excess over 65 percent margin in the
general account would permit another transfer.
3. Q. Customer's account has a Regulation T margin call which was
outstanding (and not overdue) as of the close of business on the
preceding business day. In computing the account to determine if it is
subject to section 8(g), may the creditor consider the outstanding
Regulation T margin call as collected?
A. Yes, for the purpose of computing an account to determine whether
it is subject to section 8(g), the creditor may give credit to such an
outstanding Regulation T margin call which would reduce the adjusted
debit balance.
4. Q. Customer is long $10,000 margin securities in his general
account which has an adjusted debit balance of $6,075. The account is
subject to section 8(g) by an amount less than $100. He wishes to
purchase margin securities valued at $1,000 and sell securities valued
at $1,000 in the account on the same day. What Regulation T margin call
if any should be issued?
A. $350. Once the determination has been made that an account is
subject to section 8(g), purchases in the general account are charged
the margin required, currently 65 percent, and sales currently release
30 percent. The $100 rule in 220.3(g)(3) does not apply to the 8(g)
computation.
5. Q. Customer's account has an outstanding maintenance margin call.
In computing the account to determine if it is subject to section 8(g),
may the creditor consider the outstanding maintenance margin call as
collected?
A. No; maintenance margin calls are generally credited to the
customer's special miscellaneous account, and accordingly, the
collection of the maintenance margin call would not change the adjusted
debit balance.
6. Q. Customer is long $10,000 margin securities in his general
account which is subject to section 8(g) by $100 and is in a so-called
regular restricted status by $2,600. He wishes to sell securities worth
$9,000 and buy margin securities worth $9,000 on the same day. The
purchase would require margin of $5,850 and the sale would release
$2,700 (net $3,150). In what amount should the creditor issue a
Regulation T margin call?
A. $2,600. The customer would not be required to deposit more than is
needed to eliminate the so-called regular restriction.
7. Q. Does a debit to the general account and a credit to the special
miscellaneous account (SMA) increase the customer's adjusted debit
balance?
A. Yes; the reference to ''net debit balance'' in 220.3(d)(1) of
Regulation T, in connection with the adjusted debit balance computation,
includes any amounts debited to the general account and credited to the
SMA. It is quite possible for an account to be subject to section 8(g)
as a result of such entries. For regulatory purposes, the balances of
the two accounts should be separately stated, whether the creditor
maintains the SMA by journal or memorandum entry methods.
Section 220.4(a) provides that a creditor may establish an SMA, the
purpose of which is defined in paragraph (f)(6), provided it is recorded
separately, and confined to its intended purpose, with an adequate
record maintained. Paragraph (a)(3) further provides that:
* * * If a customer has with a creditor both a general account and
one or more such special accounts, the creditor shall treat each such
special account as if the customer had with the creditor no general
account * * *
The agreement between the creditor and the customer should clearly
show that two accounts will be maintained and that when transfers of
amounts such as dividends, maintenance margin calls, and excess are
made, the general account and the SMA are debited or credited as the
case may be. Funds cannot be freely transferred back and forth.
Generally, while funds can always be transferred from the SMA to the
general account, transfers from the general account to the SMA can only
be made when certain specific events occur and conditions are met.
8. Q. Customer is long $80,000 convertible debt securities in a
special convertible debt security account which has an adjusted debit
balance of $50,000. The account is subject to section 8(g). The
customer wishes to purchase $60,000 convertible debt securities (which
are marginable) and sell $60,000 convertible debt securities on the same
day. What is the Regulation T margin call if any?
A. $10,000. The margin currently required on the purchase is $30,000
and the margin currently released on the sale is $18,000. However, the
customer would not be required to deposit more than is needed to
eliminate the so-called regular restriction of $10,000 in the account.
9. Q. Does the 8(g) rule apply to the special bond account?
A. No; in a special bond account, the maximum loan value of
collateral held in the account is determined by the creditor in good
faith, and the retention requirement which applies to withdrawal of such
collateral is equal to the good faith loan value applied by the
creditor.
10. Q. Customer has an account subject to 8(g) and wishes to know how
much he can buy or sell without incurring a Regulation T margin call.
A. (1) Under the current 65 percent margin requirement (in the
general account),
(a) To determine how much a customer can buy with the proceeds of a
sale in that account, apply this formula:
(30% (margin released on sale)/65% (margin required on
purchase)=46.1% (round off 46%)
Thus, a sale of $10,000 would permit a purchase of $4,600.
(b) To determine how much a customer would have to sell to meet the
margin requirement on a purchase, apply this formula:
(65% (margin required on purchase)/30% (margin released on sale)=216
2/3% (round off 217%)
Thus, a purchase of $10,000 would require a sale of $21,667.
(2) Under the current 50 percent margin requirement (in the special
convertible debt security account),
(a) To determine how much a customer can buy with the proceeds of a
sale in that account, apply this formula:
30% (margin released on sale)/50% (margin required on purchase)=60%
Thus, a sale of $10,000 would permit a purchase of $6,000.
(b) To determine how much a customer would have to sell to meet the
margin requirement on a purchase, apply this formula:
50% (margin required on purchase)/30% (margin released on sale)=166
2/3% (round off 167%)
Thus, a purchase of $10,000 would require a sale of $16,700.
11. Q. A Regulation T margin call is issued as a result of a same-day
substitution occurring in an account that is subject to section 8(g).
What computation is required?
A. The amount may be determined by applying this formula:
Less:
Margin required on commitment
Margin released on liquidation
Equals: Regulation T margin call
12. Q. Customer's general account which is subject to section 8(g)
includes a short position in stock A of 100 shares at 100 (market value
$10,000). Customer buys 200 shares of the same stock and maintains his
short position, which results in a long position of 200 shares of which
100 shares is considered the long side of the short sale ''against the
box.'' Does this transaction result in the issuance of a Regulation T
margin call and for how much?
A. Yes; the customer would incur a Regulation T margin call of
$6,500, the margin required on the new net commitment of 100 shares
long. Because the customer's account is subject to section 8(g), the
retention requirement provision in the regulation (which does not
provide for any release on the covering of a short position) would
apply.
13. Q. Customer's general account is subject to section 8(g) and he
wishes to buy and sell the same stock on the same day (day trade). May
he do so without furnishing additional margin under Regulation T? (This
question assumes that the customer could effect such a day trade in
conformance with exchange requirements.)
A. No; Regulation T in providing for transactions on a given day in
220.3(g) does not distinguish between same or different securities.
Therefore, the amount of deposit required would be computed on the basis
of the margin required on the purchase less the amount released on the
sale of the same stock.
14. Q. May the amount deposited to meet a Regulation T margin call in
an account subject to section 8(g) be credited to the customer's special
miscellaneous account?
A. No; any Regulation T margin call must be credited directly to the
account with respect to which the call was issued and may not be
transferred to the customer's special miscellaneous account.
15. Q. Customer's general account is subject to section 8(g). He
effects a same-day substitution by liquidating securities worth $21,334,
thereby releasing 30 percent ($6,400), and purchasing margin securities
worth $10,000, thereby requiring margin of 65 percent ($6,500). Must
the customer deposit the $100 difference?
A. No; the creditor may waive a Regulation T margin call of $100 or
less.
16. Q. Customer's special convertible debt security account is
subject to section 8(g). His general account is in a so-called
restricted status but not subject to section 8(g). May he effect a
same-day substitution of securities in like amounts in his general
account without incurring a Regulation T margin call?
A. Yes. Each account is computed separately, either one of which may
or may not be subject to section 8(g).
17. Q. Customer's general account is subject to section 8(g) and he
has a $200 balance in his special miscellaneous account. May he
withdraw the $200?
A. Yes; Regulation T would not prevent such a withdrawal. However,
exchange and creditor requirements should be considered.
18. Q. A customer's general account is priced as of the previous
night's close of business and is subject to section 8(g) by $300. On
the current day, may the customer deposit $300 directly into his general
account and subsequently effect a same-day substitution of margin
securities without incurring a Regulation T margin call?
A. No; when an account is subject to section 8(g), a deposit on the
current day of the amount by which the account is subject to section
8(g) would not eliminate the section 8(g) restriction. Accordingly, a
Regulation T margin call should be issued in the appropriate amount if
there is effected in the account a same-day substitution of margin
securities.
19. Q. Customer is long a profitable call option on 100 shares of
margin stock A at 50 in his general account which is subject to section
8(g). He wishes to exercise the option and hold the stock which is
currently at 55. What is the Regulation T margin call if any?
A. $3,250, the margin required on the purchase of $5,000. In pricing
the account subsequent to the purchase, loan value would be applied to
the stock's current market value of $5,500.
20. Q. Customer is long a profitable call option on 100 shares of
margin stock B at 50 in his general account which is subject to section
8(g). He wishes to exercise the option by buying stock B at 50 and
selling stock B at 55 on the same day. What is the Regulation T margin
call if any?
A. $1,600, the margin required on the purchase ($3,250) minus the
margin released on the sale ($1,650).
21. Q. Is it possible under Regulation T for a customer who is long a
profitable option in his general account which is subject to section
8(g) to terminate his position in the option and have immediate access
to the funds representing the profit?
A. Yes; he may give instructions to his broker to transfer the
option from his general account to his special cash account where he
could sell the option itself either back to the broker or to others.
22. Q. A customer's general account is subject to section 8(g). May
he transfer a profitable call option from his general account to his
special cash account where he would exercise it?
A. Yes; provided that full cash payment for the purchased stock is
available in the special cash account or is deposited promptly. Such
payment must be deposited in the special cash account prior to the
release of the proceeds of the resale of the security, if the customer
wishes to liquidate the position in the security acquired upon exercise.
23. Q. Customer is short an uncovered call option on 100 shares of
stock C with a striking price of 50 in his general account which is
subject to section 8(g). His net debit balance was reduced by $1,500
(30 percent margin requirement) when the short option position was taken
(made up by receipt of $500 premium and additional deposit of $1,000,
both credited to the general account). Presently, the market value of
stock C is up to 60 and customer's adjusted debit balance now includes
$2,800 ($6,000 30 percent=$1,800 plus the mark to the market loss of
$1,000). The call is exercised against him at 60 and customer purchases
the stock and delivers it the same day. What is the Regulation T margin
call, if any?
A. $2,400, the margin required on the purchase of stock C ($3,900)
minus the margin released on the sale of stock C ($1,500). When an
account is subject to section 8(g), the retention requirement provisions
in the regulation do not provide for any release of any portion of the
amount included in the adjusted debit balance computation in connection
with the option prior to its exercise. The account, of course, may
subsequently be refigured for any Regulation T excess.
24. Q. Customer's account is the same as in question 23. However,
when the call is exercised against him at 60, customer borrows the stock
for delivery (without buying in), thereby establishing a short position
in stock C. What is the Regulation T margin call if any?
A. $3,250, the margin required on the newly established short
position in stock C. Here, too, because the account is subject to
section 8(g), the regulation would not permit the broker to offset the
Regulation T margin call by any portion of the amount previously
included in the adjusted debit balance computation in connection with
the outstanding option prior to its exercise. It should be further
noted that subsequent to the exercise and during the time the customer
maintains the short position in stock C, the adjusted debit balance
computation for the short position would be based on the current market
value of the security.
25. Q. Customer's account is the same as in question 23. However,
when the call is exercised, the customer assumes a short position of 100
shares in stock C. Later in the day the customer covers his short
position by purchasing on the open market 100 shares of stock C at 60.
What is the Regulation T margin call, if any?
A. $2,400, the margin required on the purchase of stock C ($3,900)
minus the margin released on the sale of stock C ($1,500).
26. Q. Customer is short an uncovered call option on 100 shares of
stock D with a striking price of 50 in his general account which is
subject to section 8(g). His net debit balance was reduced by $1,500
(30 percent margin requirement) when the short option position was
taken. Presently, the market value of stock D is down to 40 and
customer's adjusted debit balance now includes $200 ($4,000 30
percent=$1,200 minus the mark to the market gain of $1,000). The holder
of the option allows it to expire. May the customer who is short the
option withdraw any portion of the amount included as margin in the
adjusted debit balance computation in connection with the option or use
the amount against another transaction?
A. No. When an account is subject to section 8(g), the retention
requirement provisions in the Regulation do not provide for any release
of any portion of the amount included as margin in the adjusted debit
balance computation in connection with the option.
(38 FR 16652, June 25, 1973)
12 CFR 220.130 Escrow receipts for option transactions.
(a) The Board has been asked whether or not it is permissible under
the provisions of 220.4(c) of Regulation T (12 CFR 220.4(3)) relating
to the special cash account, to allow customers to write put and call
securities options which are ''covered'' by the escrow receipt of a bank
when the escrow receipt, because of the mechanics of the trade, cannot
be delivered to the broker on the day the option is written. When
exchange-traded securities options were first introduced in 1973 the
Board expressed the view that certain option transactions were permitted
in the cash account (1973 Bulletin 525; 12 CFR 220.126) under
circumstances which indicated their nature as bona fide cash
transactions. Basically, that interpretation indicates that the special
cash account can be used if the underlying securities, or the funds
necessary to pay for the securities, are held in the account on the day
the option is written. (This is commonly referred to as a ''covered''
transaction.) The use of ''escrow receipts'' for option transactions to
be effected in a special cash account was not considered by the Board at
the time of the 1973 interpretation.
(b) An escrow receipt is an agreement under which a bank represents
and warrants that it holds for the account of a customer the securities
which are the subject of a call, or the cash to purchase the securities
which are the subject of a put, and will continue to hold the same until
the option is either exercised or expires. If the option is exercised,
the bank will deliver or accept delivery of the appropriate securities
against payment, as the circumstances require.
(c) It has been represented to the Board that customers who wish to
write covered options in a cash account using escrow receipts are
hampered because of procedural delays in transmitting the escrow receipt
from the bank to the broker. Up to three business days may elapse
before the receipt can be in the physical possession of the broker
because, for example, some banks will not issue the receipt until the
premium for writing the option is delivered.
(d) The Board is of the view that a broker may effect an option
transaction in a special cash account where the customer represents that
the required securities or cash are then held for that customer at a
bank and the broker independently verifies that the appropriate escrow
receipt will be delivered to the broker by the bank as soon as possible
but, in no event, later than three business days after the option is
written. (The term ''bank'' as defined in section 3(a)(6) of the
Securities Exchange Act of 1934 includes banks, trust companies and
those branches of foreign banks which are located in the United States
and are supervised and examined by State banking authorities.) Any delay
in delivery of the escrow receipt resulting from factors within the
customer's control would, of course, cast doubt on the eligibility of
the transaction as a bona fide cash transaction.
(41 FR 34938, Aug. 18, 1976)
12 CFR 220.131 Application of the arranging section to broker-dealer
activities under SEC Rule 144A.
(a) The Board has been asked whether the purchase by a broker-dealer
of debt securities for resale in reliance on Rule 144A of the Securities
and Exchange Commission (17 CFR 230.144A) /1/ may be considered an
arranging of credit permitted as an ''investment banking service'' under
220.13(a) of Regulation T.
(b) SEC Rule 144A provides a safe harbor exemption from the
registration requirements of the Securities Act of 1933 for resales of
restricted securities to qualified institutional buyers, as defined in
the rule. In general, a qualified institutional buyer is an
institutional investor that in the aggregate owns and invests on a
discretionary basis at least $100 million in securities of issuers that
are not affiliated with the buyer. Registered broker-dealers need only
own and invest on a discretionary basis at least $10 million of
securities in order to purchase as principal under the rule. Section
4(2) of the Securities Act of 1933 provides an exemption from the
registration requirements for ''transactions by an issuer not involving
any public offering.'' Securities acquired in a transaction under
section 4(2) cannot be resold without registration under the Act or an
exemption therefrom. Rule 144A provides a safe harbor exemption for
resales of such securities. Accordingly, broker-dealers that previously
acted only as agents in intermediating between issuers and purchasers of
privately-placed securities, due to the lack of such a safe harbor, now
may purchase privately-placed securities from issuers as principal and
resell such securities to ''qualified institutional buyers'' under Rule
144A.
(c) The Board has consistently treated the purchase of a
privately-placed debt security as an extension of credit subject to the
margin regulations. If the issuer uses the proceeds to buy securities,
the purchase of the privately-placed debt security by a creditor
represents an extension of ''purpose credit'' to the issuer. Section
7(c) of the Securities Exchange Act of 1934 prohibits the extension of
purpose credit by a creditor if the credit is unsecured, secured by
collateral other than securities, or secured by any security (other than
an exempted security) in contravention of Federal Reserve regulations.
If a debt security sold pursuant to Rule 144A represents purpose credit
and is not properly collateralized by securities, the statute and
Regulation T can be viewed as preventing the broker-dealer from taking
the security into inventory in spite of the fact that the broker-dealer
intends to immediately resell the debt security.
(d) Under 220.13 of Regulation T, a creditor may arrange credit it
cannot itself extend if the arrangement is an ''investment banking
service'' and the credit does not violate Regulations G and U.
Investment banking services are defined to include, but not be limited
to, ''underwritings, private placements, and advice and other services
in connection with exchange offers, mergers, or acquisitions, except for
underwritings that involve the public distribution of an equity security
with installment or other deferred-payment provisions.'' To comply with
Regulations G and U where the proceeds of debt securities sold under
Rule 144A may be used to purchase or carry margin stock and the debt
securities are secured in whole or in part, directly or indirectly by
margin stock (see 12 CFR 207.2(f), 207.112, and 221.2(g)), the margin
requirements of the regulations must be met.
(e) The SEC's objective in adopting Rule 144A is to achieve ''a more
liquid and efficient institutional resale market for unregistered
securities.'' To further this objective, the Board believes it is
appropriate for Regulation T purposes to characterize the participation
of broker-dealers in this unique and limited market as an ''investment
banking service.'' The Board is therefore of the view that the purchase
by a creditor of debt securities for resale pursuant to SEC Rule 144A
may be considered an investment banking service under the arranging
section of Regulation T. The market-making activities of broker-dealers
who hold themselves out to other institutions as willing to buy and sell
Rule 144A securities on a regular and continuous basis may also be
considered an arranging of credit permissible under 220.13(a) of
Regulation T.
(Reg. T, 55 FR 29566, July 20, 1990)
/1/ Rule 144A, 17 CFR 230.144A, was originally published in the
Federal Register at 55 FR 17933, April 30, 1990.
12 CFR 220.131 PART 221 -- CREDIT BY BANKS FOR THE PURPOSE OF
PURCHASING OR CARRYING MARGIN STOCK
Sec.
221.1 Authority, purpose, and scope.
221.2 Definitions.
221.3 General requirements.
221.4 Agreements of nonmember banks.
221.5 Special purpose loans to brokers and dealers.
221.6 Exempted transactions.
221.7 Requirements for the List of OTC margin stocks.
221.8 Supplement, maximum loan value of margin stock and other
collateral.
221.101 Determination and effect of purpose of loan.
221.102 Designation of New York Stock Exchange for purposes of
specialists transactions.
221.103 Loans to brokers or dealers.
221.104 Federal credit unions.
221.105 Arranging for extensions of credit to be made by a bank.
221.106 Reliance in ''good faith'' on statement of purpose of loan.
221.107 Arranging loan to purchase open-end investment company
shares.
221.108 Effect of registration of stock subsequent to making of loan.
221.109 Loan to open-end investment company.
221.110 Questions arising under Regulation U.
221.111 Purchase-and-sale substitution on same day.
221.112 Loans by bank in capacity as trustee.
221.113 Loan which is secured indirectly by stock.
221.114 Bank loans to purchase stock of American Telephone and
Telegraph Company under Employees' Stock Plan.
221.115 Accepting a purpose statement through the mail without
benefit of face-to-face interview.
221.116 Bank loans to replenish working capital used to purchase
mutual fund shares.
221.117 When bank in ''good faith'' has not relied on stock as
collateral.
221.118 Bank arranging for extension of credit by corporation.
221.119 Status after July 8, 1969, of credit extended prior to that
date to purchase or carry mutual fund shares.
221.120 Allocation of stock collateral to purpose and nonpurpose
credits to same customer.
221.121 Computation of time periods for acquiring and holding blocks
of stock by block positioners.
221.122 Applicability of margin requirements to credit in connection
with Insurance Premium Funding Programs.
221.123 Bona fide arbitrage transactions.
221.124 Application of the single-credit rule to loan participations.
Authority: Secs. 3, 7, 8 and 23 of the Securities Exchange Act of
1934, as amended (15 U.S.C. 78c, 78g, 78h and 78w).
Source: Reg. U, 221.1 through 221.8 appear at 48 FR 35076, Aug.
3, 1983, unless otherwise noted.
Editorial Notes: (1) A copy of each form referred to in this part is
filed as a part of the original document. Copies are available upon
request to the Board of Governors of the Federal Reserve System or any
Federal Reserve Bank.
(2) See the List of CFR Sections Affected in the Finding Aids section
of this volume for FR citations to Part 221 OTC Margin Stocks changes.
12 CFR 221.1 Authority, purpose, and scope.
(a) Authority. Regulation U (''this part'') is issued by the Board
of Governors of the Federal Reserve System (''the Board'') pursuant to
the Securities Exchange Act of 1934 (the ''Act'') (15 U.S.C. 78a et
seq.).
(b) Purpose and scope. This part imposes credit restrictions upon
''banks'' (as defined in 221.2(b) of this part) that extend credit for
the purpose of buying or carrying margin stock if the credit is secured
directly or indirectly by margin stock. Banks may not extend more than
the maximum loan value of the collateral securing such credit, as set by
the Board in 221.8 (the Supplement).
(Reg. U, 48 FR 35076, Aug. 3, 1983; 48 FR 37361, Aug. 18, 1983)
12 CFR 221.2 Definitions.
The terms used in this part have the meanings given them in section
3(a) of the Act or as defined in this section.
(a) Affiliate means: (1) Any bank holding company of which a bank is
a subsidiary within the meaning of the Bank Holding Company Act of 1956,
as amended (12 U.S.C. 1841(d));
(2) Any other subsidiary of such bank holding company; and
(3) Any other corporation, business trust, association, or other
similar organization that is an affiliate as defined in section 2(b) of
the Banking Act of 1933 (12 U.S.C. 221a(c)).
(b)(1) Bank has the meaning given to it in section 3(a)(6) of the Act
(15 U.S.C. 78c(a)(6)) and includes: (i) Any subsidiary of a bank;
(ii) Any corporation organized under section 25(a) of the Federal
Reserve Act (12 U.S.C. 611); and
(iii) Any agency or branch of a foreign bank located within the
United States.
(2) Bank does not include: (i) Any savings and loan association,
(ii) Any credit union,
(iii) Any lending institution that is an instrumentality or agency of
the United States, or
(iv) Any member of a national securities exchange.
(c) Carrying credit is credit that enables a customer to maintain,
reduce, or retire indebtedness originally incurred to purchase a
security that is currently a margin stock.
(d) Current market value of (1) a security means: (i) If quotations
are available, the closing sale price of the security on the preceding
business day, as appearing on any regularly published reporting or
quotation service; or
(ii) If there is no closing sale price, the bank may use any
reasonable estimate of the market value of the security as of the close
of business on the preceding business day; or
(iii) If the credit is used to finance the purchase of the security,
the total cost of purchase, which may include any commissions charged.
(2) Any other collateral means a value determined by any reasonable
method in accordance with sound banking practices.
(e) Customer includes any person or persons acting jointly, to or for
whom a bank extends or maintains credit.
(f) Good faith with respect to: (1) The loan value of collateral,
means that amount (not exceeding 100 per cent of the current market
value of the collateral) which a bank, exercising sound banking
judgment, would lend, without regard to the customer's other assets held
as collateral in connection with unrelated transactions.
(2) Accepting notice or certification from or on behalf of a customer
means that the bank or its duly authorized representative is alert to
the circumstances surrounding the credit, and if in possession of
information that would cause a prudent person not to accept the notice
or certification without inquiry, investigates and is satisfied that it
is truthful;
(g) Indirectly secured (1) Includes any arrangement with the customer
under which:
(i) The customer's right or ability to sell, pledge, or otherwise
dispose of margin stock owned by the customer is in any way restricted
while the credit remains outstanding; or
(ii) The exercise of such right is or may be caused for accelerating
the maturity of the credit.
(2) Does not include such an arrangement if:
(i) After applying the proceeds of the credit, not more than 25
percent of the value (as determined by any reasonable method) of the
assets subject to the arrangement is represented by margin stock;
(ii) It is a lending arrangement that permits accelerating the
maturity of the credit as a result of a default or renegotiation of
another credit to the customer by another lender that is not an
affiliate of the bank;
(iii) The bank holds the margin stock only in the capacity of
custodian, depositary, or trustee, or under similar circumstances, and,
in good faith, has not relied upon the margin stock as collateral; or
(iv) The bank, in good faith, has not relied upon the margin stock as
collateral in extending or maintaining the particular credit.
(h) Margin stock means: (1) Any equity security registered or having
unlisted trading privileges on a national securities exchange;
(2) Any OTC margin stock;
(3) Any OTC security designated as qualified for trading in the
National Market System under a designation plan approved by the
Securities and Exchange Commission (NMS security);
(4) Any debt security convertible into a margin stock or carrying a
warrant or right to subscribe to or purchase a margin stock;
(5) Any warrant or right to subscribe to or purchase a margin stock;
or
(6) Any security issued by an investment company registered under
section 8 of the Investment Company Act of 1940 (15 U.S.C. 80a-8), other
than:
(i) A company licensed under the Small Business Investment Company
Act of 1958, as amended (15 U.S.C. 661); or
(ii) A company which has at least 95 percent of its assets
continuously invested in exempted securities (as defined in 15 U.S.C.
78c(a)(12)); or
(iii) A company which issues face-amount certificates as defined in
15 U.S.C. 80a-2(a)(15), but only with respect of such securities.
(i) Maximum loan value is the percentage of current market value
assigned by the Board under 221.8 of this part to specified types of
collateral. The maximum loan value of margin stock is stated as a
percentage of its current market value. Puts, calls and combinations
thereof have no loan value except for purposes of 221.5(c)(10) of this
part. All other collateral has good faith loan value.
(j) OTC margin stock is any equity security not traded on a national
securities exchange that the Board has determined has the degree of
national investor interest, the depth and breadth of market, the
availability of information respecting the security and its issuer, and
the character and permanence of the issuer to warrant being treated like
an equity security traded on a national securities exchange. An OTC
stock is not considered to be an OTC margin stock unless it appears on
the Board's periodically published list of OTC margin stocks.
(k) Purpose credit is any credit for the purpose, whether immediate,
incidental, or ultimate, of buying or carrying margin stock.
(Reg. U, 48 FR 35076, Aug. 3, 1983, as amended at 50 FR 10934, Mar.
19, 1985)
12 CFR 221.3 General requirements.
(a) Extending, maintaining, and arranging credit -- (1) Extending
credit. No bank shall extend any purpose credit, secured directly or
indirectly by margin stock, in an amount that exceeds the maximum loan
value of the collateral securing the credit. The maximum loan value of
margin stock (set forth in 221.8 of this part) is assigned by the Board
in terms of a percentage of the current market value of the margin
stock. All other collateral has good faith loan value, as defined in
221.2(f) of this part.
(2) Maintaining credit. A bank may continue to maintain any credit
initially extended in compliance with this part, regardless of:
(i) Reduction in the customer's equity resulting from change in
market prices;
(ii) Change in the maximum loan value prescribed by this part; or
(iii) Change in the status of the security (from nonmargin to margin)
securing an existing purpose credit.
(3) Arranging credit. No bank may arrange for the extension or
maintenance of any purpose credit, except upon the same terms and
conditions under which the bank itself may extend or maintain purpose
credit under this part.
(b) Purpose statement. Except for credit extended under paragraph
(c) of this section, whenever a bank extends credit secured directly or
indirectly by any margin stock, in an amount exceeding $100,000, the
bank shall require its customer to execute Form FR U-1 (OMB No.
7100-0115), which shall be signed and accepted by a duly authorized
officer of the bank acting in good faith.
(c) Purpose statement for revolving-credit or multiple-draw
agreements. (1) If a bank extends credit, secured directly or
indirectly by any margin stock, in an amount exceeding $100,000, under a
revolving-credit or other multiple-draw agreement, Form FR U-1 can
either be executed each time a disbursement is made under the agreement,
or at the time the credit arrangement is originally established.
(2) If a purpose statement executed at the time the credit
arrangement is initially made indicates that the purpose is to purchase
or carry margin stock, the credit will be deemed in compliance with this
part if the maximum loan value of the collateral at least equals the
aggregate amount of funds actually disbursed. For any purpose credit
disbursed under the agreement, the bank shall obtain and attach to the
executed Form F.R. U-1 a current list of collateral which adequately
supports all credit extended under the agreement.
(d) Single credit rule. (1) All purpose credit extended to a
customer shall be treated as a single credit, and all the collateral
securing such credit shall be considered in determining whether or not
the credit complies with this part.
(2) A bank that has extended purpose credit secured by margin stock
may not subsequently extend unsecured purpose credit to the same
customer unless the combined credit does not exceed the maximum loan
value of the collateral securing the prior credit.
(3) If a bank extended unsecured purpose credit to a customer prior
to the extension of purpose credit secured by margin stock, the credits
shall be combined and treated as a single credit solely for the purposes
of the withdrawal and substitution provision of paragraph (f) of this
section.
(4) If a bank extends purpose credit secured by any margin stock and
non-purpose credit to the same customer, the bank shall treat the
credits as two separate loans and may not rely upon the required
collateral securing the purpose credit for the nonpurpose credit.
(e) Mixed collateral loans. A purpose credit secured in part by
margin stock, and in part by other collateral shall be treated as two
separate loans, one secured by margin stock and one by all other
collateral. A bank may use a single credit agreement, if it maintains
records identifying each portion of the credit and its collateral.
(f) Withdrawals and substitutions. (1) A bank may permit any
withdrawal or substitution of cash or collateral by the customer if the
withdrawal or substitution would not:
(i) Cause the credit to exceed the maximum loan value of the
collateral; or
(ii) Increase the amount by which the credit exceeds the maximum loan
value of the collateral.
(2) For purposes of this section, the maximum loan value of the
collateral on the day of the withdrawal or substitution shall be used.
(g) Exchange offers. To enable a customer to participate in a
reorganization, recapitalization or exchange offer that is made to
holders of an issue of margin stock, a bank may permit substitution of
the securities received. A nonmargin, nonexempted security acquired in
exchange for a margin stock shall be treated as if it is margin stock
for a period of 60 days following the exchange.
(h) Renewals and extensions of maturity. A renewal or extension of
maturity of a credit need not be considered a new extension of credit if
the amount of the credit is increased only by the addition of interest,
service charges, or taxes with respect to the credit.
(i) Transfers of credit. (1) A transfer of a credit between
customers or banks or between a bank and a lender subject to part 207 of
this chapter shall not be considered a new extension of credit if:
(i) The original credit was extended by a bank in compliance with
this part or by a lender subject to part 207 of this chapter in a manner
that would have complied with this part;
(ii) The transfer is not made to evade this part or part 207 of this
chapter;
(iii) The amount of credit is not increased; and
(iv) The collateral for the credit is not changed.
(2) Any transfer between customers at the same bank shall be
accompanied by a statement by the transferor customer describing the
circumstances giving rise to the transfer and shall be accepted an
signed by an officer of the bank acting in good faith. The bank shall
keep such statement with its records of the transferee account.
(3) When a transfer is made between banks or between a bank and a
lender subject to part 207 of this chapter, the transferee shall obtain
a copy of the Form FR U-1 or Form FR G-3 originally filed with the
transferor and retain the copy with its records of the transferee
account. If no form was originally filed with the transferor, the
transferee may accept in good faith a statement from the transferor
describing the purpose of the loan and the collateral securing it.
(j) Action for bank's protection. Nothing in this part shall require
a bank to waive or forego any lien or prevent a bank from taking any
action it deems necessary in good faith for its protection.
(k) Mistakes in good faith. A mistake in good faith in connection
with the extension of maintenance of credit shall not be a violation of
this part.
(l) Lack of notice of NMS security designation. Failure to treat an
NMS security as a margin stock in connection with an extension of credit
shall not be deemed a violation of this part if the designation is made
between quarterly publications of the Board's List of OTC Margin Stocks
and the bank does not have actual notice of the designation.
(Reg. U, 48 FR 35076, Aug. 3, 1983, as amended at 49 FR 35758, Sept.
12, 1984; 52 FR 35683, Sept. 23, 1987; 56 FR 46111, Sept. 10, 1991;
56 FR 66120, Dec. 20, 1991)
12 CFR 221.4 Agreements of nonmember banks.
(a) Banks that are not members of the Federal Reserve System shall
file an agreement that conforms to the requirements of section 8(a) of
the Act (See Form T-1 for domestic nonmember banks and Form T-2 for all
other nonmember banks) prior to extending any credit secured by any
nonexempt security registered on a national securities exchange to
persons subject to Part 220 of this chapter, who are borrowing in the
ordinary course of business.
(b) Any nonmember bank may terminate its agreement upon written
notification to the Board.
12 CFR 221.5 Special purpose loans to brokers and dealers.
(a) Special purpose loans. A member bank and a nonmember bank that
is in compliance with 221.4 of this part, may extend and maintain
purpose credit to brokers and dealers without regard to the limitations
set forth in 221.3 and 221.8 of this part, if the credit is for any of
the specific purposes and meets the conditions set forth in paragraph
(c) of this section.
(b) Written notice. Prior to extending credit for more than a day
under this section, the bank shall obtain and accept in good faith a
written notice or certification from the borrower as to the purposes of
the loan. The written notice or certification shall be evidence of
continued eligiblity for the special credit provisions until the
borrower notifies the bank that it is no longer eligible or the bank has
information that would cause a reasonable person to question whether the
credit is being used for the purpose specified.
(c) Types of special purpose credit. The types of credit that may be
extended and maintained on a good faith basis are as follows:
(1) Hypothecation loans. Credit secured by hypothecated customer
securities that, according to written notice received from the broker or
dealer, may be hypothecated by the broker or dealer under Securities and
Exchange Commission (''SEC'') rules.
(2) Temporary advances in payment-against-delivery transactions.
Credit to finance the purchase or sale of securities for prompt
delivery, if the credit is to be repaid upon completion of the
transaction.
(3) Loans for securities in transit or transfer. Credit to finance
securities in transit or surrendered for transfer, if the credit is to
be repaid upon completion of the transaction.
(4) Intra-day loans. Credit to enable a broker or dealer to pay for
securities, if the credit is to be repaid on the same day it is
extended.
(5) Arbitrage loans. Credit to finance proprietary or customer bona
fide arbitrage transactions. For the purpose of this section bona fide
arbitrage means:
(i) Purchase or sale of a security in one market, together with an
offsetting sale or purchase of the same security in a different market
at nearly the same time as practicable, for the purpose of taking
advantage of a difference in prices in the two markets; or
(ii) Purchase of a security that is, without restriction other than
the payment of money, exchangeable or convertible within 90 calendar
days of the purchase into a second security, together with an offsetting
sale of the second security at or about the same time, for the purpose
of taking advantage of a concurrent disparity in the price of the two
securities.
(6) Distribution loans. Credit to finance the distribution of
securities to customers.
(7) Odd-lot loans. Credit to finance the odd lot transactions of a
person registered as an odd lot dealer on a national securities
exchange.
(8) Emergency loans. Credit that is essential to meet emergency
needs of the broker-dealer business arising from exceptional
circumstances.
(9) Capital contribution loans. (i) Credit that Board has exempted
by order upon a finding that the exemption is necessary or appropriate
in the public interest or for the protection of investors, provided the
Securities Investor Protection Corporation certifies to the Board that
the exemption is appropriate; or
(ii) Credit to a customer for the purpose of making a subordinated
loan or capital contribution to a broker or dealer in conformity with
the SEC's net capital rules and the rules of the broker's or dealer's
Examining Authority, provided:
(A) The customer reduces the credit by the amount of any reduction in
the loan or contribution to the broker or dealer; and
(B) The credit is not used to purchase securities issued by the
broker or dealer in a public distribution.
(10) Loans to specialists. Credit extended to finance the specialty
security and permitted offset positions of members of a national
securities exchange who are registered and acting as specialists on the
exchange, provided the credit is extended on a good faith loan value
basis.
(11) OTC market maker credit. Credit to a dealer who has given
written notice to the bank that it is a ''qualified OTC market maker''
in an OTC margin security as defined in SEC Rule 3b-8 (17 CFR 240.3b-8)
and that the credit will be used solely for the purpose of financing the
market making activity, provided the credit is extended on a good faith
loan value basis.
(12) Third market maker loans. Credit to a dealer who has given
written notice to the bank that it is a ''qualified third market
maker,'' as defined in SEC Rule 3b-8 (17 CFR 240.3b-8), and that the
credit will be used solely for the purpose of financing positions in
securities assumed as a ''qualified third market maker,'' provided the
credit is extended on a good faith loan value basis.
(13) Block positioner credit. Credit to a dealer who has given
written notice to the bank that it is a ''qualified block positioner''
for a block of securities, as defined in SEC Rule 3b-8 (17 CFR
240.3b-8), and that the credit will be used to finance a position in
that block, provided the credit is extended on a good faith loan value
basis.
(Reg. U, 48 FR 35076, Aug. 3, 1983, as amended at 48 FR 37361, Aug.
18, 1983)
12 CFR 221.6 Exempted transactions.
A bank may extend and maintain purpose credit without regard to the
provisions of this part if such credit is extended:
(a) To any bank;
(b) To any foreign banking insititution;
(c) Outside the United States;
(d) To an employee stock ownership plan (ESOP) qualified under
section 401 of the Internal Revenue Code (26 U.S.C 401);
(e) To any ''plan lender'' as defined in part 207 of this chapter to
finance such a plan, provided the bank has no recourse to any securities
purchased pursuant to the plan;
(f) To any customer, other than a broker or dealer, to temporarily
finance the purchase or sale of securities for prompt deliver, if the
credit is to be repaid in the ordinary course of business upon
completion of the transaction;
(g) Against securities in transit, if the credit is not extended to
enable the customer to pay for securities purchased in an account
subject to Part 220 of this chapter; or
(h) To enable a customer to meet emergency expenses not reasonably
foreseeable, and if the extension of credit is supported by a statement
executed by the customer and accepted and signed by an officer of the
bank acting in good faith. For this purpose, emergency expenses include
expenses arising from circumstances such as the death or disability of
the customer, or some other change in circumstances involving extreme
hardship, not reasonably foreseeable at the time the credit was
extended. The opportunity to realize monetary gain or to avoid loss is
not a ''change in circumstances'' for this purpose.
12 CFR 221.7 Requirements for the list of OTC margin stocks.
(a) Requirements for inclusion on the list. Except as provided in
paragraph (d) of this section, an OTC margin stock shall meet the
following requirements:
(1) Four or more dealers stand willing to, and do in fact, make a
market in such stock and regularly submit bona fide bids and offers to
an automated quotations system for their own accounts;
(2) The minimum average bid price of such stock, as determined by the
Board, is at least $5 per share;
(3) The stock is registered under section 12 of the Act, is issued by
an insurance company subject to section (12)(g)(2)(G) of the Act, is
issued by a closed end investment management company subject to
registration pursuant to section 8 of the Investment Company Act of 1940
(15 U.S.C. 80a-8), is an American Depository Receipt (ADR) of a foreign
issuer whose securities are registered under secton 12 of the Act, or is
a stock of an issuer required to file reports under section 15(d) of the
Act;
(4) Daily quotations for both bid and asked prices for the stock are
continuously available to the general public;
(5) The stock has been publicly traded for at least six months;
(6) The issuer had at least $4 million of capital, surplus, and
undivided profits;
(7) There are 400,000 or more shares of such stock outstanding in
addition to shares held beneficially by officers, directors or
beneficial owners of more than 10 percent of the stock;
(8) There are 1,200 or more holders of record, as defined in SEC Rule
12g5-1 (17 CFR 240.12g5-1), of the stock who are not officers, directors
or beneficial owners of ten percent or more of the stock, or the average
daily trading volume of such a stock as determined by the Board, is at
least 500 shares; and
(9) The issuer or a predecessor in interest has been in existence for
at least three years.
(b) Requirements for continued inclusion on the list. Except as
provided in paragraph (d) of this section, an OTC margin stock shall
meet the following requirements:
(1) Three or more dealers stand willing to, and do in fact make a
market in such stock and regularly submit bona fide bids and offers to
an automated quotations system for their own accounts;
(2) The minimum average bid price of such stocks, as determined by
the Board, is at least $2 per share;
(3) The stock is registered as specified in paragraph (a)(3) of this
section;
(4) Daily quotations for both bid and asked prices for the stock are
coninuously available to the general public;
(5) The issuer has at least $1 million of capital, surplus, and
undivided profits;
(6) There are 300,000 or more shares of such stock outstanding in
addition to shares held beneficially by officers, directors, or
beneficial owners of more than 10 percent of the stock; and
(7) There continue to be 800 or more holders of record, as defined in
SEC Rule 12g5-1 (17 CFR 240.12g5-1), of the stock who are not officers,
directors, or beneficial owners of ten percent or more of the stock, or
the average daily trading volume of such stock, as determined by the
Board, is at least 300 shares.
(c) Removal from the list. The Board shall periodically remove from
the list any stock that:
(1) Ceases to exist or of which the issuer ceases to exist, or
(2) No longer substantially meets the provisions of paragraph (b) of
this section or 221.2(j).
(d) Discretionary authority of Board. Without regard to the other
paragraphs of this section, the Board may add to, or omit or remove
from, the OTC margin stock list, any equity security, if in the judgment
of the Board, such action is necessary or appropriate in the public
interest.
(e) Unlawful representations. It shall be unlawful for any bank to
make, or cause to be made, any representation to the effect that the
inclusion of a security on the list of OTC margin stocks is evidence
that the Board or the SEC has in any way passed upon the merits of, or
given approval to, such security or any transactions therein. Any
statement in an advertisement or other similar communication containing
a reference to the Board in connection with the list or stocks on that
list shall be an unlawful representation.
12 CFR 221.8 Supplement, maximum loan value of margin stock and other
collateral.
(a) Maximum loan value of margin stock. The maximum loan value of
any margin stock expect options is fifty per cent of its current market
value.
(b) Maximum loan value of nonmargin stock and all other collateral.
The maximum loan value of nonmargin stock and all other collateral
except puts, calls, or combinations thereof is their good faith loan
value.
(c) Maximum loan value of options. Except for purposes of
221.5(c)(10) of this part, puts, calls, and combinations thereof have no
loan value.
12 CFR 221.8 Interpretations
12 CFR 221.101 Determination and effect of purpose of loan.
(a) Under this part the original purpose of a loan is controlling.
In other words, if a loan originally is not for the purpose of
purchasing or carrying registered stocks, changes in the collateral for
the loan do not change its exempted character.
(b) However, a so-called increase in the loan is necessarily on an
entirely different basis. So far as the purpose of the credit is
concerned, it is a new loan, and the question of whether or not it is
subject to this part must be determined accordingly.
(c) Certain facts should also be mentioned regarding the
determination of the purpose of a loan. Section 221.3(a) provides in
that connection that ''a bank may rely upon a statement with respect
thereto, accepted by the bank in good faith, signed by an officer of the
bank or by the borrower.'' The requirement of ''good faith'' is of vital
importance here. Its application will necessarily vary with the facts
of the particular case, but it is clear that the bank must be alert to
the circumstances surrounding the loan. For example, if the loan is to
be made to a customer who is not a broker or dealer in securities, but
such a broker or dealer is to deliver registered stocks to secure the
loan or is to receive the proceeds of the loan, the bank would be put on
notice that the loan would probably be subject to this part. It could
not accept in good faith a statement to the contrary without obtaining a
reliable and satisfactory explanation of the situation.
(d) Furthermore, the purpose of a loan means just that. It cannot be
altered by some temporary application of the proceeds. For example, if
a borrower is to purchase Government securities with the proceeds of a
loan, but is soon thereafter to sell such securities and replace them
with registered stocks, the loan is clearly for the purpose of
purchasing or carrying registered stocks.
(12 FR 40, Jan. 3, 1947)
12 CFR 221.102 Designation of New York Stock Exchange for purposes of
specialists transactions.
(a) As amended effective July 20, 1949, 221.3(o) removes the maximum
loan level requirements applicable to credit for financing the functions
of ''specialists'' on an exchange designated by the Board of Governors
of the Federal Reserve System.
(b) Effective July 20, 1949, the Board of Governors of the Federal
Reserve System has designated the New York Stock Exchange pursuant to
221.3(o), as amended, this designation to be effective until further
notice.
(14 FR 4665, July 27, 1949)
12 CFR 221.103 Loans to brokers or dealers.
Questions have arisen as to the adequacy of statements received by
lending banks under 221.3(a) in the case of loans to brokers or dealers
secured by stock where the proceeds of the loans are to be used to
finance customer transactions involving the purchasing or carrying of
registered stocks.
While some such loans may qualify for exemption under 221.2, unless
they do qualify for such an exemption they are subject to this part.
For example, if a loan so secured is made to a broker to furnish cash
working capital for the conduct of his brokerage business (i.e., for
purchasing and carrying securities for the account of customers), the
maximum loan value prescribed in 221.4 would be applicable unless the
loan should be of a kind exempted by 221.2. This result would not be
affected by the fact that the stock given as security for the loan was
or included stock owned by the brokerage firm.
In view of the foregoing, the statement referred to in 221.3(a)
which the lending bank may accept and rely upon in good faith in
determining the purpose of the loan would be inadequate if the form of
statement accepted or used by the bank failed to call for answers which
would indicate whether or not the loan was of the kind discussed above.
(17 FR 191, Jan. 8, 1952)
12 CFR 221.104 Federal credit unions.
For text of this interpretation, see 220.110 of this subchapter.
(18 FR 4592, Aug. 5, 1953)
12 CFR 221.105 Arranging for extensions of credit to be made by a bank.
For text of this interpretation, see 220.111 of this subchapter.
(18 FR 5505, Sept. 15, 1953)
12 CFR 221.106 Reliance in ''good faith'' on statement of purpose of
loan.
(a) Certain situations have arisen from time to time under this part
wherein it appeared doubtful that, in the circumstances, the lending
banks may have been entitled to rely upon the statements accepted by
them in determining whether the purposes of certain loans were such as
to cause the loans to be not subject to the part.
(b) The use by a lending bank of a statement in determining the
purpose of a particular loan is, of course, provided for by 221.3(a).
However, under that paragraph a lending bank may ''rely'' upon any such
statement only if it is ''accepted by the bank in good faith.'' As the
Board stated in the interpretation contained in 221.101, the
''requirement of 'good faith' is of vital importance''; and, to fulfill
such requirement, ''it is clear that the bank must be alert to the
circumstances surrounding the loan''.
(c) Obviously, such a statement would not be accepted by the bank in
''good faith'' if at the time the loan was made the bank had knowledge,
from any source, of facts or circumstances which were contrary to the
natural purport of the statement, or which were sufficient reasonably to
put the bank on notice of the questionable reliability or completeness
of the statement.
(d) Furthermore, the same requirement of ''good faith'' is to be
applied whether the statement accepted by the bank is signed by the
borrower or by an officer of the bank. In either case, ''good faith''
requires the exercise of special diligence in any instance in which the
borrower is not personally known to the bank or to the officer who
processes the loan.
(e) The interpretation set forth in 221.101 contains an example of
the application of the ''good faith'' test. There it was stated that
''if the loan is to be made to a customer who is not a broker or dealer
in securities, but such a broker or dealer is to deliver registered
stocks to secure the loan or is to receive the proceeds of the loan, the
bank would be put on notice that the loan would probably be subject to
this part. It could not accept in good faith a statement to the
contrary without obtaining a reliable and satisfactory explanation of
the situation''.
(f) Moreover, and as also stated by the aforementioned interpretation
contained in 221.101, the purpose of a loan, of course, ''cannot be
altered by some temporary application of the proceeds. For example, if
a borrower is to purchase Government securities with the proceeds of a
loan, but is soon thereafter to sell such securities and replace them
with registered stocks, the loan is clearly for the purpose of
purchasing or carrying registered stocks''. The purpose of a loan
therefore, should not be determined upon a narrow analysis of the
immediate use to which the proceeds of the loan are put. Accordingly, a
bank acting in ''good faith'' should carefully scrutinize cases in which
there is any indication that the borrower is concealing the true purpose
of the loan, and there would be reason for special vigilance if
registered stocks are substituted for bonds or unregistered stocks soon
after the loan is made, or on more than one occasion.
(g) Similarly, the fact that a loan made on the borrower's signature
only, for example, becomes secured by registered stock shortly after the
disbursement of the loan usually would afford reasonable grounds for
questioning the bank's apparent reliance upon merely a statement that
the purpose of the loan was not to purchase or carry registered stock.
(h) These examples are, of course, by no means exhaustive. They
simply illustrate the fundamental fact that no statement accepted by a
bank is of any value for the purposes of the regulation unless
''accepted by the bank in good faith'', and that ''good faith''
requires, among other things, reasonable diligence to learn the truth.
(18 FR 5505, Sept. 15, 1953)
12 CFR 221.107 Arranging loan to purchase open-end investment company
shares.
For text of this interpretation, see 220.112 of this subchapter.
(20 FR 1643, Mar. 18, 1955)
12 CFR 221.108 Effect of registration of stock subsequent to making of
loan.
(a) The Board recently was asked whether a loan by a bank to enable
the borrower to purchase a newly issued stock during the initial
over-the-counter trading period prior to the stock becoming registered
(listed) on a national securities exchange would be subject to this
part. The Board replied that, until such stock is so registered, this
would not be applicable to such a loan.
(b) The Board has now been asked what the position of the lending
bank would be under this part if, after the date on which the stock
should become registered, such bank continued to hold a loan of the kind
just described. It is assumed that the loan was in an amount greater
than the maximum loan value for the collateral specified in this part.
(c) If the stock should become registered, the loan would then be for
the purpose of purchasing or carrying a registered stock, and, if
secured directly or indirectly by any stock, would be subject to this
part as from the date the stock was registered. Under this part, this
does not mean that the bank would have to obtain reduction of the loan
in order to reduce it to an amount no more than the specified maximum
loan value. It does mean, however, that so long as the loan balance
exceeded the specified maximum loan value, the bank could not permit any
withdrawals or substitutions of collateral that would increase such
excess; nor could the bank increase the amount of the loan balance
unless there was provided additional collateral having a maximum loan
value at least equal to the amount of the increase. In other words, as
from the date the stock should become registered, the loan would be
subject to this part in exactly the same way, for example, as a loan
subject to this part that became under-margined because of a decline in
the current market value of the loan collateral or because of a decrease
by the Board in the maximum loan value of the loan collateral.
(21 FR 1094, Feb. 17, 1956)
12 CFR 221.109 Loan to open-end investment company.
In response to a question regarding a possible loan by a bank to an
open-end investment company that customarily purchases stocks registered
on a national securities exchange, the Board stated that in view of the
general nature and operations of such a company, any loan by a bank to
such a company should be presumed to be subject to this part as a loan
for the purpose of purchasing or carrying registered stocks. This would
not be altered by the fact that the open-end company had used, or
proposed to use, its own funds or proceeds of the loan to redeem some of
its own shares, since mere application of the proceeds of a loan to some
other use cannot prevent the ultimate purpose of a loan from being to
purchase or carry registered stocks.
(23 FR 8945, Nov. 18, 1958)
12 CFR 221.110 Questions arising under Regulation U.
(a) Regulation U governs ''any loan'' made by a bank ''secured
directly or indirectly by any stock for the purpose of purchasing or
carrying any stock registered on a national securities exchange'', with
certain exceptions, and provides that the maximum loan value of such
stock shall be a fixed percentage ''of its current market value, as
determined by any reasonable method.''
(b) The Board of Governors has recently had occasion to consider the
application of this language to the three following questions:
(1) Loan secured by stock. First, is a loan to purchase or carry
registered stock subject to Regulation U where made in unsecured form,
if stock is subsequently deposited as security with the lending bank,
and surrounding circumstances indicate that the parties originally
contemplated that the loan should be so secured? The Board answered
that in a case of this kind, the loan would be subject to the
Regulation, for the following reasons.
(i) The Board has long held, in the closely related purpose area,
that the original purpose of a loan should not be determined upon a
narrow analysis of the technical circumstances under which a loan is
made. Instead, the fundamental purpose of the loan is considered to be
controlling. Indeed, ''the fact that a loan made on the borrower's
signature only, for example, becomes secured by registered stock shortly
after the disbursement of the loan'' affords reasonable grounds for
questioning whether the bank was entitled to rely upon the borrower's
statement as to the purpose of the loan. 1953 Bull. 951.
(ii) Where security is involved, standards of interpretation should
be equally searching. If, for example, the original agreement between
borrower and bank contemplated that the loan should be secured by
registered stock, and such stock is in fact delivered to the bank when
available, the transaction must be regarded as fundamentally a secured
loan. This view is strengthened by the fact that the regulation applies
to a loan ''secured directly or indirectly by any stock.''
(2) Loan to acquire controlling shares. (i) The second question is
whether the Regulation governs a stock-secured loan made for the
business purpose of purchasing a controlling interest in a corporation,
or whether such a loan would be exempt on the ground that the Regulation
is directed solely toward purchases of stock for speculative or
investment purposes. The Board answered that a stock-secured loan for
the purpose of purchasing or carrying registered stock is subject to the
Regulation, regardless of the reason for which the purchase is made.
(ii) The answer is required, in the Board's view, since the language
of the Regulation is explicitly inclusive, covering ''any loan * * *
secured directly or indirectly by any stock for the purpose of
purchasing or carrying any stock registered on a national securities
exchange.'' Moreover, the withdrawal in 1945 of the original section
2(e) of the Regulation, which exempted ''any loan for the purpose of
purchasing a stock from or through a person who is not a member of a
national securities exchange * * *'' plainly implies that transactions
of the sort described are now subject to the general prohibition of
section 1.
(3) Determination of ''current market value.'' (i) The third question
is how to determine the ''current market value'' of a block of
registered stock which represents a controlling interest in a
corporation where the block is purchased at a price in excess of the
average of bid and asked prices on the Exchange for the day of the
purchase, and also in excess of the average price on the Exchange over
recent months, while the parties to the loan, on the other hand, believe
the purchase to be a bargain and report opportunities to resell at a
price which is higher still. In a case of this kind, the Board believes
that the current market value of the block is the price at which the
actual purchase was made.
(ii) The Supplement to Regulation U states that current market value
shall be determined by ''any reasonable method''. Regulation T, which,
while not controlling, may throw some light on the problem, provides
that the current market value of a security ''throughout the day of its
purchase or sale'' shall be ''total cost or the net proceeds of its
sale.'' The Board is of the opinion that actual sale price in an arm's
length transaction provides the best evidence of value. Particularly in
circumstances such as those indicated above, it must be assumed that
this price reflects intangible factors including control.
(24 FR 1858, Mar. 14, 1959)
12 CFR 221.111 Purchase-and-sale substitution on same day.
(a) Amendments to part 221, effective June 15, 1959 (24 FR 3867),
deal, among other things, with changes in collateral for a ''restricted
loan'', i.e., a bank loan that exceeds the maximum loan value of the
collateral therefor. In connection with those amendments an inquiry has
been received as to whether the bank may permit a substitution of
collateral for such a loan under the amended part in a case in which the
excess of the loan over the maximum loan value is not thereby increased
and the substitution occurs in the form of a purchase and sale of
collateral, both the purchase and sale orders being executed on the same
day.
(b) The bank may permit such a purchase-and-sale substitution under
the amended part without additional collateral or reduction in the loan
if it reasonably ascertains, and has evidence thereof in its records,
that the purchase and sale orders were executed on the same day. The
controlling events which must occur on the same day are the executions
of the purchase order and sale order, and not the bank's receipt or
release of stock certificates. It may be noted that the result is
substantially similar to that under the June 15, 1959, amendments to
Part 220 of this subchapter. Substitutions that do not involve a
same-day purchase and sale are subject to the withdrawal limitations
under both parts.
(24 FR 4698, June 10, 1959)
12 CFR 221.112 Loans by bank in capacity as trustee.
(a) The Board's advice has been requested whether a bank's activities
in connection with the administration of an employees' savings plan are
subject to this Part 221.
(b) Under the plan, any regular, full-time employee may participate
by authorizing the sponsoring company to deduct a percentage of his
salary and wages and transmit the same to the bank as trustee.
Voluntary contributions by the company are allocated among the
participants. A participant may direct that funds held for him be
invested by the trustee in insurance, annuity contracts, Series E Bonds,
or in one or more of three specified securities which are listed on a
stock exchange. Loans to purchase the stocks may be made to
participants from funds of the trust, subject to approval of the
administrative committee, which is composed of five participants, and of
the trustee. The bank's right to approve is said to be restricted to
the mechanics of making the loan, the purpose being to avoid cumbersome
procedures.
(c) Loans are secured by the credit balance of the borrowing
participants in the savings fund, including stock, but excluding (in
practice) insurance and annuity contracts and government securities.
Additional stocks may be, but, in practice, have not been pledged as
collateral for loans. Loans are not made, under the plan, from bank
funds, and participants do not borrow from the bank upon assignment of
the participants' accounts in the trust.
(d) It is urged that loans under the plan are not subject to this
Part 221 because a loan should not be considered as having been made by
a bank where the bank acts solely in its capacity of trustee, without
exercise of any discretion.
(e) The Board reviewed this question upon at least one other occasion
in recent years, and full consideration has again been given to the
matter. After considering the arguments on both sides, the Board has
reaffirmed its earlier view that, in conformity with an interpretation
not published in CFR which was published at page 874 of the 1946 Federal
Reserve Bulletin, this Part 221 applies to the activities of a bank when
it is acting in its capacity as trustee. Although the bank in that case
had at best a limited discretion with respect to loans made by it in its
capacity as trustee, the Board concluded that this fact did not affect
the application of the regulation to such loans.
(25 FR 5923, June 28, 1960)
12 CFR 221.113 Loan which is secured indirectly by stock.
(a) A question has been presented to the Board as to whether a loan
by a bank to a mutual investment fund is ''secured * * * indirectly by
any stock'' within the meaning of 221.1, so that the loan should be
treated as subject to the regulation.
(b) Briefly, the facts are as follows. Fund X, an open-end
investment company, entered into a loan agreement with Bank Y, which was
(and still is) custodian of the securities which comprise the portfolio
of Fund X. The agreement includes the following terms, which are
material to the question before the Board;
(1) Fund X agrees to have an ''asset coverage'' (as defined in the
agreements) of 400 percent of all its borrowings, including the proposed
borrowing, at the time when it takes down any part of the loan.
(2) Fund X agrees to maintain an ''asset coverage'' of at least 300
percent of its borrowings at all times.
(3) Fund X agrees not to amend its custody agreement with Bank Y, or
to substitute another custodian without Bank Y's consent.
(4) Fund X agrees not to mortgage, pledge, or otherwise encumber any
of its assets elsewhere than with Bank Y.
(c) In 221.109 the Board stated that because of ''the general nature
and operations of such a company'', any ''loan by a bank to an open-end
investment company that customarily purchases stocks registered on a
national securities exchange * * * should be presumed to be subject to
this part as a loan for the purpose of purchasing or carrying registered
stocks'' (''purpose loans''). The Board's interpretation went on to say
that --
This would not be altered by the fact that the open-end company had
used, or proposed to use, its own funds or proceeds of the loan to
redeem some of its own shares * * *.
(d) Accordingly, the loan by Bank Y to Fund X was and is a ''purpose
loan''. However, a loan by a bank is not subject to this part unless
(1) it is a purpose loan and (2) it is ''secured directly or indirectly
by any stock''. In the present case, the loan is not ''secured
directly'' by stock in the ordinary sense, since the portfolio of Fund X
is not pledged to secure the credit from Bank Y. But the word
''indirectly'' must signify some form of security arrangement other than
the ''direct'' security which arises from the ordinary ''transaction
that gives recourse against a particular chattel or land or against a
third party on an obligation'' described in the American Law Institute's
Restatement of the Law of Security, page 1. Otherwise the word
''indirectly'' would be superflous, and a regulation, like a statute,
must be construed if possible to give meaning to every word.
(e) The Board has indicated its view that any arrangement under which
stock is more readily available as security to the lending bank than to
other creditors of the borrower may amount to indirect security within
the meaning of this part. In an interpretation published at 221.110 it
stated.
The Board has long held, in the * * * purpose area, that the original
purpose of a loan should not be determined upon a narrow analysis of the
technical circumstances under which a loan is made * * * Where security
is involved, standards of interpretation should be equally searching.
In its pamphlet issued for the benefit and guidance of banks and bank
examiners, entitled ''Questions and Answers Illustrating Application of
Regulation U'', the Board said
In determining whether a loan is ''indirectly'' secured, it should be
borne in mind that the reason the Board has thus far refrained * * *
from regulating loans not secured by stock has been to simplify
operations under the regulation. This objective of simplifying
operations does not apply to loans in which arrangements are made to
retain the substance of stock collateral while sacrificing only the
form.
(f) A wide variety of arrangements as to collateral can be made
between bank and borrower which will serve, to some extent, to protect
the interest of the bank in seeing that the loan is repaid, without
giving the bank a conventional direct ''security'' interest in the
collateral. Among such arrangements which have come to the Board's
attention are the following:
(1) The borrower may deposit stock in the custody of the bank.
An arrangement of this kind may not, it is true, place the bank in
the position of a secured creditor in case of bankruptcy, or even of
conflcting claims, but it is likely effectively to strengthen the bank's
position. Section 221.3(f), which provides that
A loan need not be treated as collateralled by securities which are
held by the bank only in the capacity of custodian, depositary or
trustee, or under similar circumstances, if the bank in good faith has
not relied upon such securities as collateral in the making or
maintenance of the particular loan.
does not exempt a deposit of this kind from the impact of the
regulation unless it is clear that the bank ''has not relied'' upon the
securities deposited with it.
(2) A borrower may not deposit his stock with the bank, but agree not
to pledge or encumber his assets elsewhere while the loan is
outstanding.
Such an agreement may be difficult to police, yet it serves to some
extent to protect the interest of the bank if only because the future
credit standing and business reputation of the borrower will depend upon
his keeping his word. If the assets covered by such an agreement
include stock, then, as under paragraphs (f)(1) and (3) of this section,
the stock is ''indirect security'' for the loan within the meaning of
this part.
(3) The borrower may deposit stock with a third party who agrees to
hold the stock until the loan has been paid off. Here, even though the
parties may purport to provide that the stock is not ''security'' for
the loan (for example, by agreeing that the stock may not be sold and
the proceeds applied to the debt if the borrower fails to pay), the mere
fact that the stock is out of the borrower's control for the duration of
the loan serves to some extent to protect the bank.
(g) The three instances described above are merely illustrative.
Other methods, or combinations of methods, may serve a similar purpose.
The conclusion that any given arrangement constitutes ''indirect
security'' may, but need not, be reinforced by facts such as that the
stock in question was purchased with proceeds of the loan, that the
lending bank suggests or insists upon the arrangement, or that the loan
would probably be subject to criticism by supervisory authorities were
it not for the protective arrangement.
(h) Accordingly, the Board concludes that the loan by Bank Y to Fund
X is indirectly secured by the portfolio of the fund and must be treated
by the bank as a regulated loan.
(26 FR 4884, June 2, 1961)
12 CFR 221.114 Bank loans to purchase stock of American Telephone and
Telegraph Company under Employees' Stock Plan.
(a) The Board of Governors recently interpreted Part 221 (Regulation
U) in connection with proposed loans by a bank to persons who are
purchasing shares of stock of American Telephone and Telegraph Company
pursuant to its Employees' Stock Plan.
(b) According to the current offering under the Plan, an employee of
the AT&T system may purchase shares through regular deductions from his
pay over a period of 24 months. At the end of that period, a
certificate for the appropriate number of shares will be issued to the
participating employee by AT&T. Each employee is entitled to purchase,
as a maximum, shares that will cost him approximately three-fourths of
his annual base pay. Since the program extends over two years, it
follows that the payroll deductions for this purpose may be in the
neighborhood of 38 percent of base pay and a larger percentage of
''take-home pay.'' Deductions of this magnitude are in excess of the
saving rate of many employees.
(c) Certain AT&T employees, who wish to take advantage of the current
offering under the Plan, are the owners of shares of AT&T stock that
they purchased under previous offerings. A bank proposed to receive
such stock as collateral for a ''living expenses'' loan that will be
advanced to the employee in monthly installments over the 24-month
period, each installment being in the amount of the employee's monthly
payroll deduction under the Plan. The aggregate amount of the advances
over the 24-month period would be substantially greater than the maximum
loan value of the collateral as prescribed in 221.4, the Supplement to
Regulation U (30 percent, at the present time).
(d) In the opinion of the Board of Governors, a loan of the kind
described would violate this part 221 if it exceeded the maximum loan
value of the collateral. The regulation applies to any stock-secured
loan for the purpose of purchasing or carrying stock registered on a
national securities exchange ( 221.1(a)). Although the proposed loan
would purport to be for living expenses, it seems quite clear, in view
of the relationship of the loan to the Employees' Stock Plan, that its
actual purpose would be to enable the borrower to purchase AT&T stock,
which is registered on a national securities exchange. At the end of
the 24-month period the borrower would acquire a certain number of
shares of that stock and would be indebted to the lending bank in an
amount approximately equal to the amount he would pay for such shares.
In these circumstances, the loan by the bank must be regarded as a loan
''for the purpose of purchasing'' the stock, and therefore it is subject
to the limitations prescribed by this part 221. This conclusion follows
from the provisions of the part, and it may also be observed that a
contrary conclusion could largely defeat the basic purpose of the margin
regulations.
(e) Accordingly, the Board concluded that a loan of the kind
described may not be made in an amount exceeding the maximum loan value
of the collateral, as prescribed by the current Supplement to Regulation
U ( 221.4).
(27 FR 5538, June 12, 1962)
12 CFR 221.115 Accepting a purpose statement through the mail without
benefit of face-to-face interview.
For text of an interpretation on this subject, see 207.110 of this
subchapter (15 U.S.C. 78g).
(43 FR 30039, July 13, 1978)
12 CFR 221.116 Bank loans to replenish working capital used to purchase
mutual fund shares.
(a) In a situation recently considered by the Board of Governors, a
business concern (''X'') proposed to purchase mutual fund shares, from
time to time, with proceeds from its accounts receivable, then pledge
the shares with a bank in order to secure working capital. The bank was
prepared to lend amounts equal to 70 percent of the current value of the
shares as they were purchased by X. If the loans were subject to this
part (Regulation U), only 30 percent of the current market value of the
shares could be lent.
(b) The immediate purpose of the loans would be to replenish X's
working capital. However, as time went on, X would be acquiring mutual
fund shares at a cost that would exceed the net earnings it would
normally have accumulated, and would become indebted to the lending bank
in an amount approximately 70 percent of the prices of said shares.
(c) The Board held that the loans were for the purpose of purchasing
the shares, and therefore subject to the limitations prescribed by this
part. As pointed out in 221.114 with respect to a similar program for
putting a high proportion of cash income into stock, then borrowing
against the stock to meet needs for which the cash would otherwise have
been required, a contrary conclusion could largely defeat the basic
purpose of the margin regulations.
(d) Also considered was an alternative proposal under which X would
deposit proceeds from accounts receivable in a time account for 1 year,
before using those funds to purchase mutual fund shares. The Board held
that this procedure would not change the situation in any significant
way. Once the arrangement was established, the proceeds would be
flowing into the time account at the same time that similar amounts were
released to purchase the shares, and over any extended period of time
the result would be the same. Accordingly, the Board concluded that
bank loans made under the alternative proposal would similarly be
subject to this part.
(32 FR 8357, June 10, 1967)
12 CFR 221.117 When bank in ''good faith'' has not relied on stock as
collateral.
(a) The Board has received questions regarding the circumstances in
which an extension or maintenance of credit will not be deemed to be
''indirectly secured'' by stock as indicated by the phrase, ''if the
bank in good faith has not relied upon such stock as collateral,''
contained in clause (2) of a recent amendment to 221.3(c) of Regulation
U. A similar phrase is contained in 207.2(g) of Regulation G of this
chapter and the following applies to that paragraph, insofar as
appropriate and consistent.
(b) In response, the Board noted that in amending this portion of the
regulation it was indicated that one of the purposes of the change was
to make clear that 221.3(c) does not apply to certain routine negative
covenants in loan agreements. Also, while the question of whether or
not a bank has relied upon particular stock as collateral is necessarily
a question of fact to be determined in each case in the light of all
relevant circumstances, some indication that the bank had not relied
upon stock as collateral would seem to be afforded by such circumstances
as the fact that (1) the bank had obtained a reasonably current
financial statement of the borrower and this statement could reasonably
support the loan, and (2) the loan was not payable on demand or because
of fluctuations in market value of the stock, but instead was payable on
one or more fixed maturities which were typical of maturities applied by
the bank to loans otherwise similar except for not involving any
possible question of stock collateral.
(33 FR 7485, May 21, 1968)
12 CFR 221.118 Bank arranging for extension of credit by corporation.
For text of this interpretation, see 207.103 of this subchapter.
(34 FR 7005, Apr. 29, 1969)
12 CFR 221.119 Status after July 8, 1969, of credit extended prior to
that date to purchase or carry mutual fund shares.
(a) Prior to July 8, 1969, the margin and other requirements of
Regulations G and U applied to credit extended to purchase or carry
shares of a mutual fund (secured by certain described collateral), if
(1) the portfolio of the fund did ''customarily include'' securities
that would themselves have been subject to the regulations and (2) the
fund was included in a list of such funds that the Board published for
this purpose.
(b) It was found that virtually all mutual funds met the
''customarily include'' test. Accordingly, for administrative reasons,
the Board discontinued publication of the list and restated the rule to
cover all mutual funds except those at least 95 percent of whose assets
are continuously invested in exempted securities.
(c) The Board made these changes, effective July 8, 1969, in
Regulation G (Code of Federal Regulations, title 12, part 207) by adding
a new 207.2(d) (while eliminating former 207.2(c)(3) and 207.4(b)),
and in Regulation U (Code of Federal Regulations, title 12, part 221) by
adding a new 221.3(v) (while eliminating former 221.(b)(3) and
221.3(d)).
(d) The Board has received several questions respecting the effect of
the amendments on certain stock-secured credits that were extended prior
to July 8, 1969, to purchase or carry mutual fund shares and were
treated as not subject to Regulations G or U at the time of extension on
the ground that the funds were not on the Board's published list.
(e) The Board has held that whether a loan is for the purpose of
purchasing or carrying a stock not registered on a national securities
exchange depends on the present status of the stock. Thus, a credit is
treated as one for such a purpose if used to purchase or carry a stock
that became registered after the loan was made. (1937 Federal Reserve
Bulletin 955; Published Interpretations Par. 6435). The converse is
also true (1938 Federal Reserve Bulletin 90; Published Interpretations
Par. 6445).
(f) The same principle applies to the closely parallel question in
the present case. Credits extended before July 8, 1969, to purchase or
carry shares in the mutual funds in question were for the purpose of
purchasing or carrying ''margin stocks'' (Regulation U) or ''margin
securities'' (Regulation G) even though at the time of extension, the
funds were not on the Board's published list. Accordingly, if
collateralized as specified in the regulations, the credits were subject
to the pertinent regulation from the effective date of the amendments,
July 8, 1969.
(g) In applying the above interpretation, it should be borne in mind
that the Board's margin regulations are based on (1) the requirement of
an initial deposit in connection with the original extension of a
credit, and (2) limitations on substitutions or withdrawals of the
collateral securing a credit.
(h) In the latter category, the Board's margin regulations apply a
retention requirement to proceeds of a sale of collateral in an
undermargined loan (except for a same-day sale-and-purchase
substitution) in order to strengthen the margin status of the loan (
207.1(j) of Regulation G and 221.1(b) of Regulation U). While this
requirement became applicable on July 8, 1969, to credit previously
extended to purchase shares in mutual funds that had not been on the
Board's list prior to that date, the Board, in view of all the
circumstances, will not insist upon reconstitution of loans to take
account of withdrawals and substitutions of collateral before April 27,
1970, the date of issuance of this interpretation, even though
henceforth all withdrawals and substitutions must comply with the
requirement.
(i) Application of 221.3(q): Section 221.3(q) of Regulation U
provides that credit extended by banks to a customer who is engaged
''principally, or as one of the customer's important activities,'' in
the business of extending credit to purchase or carry margin securities
is considered to be extended for that purpose. Banks extending credit
to such customers must treat the credit as subject to that regulation,
and the credit must comply with all the requirements thereof ''unless
the credit and its purposes are effectively and unmistakably separated
and disassociated from any financing or refinancing, for the customer or
others, of any purchasing or carrying of (margin) stocks.''
(j) Since credit to purchase or carry mutual fund shares (no matter
when extended) is credit to purchase or carry margin stocks, any person
or organization that engages, as an important activity, in extending
credit to purchase or carry such shares (with the exception mentioned)
is a lender subject to 221.3(q) even though the funds were not on the
Board's list prior to July 8, 1969. However, as stated above, as an
administrative matter the retention requirements of the regulations need
apply only to all substitutions and withdrawals, occurring on or after
April 27, 1970, of collateral securing such credit.
(k) In view of the likelihood that 221.3(q) applies to any loan to
any financial institution which has pledged or offers to pledge mutual
fund shares, particularly shares which were not on the Board's list
prior to July 8, 1969, a bank should treat any such loan as being
subject to the requirements of the regulation unless the borrower
supplies clear proof, to be preserved in the files of the bank, that
221.3(q) does not apply or that the loan is ''separated and
disassociated'' as specified in the section. In this connection, a
general statement, such as that the credit is for ''working capital'' or
''general corporate purposes'', is insufficient evidence that the
requirements of the regulation are not applicable.
(35 FR 6959, May 1, 1970)
12 CFR 221.120 Allocation of stock collateral to purpose and nonpurpose
credits to same customer.
(a) A bank proposes to extend two credits (Credits ''A'' and ''B'')
to its customer. Although the two credits are proposed to be extended
at the same time, each would be evidenced by a separate agreement.
Credit A would be extended for the purpose of providing the customer
with working capital (nonpurpose credit), collateralized by stock.
Credit B would be extended for the purpose of purchasing or carrying
margin stock (purpose credit), without collateral or on collateral other
than stock.
(b) Regulation U allows a bank to extend purpose and nonpurpose
credits simultaneously or successively to the same customer. This rule
is expressed in 221.3(n)(3) which provides in substance that for any
nonpurpose credit to the same customer, the bank shall in good faith
require as much collateral not already identified to the customer's
purpose credit as the bank would require if it held neither the purpose
loan nor the identified collateral. This rule also takes into account
that the bank would not necessarily be required to hold collateral for
the nonpurpose credit if, consistent with good faith banking practices,
it would normally make this kind of nonpurpose loan without collateral.
(c) The Board views 221.3(n)(3) of Regulation U, when read in
conjunction with 221.3(n)(1), as requiring that whenever a bank extends
two credits to the same customer, one a purpose credit and the other
nonpurpose, any stock collateral must first be identified with and
attributed to the purpose loan by taking into account the maximum loan
value of such collateral as prescribed in 221.4 (the Supplement) of
Regulation U.
(d) The Board is further of the opinion that under the foregoing
circumstances Credit B would be indirectly secured by stock, despite the
fact that there would be separate loan agreements for both credits.
This conclusion flows from the circumstance that the bank would hold in
its possession stock collateral to which it would have access with
respect to Credit B, despite any ostensible allocation of such
collateral to Credit A.
(36 FR 25150, Dec. 29, 1971)
12 CFR 221.121 Computation of time periods for acquiring and holding
blocks of stock by block positioners.
(a) The Board recently considered two questions in connection with
221.3 (z) (2) and (3) of Regulation U providing for bank credit to block
positioners which is exempt from the normal margin requirements as
prescribed from time to time in that regulation.
(b) The first question pertained to the period of time in which a
block positioner, in order to qualify for the exemption, must position a
block of stock when such positioning results from several transactions
at approximately the same time from a single source, as set forth in
221.3(z)(2)(ii).
(c) The Board is of the view that the aggregate of several
transactions from a single source would ordinarily be carried out within
a timespan of one-half hour in order for such aggregate to be considered
one block of stock eligible for exempt credit. In extraordinary
circumstances, however, the block positioner could consult the Reserve
Bank in whose district its office is situated as to whether stock
positioned over a slightly longer period constitutes a single block. In
such a case the block positioner should, of course, disclose all
relevant circumstances to the Reserve Bank.
(d) The second question related to the computation of the period of
20 business days, specified in 221.3(z)(3), in which exempt credit may
remain outstanding for positioning a block of stock.
(e) The Board is of the view that the computation of such 20-day
period shall commence on the business day following the date of trade.
(37 FR 24105, Nov. 14, 1972; 37 FR 26315, Dec. 9, 1972)
12 CFR 221.122 Applicability of margin requirements to credit in
connection with Insurance Premium Funding Programs.
For text of this interpretation, see 207.108 of this subchapter.
(Interprets and applies 12 CFR 207.4(f) and 12 CFR 221.3(x))
(39 FR 9425, Mar. 11, 1974)
12 CFR 221.123 Bona fide arbitrage transactions.
For the text of this interpretation, see 220.126 of this subchapter.
(Interprets and applies 12 CFR 220.4(c), 220.4(d))
(38 FR 5237, Feb. 27, 1973; 40 FR 59322, Dec. 23, 1975)
12 CFR 221.124 Application of the single-credit rule to loan
participations.
For text of this interpretation, see 207.113 of this chapter.
(Reg. U, 56 FR 46228, Sept. 11, 1991)
12 CFR 221.124 PART 224 -- BORROWERS OF SECURITIES CREDIT
Sec.
224.1 Authority, purpose and scope.
224.2 Definitions.
224.3 Margin regulations to be applied by nonexempted borrowers.
Authority: Sec. 7(f), as amended (15 U.S.C. 78a-jj).
Source: Reg. X, 48 FR 56572, Dec. 22, 1983, unless otherwise noted.
Editorial Note: See the List of CFR Sections Affected in the Finding
Aids section of this volume for FR citations to Part 224 OTC Margin
Stocks changes.
12 CFR 224.1 Authority, purpose, and scope.
(a) Authority and purpose. Regulation X (this part) is issued by the
Board of Governors of the Federal Reserve System (the Board) under the
Securities Exchange Act of 1934, as amended (the Act) (15 U.S.C. 78a et
seq.). This part implements section 7(f) of the Act (15 U.S.C. 78g(f)),
the purpose of which is to require that credit obtained within or
outside the United States complies with the limitations of the Board's
Margin Regulations G, T, and U (12 CFR parts 207, 220, and 221,
respectively).
(b) Scope and exemptions. The Act and this part apply the Board's
margin regulations to United States persons and foreign persons
controlled by or acting on behalf of or in conjunction with United
States persons (hereinafter borrowers), who obtain credit outside the
United States to purchase or carry United States securities, or within
the United States to purchase or carry any securities (both types of
credit are hereinafter referred to as purpose credit). The following
borrowers are exempt from the Act and this part:
(1) Any borrower who obtains purpose credit within the United States,
unless the borrower willfully causes the credit to be extended in
contravention of Regulations G, T, or U.
(2) Any borrower whose permanent residence is outside the United
States and who does not obtain or have outstanding, during any calendar
year, a total of more than $100,000 in purpose credit obtained outside
the United States; and
(3) Any borrower who is exempt by Order upon terms and conditions set
by the Board.
12 CFR 224.2 Definitions.
The terms used in this part have the meanings given to them in
sections 3(a) and 7(f) of the Act, and in Regulations G, T, and U.
Section 7(f) of the Act contains the following definitions:
(a) United States person includes a person which is organized or
exists under the laws of any State or, in the case of a natural person,
a citizen or resident of the United States; a domestic estate; or a
trust in which one or more of the foregoing persons has a cumulative
direct or indirect beneficial interest in excess of 50 per centum of the
valve of the trust.
(b) United States security means a security (other than an exempted
security) issued by a person incorporated under the laws of any State,
or whose principal place of business is within a State.
(c) Foreign person controlled by a United States person includes any
noncorporate entity in which United States persons directly or
indirectly have more than a 50 per centum beneficial interest, and any
corporation in which one or more United States persons, directly or
indirectly, own stock possessing more than 50 per centum of the total
combined voting power of all classes of stock entitled to vote, or more
than 50 per centum of the total value of shares of all classes of stock.
12 CFR 224.3 Margin regulations to be applied by nonexempted borrowers.
(a) Credit transactions outside the United States. No borrower shall
obtain purpose credit from outside the United States unless it conforms
to the following margin regulations:
(1) Regulation T (12 CFR part 220) if the credit is obtained from a
foreign branch of a broker-dealer;
(2) Regulation U (12 CFR part 221) if the credit is obtained from a
foreign branch of a bank, except for the requirement of a purpose
statement (12 CFR 221.3 (b) and (c)); and
(3) Regulation G (12 CFR part 207) if the credit is obtained from any
other lender outside the United States, except for the requirement of a
purpose statement (12 CFR 207.3 (e) and (f)).
(b) Credit transactions within the United States. Any borrower who
willfully causes credit to be extended in contravention of Regulations
G, T, or U, and who, therefore, is not exempted by 224.1(b)(1) of this
part, must conform the credit to the margin regulation that applies to
the lender.
(c) Inadvertent noncompliance. No borrower who inadvertently
violates this part and who acts to remedy the violation as soon as
practicable shall be deemed in violation of this part.
12 CFR 224.3 PART 225 -- BANK HOLDING COMPANIES AND CHANGE IN BANK CONTROL
12 CFR 224.3 Pt. 225
12 CFR 224.3 Subpart A -- General Provisions
Sec.
225.1 Authority, purpose, and scope.
225.2 Definitions.
225.3 Administration.
225.4 Corporate practices.
225.5 Registration, reports, and inspections.
225.6 Penalties for violations.
12 CFR 224.3 Subpart B -- Acquisition of Bank Securities or Assets
225.11 Transactions requiring Board approval.
225.12 Transactions not requiring Board approval.
225.13 Factors considered in acting on bank applications.
225.14 Procedures for applications, notices, and hearings.
12 CFR 224.3 Subpart C -- Nonbanking Activities and Acquisitions by
Bank Holding Companies
225.21 Prohibited nonbanking activities and acquisitions; exempt
bank holding companies.
225.22 Exempt nonbanking activities and acquisitions.
225.23 Procedures for applications, notices, and hearings.
225.24 Factors considered in acting on nonbanking applications.
225.25 List of permissible nonbanking activities.
12 CFR 224.3 Subpart D -- Control and Divestiture Proceedings
225.31 Control proceedings.
225.32 Divestiture proceedings.
12 CFR 224.3 Subpart E -- Change in Bank Control
225.41 Transactions requiring prior notice.
225.42 Transactions not requiring prior notice.
225.43 Procedures for filing, processing, publishing, and acting on
notices.
12 CFR 224.3 Subpart F -- Limitations on Nonbank Banks
225.51 Seven percent growth limit for nonbank banks.
225.52 Limitation on overdrafts.
12 CFR 224.3 Subpart G -- Appraisals
225.61 Authority, purpose, and scope.
225.62 Definitions.
225.63 Appraisals not required; transactions requiring a State
certified or licensed appraiser.
225.64 Appraisal standards.
225.65 Appraiser independence.
225.66 Professional association membership; competency.
225.67 Enforcement.
Appendix A to Subpart G of Part 225 -- Excerpts from the Uniform
Standards of Professional Appraisal Practice Applicable to Federally
Related Transactions
12 CFR 224.3 Subpart H -- Notice of Addition or Change of Directors and
Senior Executive Officers
225.71 Definitions.
225.72 Director and officer appointments; prior notice requirement.
225.73 Procedures for filing, processing, and acting on notices;
standards for disapproval; waiver of notice.
225.101 Bank holding company's subsidiary banks owning shares of
nonbanking companies.
225.102 Bank holding company indirectly owning nonbanking company
through subsidiaries.
225.103 Bank holding company acquiring stock by dividends, stock
splits or exercise of rights.
225.104 ''Services'' under section 4(c)(1) of Bank Holding Company
Act.
225.107 Acquisition of stock in small business investment company.
225.109 ''Services'' under section 4(c)(1) of Bank Holding Company
Act.
225.111 Limit on investment by bank holding company system in stock
of small business investment companies.
225.112 Indirect control of small business concern through
convertible debentures held by small business investment company.
225.113 Services under section 4(a) of Bank Holding Company Act.
225.115 Applicability of Bank Service Corporation Act in certain bank
holding company situations.
225.118 Computer services for customers of subsidiary banks.
225.121 Acquisition of Edge corporation affiliate by State member
banks of registered bank holding company.
225.122 Bank holding company ownership of mortgage companies.
225.123 Activities closely related to banking.
225.124 Foreign bank holding companies.
225.125 Investment adviser activities.
225.126 Activities not closely related to banking.
225.127 Investment in corporations or projects designed primarily to
promote community welfare.
225.129 Activities closely related to banking.
225.130 Issuance and sale of short-term debt obligations by bank
holding companies.
225.131 Activities closely related to banking.
225.132 Acquisition of assets.
225.133 Computation of amount invested in foreign corporations under
general consent procedures.
225.134 Escrow arrangements involving bank stock resulting in a
violation of the Bank Holding Company Act.
225.136 Utilization of foreign subsidiaries to sell long-term debt
obligations in foreign markets and to transfer the proceeds to their
United States parent(s) for domestic purposes.
225.137 Acquisitions of shares pursuant to section 4(c)(6) of the
Bank Holding Company Act.
225.138 Statement of policy concerning divestitures by bank holding
companies.
225.139 Presumption of continued control under section (2)(g)(3) of
the Bank Holding Company Act.
225.140 Disposition of property acquired by satisfaction of debts
previously contracted.
225.141 Operations subsidiaries of a bank holding company.
225.142 Statement of policy concerning bank holding companies
engaging in futures, forward and options contracts on U.S. Government
and agency securities and money market instruments.
225.143 Policy statement on nonvoting equity investments by bank
holding companies.
225.144 Application required for the relocation of a subsidiary bank
to another state.
225.145 Limitations established by the Competitive Equality Banking
Act of 1987 on the activities and growth of nonbank banks.
Appendix A to Part 225 -- Capital Adequacy Guidelines for Bank
Holding Companies: Risk-Based Measure
Appendix B to Part 225 -- Capital Adequacy Guidelines for Bank
Holding Companies and State Member Banks: Leverage Measure
Appendix C to Part 225 -- Policy Statement for Formation of Small
One-Bank Holding Companies
Appendix D to Part 225 -- Capital Adequacy Guidelines for Bank
Holding Companies: Tier 1 Leverage Measure
Authority: 12 U.S.C. 1817(j)(13), 1818, 1831i, 1843(c)(8), 1844(b),
1972(l), 3106, 3108, 3907, 3909, 3310, and 3331-3351.
Source: Reg. Y, 49 FR 818, Jan. 5, 1984, unless otherwise noted.
12 CFR 224.3 Regulations
12 CFR 224.3 Subpart A -- General Provisions
12 CFR 225.1 Authority, purpose, and scope.
(a) Authority. This part (Regulation Y) is issued by the Board of
Governors of the Federal Reserve System (Board) under section 5(b) of
the Bank Holding Company Act of 1956, as amended (12 U.S.C. 1844(b))
(BHC Act); sections 8 and 13(a) of the International Banking Act of
1978 (12 U.S.C. 3106 and 3108); section 7(j)(13) of the Federal Deposit
Insurance Act, as amended by the Change in Bank Control Act of 1978 (12
U.S.C. 1817(j)(13) (Bank Control Act); section 8(b) of the Federal
Deposit Insurance Act (12 U.S.C. 1818(b)); and the International
Lending Supervision Act of 1983 (Pub. L. 98-181, title IX). The BHC
codified at 12 U.S.C. 1841, et seq.
(b) Purpose. The principal purposes of this part are to regulate the
acquisition of control of banks by companies and individuals, to define
and regulate the nonbanking activities in which bank holding companies
and foreign banking organizations with United States operations may
engage, and to set forth the procedures for securing approval for such
transactions and activities.
(c) Scope. (1) Subpart A contains general provisions and definitions
of terms used in this regulation.
(2) Subpart B governs acquisitions of bank or bank holding company
securities and assets by bank holding companies or by any company that
will become a bank holding company as a result of the acquisition.
(3) Subpart C defines and regulates the nonbanking activities in
which bank holding companies and foreign banking organizations may
engage directly or through a subsidiary. In addition, certain
nonbanking activities conducted by foreign banking organizations and
certain foreign activities conducted by bank holding companies are
governed by the Board's Regulation K (12 CFR part 211, International
Banking Operations).
(4) Subpart D specifies situations in which a company is presumed to
control voting securities or to have the power to exercise a controlling
influence over the management or policies of a bank or other company,
sets forth the procedures for making a control determination, and
provides rules governing the effectiveness of divestitures by bank
holding companies.
(5) Subpart E governs changes in bank control resulting from the
acquisition by individuals or companies (other than bank holding
companies) of voting securities of a bank holding company or state
member bank of the Federal Reserve System.
(6) Appendix A to the regulation contains the Board's Capital
Adequacy Guidelines for bank holding companies and for state member
banks.
(7) Appendix B to the regulation contains the Board's Policy
Statement for Formation of Small One-Bank Holding Companies.
12 CFR 225.2 Definitions.
Except as modified in this section or unless the context otherwise
requires, the terms used in this regulation have the same meanings as
set forth in the relevant statutes.
(a) Affiliate means any company that controls, is controlled by, or
is under common control with, a bank or nonbank bank.
(b)(1) Bank means:
(i) An insured bank as defined in section 3(h) of the Federal Deposit
Insurance Act (12 U.S.C. 1813(h)); or
(ii) An institution organized under the law of the United States
which both:
(A) Accepts demand deposits or deposits that the depositor may
withdraw by check or similar means for payment to third parties or
others; and
(B) Is engaged in the business of making commercial loans.
(2) Bank does not include those institutions qualifying under the
exceptions listed in section 2(c)(2) of the BHC Act (12 U.S.C.
1841(c)(2)).
(c)(1) Bank holding company means any company (including a bank) that
has direct or indirect control of a bank, other than control that
results from the ownership or control of:
(i) Voting securities held in good faith in a fiduciary capacity
(other than as provided in paragraphs (d)(2)(ii) and (iii) of this
section) without sole discretionary voting authority, or as otherwise
exempted under section 2(a)(5)(A) of the BHC Act;
(ii) Voting securities acquired and held only for a reasonable period
of time in connection with the underwriting of securities, as provided
in section 2(a)(5)(B) of the BHC Act;
(iii) Voting rights to voting securities acquired for the sole
purpose and in the course of participating in a proxy solicitation, as
provided in section 2(a)(5)(C) of the BHC Act:
(iv) Voting securities acquired in satisfaction of debts previously
contracted in good faith, as provided in section 2(a)(5)(D) of the BHC
Act, if the securities are divested within two years of acquisition (or
such later period as the Board may permit by order); or
(v) Voting securities of certain institutions owned by a thrift
institution or a trust company, as provided in sections 2(a)(5)(E) and
(F) of the BHC Act.
(2) Except for the purposes of 225.4(b) of this subpart and subpart
E of this regulation or as otherwise provided in this regulation, the
term bank holding company includes a foreign banking organization. For
the purposes of subpart B, the term bank holding company includes a
foreign banking organization only if it owns or controls a bank in the
United States.
(d)(1) Company includes any bank, corporation, general or limited
partnership, association or similar organization, business trust, or any
other trust unless by its terms it must terminate either within 25
years, or within 21 years and 10 months after the death of individuals
living on the effective date of the trust.
(2) Company does not include any organization, the majority of the
voting securities of which are owned by the United States or any state.
(e)(1) Control of a bank or other company means (except for the
purposes of subpart E):
(i) Ownership, control, or power to vote 25 percent or more of the
outstanding shares of any class of voting securities of the bank or
other company, directly or indirectly or acting through one or more
other persons;
(ii) Control in any manner over the election of a majority of the
directors, trustees, or general partners (or individuals exercising
similar functions) of the bank or other company;
(iii) The power to exercise, directly or indirectly, a controlling
influence over the management or policies of the bank or other company,
as determined by the Board after notice and opportunity for hearing in
accordance with 225.31 of subpart D of this regulation; or
(iv) Conditioning in any manner the transfer of 25 percent or more of
the outstanding shares of any class of voting securities of a bank or
other company upon the transfer of 25 percent or more of the outstanding
shares of any class of voting securities of another bank or other
company.
(2) A bank or other company is deemed to control voting securities or
assets owned, controlled, or held, directly or indirectly:
(i) By any subsidiary of the bank or other company;
(ii) In a fiduciary capacity (including by pension and profit-sharing
trusts) for the benefit of the shareholders, members, or employees (or
individuals serving in similar capacities) of the bank or other company
or of any of its subsidiaries; or
(iii) In a fiduciary capacity for the benefit of the bank or other
company or any of its subsidiaries.
(f) Foreign banking organization and qualifying foreign banking
organization shall have the same meanings as provided in 211.23 of the
Board's Regulation K (12 CFR 211.23).
(g) Management official means any officer, director (including
honorary or advisory directors), partner, or trustee of a bank or other
company, or any employee of the bank or other company with policy-making
functions.
(h) Nonbank bank means any institution that:
(1) Became a bank as a result of enactment of the Competitive
Equality Amendments of 1987 (Pub. L. No. 100-86), on the date of such
enactment (August 10, 1987); and
(2) Was not controlled by a bank holding company on the day before
the enactment of the Competitive Equality Amendments of 1987 (August 9,
1987).
(i) Outstanding shares means any voting securities, but does not
include securities owned by the United States or by a company
wholly-owned by the United States.
(j) Person includes an individual, bank, corporation, partnership,
trust, association, joint venture, pool, syndicate, sole proprietorship,
unincorporated organization, or any other form of entity.
(k) Principal shareholder means a person that owns or controls,
directly or indirectly, 25 percent or more of any class of voting
securities of a bank or other company.
(l) Savings association means:
(1) Any Federal savings association or Federal savings bank;
(2) Any building and loan association, savings and loan association,
homestead association, or cooperative bank if such association or
cooperative bank is a member of the Savings Association Insurance Fund;
and
(3) Any savings bank or cooperative which is deemed by the Director
of the Office of Thrift Supervision to be a savings association under
section 10(1) of the Home Owners Loan Act.
(m) Subsidiary means a bank or other company that is controlled by
another company, and refers to a direct or indirect subsidiary of a bank
holding company. An indirect subsidiary is a bank or other company that
is controlled by a subsidiary of the bank holding company.
(n) United States means the United States and includes any State of
the United States, the District of Columbia, any territory of the United
States, Puerto Rico, Guam, American Samoa, and the Virgin Islands.
(o) (1) Voting securities means shares of common or preferred stock,
general or limited partnership shares or interests, or similar interests
if the shares or interest, by statue, charter, or in any manner, entitle
the holder: (i) to vote for or to select directors, trustees, or
partners (or persons exercising similar functions of the issuing
company); or (ii) to vote on or to direct the conduct of the operations
or other significant policies of the issuing company.
(2) Preferred shares, limited partnership shares or interests, or
similar interests are not voting securities if:
(i) Any voting rights associated with the shares or interest are
limited solely to the type customarily provided by statute with regard
to matters that would significantly and adversely affect the rights or
preference of the security or other interest, such as the issuance of
additional amounts or classes of senior securities, the modification of
the terms of the security or interest, the dissolution of the issuing
company, or the payment of dividends by the issuing company when
preferred dividends are in arrears;
(ii) The shares or interest represent an essentially passive
investment or financing device and do not otherwise provide the holder
with control over the issuing company; and
(iii) The shares or interest do not entitle the holder, by statute,
charter, or in any manner, to select or to vote for the selection of
directors, trustees, or partners (or persons exercising similar
functions) of the issuing company.
(Reg. Y, 49 FR 818, Jan. 5, 1984. Redesignated and amended at Reg.
Y, 53 FR 37744, Sept. 28, 1988; Reg. Y, 54 FR 37302, Sept. 8, 1989)
12 CFR 225.3 Administration.
(a) Delegation of authority. Designated Board members and officers
and the Federal Reserve Banks are authorized by the Board to exercise
various functions prescribed in this regulation and in the Board's Rules
Regarding Delegation of Authority (12 CFR part 265) and the Board's
Rules of Procedure (12 CFR part 262).
(b) Appropriate Federal Reserve Bank. In administering this
regulation, the appropriate Federal Reserve Bank is as follows:
(1) For a bank holding company (or a company applying to become a
bank holding company): the Reserve Bank of the Federal Reserve district
in which the company's banking operations are principally conducted, as
measured by total domestic deposits in its subsidiary banks on the date
it became (or will become) a bank holding company;
(2) For a foreign banking organization that has no subsidiary bank
and is not subject to paragraph (b)(1) of this section: the Reserve
Bank of the Federal Reserve district in which the total assets of the
organization's United States branches, agencies, and commercial lending
companies are the largest as of the later of January 1, 1980, or the
date it becomes a foreign banking organization;
(3) For an individual or company submitting a notice under subpart E
of this regulation: the Reserve Bank of the Federal Reserve district in
which the banking operations of the bank holding company or State member
bank to be acquired are principally conducted, as measured by total
domestic deposits on the date the notice is filed.
12 CFR 225.4 Corporate practices.
(a) Bank holding company policy and operations. (1) A bank holding
company shall serve as a source of financial and mangerial strength to
its subsidiary banks and shall not contuct its operations in an unsafe
or unsound manner.
(2) Whenever the Board believes an activity of a bank holding company
or control of a nonbank subsidiary (other than a nonbank subsidiary of a
bank) constitutes a serious risk to the financial safety, soundness, or
stability of a subsidiary bank of the bank holding company and is
inconsistent with sound banking principles or the purposes of the BHC
Act or the Financial Institutions Supervisory Act of 1966, as amended
(12 U.S.C. 1818(b) et seq.), the Board may require the bank holding
company to terminate the activity or to terminate control of the
subsidiary, as provided in section 5(e) of the BHC Act.
(b) Purchase or redemption by a bank holding company of its own
securities -- (1) Filing notice. A bank holding company shall give the
Board prior written notice before purchasing or redeeming its equity
securities, if the gross consideration for the purchase or redemption,
when aggregated with the net consideration paid by the company for all
such purchases or redemptions during the preceding 12 months, is equal
to 10 percent or more of the company's consolidated net worth. For the
purposes of this section, net consideration is the gross consideration
paid by the company for all of its equity securities purchased or
redeemed during the period minus the gross consideration received for
all of its equity securities sold during the period other than as part
of a new issue.
(2) Content of notice. Any notice under this section shall be filed
with the appropriate Reserve Bank and shall contain the following
information:
(i) The purpose of the transaction, a description of the securities
to be purchased or redeemed, the total number of each class outstanding,
the gross consideration to be paid, and the terms of any debt incurred
in connection with the transaction;
(ii) A description of all equity securities redeemed within the
preceding 12 months, the net consideration paid, and the terms of any
debt incurred in connection with those transactions; and
(iii) A current and pro forma consolidated balance sheet if the bank
holding company has total assets of over $150 million, or a current and
pro forma parent company only balance sheet if the bank holding company
has total assets of $150 million or less.
(3) Acting on notice. Within 30 calendar days of receipt of a notice
under this section, the appropriate Reserve Bank shall either approve
the transaction proposed in the notice or refer the notice to the Board
for decision. If the notice is referred to the Board for decision, the
Board shall act on the notice within 60 calendar days after the Reserve
Bank receives the notice.
(4) Factors considered in acting on notice. The Board may disapprove
a proposed purchase or redemption if it finds that the proposal would
constitute an unsafe or unsound practice, or would violate any law,
regulation, Board order, directive, or any condition imposed by, or
written agreement with, the Board. In determining whether a proposal
constitutes an unsafe or unsound practice, the Board will consider
whether the bank holding company's financial condition, after giving
effect to the proposed purchase or redemption, meets the financial
standards applied by the Board under section 3 of the BHC Act, including
the Board's Capital Adequacy Guidelines (appendix A to subparts A
through E) and the Board's Policy Statement for Formation of Small
One-Bank Holding Companies (appendix B to subparts A through E).
(5) Disapproval and hearing. The Board shall notify the bank holding
company in writing of the reasons for a decision to disapprove any
proposed purchase or redemption. Within 10 calendar days of receipt of
a notice of disapproval by the Board, the bank holding company may
submit a written request for a hearing. The Board will order a hearing
within 10 calendar days of receipt of that request if it finds that
material facts are in dispute or if it otherwise appears appropriate.
Any hearing conducted under this paragraph shall be held in accordance
with the Board's Rules of Practice for Formal Hearings (12 CFR part
263). At the conclusion of the hearing, the Board shall by order
approve or disapprove the proposed purchase or redemption on the basis
of the record of the hearing.
(c) Deposit insurance. Every bank that is a bank holding company or
a subsidiary of a bank holding company shall obtain Federal Deposit
Insurance and shall remain an insured bank as defined in section 3(h) of
the Federal Deposit Insurance Act (12 U.S.C. 1813(h)).
(d)(1) Limitation on tie-in arrangements. A bank holding company and
any nonbanking subsidiary conducting an activity authorized under
225.23 of this regulation may not in any manner extend credit, lease or
sell property of any kind, provide any service, or fix or vary the
consideration for any of these transactions subject to any condition or
requirement that, if imposed by a bank, would constitute an unlawful
tie-in arrangement under section 106 of the Bank Holding Company Act
Amendments of 1970 (12 U.S.C. 1971, 1972(1)).
(2) Exemption for credit cards. A bank (including a credit card
bank) owned by a bank holding company may vary the consideration
(including interest rates and fees) charged on extensions of credit made
pursuant to a credit card offered by the bank on the basis of the
condition or requirement that a customer also obtain a loan, discount,
deposit, or trust service (but no other products) from another
subsidiary of the card-issuing bank's parent holding company, if the
credit card and the loan, discount, deposit, or trust service offered in
the arrangement are also separately available for purchase by a
customer. The exemption granted pursuant to this paragraph shall
terminate upon a finding by the Board that the arrangement is resulting
in anticompetitive practices.
(e) Acting as transfer agent, municipal securities dealer, or
clearing agent. A bank holding company or any nonbanking subsidiary
that is a ''bank,'' as defined in section 3(a)(6) of the Securities
Exchange Act of 1934 (15 U.S.C. 78c(a)(6)), and that is a transfer agent
of securities, a municipal securities dealer, a clearing agency, or a
participant in a clearing agency (as those terms are defined in section
3(a) of the Securities Exchange Act, (12 U.S.C. 78c(a)), shall be
subject to 208.8(f)-(j) of the Board's Regulation H (12 CFR
208.8(f)-(j)) as if it were a state member bank.
(Reg. Y, 49 FR 818, Jan. 5, 1984, as amended by Reg. Y, 55 FR 47743,
Nov. 15, 1990)
12 CFR 225.5 Registration, reports, and inspections.
(a) Registration of bank holding companies. Each company shall
register within 180 days after becoming a bank holding company by
furnishing information in the manner and form prescribed by the Board.
A company that receives the Board's prior approval under subpart B of
this regulation to become a bank holding company may complete this
registration requirement through submission of its first annual report
to the Board as required by paragraph (b) of this section.
(b) Reports of bank holding companies. Each bank holding company
shall furnish, in the manner and form prescribed by the Board, an annual
report of the company's operations for the fiscal year in which it
becomes a bank holding company, and for each fiscal year during which it
remains a bank holding company. Additional information and reports
shall be furnished as the Board may require.
(c) Examinations and inspections. The Board may examine or inspect
any bank holding company and each of its subsidiaries and prepare a
report of their operations and activities. With respect to a foreign
banking organization, the Board may also examine any branch or agency of
a foreign bank in any state of the United States and may examine or
inspect each of the organization's subsidiaries in the United States and
prepare reports of their operations and activities. The Board will rely
as far as possible on the reports of examination made by the primary
federal or state supervisor of the subsidiary bank of a bank holding
company or of the branch or agency of the foreign bank.
12 CFR 225.6 Penalties for violations.
(a) Criminal and civil penalties. Section 8 of the BHC Act provides
criminal penalties for willful violation, and civil penalties for
violation, by any company or individual of the BHC Act or any regulation
or order issued under it, or for making a false entry in any book,
report, or statement of a bank holding company. Civil money penalty
assessments for violations of the BHC Act shall be made in accordance
with subpart C of the Board's Rules of Practice for Hearings (12 CFR
part 263, subpart C). For any willful violation of the Bank Control Act
or any regulation or order issued under it, the Board may assess a civil
penalty as provided in 12 U.S.C. 1817(j)(15).
(b) Cease and desist proceedings. For any violation of the BHC Act,
the Bank Control Act, this regulation, or any order or notice issued
thereunder, the Board may institute a cease and desist proceeding in
accordance with the Financial Institutions Supervisory Act of 1966, as
amended (12 U.S.C. 1818(b) et seq.).
(Reg. Y, 49 FR 818, Jan. 5, 1984, as amended at 56 FR 38052, Aug. 9,
1991)
12 CFR 225.6 Subpart B -- Acquisition of Bank Securities or Assets
12 CFR 225.11 Transactions requiring Board approval.
The following transactions require an application for the Board's
prior approval under section 3 of the BHC Act unless otherwise exempted
under 225.12 of this Subpart:
(a) Formation of bank holding company. Any action that causes a bank
or other company to become a bank holding company.
(b) Acquisition of subsidiary bank. Any action that causes a bank to
become a subsidiary of a bank holding company.
(c) Acquisition of control of bank or bank holding company
securities. The acquisition by a bank holding company of direct or
indirect ownership or control of any voting securities of a bank or bank
holding company, if the acquisition results in the company's control of
more than 5 percent of the outstanding shares of any class of voting
securities of the bank or bank holding company. An acquisition includes
the purchase of additional securities through the exercise of preemptive
rights, but does not include securities received in a stock dividend or
stock split that does not alter the bank holding company's proportional
share of any class of voting securities.
(d) Acquisition of bank assets. The acquisition by a bank holding
company or by a subsidiary thereof (other than a bank) of all or
substantially all of the assets of a bank.
(e) Merger of bank holding companies. The merger or consolidation of
bank holding companies, including a merger through the purchase of
assets and assumption of liabilities.
12 CFR 225.12 Transactions not requiring Board approval.
The following transactions do not require the Board's approval under
225.11 of this Subpart:
(a) Acquisition of securities in fiduciary capacity. The acquisition
by a bank or other company (other than a trust that is a company) of
control of voting securities of a bank or bank holding company in good
faith in a fiduciary capacity, unless:
(1) The acquiring bank or other company has sole discretionary
authority to vote the securities and retains the authority for more than
two years; or
(2) The acquisition is for the benefit of the acquiring bank or other
company, or its shareholders, employees, or subsidiaries.
(b) Acquisition of securities in satisfaction of debts previously
contracted. The acquisition by a bank or other company of control of
voting securities of a bank or bank holding company in the regular
course of securing or collecting a debt previously contracted in good
faith, if the acquiring bank or other company divests the securities
within two years of acquisition. The Board or Reserve Bank may grant
requests for up to three one-year extensions.
(c) Acquisition of securities by a bank holding company with majority
control. The acquisition by a bank holding company of additional voting
securities of a bank or bank holding company if more than 50 percent of
the outstanding voting securities of the bank or bank holding company is
lawfully controlled by the acquiring bank holding company prior to the
acquisition.
(d) Transactions subject to Bank Merger Act. The merger or
consolidation of a subsidiary bank of a bank holding company with
another bank, or the purchase of assets by such a subsidiary bank, or a
similar transaction involving subsidiary banks of a bank holding
company, if the transaction requires the prior approval of a Federal
supervisory agency under the Bank Merger Act (12 U.S.C. 1828(c)). This
exception does not include:
(1) The merger of a nonsubsidiary bank and a nonoperating subsidiary
bank formed by a company for the purpose of acquiring the nonsubsidiary
bank; and
(2) Any transaction requiring the Board's prior approval under
225.11(e) of this Subpart. The Board may require an application under
this subpart if it determines that the merger or consolidation would
have a significant adverse impact on the financial condition of the bank
holding company or otherwise requires approval under section 3 of the
BHC Act.
(e) Holding securities in escrow. The holding of any voting
securities of a bank or bank holding company in an escrow arrangement
for the benefit of an applicant pending the Board's action on an
application for approval of the proposed acquisition, if title to the
securities and the voting rights remain with the seller and payment for
the securities has not been made to the seller.
12 CFR 225.13 Factors considered in acting on bank applications.
(a) Prohibited anticompetitive transactions. As specified in
sections 3(c) (1) and (2) of the BHC Act, the Board may not approve any
application under this subpart if:
(1) The transaction would result in a monopoly or would further any
combination or conspiracy to monopolize, or to attempt to monopolize,
the business of banking in any part of the United States; or
(2) The effect of the transaction may be substantially to lessen
competition in any section of the country, tend to create a monopoly, or
in any other manner be in restraint of trade, unless the Board finds
that the transaction's anticompetitive effects are clearly outweighed by
its probable effect in meeting the convenience and needs of the
community.
(b) Other factors. In deciding applications under this subpart, the
Board also considers the following factors with respect to the
applicant, its subsidiaries, any banks related to the applicant through
common ownership or management, and the bank or banks to be acquired:
(1) Financial condition. Their financial condition and future
prospects, including whether current and projected capital positions and
levels of indebtedness conform to standards and policies established by
the Board.
(2) Management. The competence and character of the principals of
the applicant and banks or bank holding companies concerned; their
record of compliance with laws and regulations; and applicant's record
of fulfilling any commitments to, and any conditions imposed by, the
Board in connection with prior applications.
(3) Convenience and needs of the community. The convenience and
needs of the communities to be served, including the record of
performance under the Community Reinvestment Act of 1977 (12 U.S.C.
2901 et seq.) and regulations issued thereunder, including the Board's
Regulation BB (12 CFR Part 228).
(c)(1) Interstate transactions. The Board may not approve any
application under this subpart that would permit:
(i) The formation of a bank holding company that controls more than 5
percent of the outstanding shares of any class of voting securities of
two or more banks located in different states; or
(ii) The acquisition by a bank holding company or by any of its
subsidiaries of any voting securities of, any interest in, or
substantially all of the assets of, an additional bank located in a
state other than the state in which the operations of the banking
subsidiaries of the bank holding company were principally conducted (as
measured by total deposits) on July 1, 1966, or on the date on which the
company became a bank holding company, whichever date is later.
(2) Exceptions. The prohibitions of this paragraph do not apply if:
(i) The Bank is located in a state that by statute expressly
authorizes the acquisition of securities of, an interest in, or
substantially all of the assets of, a bank within the state by an
out-of-state bank holding company; or
(ii) The acquisition involves a closed or failing bank with assets of
at least $500,000,000, and has been authorized under section 13(f) of
the Federal Deposit Insurance Act (12 U.S.C. 1823(f)).
12 CFR 225.14 Procedures for applications, notices, and hearings.
(a) Filing application. An application for the Board's prior
approval under this subpart shall be filed with the appropriate Reserve
Bank on the designated form and shall comply with 262.3 of the Rules of
Procedure (12 CFR 262.3), which requires the applicant to publish
newspaper notice of the application.
(b) Notice -- (1) Notice to primary banning supervisor. Upon receipt
of an application under this subpart, the Reserve Bank shall promptly
furnish notice and a copy of the application to the primary banking
supervisor of the bank to be acquired. The primary supervisor shall
have 30 calendar days from the date of the letter giving notice in which
to submit its views and recommendations to the Board.
(2) Federal Register notice. Upon receipt by the Reserve Bank of an
application under this section, notice of the application shall be
promptly sent to the Federal Register for publication. The Federal
Register notice shall invite comment on the application for a period of
no more than 30 days.
(c) Accepting application for processing. Within 10 business days
after the Reserve Bank receives an application under this section, the
Reserve Bank shall accept it for processing, request additional
information to complete the application, or return the application if it
is substantially incomplete. If additional information is requested,
the Reserve Bank shall, within 5 business days of receipt of the
requested information, either accept the application for processing or
return it to the applicant if it is still incomplete. Upon accepting an
application, the Reserve Bank shall immediately send copies to the
Board.
(d) Action on applications -- (1) Action under delegated authority.
The Reserve Bank shall approve an application under this section within
30 calendar days after it has accepted the application, unless the
Reserve Bank, upon notice to the applicant, refers the application to
the Board for decision because action under delegated authority is not
appropriate. Upon written notice to the applicant, the Reserve Bank may
extend the 30-day period for 15 days. If the extension of time is to
request necessary additional information, the 15-day period does not
commence until after the Reserve Bank receives the requested
information.
(2) Board action. The Board shall act on an application under this
subpart that is referred to it for decision within 60 calendar days
after the Reserve Bank has accepted the application, unless the Board
notifies the applicant that the 60-day period is being extended for a
specified period and states the reasons for the extension. In no event
may the extension exceed the 91-day period provided in paragraph (g) of
this section. The Board may request additional information that it
believes is necessary for its decision.
(e) Notice to Attorney General. The Board or Reserve Bank shall
immediately notify the Attorney General of approval of any application
under this section.
(f) Hearings. As provided in section 3(b) of the Act, the Board
shall order a hearing if it receives from the primary supervisor of the
bank to be acquired, within the 30-day period specified in paragraph
(b)(1) of this section, a written recommendation of disapproval of an
application. The Board may order a formal or informal hearing or other
proceeding on the application, as provided in 262.3(i)(2) of the
Board's Rules of Procedure. Any request for hearing (other than from
the primary supervisor) shall comply with 262.3(e) of the Rules of
Procedure (12 CFR 262.3(e)).
(g) Approval through failure to act -- (1) Ninety-one day rule. An
application under this subpart shall be deemed approved if the Board
fails to act on the application within 91 calendar days after the date
of submission to the Board of the complete record on the application.
For this purpose, the Board acts when it issues an order stating that
the Board has approved or denied the application, reflecting the votes
of the members of the Board, and indicating that a statement of the
reasons for the decision will follow promptly.
(2) Complete record. For the purpose of computing the commencement
of the 91-day period, the record is complete on the latest of:
(i) The date of receipt by the Board of an application that has been
accepted by the Reserve Bank;
(ii) The last day provided in any notice for receipt of comments and
hearing requests on the application;
(iii) The date of receipt by the Board of the last relevant material
regarding the application that is needed for the Board's decision, if
the material is received from a source outside of the Federal Reserve
System; or
(iv) The date of completion of any hearing or other proceeding.
(h) Exceptions to notice and hearing requirements -- (1) Probable
bank failure. If the Board finds it must act immediately on an
application in order to prevent the probable failure of a bank or bank
holding company, the Board may modify or dispense with the notice and
hearing requirements provided in this section.
(2) Emergency. If the Board finds that, although immediate action on
an application is not necessary, an emergency exists requiring
expeditious action, the Board shall provide the primary supervisor ten
days to submit its recommendation. The Board may act on such an
application without a hearing and may modify or dispense with the other
notice and hearing requirements provided in this section.
(i) Waiting period. A transaction approved under this subpart shall
not be consummated until thirty days after the date of approval of the
application, unless the Board has determined under paragraph (h) of this
section that:
(1) The application involves a probable bank failure, in which case
the transaction may be consummated immediately upon approval; or
(2) An emergency exists requiring expeditious action, in which case
the transaction may be consummated on or after the fifth calendar day
following approval.
12 CFR 225.14 Subpart C -- Nonbanking Activities and Acquisitions by Bank Holding Companies
12 CFR 225.21 Prohibited nonbanking activities and acquisitions;
exempt bank holding companies.
(a) Prohibited nonbanking activities and acquisitions. Except as
provided in 225.22 of this subpart, a bank holding company or a
subsidiary may not engage in, or acquire or control, directly or
indirectly, voting securities or assets of a company engaged in, any
activity other than:
(1) Banking or managing or controlling banks and other subsidiaries
authorized under the BHC Act; and
(2) An activity that the Board determines to be so closely related to
banking or managing or controlling banks as to be a proper incident
thereto, including any incidental activities that are necessary to carry
on such an activity, if the bank holding company has obtained the prior
approval of the Board for that activity in accordance with and subject
to the requirements of this regulation.
(b) Exempt bank holding companies. The following bank holding
companies are exempt from the provisions of this subpart:
(1) Family-owned companies. Any company that is a ''company covered
in 1970,'' as defined in section 2(b) of the BHC Act, more than 85
percent of the voting securities of which was collectively owned on June
30, 1968, and continuously thereafter, by members of the same family (or
their spouses) who are lineal descendants of common ancestors.
(2) Labor, agricultural, and horticultural organizations. Any
company that was on January 4, 1977, both a bank holding company and a
labor, agricultural, or horticultural organization exempt from taxation
under section 501 of the Internal Revenue Code (26 U.S.C. 501(c)).
(3) Companies granted hardship exemption. Any bank holding company
that has controlled only one bank since before July 1, 1968, and that
has been granted an exemption by the Board under section 4(d) of the BHC
Act, subject to any conditions imposed by the Board.
(4) Companies granted exemption on other grounds. Any company that
acquired control of a bank before December 10, 1982, without the Board's
prior approval under section 3 of the BHC Act, on the basis of a narrow
interpretation of the term ''demand deposit'' or ''commercial loan'' if
the Board has determined that: (i) coverage of the company as a bank
holding company under this subpart would be unfair or represent an
unreasonable hardship; and (ii) exclusion of the company from coverage
under this regulation is consistent with the purposes of the BHC Act and
section 106 of the Bank Holding Company Act Amendments of 1970 (12
U.S.C. 1971, 1972(1)). The provisions of 225.4 of Subpart A of this
regulation are not applicable to a company exempt under this paragraph.
12 CFR 225.22 Exempt nonbanking activities and acquisitions.
(a) Servicing activities. A bank holding company may, without the
Board's prior approval under this subpart, furnish services to or
perform services for, or establish or acquire a company that engages
solely in furnishing services to or performing services for:
(1) The bank holding company or its subsidiaries in connection with
their activities as authorized by law, including services that are
necessary to fulfill commitments entered into by the subsidiaries with
third parties, if the bank holding company or servicing company complies
with the Board's published interpretations and does not act as principal
in dealing with third parties; and
(2) The internal operations of the bank holding company or its
subsidiaries. Services for the internal operations of the bank holding
company or its subsidiaries include, but are not limited to:
(i) Accounting, auditing, and appraising;
(ii) Advertising and public relations;
(iii) Data processing and data transmission services, data bases or
facilities;
(iv) Personnel services;
(v) Courier services;
(vi) Holding or operating property used wholly or substantially by a
subsidiary in its operations or for its future use;
(vii) Liquidating property acquired from a subsidiary;
(viii) Liquidating property acquired from any sources either prior to
May 9, 1956, or the date on which the company became a bank holding
company, whichever is later; and
(ix) Selling, purchasing, or underwriting insurance such as blanket
bond insurance, group insurance for employees, and property and casualty
insurance.
(b) Safe deposit business. A bank holding company or nonbank
subsidiary may, without the Board's prior approval, conduct a safe
deposit business, or acquire voting securities of a company that
conducts such a business.
(c) Nonbanking acquisitions not requiring prior Board approval. The
Board's prior approval is not required under this subpart for the
following acquisitions:
(1) DPC acquisitions. (i) Voting securities or assets, acquired by
foreclosure or otherwise, in the ordinary course of collecting a debt
previously contracted (''DPC property'') in good faith, if the DPC
property is divested within two years of acquisition.
(ii) The Board may, upon request, extend this two-year period for up
to three additional one-year periods. The Board may permit additional
extensions for up to 5 years (for a total of 10 years), for real estate
or other assets that are demonstrated by the bank holding company to
have value and marketability characteristics similar to real estate.
(iii) Transfers of DPC property within the bank holding company
system do not extend any period for divestiture of the property.
(2) Securities or assets required to be divested by subsidiary.
Voting securities or assets required to be divested by a subsidiary at
the request of an examining federal or state authority (except by the
Board under the BHC Act or this regulation), if the bank holding company
divests the securities or assets within two years from the date acquired
from the subsidiary.
(3) Fiduciary investments. Voting securities or assets acquired by a
bank or other company (other than a trust that is a company) in good
faith in a fiduciary capacity, if the voting securities or assets are:
(i) Held in the ordinary course of business; and
(ii) Not acquired for the benefit of the company or its shareholders,
employees, or subsidiaries.
(4) Securities eligible for investment by a national bank. Voting
securities of the kinds and amounts explicitly eligible by federal
statute (other than section 4 of the Bank Service Corporation Act, 12
U.S.C. 1864) for investment by a national bank, and voting securities
acquired prior to June 30, 1971, in reliance on section 4(c)(5) of the
BHC Act and interpretations of the Comptroller of the Currency under
section 5136 of the Revised Statutes (12 U.S.C. 24(7)).
(5) Securities or property representing 5 percent or less of a
company. Voting securities of a company or property that, in the
aggregate, represent 5 percent or less of the outstanding shares of any
class of voting securities of a company or a 5 percent interest or less
in the property, subject to the provisions of 12 CFR 225.137.
(6) Securities of investment company. Voting securities of an
investment company that is solely engaged in investing in securities and
that does not own or control more than 5 percent of the outstanding
shares of any class of voting securities of any company.
(7) Assets acquired in the ordinary course of business. Assets of a
company acquired in the ordinary course of business, subject to the
provisions of 12 CFR 225.132, if the assets relate to activities in
which the acquiring company has previously received Board approval under
this regulation to engage in the geographic areas to be served.
(8) Asset acquisitions by consumer finance or mortgage company or
industrial bank. Assets of an office(s) of a company, all or
substantially all of which relate to making, acquiring, or servicing
loans for personal, family, or household purposes, if:
(i) The acquiring company has previously received Board approval
under this regulation to engage in consumer finance, residential
mortgage banking, or industrial banking activities in the geographic
areas to be served by the acquired office(s);
(ii) The assets acquired during any twelve-month period do not
represent more than 25 percent of the assets (on a consolidated basis)
of the acquiring consumer finance company, mortgage company or
industrial bank, or more than $25 million, whichever amount is less;
(iii) The assets acquired do not represent more than 50 percent of
the selling company's consolidated assets that are devoted to the
consumer finance, residential mortgage banking, or industrial banking
business;
(iv) The acquiring company notifies the Reserve Bank of the
acquisition within 30 days after the acquisition; and
(v) The acquiring company, after giving effect to the transaction,
meets the Board's Capital Adequacy Guidelines (Appendix A to Subparts A
through E) and the Board has not previously notified the acquiring
company that it may not acquire assets under the exemption in this
paragraph.
(d) Acquisition of securities by subsidiary banks -- (1) National
bank. A national bank or its subsidiary may, without the Board's
approval under this subpart, acquire or retain securities on the basis
of section 4(c)(5) of the BHC Act in accordance with the regulations of
the Comptroller of the Currency.
(2) State bank. A state-chartered bank or its subsidiary may,
insofar as Federal law is concerned and without the Board's prior
approval under this subpart:
(i) Acquire or retain securities, on the basis of section 4(c)(5) of
the BHC Act, of the kinds and amounts explicitly eligible by federal
statute for investment by a national bank; or
(ii) Acquire or retain all (but, except for directors' qualifying
shares, not less than all) of the securities of a company that engages
solely in activities in which the parent bank may engage, at locations
at which the bank may engage in the activity, and subject to the same
limitations as if the bank were engaging in the activity directly.
(e) Activities and securities of new bank holding companies. A
company that becomes a bank holding company may, for a period of two
years, engage in nonbanking activities and control voting securities or
assets of a nonbank subsidiary, if the bank holding company engaged in
such activities or controlled such voting securities or assets on the
date it became a bank holding company. The Board may grant requests for
up to three one-year extensions of the two-year period.
(f) Grandfathered activities and securities. Unless the Board orders
divestiture or termination under section 4(a)(2) of the BHC Act, a
''company covered in 1970,'' as defined in section 2(b) of the BHC Act,
may:
(1) Retain voting securities or assets and engage in activities that
it has lawfully held or engaged in continuously since June 30, 1968;
and
(2) Acquire voting securities of any newly-formed company to engage
in such activities.
(g) Securities or activities exempt under Regulation K. A bank
holding company may acquire voting securities or assets and engage in
activities as authorized in Regulation K (12 CFR Part 211).
12 CFR 225.23 Procedures for applications, notices, and hearings.
(a) Application or notice required for nonbanking activities. An
application or notice for the Board's prior approval under 225.21(a) of
this subpart for the following transactions shall be filed by a bank
holding company with the appropriate Reserve Bank on the designated form
in accordance with the Board's Rules of Procedure (12 CFR 262.2):
(1) Engaging de novo in listed nonbanking activities. A notice is
required to commence or to engage de novo, either directly or through a
subsidiary, in a nonbanking activity listed in 225.25 of this subpart.
The applicant may commence the activity 30 days after receipt by the
Reserve Bank of the notice unless the Reserve Bank within the 30-day
period:
(i) Returns the notice because it is incomplete or requires an
application under paragraph (a) (2) or (3) of this section;
(ii) Notifies the company that it may consummate the transaction at
an earlier date;
(iii) Extends the 30-day period for an additional 15 days; or
(iv) Refers the notice to the Board for decision because substantive
adverse comment is received or it otherwise appears appropriate.
If the 30-day period is extended by the Reserve Bank to request
necessary additional information, the 15-day period does not commence
until after the Reserve Bank receives the requested information. The
Reserve Bank shall promptly send a copy of any notice received under
this paragraph to the Board.
(2) Acquiring a company engaged in listed nonbanking activities. An
application is required to acquire or control voting securities or
assets of a company engaged in a permissible nonbanking activity listed
in 225.25 of this subpart.
(3) Engaging in or acquiring a company to engage in unlisted
nonbanking activities. An application is required to commence or to
engage de novo, or to acquire or control voting securities or assets of
a company engaged in, any activity not listed in 225.25 of this
subpart. The application shall contain evidence that the proposed
activity is so closely related to banking or managing or controlling
banks as to be a proper incident thereto.
(b) Notice to expand or alter nonbanking activities -- (1) De novo
expansion. A notice under paragraph (a)(1) of this section is required
to open a new office or to form a subsidiary to engage in, or to
relocate an existing office engaged in, a nonbanking activitiy that the
Board has previously approved for the bank holding company under this
regulation, only if:
(i) The Board's prior approval was limited geographically;
(ii) The activity is to be conducted in a country outside of the
United States and the bank holding company has not previously received
prior Board approval under this regulation to engage in the activity in
that country; or
(iii) The Board or appropriate Reserve Bank has notified the company
that a notice under paragraph (a)(1) of this section is required.
The Board may require an application under paragraph (a)(2) or (a)(3)
of this section instead of a notice.
(2) Activities outside United States. With respect to activities to
be engaged in outside the United States that require approval under this
subpart, the procedures of this section apply only to activities to be
engaged in directly by a bank holding company that is not a qualifying
foreign banking organization or by a nonbank subsidiary of a bank
holding company approved under this subpart. Regulation K (12 CFR Part
211) governs other international operations of bank holding companies.
(3) Alteration of nonbanking activity. A notice under paragraph
(a)(1) of this section is required to alter a nonbanking activity in any
material respect from that considered by the Board in acting on the
application or notice to engage in the activity. The Board may require
an application under paragraph (a) (2) or (3) of this section instead of
a notice.
(c) Accepting application for processing. Withing 10 business days
after the Reserve Bank receives an application under this section, the
Reserve Bank shall accept it for processing, request additional
information to complete the application, or return the application to
the applicant if it is substantially incomplete. If additional
information is requested, the Reserve Bank shall, within 5 business days
of receipt of the requested information, either accept the application
for processing or return the application to the applicant if it is still
incomplete. Upon accepting an application, the Reserve Bank shall
immediately send copies to the Board.
(d) Federal Register notice -- (1) Listed activities. Upon receipt
by the Reserve Bank of an application or notice involving an activity
listed in 225.25 of this subpart, notice of the application or proposal
shall be promptly sent to the Federal Register for publication. The
Federal Register notice shall invite comment for a period of not more
than 30 days.
(2) Unlisted activities. In the case of an application under this
section involving an activity not listed in 225.25 of this subpart, the
Board shall, within 10 business days of acceptance by the Reserve Bank,
send notice of the application to the Federal Register for publication,
unless the Board determines that the applicant has not demonstrated that
the activity is so closely related to banking or to managing or
controlling banks as to be a proper incident thereto. The Board may
extend the 10-day period for an additional 30 calendar days upon notice
to the applicant. In the event notice of an application is not
published for comment, the Board shall inform the applicant of the
reasons for the decision. The Federal Register notice shall invite
comment on the proposal for a reasonable period of time, generally for
30 days.
(e) Action on applications -- (1) Action under delegated authority.
The Reserve Bank shall approve an application under paragraph (a)(2) of
this section within 30 calendar days after it has accepted the
application, unless the Reserve Bank, upon notice to the applicant,
refers the application to the Board for decision because action under
delegated authority is not appropriate. Upon written notice to the
applicant, the Reserve Bank may extend the 30-day period for 15 days.
If the extension of time is to request necessary additional information,
the 15-day period does not commence until the Reserve Bank receives the
requested information.
(2) Board action. The Board shall act on an application or notice
under this section that is referred to it for decision within 60
calendar days after the Reserve Bank has accepted the application or
received the notice, unless the Board notifies the applicant that the
60-day period is being extended for a specified period and explains the
reasons for the extension. In no event may the extension exceed the
91-day period specified in paragraph (h) of this section. The Board may
request additional information that it believes is necessary for its
decision.
(f) Expedited procedure for small acquisitions -- (1) Filing notice.
As an alternative to the application procedure of paragraph (a)(2) of
this section, a bank holding company may apply to acquire voting
securities or assets of a company engaged in an activity listed in
225.25 of this subpart by:
(i) Providing the appropriate Reserve Bank with a description of the
transaction; and either
(ii) Submitting a copy of a newspaper notice in the form prescribed
by the Board; or
(iii) Requesting the Board to publish notice of the application in
the Federal Register. The newspaper notice shall be published in a
newspaper of general circulation in the areas to be served as a result
of the acquisition and shall provide an opportunity for interested
persons to comment on the application for a period of at least 10
calendar days. If the applicant elects Federal Register notice, the
notice shall provide an opportunity for interested persons to comment
for a period of at least 15 calendar days.
(2) Criteria for use of expedited procedure. The procedure in this
paragraph is available only if:
(i) Neither the book value of the assets to be acquired nor the gross
consideration to be paid for the securities or assets exceeds $15
million;
(ii) The bank holding company has previously received Board approval
to engage in the activity involved in the acquisition; and
(iii) The bank holding company meets the Board's Capital Adequacy
Guidelines (Appendix A to Subparts A through E).
(3) Action on application. Within 5 business days after the close of
the comment period specified in the Federal Register notice or within 15
calendar days after receipt by the Reserve Bank of the newspaper notice,
the Reserve Bank shall either approve the application or refer it to the
Board for decision if action under delegated authority is not
appropriate. The Board shall act on an application under this paragraph
that is referred to it for decision in accordance with paragraph (e)(2)
of this section. The Reserve Bank, upon written notice to the
applicant, may extend the time period for approval under this paragraph
for a reasonable period of time not to exceed 30 days. The Reserve Bank
or the Board may require an application under paragraph (a)(2) of this
section.
(g) Hearing. Any request for a hearing on an application or notice
under this section shall comply with the provisions of 262.3(e) of the
Board's Rules of Procedure (12 CFR 262.3(e)). The Board may order a
formal or informal hearing or other proceeding on an application, as
provided in 262.3(i)(2) of the Rules of Procedure (12 CFR 262.3(i)(2)).
The Board shall order a hearing only if there are disputed issues of
material fact that cannot be resolved in some other manner.
(h) Approval through failure to act; 91-day rule. An application or
notice under this subpart shall be deemed approved if the Board fails to
act on the application or notice within 91 calendar days after the date
of submission to the Board of the complete record on the application or
notice. The procedures for computation of the 91-day rule as set forth
in 225.14(g) of Subpart B of this regulation apply to applications and
notices under this subpart.
(i) Emergency thrift institution acquisitions. In the case of an
application to acquire a thrift institution, the Board may modify or
dispense with the notice and hearing requirements of this section if the
Board finds that an emergency exists that requires the Board to act
immediately and the primary Federal regulator of the institution
concurs.
12 CFR 225.24 Factors considered in acting on nonbanking applications.
In evaluating an application or notice under 225.23 of this subpart,
the Board shall consider whether the performance by the applicant of the
activity can reasonably be expected to produce benefits to the public
(such as greater convenience, increased competition, the gains in
efficiency) that outweigh possible adverse effects (such as undue
concentration of resources, decreased or unfair competition, conflicts
of interest, and unsound banking practices). This consideration
includes an evaluation of the financial and managerial resources of the
applicant, including its subsidiaries, and any company to be acquired,
and the effect of the proposed transaction on those resources. Unless
the record demonstrates otherwise, the commencement or expansion of a
nonbanking activity de novo is presumed to result in benefits to the
public through increased competition.
12 CFR 225.25 List of permissible nonbanking activities.
(a) Closely related nonbanking activities. The activities listed
below are so closely related to banking or managing or controlling banks
as to be a proper incident thereto and may be engaged in by a bank
holding company or a subsidiary thereof in accordance with and subject
to the requirements of this regulation.
(b)(1) Making and servicing loans. Making, acquiring, or servicing
loans or other extensions of credit (including issuing letters of credit
and accepting drafts) for the company's account or for the account of
others, such as would be made, for example, by the following types of
companies:
(i) Consumer finance;
(ii) Credit card;
(iii) Mortgage;
(iv) Commercial finance; and
(v) Factoring.
(2) Industrial banking. Operating an industrial bank, Morris Plan
bank, or industrial loan company, as authorized under state law, so long
as the institution is not a bank.
(3) Trust company functions. Performing functions or activities that
may be performed by a trust company (including activities of a
fiduciary, agency, or custodial nature), in the manner authorized by
federal or state law, so long as the institution is not a bank and does
not make loans or investments or accept deposits other than:
(i) Deposits that are generated from trust funds not currently
invested and that are properly secured to the extent required by law;
(ii) Deposits representing funds received for a special use in the
capacity of managing agent or custodian for an owner of, or investor in,
real property, securities, or other personal property; or for such
owner or investor as agent or custodian of funds held for investment or
as escrow agent; or for an issuer of, or broker or dealer in
securities, in a capacity such as a paying agent, dividend disbursing
agent, or securities clearing agent; provided such deposits are not
employed by or for the account of the customer in the manner of a
general purpose checking account or interest-bearing account; or
(iii) Making call loans to securities dealers or purchasing money
market instruments such as certificates of deposit, commercial paper,
government or municipal securities, and bankers acceptances. (Such
authorized loans and investments, however, may not be used as a method
of channeling funds to nonbanking affiliates of the trust company.)
(4) Investment or financial advice. Acting as investment or
financial adviser to the extent of:
(i) Serving as the advisory company for a mortgage or a real estate
investment trust;
(ii) Serving as investment adviser (as defined in section 2(a)(20) of
the Investment Company Act of 1940, 15 U.S.C. 80a-2(a)(20)), to an
investment company registered under that act, including sponsoring,
organizing, and managing a closed-end investment company;
(iii) Providing portfolio investment advice1 to any other person;
(iv) Furnishing general economic information and advice, general
economic statistical forecasting services and industry studies;2 and
(v) Providing financial advice to state and local governments, such
as with respect to the issuance of their securities.
(5) Leasing personal or real property. Leasing personal or real
property or acting as agent, broker, or adviser in leasing such property
if:
(i) The lease is to serve as the functional equivalent of an
extension of credit to the lessee of the property;
(ii) The property to be leased is acquired specifically for the
leasing transaction under consideration or was acquired specifically for
an earlier leasing transaction;
(iii) The lease is on a nonoperating basis; /3/
(iv) At the inception of the initial lease the effect of the
transaction (and, with respect to governmental entities only, reasonably
anticipated future transactions /4/ ) will yield a return that will
compensate the lessor for not less than the lessor's full investment in
the property plus the estimated total cost of financing the property
over the term of the lease, /5/ from:
(A) Rentals;
(B) Estimated tax benefits (investment tax credit, net economic gain
from tax deferral from accelerated depreciation, and other tax benefits
with a substantially similar effect);
(C) The estimated residual value of the property at the expiration of
the initial term of the lease, which in no case shall exceed 20 percent
of the acquisition cost of the property to the lessor; and
(D) In the case of a lease of personal property of not more than
seven years in duration, such additional amount, which shall not exceed
60 percent of the acquisition cost of the property, as may be provided
by an unconditional guarantee by a lessee, independent third party, or
manufacturer, which has been determined by the lessor to have the
financial resources to meet such obligation, that will assure the lessor
of recovery of its investment and cost of financing;
(v) The maximum lease term during which the lessor must recover the
lessor's full investment in the property, plus the estimated total cost
of financing the property, shall be 40 years; and
(vi) At the expiration of the lease (including any renewals or
extensions with the same lessee), all interest in the property shall be
either liquidated or released on a nonoperating basis as soon as
practicable but in no event later than two years from the expiration of
the lease; /6/ however, in no case shall the lessor retain any interest
in the property beyond 50 years after its acquisition of the property.
(6) Community development. Making equity and debt investments in
corporations or projects designed primarily to promote community
welfare, such as the economic rehabilitation and development of
low-income areas by providing housing, services, or jobs for residents.
(7) Data processing. Providing to others data processing and data
transmission services, facilities (including data processing and data
transmission hardware, software, documentation or operating personnel),
data bases, or access to such services, facilities, or data bases by any
technological means, if:
(i) The data to be processed or furnished are financial, banking, or
economic, and the services are provided pursuant to a written agreement
so describing and limiting the services;
(ii) The facilities are designed, marketed, and operated for the
processing and transmission of financial, banking, or economic data;
and
(iii) The hardware provided in connection therewith is offered only
in conjunction with software designed and marketed for the processing
and transmission of financial, banking, or economic data, and where the
general purpose hardware does not constitute more than 30 percent of the
cost of any packaged offering.
(8) Insurance agency and underwriting -- (i) Credit Insurance.
Acting as principal, agent, or broker for insurance (including home
mortgage redemption insurance) that is:
(A) Directly related to an extension of credit by the bank holding
company or any of its subsidiaries; and
(B) Limited to assuring the repayment of the outstanding balance due
on the extension of credit /7/ in the event of the death, disability, or
involuntary unemployment of the debtor.
(ii) Finance company subsidiary. Acting as agent or broker for
insurance directly related to an extension of credit by a finance
company /8/ that is a subsidiary of a bank holding company, if:
(A) The insurance is limited to assuring repayment of the outstanding
balance on such extension of credit in the event of loss or damage to
any property used as collateral for the extension of credit; and
(B) The extension of credit is not more than $10,000, or $25,000 if
it is to finance the purchase of a residential manufactured home /9/ and
the credit is secured by the home; and
(C) The applicant commits to notify borrowers in writing that:
(1) They are not required to purchase such insurance from the
applicant;
(2) Such insurance does not insure any interest of the borrower in
the collateral; and
(3) The applicant will accept more comprehensive property insurance
in place of such single interest insurance.
(iii) Insurance in small towns. Engaging in any insurance agency
activity in a place where the bank holding company or a subsidiary of
the bank holding company has a lending office and that:
(A) Has a population not exceeding 5,000 (as shown in the preceding
decennial census); or
(B) Has inadequate insurance agency facilities, as determined by the
Board, after notice and opportunity for hearing.
(iv) Insurance agency activities conducted on May 1, 1982. Engaging
in any specific insurance agency activity /10/ if the bank holding
company, or subsidiary conducting the specific activity, conducted such
activity on May 1, 1982, or received Board approval to conduct such
activity on or before May 1, 1982. /11/ A bank holding company or
subsidiary engaging in a specific insurance agency activity under this
clause may:
(A) Engage in such specific insurance agency activity only at
locations:
(1) In the State in which the bank holding company has its principal
place of business (as defined in 12 U.S.C. 1842(d));
(2) In any State or States immediately adjacent to such State; and
(3) In any State in which the specific insurance agency activity was
conducted (or was approved to be conducted) by such bank holding company
or subsidiary thereof or by any other subsidiary of such bank holding
company on May 1, 1982; and
(B) Provide other insurance coverages that may become available after
May 1, 1982, so long as those coverages insure against the types of
risks as (or are otherwise functionally equivalent to) coverages sold or
approved to be sold on May 1, 1982 by such bank holding company or
subsidiary.
(v) Supervision of retail insurance agents. Supervising on behalf of
insurance underwriters the activities of retail insurance agents who
sell:
(A) Fidelity insurance and property and casualty insurance on the
real and personal property used in the operations of the bank holding
company or its subsidiaries; and
(B) Group insurance that protects the employees of the bank holding
company or its subsidiaries.
(vi) Small bank holding companies. Engaging in any insurance agency
activity if the bank holding company has total consolidated assets of
$50 million or less. A bank holding company performing insurance agency
activities under this paragraph may not engage in the sale of life
insurance or annuities except as provided in paragraphs (b)(8) (i) and
(iii) of this section, and it may not continue to engage in insurance
agency activities pursuant to this provision more than 90 days after the
end of the quarterly reporting period in which total assets of the
holding company and its subsidiaries exceed $50 million.
(vii) Insurance agency activities conducted before 1971. Engaging in
any insurance agency activity performed at any location in the United
States directly or indirectly by a bank holding company that was engaged
in insurance agency activities prior to January 1, 1971, as a
consequence of approval by the Board prior to January 1, 1971.
(9) Operating savings association. Owning, controlling or operating
a savings association, if the savings association engages only in
deposit taking activities and lending and other activities that are
permissible for bank holding companies under this subpart C.
(10) Courier services. Providing courier services for:
(i) Checks, commercial papers, documents, and written instruments
(excluding currency or bearer-type negotiable instruments) that are
exchanged among banks and financial institutions; and
(ii) Audit and accounting media of a banking or financial nature and
other business records and documents used in processing such media.
/12/
(11) Management consulting to depository institutions. Providing
management consulting advice /13/ to nonaffiliated bank and nonbank
depository institutions, including commercial banks, savings and loan
associations, mutual savings banks, credit unions, industrial banks,
Morris Plan banks, cooperative banks, and industrial loan companies, if:
(i) Neither the bank holding company nor any of its subsidiaries own
or control, directly or indirectly, any equity securities in the client
institution;
(ii) No management official, as defined in 12 CFR 212.2(h), of the
bank holding company or any of its subsidiaries serves as a management
official of the client institution, except where such interlocking
relationships are permitted pursuant to an exemption granted under 12
CFR 212.4(b);
(iii) The advice is rendered on an explicit fee basis without regard
to correspondent balances maintained by the client institution at any
depository institution subsidiary of the bank holding company; and
(iv) Disclosure is made to each potential client institution of (A)
the names of all depository institutions that are affiliates of the
consulting company, and (B) the names of all existing client
institutions located in the same county(ies), Metropolitan Statistical
Area, or Primary Metropolitan Statistical Area as the client
institution. /14/
(12) Money orders, savings bonds, and travelers checks. The issuance
and sale at retail of money orders and similar consumer-type payment
instruments having a face value of not more than $1,000; the sale of
U.S. savings bonds; and the issuance and sale of travelers checks.
(13) Real estate and personal property appraising. Performing
appraisals of real estate and tangible and intangible personal property,
including securities.
(14) Arranging commercial real estate equity financing. Acting as
intermediary for the financing of commercial or industrial
income-producing real estate by arranging for the transfer of the title,
control and risk of such a real estate project to one or more investors,
if:
(i) The financing arranged exceeds $1 million;
(ii) The bank holding company and its affiliates do not provide
financing to the investors to acquire a real estate project for which
the bank holding company arranges equity financing;
(iii) The bank holding company and its affiliates do not have an
interest in or participate in managing, developing or syndicating a real
estate project for which it arranges equity financing, and do not
promote or sponsor the development or syndication of such property; and
(iv) The fee received for arranging equity financing for a real
estate project is not based on profits to be derived from the project
and is not larger than the fee that would be charged by an unaffiliated
intermediary.
(15) Securities brokerage. Providing securities brokerage services,
related securities credit activities pursuant to the Board's Regulation
T (12 CFR Part 220), and incidental activities such as offering
custodial services, individual retirement accounts, and cash management
services, if the securities brokerage services are restricted to buying
and selling securities solely as agent for the account of customers and
do not include securities underwriting or dealing or investment advice
or research services.
(16) Underwriting and dealing in government obligations and money
market instruments. Underwriting and dealing in obligations of the
United States, general obligations of states and their political
subdivisions, and other obligations that state member banks of the
Federal Reserve System may be authorized to underwrite and deal in under
12 U.S.C. 24 and 335, including bankers' acceptances and certificates of
deposit, under the same limitations as would be applicable if the
activity were performed by the bank holding company's subsidiary member
banks or its subsidiary nonmember banks as if they were member banks.
(17) Foreign exchange advisory and transactional services.
Providing, by any means, general information and statistical forecasting
with respect to foreign exchange markets; advisory services designed to
assist customers in monitoring, evaluating and managing their foreign
exchange exposures; and transactional services with respect to foreign
exchange by arranging for ''swaps'' among customers with complementary
foreign exchange exposures and for the execution of foreign exchange
transactions; provided the activity is conducted through a separately
incorporated subsidiary of the bank holding company that:
(i) Does not take positions in foreign exchange for its own account;
(ii) Observes the standards of care and conduct applicable to
fiduciaries with respect to its foreign exchange advisory and
transactional services; and
(iii) Does not itself execute foreign exchange transactions.
(18) Futures commission merchant. Acting as a futures commission
merchant for nonaffiliated persons in the execution and clearance on
major commodity exchanges of futures contracts and options on futures
contracts for bullion, foreign exchange, government securities,
certificates of deposit and other money market instruments that a bank
may buy or sell in the cash market for its own account, if the activity
is conducted through a separately incorporated subsidiary of the bank
holding company that:
(i) Does not become a clearing member of any exchange or clearing
association that requires the parent corporation of the clearing member
to also become a member of that exchange or clearing association unless
a waiver of the requirement is obtained;
(ii) Does not trade for its own account except for the purpose of
hedging a cash position in the related government security, bullion,
foreign currency, or money market instrument;
(iii) Time stamps orders of all customers to the nearest minute,
executes all orders strictly in chronological sequence to the extent
consistent with the customers' specifications, and executes all orders
with reasonable promptness with due regard to market conditions;
(iv) Does not extend credit to customers for the purpose of meeting
initial or maintenance margins required of customers except for posting
margin on behalf of customers in advance of prompt reimbursement; and
(v) Has and maintains capitalization fully adequate to meet its own
commitments and those of its customers, including affiliates.
(19) Investment advice on financial futures and options on futures.
Providing investment advice, including counsel, publications, written
analyses and reports, as a futures commission merchant (''FCM'')
authorized pursuant to paragraph (b)(18) of this section or as a
commodity trading advisor (''CTA'') registered with the Commodity
Futures Trading Commission, with respect to the purchase and sale of
futures contracts and options on futures contracts for the commodities
and instruments referred to in paragraph (b)(18) of this section,
Provided that the FCM or CTA:
(i) Does not trade for its own account except for the purpose of
hedging a cash position in the related government security, bullion,
foreign currency, or money market instrument; and
(ii) Limits its advice to financial institutions and other
financially sophisticated customers that have significant dealings or
holdings in the underlying commodities, securities, or instruments.
(20) Consumer financial counseling. Providing advice, educational
courses, and instructional materials to consumers on individual
financial management matters, including debt consolidation, applying for
a mortgage, bankruptcy, budget management, tax planning, retirement and
estate planning, insurance and general investment management, Provided:
(i) Educational materials and presentations used by the counselor may
not promote specific products and services;
(ii) The counselor advises each customer that the customer is not
required to purchase any services from affiliates; and
(iii) The counselor does not obtain or disclose confidential
information concerning its customers without the customer's written
consent or pursuant to legal process.
This paragraph does not authorize the provision of advice on specific
products or investments or the provision of portfolio investment advice
or portfolio management, which are authorized under paragraph (b)(3) and
(4)(iii) of this section subject to certain fiduciary standards. If
consumer financial counseling is offered by a company that also offers
securities brokerage services pursuant to paragraph (b)(15) of this
section, the brokerage and counseling services must be provided by
different personnel and in separate offices or in separate and
distinctly marked areas.
(21) Tax planning and preparation. Providing individuals,
businesses, and nonprofit organizations tax planning and tax preparation
services, including advice and strategies to minimize tax liabilities,
and the preparation of tax forms, Provided:
(i) The materials used by the tax planner or preparer do not promote
other specific products and services; and
(ii) The tax planner or preparer does not obtain or disclose
confidential information concerning its customers without the customer's
written consent or pursuant to legal process.
(22) Check guaranty services. Authorizing a subscribing merchant to
accept personal checks tendered by the merchant's customers in payment
for goods and services and purchasing from the merchant validly
authorized checks that are subsequently dishonored, provided that the
check guarantor does not discriminate against checks drawn on
unaffiliated banks.
(23) Operating collection agency. Collecting overdue accounts
receivable, either retail or commercial, provided the collection agency:
(i) Does not obtain the names of customers of competing collection
agencies from an affiliated depository institution that maintains trust
accounts for those agencies; and
(ii) Does not provide preferential treatment to an affiliate or a
customer of such affiliate seeking collection of an outstanding debt.
(24) Operating credit bureau. Maintaining files on the past credit
history of consumers and providing that information to a credit grantor
who is considering a borrower's application for credit, provided that
the credit bureau does not provide preferential treatment to a customer
of an affiliated financial institution.
(Reg. Y, 49 FR 818, Jan. 5, 1984, as amended at 51 FR 36211, Oct. 9,
1986; 51 FR 40000, Nov. 4, 1986; Reg. Y, 54 FR 37301, Sept. 8, 1989)
1The term ''portfolio investment'' is intended to refer generally to
the investment of funds in a ''security'' as defined in section 2(1) of
the Securities Act of 1933 (15 U.S.C. 77b) or in real property
interests, except where the real property is to be used in the trade or
business of the person being advised. In furnishing portfolio
investment advice, bank holding companies and their subsidiaries shall
observe the standards of care and conduct applicable to fiduciaries.
2This is to be contrasted with ''management consulting,'' which the
Board views as including, but not limited to, the provision of analysis
or advice as to a firm's (A) purchasing operations, such as inventory
control, sources of supply, and cost minimization subject to
constraints; (B) production operations, such as quality control, work
measurement, product methods, scheduling shifts, time and motion
studies, and safety standards; (C) marketing operations, such as market
testing, advertising programs, market development, packaging, and brand
development; (D) planning operations, such as demand and cost
projections, plant location, program planning, corporate acquisitions
and mergers, and determination of long-term and short-term goals; (E)
personnel operations, such as recruitment, training, incentive programs,
employee compensation, and management-personnel relations; (F) internal
operations, such as taxes, corporate organization, budgeting systems,
budget control, data processing systems evaluation, and efficiency
evaluation; or (G) research operations, such as product development,
basic research, and product design and innovation. The Board has
determined that ''management consulting'' is not an activity that is so
closely related to banking or managing or controlling banks as to be a
proper incident thereto.
/3/ For purposes of the leasing of automobiles, the requirement that
the lease be on a nonoperating basis means that the bank holding company
may not, directly or indirectly: (A) provide for the servicing, repair,
or maintenance of the leased vehicle during the lease term; (B)
purchase parts and accessories in bulk or for an individual vehicle
after the lessee has taken delivery of the vehicle; (C) provide for the
loan of an automobile during servicing of the leased vehicle; (D)
purchase insurance for the lessee; or (E) provide for the renewal of
the vehicle's license merely as a service to the lessee where the lessee
could renew the license without authorization from the lessor.
/4/ The Board understands that some Federal, state and local
governmental entities may not enter into a lease for a period in excess
of one year. Such an impediment does not prohibit a company authorized
to conduct leasing activities under this paragraph from entering into a
lease with such governmental entities if the company reasonably
anticipates that the governmental entities will renew the lease annually
until such time as the company is fully compensated for its investment
in the leased property plus its costs of financing the property.
Further, a company authorized to conduct personal property leasing
activities under this paragraph may also engage in so-called ''bridge''
lease financing of personal property, but not real property, if the
lease is short-term pending completion of long-term financing, by the
same or another lender.
/5/ The estimate by the lessor of the total cost of financing the
property over the term of the lease should reflect, among other factors:
the term of the lease, the modes of financing available to the lessor,
the credit rating of the lessor and/or the lessee, if a factor in the
financing, and prevailing rates in the money and capital markets.
/6/ In the event of a default on a lease agreement prior to the
expiration of the lease term, the lessor shall either release the
property, subject to all the conditions of this paragraph, or liquidate
the property as soon as practicable but in no event later than two years
from the date of default on a lease agreement or such additional time as
the Board may permit under 225.22(c)(1) of this regulation, as if the
property were DPC property.
/7/ ''Extension of credit'' includes direct loans to borrowers, loans
purchased from other lenders, and leases of real or personal property so
long as the leases are nonoperating and full payout leases that meet the
requirements of paragraph (b)(5) of this section.
/8/ ''Finance company'' includes all nondeposit-taking financial
institutions that engage in a significant degree of consumer lending
(excluding lending secured by first mortgages) and all financial
institutions specifically defined by individual States as finance
companies and that engage in a significant degree of consumer lending.
/9/ These limitations increase at the end of each calendar year,
beginning with 1982, by the percentage increase in the Consumer Price
Index for Urban Wage Earners and Clerical Workers published by the
Bureau of Labor Statistics.
/10/ Nothing contained in this provision shall preclude a bank
holding company subsidiary that is authorized to engage in a specific
insurance agency activity under this clause from continuing to engage in
the particular activity after merger with an affiliate, if the merger is
for legitimate business purposes and prior notice has been provided to
the Board.
/11/ For purposes of this paragraph, activities engaged in on May 1,
1982, include activities carried on subsequently as the result of an
application to engage in such activities pending before the Board on May
1, 1982, and approved subsequently by the Board or as the result of the
acquisition by such company pursuant to a binding written contract
entered into on or before May 1, 1982, of another company engaged in
such activities at the time of the acquisition.
/12/ See also the Board's interpretation on courier activities (12
CFR 225.129), which sets forth conditions for bank holding company entry
into the activity.
/13/ A bank holding company that has received the Board's prior
approval to engage in offering management consulting advice to
nonaffiliated commercial banks as of April 20, 1982, may offer such
advice on a de novo basis to nonbank depository institutions pursuant to
this paragraph without filing an application under 225.23 of this
subpart.
/14/ In performing this activity, bank holding companies are not
authorized to perform tasks or operations or provide services to client
institutions either on a daily or continuing basis, except as necessary
to instruct the client institution on how to perform such services for
itself. See also the Board's interpretation of bank management
consulting advice (12 CFR 225.131). This interpretation shall apply to
the performance of management consulting services for commercial banks
and any other type of depository institution.
12 CFR 225.25 Subpart D -- Control and Divestiture Proceedings
12 CFR 225.31 Control proceedings.
(a) Preliminary determination of control. (1) The Board may issue a
preliminary determination of control under the procedures set forth in
this section in any case in which:
(i) Any of the presumptions of control set forth in paragraph (d) of
this section is present; or
(ii) It otherwise appears that a company has the power to exercise a
controlling influence over the management or policies of a bank or other
company.
(2) If the Board makes a preliminary determination of control under
this section, the Board shall send notice to the controlling company
containing a statement of the facts upon which the preliminary
determination is based.
(b) Response to preliminary determination of control. Within 30
calendar days of issuance by the Board of a preliminary determination of
control or such longer period permitted by the Board, the company
against whom the determination has been made shall:
(1) Submit for the Board's approval a specific plan for the prompt
termination of the control relationship;
(2) File an application under subpart B or C of this regulation to
retain the control relationship; or
(3) Contest the preliminary determination by filing a response,
setting forth the facts and circumstances in support of its position
that no control exists, and, if desired, requesting a hearing or other
proceeding.
(c) Hearing and final determination. (1) The Board shall order a
formal hearing or other appropriate proceeding upon the request of a
company that contests a preliminary determination that the company has
the power to exercise a controlling influence over the management or
policies of a bank or other company, if the Board finds that material
facts are in dispute. The Board may also in its discretion order a
formal hearing or other proceeding with respect to a preliminary
determination that the company controls voting securities of the bank or
other company under the presumptions in paragraph (d)(1) of this
section.
(2) At a hearing or other proceeding, any applicable presumptions
established by paragraph (d) of this section shall be considered in
accordance with the Federal Rules of Evidence and the Board's Rules of
Practice for Formal Hearings (12 CFR part 263).
(3) After considering the submissions of the company and other
evidence, including the record of any hearing or other proceeding, the
Board shall issue a final order determining whether the company controls
voting securities, or has the power to exercise a controlling influence
over the management or policies, of the bank or other company. If a
control relationship is found, the Board may direct the company to
terminate the control relationship or to file an application for the
Board's approval to retain the control relationship under subpart B or C
of this regulation.
(d) Rebuttable presumptions of control. The following rebuttable
presumptions shall be used in any proceeding under this section:
(1) Control of voting securities -- (i) Securities convertible into
voting securities. A company that owns, controls, or holds securities
that are immediately convertible, at the option of the holder or owner,
into voting securities of a bank or other company, controls the voting
securities.
(ii) Option or restriction on voting securities. A company that
enters into an agreement or understanding under which the rights of a
holder of voting securities of a bank or other company are restricted in
any manner controls the securities. This presumption does not apply
where the agreement or understanding:
(A) Is a mutual agreement among shareholders granting to each other a
right of first refusal with respect to their shares;
(B) Is incident to a bona fide loan transaction; or
(C) Relates to restrictions on transferability and continues only for
the time necessary to obtain approval from the appropriate Federal
supervisory authority with respect to acquisition by the company of the
securities.
(2) Control over company -- (i) Management agreement. A company that
enters into any agreement or understanding with a bank or other company
(other than an investment advisory agreement), such as a management
contract, under which the first company or any of its subsidiaries
directs or exercises significant influence over the general management
or overall operations of the bank or other company controls the bank or
other company.
(ii) Shares controlled by company and associated individuals. A
company that, together with its management officials or principal
shareholders (including members of the immediate families of either as
defined in 12 CFR 206.2(k)), owns, controls, or holds with power to vote
25 percent or more of the outstanding shares of any class of voting
securities of a bank or other company controls the bank or other
company, if the first company owns, controls, or holds with power to
vote more than 5 percent of the outstanding shares of any class of
voting securities of the bank or other company.
(iii) Common management officials. A company that has one or more
management officials in common with a bank or other company controls the
bank or other company, if the first company owns, controls or holds with
power to vote more than 5 percent of the outstanding shares of any class
of voting securities of the bank or other company, and no other person
controls as much as 5 percent of the outstanding shares of any class of
voting securities of the bank or other company.
(iv) Shares held as fiduciary. The presumptions in paragraphs (d)(2)
(ii) and (iii) of this section do not apply if the securities are held
by the company in a fidicuary capacity without sole discretionary
authority to exercise the voting rights.
(e) Presumption of non-control -- (1) In any proceeding under this
section, there is a presumption that any company that directly or
indirectly owns, controls, or has power to vote less than 5 percent of
the outstanding shares of any class of voting securities of a bank or
other company does not have control over that bank or other company.
(2) In any proceeding under this section, or judicial proceeding
under the BHC Act, other than a proceeding in which the Board has made a
preliminary determination that a company has the power to exercise a
controlling influence over the management or policies of the bank or
other company, a company may not be held to have had control over the
bank or other company at any given time, unless that company, at the
time in question, directly or indirectly owned, controlled, or had power
to vote 5 percent or more of the outstanding shares of any class of
voting securities of the bank or other company, or had already been
found to have control on the basis of the existence of a controlling
influence relationship.
12 CFR 225.32 Divestiture proceedings.
(a) Ineffective divestitures. (1) The divestiture of assets or
voting securities by a bank holding company (or a company that would be
a bank holding company but for the divestiture) is ineffective, and the
divesting company shall be presumed to control the acquiring person or
the divested assets or securities, if:
(i) The acquiring person is indebted in any manner to the divesting
company; or
(ii) The divesting company has any management official in common with
the acquiring person.
(2) For the purposes of this section:
(i) Indebtedness does not include routine business or personal credit
that is unrelated to the divestiture transaction and that is extended by
the divesting company in the ordinary course of its lending business;
and
(ii) Divesting company and acquiring person include their parent
companies, subsidiaries, and, if the acquiring person is an individual,
companies controlled by the individual.
(b) Request for divestiture determination. For any divestiture that
is deemed ineffective under paragraph (a) of this section, the divesting
company may request the Board to determine that the divestiture is in
fact effective by submitting a letter that includes:
(1) A description of the divestiture transaction and the existing and
prospective relationship between the divesting company and the acquiring
person;
(2) Evidence and argument demonstrating that the divesting company is
not capable of controlling the acquiring person or the divested assets
or securities; and
(3) A request for a hearing, if desired.
(c) Hearing. The Board shall order a formal hearing or other
appropriate proceeding upon the request of a divesting company under
paragraph (b) of this section, if the Board finds that material facts
are in dispute. The Board may also order a formal hearing or other
proceeding if, in the Board's judgment, such a proceeding would be
appropriate.
(d) Standards for making divestiture determination. In acting on the
request of a divesting company under paragraph (b) of this section, the
Board shall consider the following factors, among others, in determining
whether the divesting company is capable of controlling the acquiring
person or the divested assets or securities:
(1) Indebtedness of acquiring person to divesting company. (i) The
terms of the indebtedness, including the amount of the indebtedness in
relation to the total purchase price;
(ii) The ability of the acquiring person to repay the indebtedness;
and
(iii) The manner in which the divesting company would dispose of the
divested assets in the event it reacquires the assets as a result of
default on the indebtedness.
(2) Management official interlocks. The extent of the involvement of
the interlocking management official in the operations of the divesting
company and the acquiring person, and the management official's
relationship to the assets or securities being divested.
(e) Final determination. After considering the submission of the
divesting company and other evidence, including the record of any
hearing or other proceeding, the Board shall issue an order determining
whether the company controls or is capable of controlling the acquiring
person or the divested assets or securities.
(f) Review of other divestitures. In any divestiture of assets or
securities by a company that is not covered under paragraph (a) of his
section, the Board may review the divestiture to assure that the
divesting company is not capable of controlling the acquiring person or
the divested assets or securities.
12 CFR 225.32 Subpart E -- Change in Bank Control
12 CFR 225.41 Transactions requiring prior notice.
(a) Prior notice requirement. (1) Any person acting directly or
indirectly, or through or in concert with one or more persons, shall
give the Board 60 days' written notice, as specified in 225.43 of this
subpart, before acquiring control of a state member bank or bank holding
company, unless the acquisition is exempt under 225.42 of this subpart.
(2) For the purposes of this subpart, acquisition includes a
purchase, assignment, transfer, or pledge of voting securities, or an
increase in percentage ownership of a bank or other company resulting
from a redemption of voting securities.
(b) Acquisitions requiring prior notice. The following transactions
constitute, or are presumed to constitute, the acquisition of control
under the Bank Control Act, requiring prior notice to the Board:
(1) The acquisition of any voting securities of a state member bank
or bank holding company if, after the transaction, the acquiring person
(or persons acting in concert) owns, controls, or holds with power to
vote 25 percent or more of any class of voting securities of the
institution; or
(2) The acquisition of any voting securities of a state member bank
or bank holding company if, after the transaction, the acquiring person
(or persons acting in concert) owns, controls, or holds with power to
vote 10 percent or more (but less than 25 percent) of any class of
voting securities of the institution, and if:
(i) The institution has registered securities under section 12 of the
Securities Exchange Act of 1934 (15 U.S.C. 78l); or
(ii) No other person will own a greater percentage of that class of
voting securities immediately after the transaction.
(c) Rebuttal of presumption of control. Prior notice to the Board is
not required for any acquisition of voting securities under the
presumption set forth in paragraph (b)(2) of this section, if the Board
finds that the acquisition will not result in control. The Board will
afford the person seeking to rebut the presumption an opportunity to
present views in writing or, if appropriate, orally before its
designated representatives at an informal conference.
(d) Other transactions. Transactions other than those set forth in
paragraph (b)(2) resulting in a person's control of less than 25 percent
of a class of voting securities of a state member bank or bank holding
company do not result in control for purposes of the Bank Control Act.
12 CFR 225.42 Transactions not requiring prior notice.
The following transactions do not require prior notice to the Board
under this subpart:
(a)(1) Increase of previously authorized acquisitions above 25
percent. The acquisition of additional shares of a class of voting
securities of a state member bank or bank holding company by any person
who has lawfully acquired and maintained control of 25 percent or more
of that class of voting securities after filing the notice required
under 225.41(b)(1) of this subpart.
(2) Increase of previously authorized acquisitions between 10 percent
and 25 percent. Unless the Board or Reserve Bank otherwise provides by
order, the acquisition of additional shares of a class of voting
securities of a state member bank or bank holding company by any person
(or persons acting in concert) who has lawfully acquired and maintained
control of 10 percent or more of that class of voting securities either
after filing the notice required under 225.41(b)(2) of this subpart to
acquire voting securities of the bank or bank holding company or in
connection with an application approved under section 3 of the Bank
Holding Company Act or section 18(c) of the Federal Deposit Insurance
Act, if the aggregate amount of voting securities held following the
acquisition is less than 25 percent of any class of voting securities of
the institution.
(b) Acquisitions subject to approval under BHC Act or Bank Merger
Act. Any acquisition of voting securities subject to approval under
section 3 of the BHC Act ( 225.11 of subpart B), or section 18(c) of the
Federal Deposit Insurance Act (Bank Merger Act, 12 U.S.C. 1828(c)).
(c) Transactions exempt under BHC Act. Any acquisition described in
sections 2(a)(5) or 3(a) (A) or (B) of the BHC Act (12 U.S.C.
1841(a)(5), 1842(a) (A) and (B)) by a person described in those
provisions.
(d) Grandfathered control relationships. (1) The acquisition of
additional voting securities of a state member bank or bank holding
company by a person who continuously since March 9, 1979 (or since that
institution commenced business, if later) held power to vote 25 percent
or more of any class of voting securities of that institution; or
(2) The acquisition of additional voting securities of a state member
bank or bank holding company by a person who is presumed under
225.41(b)(2) of this subpart to have controlled the institution
continuously since March 9, 1979, if the aggregate amount of voting
securities held does not exceed 25 percent of any class of voting
securities of the institution.
(e) Acquisitions in satisfaction of debts previously contracted or
through inheritance or gift. Any acquisition of voting securities,
which would otherwise require a notice under this subpart, in
satisfaction of a debt previously contracted in good faith, or through
inheritance or a bona fide gift, if the acquiring person notifies the
appropriate Reserve Bank within 30 calendar days after the acquisition
and provides any relevant information requested by the Reserve Bank.
(f) Proxy solicitation. The acquisition of the power to vote
securities of a state member bank or bank holding company through
receipt of a revocable proxy in connection with a proxy solicitation for
the purpose of conducting business at a regular or special meeting of
the institution, if the proxy terminates within a reasonable period
after the meeting.
(g) Stock dividends. The receipt of voting securities of a state
member bank or bank holding company through a stock dividend or stock
split if the proportional interest of the recipient in the institution
remains substantially the same.
(h) Acquisition of foreign banking organization. The acquisition of
voting securities of a qualifying foreign banking organization. (This
exemption does not extend to the reports and information required under
paragraphs 9, 10, and 12 of the Bank Control Act (12 U.S.C. 1817(j) (9),
(10), and (12)).)
(Reg. Y, 49 FR 818, Jan. 5, 1984, as amended by Reg. Y, 55 FR 47845,
Nov. 16, 1990)
12 CFR 225.43 Procedures for filing, processing, publishing, and acting
on notices.
(a)(1) Filing notice. A notice required under this subpart shall be
filed with the appropriate Reserve Bank and shall contain the
information required by paragraph 6 of the Change in Bank Control Act
(12 U.S.C. 1817(j)(6)), or prescribed in the designated Board form.
With respect to personal financial statements required by paragraph 6(B)
of the Change in Bank Control Act, an individual may include a statement
of assets and liabilities as of a date within 90 days of filing the
notice, a brief income summary, and a description of any subsequent
material changes, subject to the authority of the Reserve Bank or the
Board to require additional information.
(2) Acceptance of notice. The 60-day notice period specified in
225.41 of this subpart shall commence on the date all required
information is received by the appropriate Reserve Bank or the Board.
The Reserve Bank shall notify the person or persons submitting a notice
under this subpart of the date all such required information is received
and the notice is accepted for processing.
(3) Publication -- (i) Newspaper announcement. A person(s) filing a
notice under this subpart shall publish, in a form prescribed by the
Board, an announcement soliciting public comment on the proposed
acquisition. The announcement shall be published in a newspaper of
general circulation in the community in which the head office of the
state member bank to be acquired is located or, in the case of a
proposed acquisition of a bank holding company, in the community in
which its head office is located and in the community in which the head
office of each of its subsidiary banks is located. The announcement
shall be published no earlier that 10 calendar days prior to the filing
of the notice with the appropriate Reserve Bank and no later than 10
calendar days after acceptance and the publisher's affidavit of a
publication shall be provided to the appropriate Reserve Bank.
(ii) Contents of newspaper announcement. The newspaper announcement
shall state:
(A) The name of each person identified in the notice as a proposed
acquiror of the bank or bank holding company and the percentage of
shares proposed to be acquired;
(B) The name of the bank or bank holding company to be acquired,
including, in the case of a bank holding company, the name of each of
its subsidiary banks; and
(C) A statement that interested persons may submit comments on the
notice to the Board or the appropriated Reserve Bank for a period of 20
days or such shorter period as may be provided pursuant to paragraph
(a)(3)(v) of this section.
(iii) Federal Register announcement. The Board will, upon filing of
a notice under this subpart, publish announcement in the Federal
Register of receipt of the notice. The Federal Register announcement
will contain the information required under paragraphs (a)(3)(ii)(A) and
(a)(3)(ii)(B) of this section and a statement that interested persons
may submit comments on the proposed acquisition for a period of 15 days
or such shorter period as may be provided pursuant to paragraph
(a)(3)(v) of this section. The Board may waive publication in the
Federal Register if the Board determines that such action is
appropriate.
(iv) Delay of publication. The Board may permit delay in the
publication required under paragraphs (a)(3)(i) and (a)(3)(iii) if the
Board determines, for good cause shown, that it is in the public
interest to grant such a delay. Requests for delay of publication may
be submitted to the appropriate Reserve Bank.
(v) Shortening or waiving notice. In circumstances requiring prompt
action, the Board may shorten the public comment period required under
this paragraph. The Board may also waive the newspaper publication and
solicitation of public comment requirements of this paragraph, or it may
act on a notice before the expiration of a public comment period, if it
certifies in writing that disclosure of the notice, solicitation of
public comment, or delay until expiration of the public comment period
would seriously threaten the safety or soundness of the bank or bank
holding company to be acquired.
(4) Consideration of public comments. In acting upon a notice filed
under this subpart, the Board shall consider all public comments
received in writing within the period specified in the newspaper or
Federal Register announcement, whichever is later. At the Board's
option, comments received after this period may, but need not, be
considered.
(5) Standing. No person (other than the acquiring person) who
submits comments or information on a notice filed under this subpart
shall thereby become a party to the proceeding or acquire any standing
or right to participate in the Board's consideration of the notice or to
appeal or otherwise contest the notice or the Board's action regarding
the notice.
(b) Advice to bank supervisory agencies -- (1) Upon accepting a
notice relating to acquisition of securities of a state member bank, the
Reserve Bank shall send a copy of the notice to the appropriate state
bank supervisor, which shall have 30 calendar days from the date the
notice is sent in which to submit its views and recommendations to the
Board. The Reserve Bank shall also send a copy of any notice it accepts
to the Comptroller of the Currency and the Federal Deposit Insurance
Corporation.
(2) If the Board finds that it must act immediately in order to
prevent the probable failure of the bank or bank holding company
involved, the Board may dispense with or modify the requirements for
notice to the state supervisor.
(c) Time period for Board action -- (1) Consummation of acquisition.
(i) A proposed acquisition may be consummated 60 days after submission
to the Reserve Bank of a complete notice under paragraph (a) of this
section, unless within that period the Board disapproves the proposed
acquisition or extends the 60-day period as provided under paragraph
(c)(2) of this section.
(ii) A proposed acquisition for which notice has been filed under
paragraph (a) of this section may be consummated before the expiration
of the 60-day period if the Board notifies the acquiring person in
writing of the Board's intention not to disapprove the acquisition.
(2) Extensions of time period. (i) The Board may extend the 60-day
period in paragraph (c)(1) of this section for an additional 30 days by
notifying the acquiring person(s).
(ii) The Board may further extend the period during which it may
disapprove a notice for two additional periods of not more than 45 days
each if the Board determines that:
(A) Any acquiring person has not furnished all the information
required under paragraph (a) of this section;
(B) Any material information submitted is substantially inaccurate;
(C) It is unable to complete the investigation of an acquiring person
because of inadequate cooperation or delay by that person; or
(D) Additional time is needed to investigate and determine that no
acquiring person has a record of failing to comply with the requirements
of the Bank Secrecy Act, subchapter II of Chapter 53 of Title 31, United
States Code.
(iii) If the Board extends the time period under this paragraph, it
shall notify the acquiring person(s) of the reasons therefor and shall
include a statement of the information, if any, deemed incomplete or
inaccurate.
(d)(1) Investigation and report. After receiving a notice under this
subpart, the Board or the appropriate Reserve Bank shall conduct an
investigation of the competence, experience, integrity, and financial
ability of each person by and for whom an acquisition is to be made.
The Board shall also make an independent determination of the accuracy
and completeness of any information required to be contained in a notice
under paragraph (a) of this section. In investigating any notice
accepted under this subpart, the Board or Reserve Bank may solicit
information or views from any person, including any bank or bank holding
company involved in the notice, and any appropriate state, federal, or
foreign governmental authority.
(2) The Board or the appropriate Reserve Bank shall prepare a written
report of its investigation, which shall contain, at a minimum, a
summary of the results of the investigation.
(e) Factors considered in acting on notices. In reviewing a notice
filed under this subpart, the Board shall consider the information in
the record, the views and recommendations of the appropriate bank
supervisor, and any other relevant information obtained during any
investigation of the notice. The Board may disapprove an acquisition if
it finds adverse effects with respect to any of the factors set forth in
paragraph 7 of the Bank Control Act (12 U.S.C. 1817(j)(7)) (i.e.,
competitive, financial, managerial, banking or incompleteness of
information).
(f) Disapproval and hearing. Within three days after its decision to
issue a notice of intent to disapprove any proposed acquisition, the
Board shall notify the acquiring person in writing of the reasons for
the action. Within 10 calendar days of receipt of the notice of the
Board's intent to disapprove, the acquiring person may submit a written
request for a hearing. Any hearing conducted under this paragraph shall
be in accordance with the Rules of Practice for Formal Hearings (12 CFR
part 263). At the conclusion of the hearing, the Board shall, by order,
approve or disapprove the proposed acquisition on the basis of the
record of the hearing. If the acquiring person does not request a
hearing, the notice of intent to disapprove becomes final and
unappealable.
(Reg. Y, 49 FR 818, Jan. 5, 1984, as amended at 52 FR 23023, June 17,
1987)
12 CFR 225.43 Subpart F -- Limitations on Nonbank Banks
12 CFR 225.51 Seven percent growth limit for nonbank banks.
(a) Period for determining compliance. A nonbank bank's annual rate
of asset growth for purposes of paragraph (b) of this section shall be
determined for twelve-month periods that begin on October 1 of each year
and end on September 30 of the following year, unless the bank elects to
use the alternative method described in paragraph (c) of this section.
The initial 12-month period shall commence on October 1, 1988, and
expire on September 30, 1989, unless the Board establishes a different
period pursuant to paragraph (d) of this section.
(b) Computing annual rate of asset growth -- (1) Initial 12-month
period. For the initial 12-month period beginning on October 1, 1988,
the average of the nonbank bank's Total Assets as reported on Schedule
RC-K of its Report of Condition for the four quarters during this period
may not increase by more than 7 percent of the nonbank bank's initial
base. The nonbank bank may determine its initial base under any of the
following methods:
(i) Its Total Assets as reported on Schedule RC-K of its Report of
Condition for the quarter ending September 30, 1988, divided by 1.601;
or
(ii) Its total assets on August 10, 1988, divided by 1.567, unless
the Board determines pursuant to paragraph (d) that such amount may not
be used; or
(iii) The average of its Total Assets as reported on Schedule RC-K of
its Report of Condition for the fourth quarter of 1987 and the first
three quarters of 1988.
(2) Succeeding 12-month periods. For each 12-month period after the
initial period, the average of the nonbank bank's Total Assets as
reported on Schedule RC-K of its Report of Condition for the four
quarters during that period may not increase by more than 7 percent of
the average of its Total Assets as reported on Schedule RC-K of its
Report of Condition for the four quarters in the preceding 12-month
period.
(c) Alternative method to compute annual rate of asset growth -- (1)
Quarterly measurement permitted. In lieu of the methods for measuring
compliance with the asset growth rate described in paragraph (b) of this
section, a nonbank bank may elect to have its compliance with the growth
rate determined in the following manner: its Total Assets as reported
on Schedule RC-K of its Report of Condition for each quarter ending
after August 10, 1989, may not increase by more than 7 percent of its
Total Assets as reported on Schedule RC-K of its Report of Condition for
the same quarter of the previous year.
(2) Initial quarter. In measuring compliance with the growth rate
under paragraph (c)(1) of this section for the third quarter of 1989,
the nonbank bank may elect to use its assets on August 10, 1988, as the
base rather than the Total Assets for the third quarter of 1988 as
reported on Schedule RC-K of its Report of Condition.
(3) Notice required. A nonbank bank electing to compute its asset
growth pursuant to this paragraph shall notify the Board by Ocober 15,
1988, of this election. The nonbank bank may not thereafter alter its
election.
(d) Determination of total assets on August 10, 1988. If the Board
determines that a nonbank bank has engaged in transactions that have
artificially inflated its total assets on August 10, 1988, and that are
unrelated to its normal business activities, the Board may require that
--
(1) The nonbank exclude such amounts in calculating its total assets
on August 10, 1988, for purposes of paragraph (b)(1)(ii); or
(2) The initial 12-month period for determining compliance with the 7
percent growth rate shall commence on a date later than August 10, 1988,
and the institution's total assets on that later date shall be used
instead of the bank's total assets on August 10, 1988, for purposes of
measuring compliance with the 7 percent growth rate under paragraph
(b)(1).
(e) Required reports. (1) A nonbank bank shall file with the Board
by October 15, 1988, a statement indicating the method it has elected to
compute its initial base for purposes of paragraph (b)(1). of this
section.
(2) A nonbank bank electing to use its actual total assets on August
10, 1988, as its initial base for purposes of paragraph (b)(1) of this
section, shall report that figure to the Board by October 15, 1988, and
the nonbank bank's Total Assets for the third calendar quarter of 1988
as required to be reported on Schedule RC-K of its Report of Condition
for that quarter.
(Reg. Y, 53 FR 37744, Sept. 28, 1988)
12 CFR 225.52 Limitation on overdrafts.
(a) Definitions. For purposes of this section --
(1) Account means a reserve account, clearing account, or deposit
account as defined in the Board's Regulation D (12 CFR 204.2(a)(1)(i)),
that is maintained at a Federal Reserve Bank or nonbank bank.
(2) Cash item means (i) a check other than a check classified as a
noncash item; or (ii) any other item payable on demand and collectible
at par that the Federal Reserve Bank of the district in which the item
is payable is willing to accept as a cash item.
(3) Discount window loan means any credit extended by a Federal
Reserve Bank to a nonbank bank or industrial bank pursuant to the
provisions of the Board's Regulation A (12 CFR part 201).
(4) Industrial bank means an institution as defined in section
2(c)(2)(H) of the BHC Act (12 U.S.C. 1841(c)(2)(H)).
(5) Noncash item means an item handled by a Reserve Bank as a noncash
item under the Reserve Bank's ''Collection of Noncash Items Operating
Circular'' (e.g., a maturing bankers' acceptance or a maturing security,
or a demand item, such as a check, with special instructions or an item
that has not been preprinted or post-encoded).
(6) Other nonelectronic transactions include all other transactions
not included as funds transfers, book-entry securities transfers, cash
items, noncash items, automated clearing house transactions, net
settlement entries, and discount window loans (e.g., original issue of
securities or redemption of securities).
(7) An overdraft in an account occurs whenever the Federal Reserve
Bank, nonbank bank, or industrial bank holding an account posts a
transaction to the account of the nonbank bank, industrial bank, or
affiliate that exceeds the aggregate balance of the accounts of the
nonbank bank, industrial bank, or affiliate, as determined by the
posting rules set forth in paragraphs (d) and (e) of this section and
continues until the aggregate balance of the account is zero or greater.
(8) Transfer item means an item as defined in subpart B of Regulation
J (12 CFR 210.25 et seq).
(b) Restriction on overdrafts -- (1) Affiliates. Neither a nonbank
bank nor an industrial bank shall permit any affiliate to incur any
overdraft in its account with the nonbank bank or industrial bank.
(2) Nonbank banks or industrial banks. (i) No nonbank bank or
industrial bank shall incur any overdraft in its account at a Federal
Reserve Bank on behalf of an affiliate.
(ii) An overdraft by a nonbank bank or industrial bank in its account
at a Federal Reserve Bank shall be deemed to be on behalf of an
affiliate whenever:
(A) A nonbank bank or industrial bank holds an account for an
affiliate from which third-party payments can be made; and
(B) When the posting of an affiliate's transaction to the nonbank
bank's or industrial bank's account at a Reserve Bank creates an
overdraft in its account at a Federal Reserve Bank or increases the
amount of an existing overdraft in its account at a Federal Reserve
Bank.
(c) Permissible overdrafts. The following are permissible overdrafts
not subject to paragraph (b) of this section:
(1) Inadvertent error. An overdraft in its account by a nonbank bank
or its affiliate, or an industrial bank or its affiliate, that results
from an inadvertent computer error or inadvertent accounting error, that
was not reasonably forseeable or could not have been prevented through
the maintenance of procedures reasonably adopted by the nonbank bank or
affiliate to avoid such overdraft; and
(2) Fully secured primary dealer affiliate overdrafts. (i) An
overdraft incurred by an affiliate of a nonbank bank, which affiliate is
recognized as a primary dealer by the Federal Reserve Bank of New York,
in the affiliate's account at the nonbank bank, or an overdraft incurred
by a nonbank bank on behalf of its primary dealer affiliate in the
nonbank bank's account at a Federal Reserve Bank; provided: the
overdraft is fully secured by bonds, notes, or other obligations which
are direct obligations of the United States or on which the principal
and interest are fully guaranteed by the United States or by securities
and obligations eligible for settlement on the Federal Reserve
book-entry system.
(ii) An overdraft by a nonbank bank in its account at a Federal
Reserve Bank that is on behalf of a primary dealer affiliate is fully
secured when that portion of its overdraft at the Federal Reserve Bank
that corresponds to the transaction posted for an affiliate that caused
or increased the nonbank bank's overdraft is fully secured in accordance
with paragraph (c)(2)(iii) of this section.
(iii) An overdraft is fully secured under paragraph (c)(2)(i) when
the nonbank bank can demonstrate that the overdraft is secured, at all
times, by a perfected security interest in specific, identified
obligations described in paragraph (c)(2)(i) with a market value that,
in the judgment of the Reserve Bank holding the nonbank bank's account,
is sufficiently in excess of the amount of the overdraft to provide a
margin of protection in a volatile market or in the event the securities
need to be liquidated quickly.
(d) Posting by Federal Reserve Banks. For purposes of determining
the balance of an account under this section, payments and transfers by
nonbank banks and industrial banks processed by the Federal Reserve
Banks shall be considered posted to their accounts at Federal Reserve
Banks as follows:
(1) Funds transfers. Transfer items shall be posted:
(i) To the transferor's account at the time the transfer is actually
made by the transferor's Federal Reserve Bank; and
(ii) To the transferee's account at the time the transferee's Reserve
Bank sends the transfer item or sends or telephones the advice of credit
for the item to the transferee, whichever occurs first.
(2) Book-entry securities transfers against payment. A book-entry
securities transfer against payment shall be posted: (i) to the
transferor's account at the time the entry is made by the transferor's
Reserve Bank; and (ii) to the transferee's account at the time the
entry is made by the transferee's Reserve Bank.
(3) Discount window loans. Credit for a discount window loan shall
be posted to the account of a nonbank bank or industrial bank at the
close of business on the day that it is made or such earlier time as may
be specifically agreed to by the Federal Reserve Bank and the nonbank
bank under the terms of the loan. Debit for repayment of a discount
window loan shall be posted to the account of the nonbank bank or
industrial bank as of the close of business on the day of maturity of
the loan or such earlier time as may be agreed to by the Federal Reserve
Bank and the nonbank bank or required by the Federal Reserve Bank under
the terms of the loan.
(4) Other transactions. Total aggregate credits for automated
clearing house transfers, cash items, noncash items, net settlement
entries, and other nonelectronic transactions shall be posted to the
account of a nonbank bank or industrial bank as of the opening of
business on settlement day. Total aggregate debits for these
transactions and entries shall be posted to the account of a nonbank
bank or industrial bank as of the close of business on settlement day.
(e) Posting by nonbank banks and industrial banks. For purposes of
determining the balance of an affiliate's account under this section,
payments and transfers through an affiliate's account at a nonbank bank
or industrial bank shall be posted as follows:
(1) Funds transfers. (i) Fedwire transfer items shall be posted:
(A) To the transferor affiliate's account no later than the time the
transfer is actually made by the transferor's Federal Reserve Bank; and
(B) To the transferee affiliate's account no earlier than the time
the transferee's Reserve Bank sends the transfer item, or sends or
telephones the advice of credit for the item to the transferee,
whichever occurs first.
(ii) For funds transfers not sent or received through Federal Reserve
Banks, debits shall be posted to the transferor affiliate's account not
later than the time the nonbank bank or industrial bank becomes
obligated on the transfer. Credits shall not be posted to the
transferee affiliate's account before the nonbank bank or industrial
bank has received actually and finally collected funds for the transfer.
(2) Book-entry securities transfers against payment. (i) A
book-entry securities transfer against payment shall be posted:
(A) To the transferor affiliate's account not earlier than the time
the entry is made by the transferor's Reserve Bank; and
(B) To the transferee affiliate's account not later than the time the
entry is made by the transferee's Reserve Bank.
(ii) For book-entry securities transfers against payment that are not
sent or received through Federal Reserve Banks, entries shall be posted:
(A) To the buyer-affiliate's account not later than the time the
nonbank bank or industrial bank becomes obligated on the transfer; and
(B) To the seller-affiliate's account not before the nonbank bank or
industrial bank has received actually and finally collected funds for
the transfer.
(3) Other transactions. -- (i) Credits. Except as otherwise
provided in this paragraph, credits for cash items, noncash items, ACH
transfers, net settlement entries, and all other nonelectronic
transactions shall be posted to an affiliate's account on the day of the
transaction (i.e., settlement day for ACH transactions or the day of
credit for check transactions), but no earlier than the Federal Reserve
Bank's opening of business on that day. Credit for cash items that are
required by federal or state statute or regulation to be made available
to the depositor for withdrawal prior to the posting time set forth in
the preceding paragraph shall be posted as of the required availability
time.
(ii) Debits. Debits for cash items, noncash items, ACH transfers,
net settlement entries, and all other nonelectronic transactions shall
be posted to an affiliate's account on the day of the transaction (e.g.,
settlement day for ACH transactions or the day of presentment for check
transactions), but no later than the Federal Reserve Bank's close of
business on that day. If a check drawn on an affiliate's account or an
ACH debit transfer received by an affiliate is returned timely by the
nonbank bank or industrial bank in accordance with applicable law and
agreements, no entry need to be posted to the affiliate's account for
such item.
(Reg. Y, 53 FR 37744, Sept. 28, 1988)
12 CFR 225.52 Subpart G -- Appraisals
Source: Reg. Y, 55 FR 27771, July 5, 1990, unless otherwise noted.
12 CFR 225.61 Authority, purpose, and scope.
(a) Authority. This subpart is issued by the Board of Governors of
the Federal Reserve System (the Board) under title XI of the Financial
Institutions Reform, Recovery, and Enforcement Act of 1989 (FlRREA)
(Pub. L. No. 101-73, 103 Stat. 183 (1989)), 12 U.S.C. 3310, 3331-3351,
and section 5(b) of the Bank Holding Company Act, 12 U.S.C. 1844(b).
(b) Purpose and scope. (1) Title XI provides protection for federal
financial and public policy interests in real estate related
transactions by requiring real estate appraisals used in connection with
federally related transactions to be performed in writing, in accordance
with uniform standards, by appraisers whose competency has been
demonstrated and whose professional conduct will be subject to effective
supervision. This subpart implements the requirements of title XI, and
applies to all federally related transactions entered into by the Board
or by institutions regulated by the Board (regulated institutions).
(2) This subpart:
(i) Identifies which real estate-related financial transactions
require the services of an appraiser;
(ii) Prescribes which categories of federally related transactions
shall be appraised by a State certified appraiser and which by a State
licensed appraiser; and
(iii) Prescribes minimum standards for the performance of real estate
appraisals in connection with federally related transactions under the
jurisdiction of the Board.
12 CFR 225.62 Definitions.
(a) Appraisal means a written statement independently and impartially
prepared by a qualified appraiser setting forth an opinion as to the
market value of an adequately described property as of a specific
date(s), supported by the presentation and analysis of relevant market
information.
(b) Appraisal Foundation means the Appraisal Foundation established
on November 30, 1987, as a not-for-profit corporation under the laws of
Illinois.
(c) Appraisal Subcommittee means the Appraisal Subcommittee of the
Federal Financial Institutions Examination Council.
(d) Complex 1-to-4 family residential property appraisal means one in
which the property to be appraised, the form of ownership, or market
conditions are atypical.
(e) Federally related transaction means any real estate-related
financial transaction entered into on or after August 9, 1990, that:
(1) The Board or any regulated institution engages in or contracts
for; and
(2) Requires the services of an appraiser.
(f) Market value means the most probable price which a property
should bring in a competitive and open market under all conditions
requisite to a fair sale, the buyer and seller each acting prudently and
knowledgeably, and assuming the price is not affected by undue stimulus.
Implicit in this definition is the consummation of a sale as of a
specified date and the passing of title from seller to buyer under
conditions whereby:
(1) Buyer and seller are typically motivated;
(2) Both parties are well informed or well advised, and acting in
what they consider their own best interests;
(3) A reasonable time is allowed for exposure in the open market;
(4) Payment is made in terms of cash in U.S. dollars or in terms of
financial arrangements comparable thereto; and
(5) The price represents the normal consideration for the property
sold unaffected by special or creative financing or sales concessions
granted by anyone associated with the sale.
(g) Real estate-related financial transaction means any transaction
involving:
(1) The sale, lease, purchase, investment in or exchange of real
property, including interests in property, or the financing thereof; or
(2) The refinancing of real property or interests in real property;
or
(3) The use of real property or interests in property as security for
a loan or investment, including mortgage-backed securities.
(h) State certified appraiser means any individual who has satisfied
the requirements for certification in a State or territory whose
criteria for certification as a real estate appraiser currently meet or
exceed the minimum criteria for certification issued by the Appraiser
Qualifications Board of the Appraisal Foundation. No individual shall
be a State certified appraiser unless such individual has achieved a
passing grade upon a suitable examination administered by a State or
territory that is consistent with and equivalent to the Uniform State
Certification Examination issued or endorsed by the Appraiser
Qualifications Board of the Appraisal Foundation. In addition, the
Appraisal Subcommittee must not have issued a finding that the policies,
practices, or procedures of the State or territory are inconsistent with
title XI of FIRREA. The Board may, from time to time, impose additional
qualification criteria for certified appraisers performing appraisals in
connection with federally related transactions within its jurisdiction.
(i) State licensed appraiser means any individual who has satisfied
the requirements for licensing in a State or territory where the
licensing procedures comply with title XI of FIRREA and where the
Appraisal Subcommittee has not issued a finding that the policies,
practices, or procedures of the State or territory are inconsistent with
title XI. The Board may, from time to time, impose additional
qualification criteria for licensed appraisers performing appraisals in
connection with federally related transactions within the Board's
jurisdiction.
(j) Tract development means a project of five units or more that is
constructed or is to be constructed as a single development.
(k) Transaction value means:
(1) For loans or other extensions of credit, the amount of the loan
or extension of credit;
(2) For sales, leases, purchases, and investments in or exchanges of
real property, the market value of the real property interest involved;
and
(3) For the pooling of loans or interests in real property for resale
or purchase, the amount of the loan or the market value of the real
property calculated with respect to each such loan or interest in real
property.
12 CFR 225.63 Appraisals not required; transactions requiring a State
certified or licensed appraiser.
(a) Appraisals not required. An appraisal performed by a State
certified or licensed appraiser is not required for any real
estate-related financial transaction in which:
(1) The transaction value is $100,000 or less;
(2) A lien on real property has been taken as collateral solely
through an abundance of caution and where the terms of the transaction
as a consequence have not been made more favorable than they would have
been in the absence of a lien;
(3) A lease of real estate is entered into, unless the lease is the
economic equivalent of a purchase or sale of the leased real estate;
(4) There is a subsequent transaction resulting from a maturing
extension of credit, provided that:
(i) The borrower has performed satisfactorily according to the
original terms;
(ii) No new monies have been advanced other than as previously
agreed;
(iii) The credit standing of the borrower has not deteriorated; and
(iv) There has been no obvious and material deterioration in market
conditions or physical aspects of the property which would threaten the
institution's collateral protection; or
(5) A regulated institution purchases a loan or interest in a loan,
pooled loans, or interests in real property, including mortgage-backed
securities, provided that the appraisal prepared for each pooled loan or
real property interest met the requirements of this regulation, if
applicable.
Any transaction for which a State certified or licensed appraiser is
not required nevertheless must have an appropriate evaluation of real
property collateral that is consistent with the Board's Guidelines for
Real Estate Appraisal Policies and Review Procedures.
(b) Transactions requiring a State certified appraiser. --
(1) All transactions of $1,000,000 or more. All federally related
transactions having a transaction value of $1,000,000 or more shall
require an appraisal prepared by a State certified appraiser.
(2) Nonresidential transactions of $250,000 or more. All federally
related transactions having a transaction value of $250,000 or more,
other than those involving appraisals of 1-to-4 family residential
properties, shall require an appraisal prepared by a State certified
appraiser.
(3) Complex residential transactions of $250,000 or more. All
complex 1-to-4 family residential property appraisals rendered in
connection with federally related transactions shall require a State
certified appraiser if the transaction value is $250,000 or more. A
regulated institution may presume that appraisals of 1-to-4 family
residential properties are not complex, unless the institution has
readily available information that a given appraisal will be complex.
The regulated institution shall be responsible for making the final
determination of whether the appraisal is complex. If during the course
of the appraisal a licensed appraiser identifies factors that would
result in the property, form of ownership, or market conditions being
considered atypical, then either:
(i) The regulated institution may ask the licensed appraiser to
complete the appraisal and have a certified appraiser approve and
co-sign the appraisal; or
(ii) The institution may engage a certified appraiser to complete the
appraisal.
(c) Transactions requiring either a State certified or licensed
appraiser. All appraisals for federally related transactions not
requiring the services of a State certified appraiser shall be prepared
by either a State certified appraiser or a State licensed appraiser.
12 CFR 225.64 Appraisal standards.
(a) Minimum standards. For federally related transactions, all
appraisals shall, at a minimum:
(1) Conform to the Uniform Standards of Professional Appraisal
Practice (USPAP) adopted by the Appraisal Standards Board of the
Appraisal Foundation, except that the Departure Provision of the USPAP
shall not apply to federally related transactions;
(2) Disclose any steps taken that were necessary or appropriate to
comply with the Competency Provision of the USPAP;
(3) Be based upon the definition of market value as set forth in
225.62(f);
(4)(i) Be written and presented in a narrative format or on forms
that satisfy all the requirements of this section;
(ii) Be sufficiently descriptive to enable the reader to ascertain
the estimated market value and the rationale for the estimate; and
(iii) Provide detail and depth of analysis that reflect the
complexity of the real estate appraised;
(5) Analyze and report in reasonable detail any prior sales of the
property being appraised that occurred within the following time
periods:
(i) For 1-to-4 family residential property, one year preceding the
date when the appraisal was prepared; and
(ii) For all other property, three years preceding the date when the
appraisal was prepared;
(6) Analyze and report data on current revenues, expenses, and
vacancies for the property if it is and will continue to be
income-producing;
(7) Analyze and report a reasonable marketing period for the subject
property;
(8) Analyze and report on current market conditions and trends that
will affect projected income or the absorption period, to the extent
they affect the value of the subject property;
(9) Analyze and report appropriate deductions and discounts for any
proposed construction, or any completed properties that are partially
leased or leased at other than market rents as of the date of the
appraisal, or any tract developments with unsold units;
(10) Include in the certification required by the USPAP an additional
statement that the appraisal assignment was not based on a requested
minimum valuation, a specific valuation, or the approval of a loan;
(11) Contain sufficient supporting documentation with all pertinent
information reported so that the appraiser's logic, reasoning, judgment,
and analysis in arriving at a conclusion indicate to the reader the
reasonableness of the market value reported;
(12) Include a legal description of the real estate being appraised,
in addition to the description required by the USPAP;
(13) Identify and separately value any personal property, fixtures,
or intangible items that are not real property but are included in the
appraisal, and discuss the impact of their inclusion or exclusion on the
estimate of market value; and
(14) Follow a reasonable valuation method that addresses the direct
sales comparison, income, and cost approaches to market value,
reconciles those approaches, and explains the elimination of each
approach not used.
(b) Unavailability of information. If information required or deemed
pertinent to the completion of an appraisal is unavailable, that fact
shall be disclosed and explained in the appraisal.
(c) Additional standards. Nothing contained herein shall prevent a
regulated institution from requiring additional appraisal standards if
deemed appropriate.
12 CFR 225.65 Appraiser independence.
(a) Staff appraisers. If an appraisal is prepared by a staff
appraiser, that appraiser must be independent of the lending,
investment, and collection functions and not involved, except as an
appraiser, in the federally related transaction, and have no direct or
indirect interest, financial or otherwise, in the property. If the only
qualified persons available to perform an appraisal are involved in the
lending, investment, or collection functions of the regulated
institution, the regulated institution shall take appropriate steps to
ensure that the appraisers exercise independent judgment and that the
appraisal is adequate. Such steps include, but are not limited to,
prohibiting an individual from performing appraisals in connection with
federally related transactions in which the appraiser is otherwise
involved and prohibiting directors and officers from participating in
any vote or approval involving assets on which they performed an
appraisal.
(b) Fee appraisers. If an appraisal is prepared by a fee appraiser,
the appraiser shall be engaged directly by the regulated institution or
its agent, and have no direct or indirect interest, financial or
otherwise, in the property or transaction. A regulated institution may
accept an appraisal that was prepared by an appraiser engaged directly
by another institution subject to title XI of FIRREA, if the regulated
institution that accepts the appraisal has:
(1) Established procedures for review of real estate appraisals;
(2) Reviewed the appraisal under the established review procedures,
finding the appraisal acceptable; and
(3) Documented the review in writing.
12 CFR 225.66 Professional association membership; competency.
(a) Membership in appraisal organizations. A State certified
appraiser or a State licensed appraiser may not be excluded from
consideration for an assignment for a federally related transaction
solely by virtue of membership or lack of membership in any particular
appraisal organization.
(b) Competency. All staff and fee appraisers performing appraisals
in connection with federally related transactions must be State
certified or licensed, as appropriate. However, a State certified or
licensed appraiser may not be considered competent solely by virtue of
being certified or licensed. Any determination of competency shall be
based upon the individual's experience and educational background as
they relate to the particular appraisal assignment for which he or she
is being considered.
12 CFR 225.67 Enforcement.
Institutions and institution-affiliated parties, including staff
appraisers and fee appraisers, may be subject to removal and/or
prohibition orders, cease and desist orders, and the imposition of civil
money penalties pursuant to the Federal Deposit Insurance Act, 12 U.S.C
1811 et seq., as amended, or other applicable law.
12 CFR 225.67 Pt. 225, Subpt. G, App. A
12 CFR 225.67 Appendix A to Subpart G of Part 225: Excerpts From the
Uniform Standards of Professional Appraisal Practice Applicable to
Federally Related Transactions
(Based upon the Uniform Standards of Professional Appraisal Practice
as promulgated by the Appraisal Standards Board of The Appraisal
Foundation) /1/
Section I -- Introduction
Preamble
Ethics Provision
Competency Provision
Jurisdictional Exception
Supplemental Standards
Definitions
Section II -- Real Property Appraisals
Standard 1
Standard 2
Section III -- Review Appraisals
Standard 3
It is essential that a professional appraiser arrive at and
communicate his or her analyses, opinions, and advice in a manner that
will be meaningful to the client and will not be misleading in the
marketplace. These Uniform Standards of Professional Appraisal Practice
reflect the current standards of the appraisal profession.
The importance of the role of the appraiser places ethical
obligations on those who serve in this capacity. These standards
include explanatory comments and begin with an Ethics Provision setting
forth the requirements for integrity, objectivity, independent judgment,
and ethical conduct. In addition, these standards include a Competency
Provision which places an immediate responsibility on the appraiser
prior to acceptance of an assignment. The standards contain binding
requirements, as well as specific guidelines. Definitions applicable to
these standards are also included.
These standards deal with the procedures to be followed in performing
an appraisal or review and the manner in which an appraisal or review is
communicated. Standards 1 and 2 relate to the development and
communication of a real property appraisal. Standard 3 establishes
guidelines for reviewing an appraisal and reporting on that review.
These standards are for appraisers and the users of appraisal
services. To maintain the highest level of professional practice,
appraisers must observe these standards. The users of appraisal
services should demand work performed in conformance with these
standards.
Comment: Explanatory comments are an integral part of the Uniform
Standards and should be viewed as extensions of the provisions,
definitions, and standards rules. Comments provide interpretation from
the Appraisal Standards Board concerning the background or application
of certain provisions, definitions, or standards rules. There are no
comments for provisions, definitions, and standards rules that are
axiomatic or have not yet required further explanation; however,
additional comments will be developed and others supplemented or revised
as the need arises.
Because of the fiduciary responsibilities inherent in professional
appraisal practice, the appraiser must observe the highest standards of
professional ethics. This Ethics Provision is divided into four
sections: conduct, management, confidentiality, and record keeping.
Comment: This provision emphasizes the personal obligations and
responsibilities of the individual appraiser. However, it should also
be emphasized that groups and organizations engaged in appraisal
practice share the same ethical obligations.
Conduct. An appraiser must perform ethically and competently in
accordance with these standards and not engage in conduct that is
unlawful, unethical, or improper. An appraiser who could reasonably be
perceived to act as a disinterested third party in rendering an unbiased
appraisal, review, or consulting service must perform assignments with
impartiality, objectivity, and independence and without accommodation of
personal interests.
Comment: An appraiser is required to avoid any action that could be
considered misleading or fraudulent. In particular, it is unethical for
an appraiser to use or communicate a misleading or fraudulent report or
to knowingly permit an employee or other person to communicate a
misleading or fraudulent report.
The development of an appraisal, review, or consulting service based
on a hypothetical condition is unethical unless:
(1) The use of the hypothesis is clearly disclosed;
(2) The assumption of the hypothetical condition is clearly required
for legal purposes, for purposes of reasonable analysis, or for purposes
of comparison and would not be misleading; and
(3) The report clearly describes the rationale for this assumption,
the nature of the hypothetical condition, and its effect on the result
of the appraisal, review or consulting service.
An individual appraiser employed by a group or organization which
conducts itself in a manner that does not conform to these standards
should take steps that are appropriate under the circumstances to ensure
compliance with the standards.
Management. The acceptance of compensation that is contingent upon
the reporting of a predetermined value or a direction in value that
favors the cause of the client, the amount of the value estimate, the
attainment of a stipulated result, or the occurrence of a subsequent
event is unethical.
The payment of undisclosed fees, commissions, or things of value in
connection with the procurement of appraisal, review, or consulting
assignments is unethical.
Comment: Disclosure of fees, commissions, or things of value
connected to the procurement of an assignment should appear in the
certification of a written report and in any transmittal letter in which
conclusions are stated. In groups or organizations engaged in appraisal
practice, intracompany payments to employees for business development
are not considered to be unethical. Competency, rather than financial
incentives, should be the primary basis for awarding an assignment.
Advertising for or soliciting appraisal assignments in a manner which
is false, misleading or exaggerated is unethical.
Comment: In groups or organizations engaged in appraisal practice,
decisions concerning finder or referral fees, contingent compensation,
and advertising may not be the responsibility of an individual
appraiser, but for a particular assignment, it is the responsibility of
the individual appraiser to ascertain that there has been no breach of
ethics, that the appraisal is prepared in accordance with these
standards, and that the report can be properly certified as required by
Standards Rules 2-3 or 3-2.
The restriction on contingent compensation in the first paragraph of
this section does not apply to consulting assignments where the
appraiser is not acting in a disinterested manner and would not
reasonably be perceived as performing a service that requires
impartiality. This permitted contingent compensation must be properly
disclosed in the report.
Comment: The preparer of the written report of an assignment where
the appraiser is not acting in a disinterested manner must certify that
the compensation is contingent and must explain the basis for the
contingency in the report, certification, executive summary and in any
transmittal letter in which conclusions are stated.
Confidentiality. An appraiser must protect the confidential nature of
the appraiser-client relationship.
Comment: An appraiser must not disclose confidential factual data
obtained from a client or the results of an assignment prepared for a
client to anyone other than:
(1) The client and persons specifically authorized by the client;
(2) Such third parties as may be authorized by due process of law;
and
(3) A duly authorized professional peer review committee.
As a corollary, it is unethical for a member of a duly authorized
professional peer review committee to disclose confidential information
or factual data presented to the committee.
Record Keeping. An appraiser must prepare written records of
appraisal, review, and consulting assignments -- including oral
testimony and reports -- and retain such records for a period of at
least five (5) years after preparation or at least two (2) years after
final disposition of any judicial proceeding in which testimony was
given, whichever period expires last.
Comment: Written records of assignments include true copies of
written reports, written summaries of oral testimony and reports (or a
transcript of testimony) all data and statements required by these
standards, and other information as may be required to support the
findings and conclusions of the appraiser. The term written records
also includes information stored on electronic, magnetic, or other
media. Such records must be made available by the appraiser when
required by due process of law or by a duly authorized professional peer
review committee.
Prior to accepting an assignment or entering into an agreement to
perform any assignment, an appraiser must properly identify the problem
to be addressed and have the knowledge and experience to compete the
assignment competently; or alternatively:
1. Disclose the lack of knowledge and/or experience to the client
before accepting the assignment; and
2. Take all steps necessary or appropriate to complete the assignment
competently; and
3. Describe the lack of knowledge and/or experience and the steps
taken to complete the assignment competently in the report.
Comment: The background and experience of appraisers varies widely
and a lack of knowledge or experience can lead to inaccurate or
inappropriate appraisal practice. The competency provision requires an
appraiser to have both the knowledge and the experience required to
perform a specific appraisal service competently. If an appraiser is
offered the opportunity to perform an appraisal service but lacks the
necessary knowledge or experience to complete it competently, the
appraiser must disclose his or her lack of knowledge or experience to
the client before accepting the assignment and then take the necessary
or appropriate steps to complete the appraisal service competently.
This may be accomplished in various ways including, but not limited to,
personal study by the appraiser; association with an appraiser
reasonably believed to have the necessary knowledge or experience; or
retention of others who possess the required knowledge or experience.
Although this provision requires an appraiser to identify the problem
and disclose any deficiency in competence prior to accepting an
assignment, facts or conditions uncovered during the course of as
assignment could cause an appraiser to discover that he or she lacks the
required knowledge or experience to complete the assignment competently.
At the point of such discovery, the appraiser is obligated to notify
the client and comply with items 2 and 3 of the provision.
The concept of competency also extends to appraisers who are
requested or required to travel to geographic areas wherein they have no
recent appraisal experience. An appraiser preparing an appraisal in an
unfamiliar location must spend sufficient time to understand the nuances
of the local market and the supply and demand factors relating to the
specific property type and the location involved. Such understanding
will not be imparted solely from a consideration of specific date such
as demographics, costs, sales and rentals. The necessary understanding
of local market conditions provides the bridge between a sale and a
comparable sale or a rental and a comparable rental. If an appraiser is
not in a position to spend the necessary amount of time in a market area
to obtain this understanding, affiliation with a qualified local
appraiser may be the appropriate response to ensure the development of a
competent appraisal.
If any part of these standards is contrary to the law or public
policy of any jurisdiction, only that part shall be void and of no force
or effect in that jurisdiction.
These Uniform Standards provide the common basis for all appraisal
practice. Supplemental standards applicable to appraisals prepared to
specific purposes or property types may be issued by public agencies and
certain client groups, e.g., regulatory agencies, eminent domain
authorities, asset managers, and financial institutions. Appraisers and
clients must ascertain whether any supplemental standards in addition to
these Uniform Standards apply to the assignment being considered.
For the purpose of these standards, the following definitions apply:
Appraisal: (noun) The act or process of estimating value; an
estimate of value. (adjective) of or pertaining to appraising and
related functions, e.g. appraisal practice, appraisal services.
Appraisal practice: The work or services performed by appraisers,
defined by three terms in these standards: appraisal, review, and
consulting.
Comment: These three terms are intentionally generic, and not
mutually exclusive. For example, an estimate of value may be required
as part of a review or consulting service. The use of other
nomenclature by an appraiser (e.g. analysis, counseling, evaluation,
study, submission, valuation) does not exempt an appraiser from
adherence to these standards.
Cash Flow Analysis: A study of the anticipated movement of cash into
or out of an investment.
Client: Any party for whom an appraiser performs a service.
Consulting: The act or process of providing information, analysis of
real estate data, and recommendations or conclusions on diversified
problems in real estate, other than estimating value.
Feasibility Analysis: A study of the cost benefit relationship of an
economic endeavor.
Investment Analysis: A study that reflects the relationship between
acquisition price and anticipated future benefits of a real estate
investment.
Market Analysis: A study of real estate market conditions for a
specific type of property.
Market Value: Market value is the major focus of most real property
appraisal assignments. Both economic and legal definitions of market
value have been developed and refined.
A current economic definition agreed upon by federal financial
institutions in the United States of America is:
The most probable price which a property should bring in a
competitive and open market under all conditions requisite to a fair
sale, the buyer and seller each acting prudently and knowledgeably, and
assuming the price is not affected by undue stimulus. Implicit in this
definition is the consummation of a sale as of a specified date and the
passing of title from seller to buyer under conditions whereby:
1. Buyer and seller are typically motivated;
2. Both parties are well informed or well advised, and acting in what
they consider their best interests;
3. A reasonable time is allowed for exposure in the open market;
4. Payment is made in terms of cash in United States dollars or in
terms of financial arrangements comparable thereto; and
5. The price represents the normal consideration for the property
sold unaffected by special or creative financing or sales concessions
granted by anyone associated with the sale.
Substitution of another currency for United States dollars in the
fourth condition is appropriate in countries or in reports addressed to
clients from other countries.
Persons performing appraisal services that may be subject to
litigation are cautioned to seek the exact legal definition of market
value in the jurisdiction in which the services are being performed.
Mass Appraisal: The process of valuing a universe of properties as
of a given date utilizing standard methodology, employing common data,
and allowing for statistical testing.
Mass Appraisal Model: A mathematical expression of how supply and
demand factors interact in a market.
Personal Property: Identifiable portable and tangible objects which
are considered by the general public as being ''personal,'' e.g.
furnishings, artwork, antiques, gems and jewelry, collectibles,
machinery and equipment; all property that is not classified as real
estate.
Real Estate: An identified parcel or tract of land, including
improvements, if any.
Real Property: The interests, benefits, and rights inherent in the
ownership of real estate.
Comment: In some jurisdictions, the terms real estate and real
property have the same legal meaning. The separate definitions
recognize the traditional distinction between the two concepts in
appraisal theory.
Report: Any communication, written or oral, of an appraisal, review,
or analysis; the document that is transmitted to the client upon
completion of an assignment.
Comment: Most reports are written and most clients mandate written
reports. Oral report guidelines (See Standards Rule 2-4) and
restrictions (See Ethics Provision: Record Keeping) are included to
cover court testimony and other oral communications of an appraisal,
review or consulting service.
Review: The act or process of critically studying a report prepared
by another.
In developing a real property appraisal, an appraiser must be aware
of, understand, and correctly employ those recognized methods and
techniques that are necessary to produce a credible appraisal.
Comment: Standard 1 is directed toward the substantive aspects of
developing a competent appraisal. The requirements set forth in
Standards Rule 1-1, the appraisal guidelines set forth in Standards
Rules 1-2, 1-3, 1-4, and the requirements set forth in Standards Rule
1-5 mirror the appraisal process in the order of topics addressed and
can be used by appraisers and the users of appraisal services as a
convenient checklist.
Standards Rule 1-1. In developing a real property appraisal, an
appraiser must:
(a) Be aware of, understand, and correctly employ those recognized
methods and techniques that are necessary to produce a credible
appraisal;
Comment: Departure from this binding requirement is not permitted.
This rule recognizes that the principle of change continues to affect
the manner in which appraisers perform appraisal services. Changes and
developments in the real estate field have a substantial impact on the
appraisal profession. Important changes in the cost and manner of
constructing and marketing commercial, industrial, and residential real
estate and changes in the legal framework in which real property rights
and interests are created, conveyed, and mortgaged have resulted in
corresponding changes in appraisal theory and practice. Social change
has also had an effect on appraisal theory and practice. To keep
abreast of these changes and developments, the appraisal profession is
constantly reviewing and revising appraisal methods and techniques and
devising new methods and techniques to meet new circumstances. For this
reason it is not sufficient for appraisers to simply maintain the skills
and the knowledge they possess when they become appraisers. Each
appraiser must continuously improve his or her skills to remain
proficient in real property appraisal.
(b) Not commit a substantial error of omission or commission that
significantly affects an appraisal;
Comment: Departure from this binding requirement is not permitted.
In performing appraisal services an appraiser must be certain that the
gathering of factual information is conducted in a manner that is
sufficiently diligent to ensure that the data that would have a material
or significant effect on the resulting opinions or conclusions are
considered. Further, an appraiser must use sufficient care in analyzing
such data to avoid errors that would significantly affect his or her
opinions and conclusions.
(c) Not render appraisal services in a careless or negligent manner,
such as a series of errors that, considered individually, may not
significantly affect the results of an appraisal, but which, when
considered in the aggregate, would be misleading.
Comment: Departure from this binding requirement is not permitted.
Perfection is impossible to attain and competence does not require
perfection. However, an appraiser must not render appraisal services in
a careless or negligent manner. This rule requires an appraiser to use
due diligence and due care. The fact that the carelessness or
negligence of an appraiser has not caused an error that significantly
affects his or her opinions or conclusions and thereby seriously harms a
client or a third party does not excuse such carelessness or negligence.
Standards Rule 1-2. In developing a real property appraisal, an
appraiser must observe the following specific appraisal guidelines:
(a) Adequately identify the real estate, identify the real property
interest, consider the purpose and intended use of the appraisal,
consider the extent of the data collection process, identify any special
limiting conditions, and identify the effective date of the appraisal;
(b) Define the value being considered; if the value to be estimated
is market value, the appraiser must clearly indicate whether the
estimate is the most probable price:
(i) In terms of cash; or
(ii) In terms of financial arrangements equivalent to cash; or
(iii) In such other terms as may be precisely defined; if an
estimate of value is based on submarket financing or financing with
unusual conditions or incentives, the terms of such financing must be
clearly set forth, their contributions to or negative influence on value
must be described and estimated, and the market data supporting the
valuation estimate must be described and explained;
Comment: For certain types of appraisal assignments in which a legal
definition of market value has been established and takes precedence,
the Jurisdictional Exception may apply to this guideline.
If the concept of reasonable exposure in the open market is involved,
the appraiser should be specific as to the estimate of marketing time
linked to the value estimate.
(c) Consider easements, restrictions, encumbrances, leases,
reservations, covenants, contracts, declarations, special assessments,
ordinances, or other items of a similar nature;
(d) Consider whether an appraised fractional interest, physical
segment, or partial holding contributes pro rata to the value of the
whole;
Comment: This guideline does not require an appraiser to value the
whole when the subject of the appraisal is a fractional interest, a
physical segment, or a partial holding. However, if the value of the
whole is not considered, the appraisal must clearly reflect that the
value of the property being appraised cannot be used to estimate the
value of the whole by mathematical extension.
(e) Identify and consider the effect on value of any personal
property, trade fixtures or intangible items that are not real property
but are included in the appraisal.
Comment: This guideline requires the appraiser to recognize the
inclusion of items that are not real property in an overall value
estimate. Additional expertise in personal property or business
appraisal may be required to allocate the overall value to its various
components. Separate valuation of such items is required when they are
significant to the overall value.
Standards Rule 1-3. In developing a real property appraisal, an
appraiser must observe the following specific appraisal guidelines:
(a) Consider the effect on use and value of the following factors:
existing land use regulations, reasonably probable modifications of such
land use regulations, economic demand, the physical adaptability of the
real estate, neighborhood trends, and the highest and best use of the
real estate;
Comment: This guideline sets forth a list of factors that affect use
and value. In considering neighborhood trends, an appraiser must avoid
stereotyped or biased assumptions relating to race, age, color,
religion, gender, or national origin or an assumption that racial,
ethnic, or religious homogeneity is necessary to maximize value in a
neighborhood. Further, an appraiser must avoid making an unsupported
assumption or premise about neighborhood decline, effective age, and
remaining life. In considering highest and best use, an appraiser
should develop the concept to the extent that is required for a proper
solution of the appraisal problem being considered.
(b) Recognize that land is appraised as though vacant and available
for development to its highest and best use and that the appraisal of
improvements is based on their actual contribution to the site.
Comment: This guideline may be modified to reflect the fact that, in
various legal and practical situations, a site may have a contributory
value that differs from the value as if vacant.
Standards Rule 1-4. In developing a real property appraisal, an
appraiser must observe the following specific appraisal guidelines, when
applicable:
(a) Value the site by an appropriate appraisal method or technique;
(b) Collect, verify, analyze, and reconcile:
(i) Such comparable cost data as are available to estimate the cost
new of the improvements (if any);
(ii) Such comparable data as are available to estimate the difference
between cost new and the present worth of the improvements (accrued
depreciation);
(iii) Such comparable sales data, adequately identified and
described, as are available to indicate a value conclusion;
(iv) Such comparable rental data as are available to estimate the
market rental of the property being appraised;
(v) Such comparable operating expense data as are available to
estimate the operating expenses of the property being appraised;
(vi) Such comparable data as are available to estimate rates of
capitalization and/or rates of discount.
Comment: This rule covers the three approaches to value. See
Standards Rule 2-2(j) for corresponding reporting requirements.
(c) Base projections of future rent and expenses on reasonably clear
and appropriate evidence;
Comment: This guideline requires an appraiser, in developing income
and expense statements and cash flow projections, to weigh historical
information and trends, current market factors affecting such trends,
and anticipated events such as competition from developments under
construction.
(d) When estimating the value of a leased fee estate or a leasehold
estate, consider and analyze the effect on value, if any, of the terms
and conditions of the lease(s);
(e) Consider and analyze the effect on value, if any, of the
assemblage of the various estates or component parts of a property and
refrain from estimating the value of the whole solely by adding together
the individual values of the various estates or component parts;
Comment: Although the value of the whole may be equal to the sum of
the separate estates or parts, it also may be greater than or less than
the sum of such estates or parts. Therefore, the value of the whole
must be tested by reference to appropriate market data and supported by
an appropriate analysis of such data.
A similar procedure must be followed when the value of the whole has
been established and the appraiser seeks to estimate the value of a
part. The value of any such part must be tested by reference to
appropriate market data and supported by an appropriate analysis of such
data.
(f) Consider and analyze the effect on value, if any, of anticipated
public or private improvements, located on or off the site, to the
extent that market actions reflect such anticipated improvements as of
the effective appraisal date;
Comment: In condemnation valuation assignments in certain
jurisdictions, the Jurisdictional Exception may apply to this guideline.
(g) Identify and consider the appropriate procedures and market
information required to perform the appraisal, including all physical,
functional, and external market factors as they may affect the
appraisal;
Comment: The appraisal may require a complete market analysis.
(h) Appraise proposed improvements only after examining and having
available for future examination:
(i) Plans, specifications, or other documentation sufficient to
identify the scope and character of the proposed improvements;
(ii) Evidence indicating the probable time of completion of the
proposed improvements; and
(iii) Reasonably clear and appropriate evidence supporting
development costs, anticipated earnings, occupancy projections, and the
anticipated competition at the time of completion.
Comment: The evidence required to be examined and maintained under
this guideline may include such items as contractor's estimates relating
to cost and the time required to complete construction, market, and
feasibility studies; operating cost data; and the history of recently
completed similar developments. The appraisal may require a complete
feasibility analysis.
(i) All pertinent information in items (a) through (h) above shall be
used in the development of an appraisal.
Comment: See standards Rule 2-2(k) for corresponding reporting
requirements.
Standards Rule 1-5. In developing a real property appraisal, an
appraiser must:
(a) Consider and analyze any current Agreement of Sale, option, or
listing of the property being appraised, if such information is
available to the appraiser in the normal course of business;
(b) Consider and analyze any prior sales of the property being
appraised that occurred within the following time periods:
(i) One year for one-to-four family residential property; and
(ii) Three years for all other property types;
Comment: The intent of this requirement is to encourage the research
and analysis of prior sales of the subject; the time frames cited are
minimums.
(c) Consider and reconcile the quality and quantity of data available
and analyzed within the approaches used and the applicability or
suitability of the approaches used.
Comment: Departure from this binding requirement is not permitted.
See Standards Rule 2-2(k) Comment for corresponding reporting
requirements.
In reporting the results of a real property appraisal an appraiser
must communicate each analysis, opinion, and conclusion in a manner that
is not misleading.
Comment: Standard 2 governs the form and content of the report that
communicates the results of an appraisal to a client and third parties.
Standards Rule 2-1. Each written or oral real property appraisal
report must:
(a) Clearly and accurately set forth the appraisal in a manner that
will not be misleading;
Comment: Departure from this binding requirement is not permitted.
Since most reports are used and relied upon by third parties,
communications considered adequate by the appraiser's client may not be
sufficient. An appraiser must take extreme care to make certain that
his or her reports will not be misleading in the marketplace or to the
public.
(b) Contain sufficient information to enable the person(s) who
receive or rely on the report to understand it properly;
Comment: Departure from this binding requirement is not permitted.
A failure to observe this rule could cause a client or other users of
the report to make a serious error even though each analysis, opinion,
and conclusion in the report is clearly and accurately stated. To avoid
this problem and the dangers it presents to clients and other users of
reports, this rule requires an appraiser to include in each report
sufficient information to enable the reader to understand it properly.
All reports, both written and oral, must clearly and accurately present
the analyses, opinions, and conclusions of the appraiser in sufficient
depth and detail to address adequately the significance of the specific
appraisal problem.
(c) Clearly and accurately disclose any extraordinary assumption or
limiting condition that directly affects the appraisal and indicate its
impact on value.
Comment: Departure from this binding requirement is not permitted.
Examples of extraordinary assumptions or conditions might include items
such as the execution of a pending lease agreement, atypical financing,
or completion of onsite or offsite improvements. In a written report
the disclosure would be required in conjunction with statements of each
opinion or conclusion that is affected.
Standards Rule 2-2. Each written real property appraisal report
must:
(a) Identify and describe the real estate being appraised;
(b) Identify the real property interest being appraised;
Comment on (a) and (b): These two requirements are essential
elements in any report. Identifying the real estate can be accomplished
by any combination of a legal description, address, map reference, copy
of a survey or map, property sketch and/or photographs. A property
sketch and photographs also provide some description of the real estate
in addition to written comments about the physical attributes of the
real estate. Identifying the real property rights being appraised
requires a direct statement substantiated as needed by copies or
summaries of legal descriptions or other documents setting forth any
encumbrances.
(c) State the purpose of the appraisal;
(d) Define the value to be estimated;
(e) Set forth the effective date of the appraisal and the date of the
report;
Comment on (c), (d) and (e): These three requirements call for clear
disclosure to the reader of a report the ''why, what and when''
surrounding the appraisal. The purpose of the appraisal is used
generically to include both the task involved and rationale for the
appraisal. Defining the value to be estimated requires both an
appropriately referenced definition and any comments needed to clearly
indicate to the reader how the definition is being applied (See
Standards Rule 1-2(b)). The effective date of the appraisal establishes
the context for the value estimate, while the date of the report
indicates whether the perspective of the appraiser on the market
conditions as of the effective date of the appraisal was prospective,
current, or retrospective. Reiteration of the date of the report and
the effective date of the appraisal at various stages of the report in
tandem is important for the clear understanding of the reader whenever
market conditions on the date of the report are different from market
conditions on the effective date of the appraisal.
(f) Describe the extent of the process of collecting, confirming, and
reporting data;
Comment: This requirement is designed to protect third parties whose
reliance on an appraisal report may be affected by the extent of the
appraiser's investigation; i.e., the process of collecting, confirming
and reporting data.
(g) Set forth all assumptions and limiting conditions that affect the
analyses, opinions, and conclusions;
Comment: It is suggested that assumptions and limiting conditions be
grouped together in an identified section of the report.
(h) Set forth the information considered, the appraisal procedures
followed, and the reasoning that supports the analyses, opinions, and
conclusions;
Comment: This requirement calls for the appraiser to summarize the
data considered and the procedures that were followed. Each item must
be addressed in the depth and detail required by its significance to the
appraisal. The appraiser must be certain that sufficient information is
provided so that the client, the users of the report, and the public
will understand it and will not be misled or confused. The substantive
content of the report, not its size, determines its compliance with this
specific reporting guideline.
(i) Set forth the appraiser's opinion of the highest and best use of
the real estate, when such an opinion is necessary and appropriate;
Comment: This requirement calls for written report to contain a
statement of the appraiser's opinion as to the highest and best use of
the real estate, unless an opinion as to highest and best use is
unnecessary, e.g., insurance valuation or value in use appraisals. If
an opinion as to highest and best use is required, the reasoning in
support of the opinion must also be included.
(j) Explain and support the exclusion of any of the usual valuation
approaches;
(k) Set forth any additional information that may be appropriate to
show compliance with, or clearly identify and explain permitted
departures from, the requirements of Standard 1;
Comment: This requirement calls for a written appraisal report or
other written communication concerning the results of an appraisal to
contain sufficient information to indicate that the appraiser complied
with the requirements of Standard 1, including the requirements
governing any permitted departure from the appraisal guidelines. The
amount of detail required will vary with the significance of the
information to the appraisal.
Information considered and analyzed in compliance with Standards Rule
1-5 is significant information that deserves comment in any report. If
such information is unobtainable, comment on the efforts undertaken by
the appraiser to obtain the information is required.
(l) Include a signed certification in accordance with Standards Rule
2-3.
Comment: Departure from binding requirements (a) through (l) above
is not permitted.
Standards Rule 2-3. Each written real property appraisal report must
contain a certification that is similar in content to the following
form:
I certify that, to the best of my knowledge and belief:
-- The statements of fact contained in this report are true and
correct.
-- The reported analyses, opinions, and conclusions are limited
only by the reported assumptions and limiting conditions, and are my
personal, unbiased professional analyses, opinions, and conclusions.
-- I have no (or the specified) present or prospective interest
in the property that is the subject of this report, and I have no (or
the specified) personal interest or bias with respect to the parties
involved.
-- My compensation is not contingent upon the reporting of a
predetermined value or direction in value that favors the cause of the
client, the amount of the value estimate, the attainment of a stipulated
result, or the occurence of a subsequent event.
-- My analyses, opinions, and conclusions were developed, and
this report has been prepared, in conformity with the Uniform Standards
of Professional Appraisal Practice.
-- I have (or have not) made a personal inspection of the
property that is the subject of this report. (If more than one person
signs the report, this certification must clearly specify which
individuals did and which individuals did not make a personal inspection
of the appraised property.)
-- No one provided significant professional assistance to the
person signing this report. (If there are exceptions, the name of each
individual providing significant professional assistance must be
stated.)
Comment: Departure from this binding requirement is not permitted.
Standards Rule 2-4. To the extent that it is both possible and
appropriate, each oral real property appraisal report (including expert
testimony) must address the substantive matters set forth in Standards
Rule 2-2.
Comment: In addition to complying with the requirements of Standards
Rule 2-1, an appraiser making an oral report must use his or her best
efforts to address each of the substantive matters in Standards Rule
2-2.
Testimony of an appraiser concerning his or her analyses, opinions,
and conclusions is an oral report in which the appraiser must comply
with the requirements of this Standards Rule.
See Record Keeping under the ETHICS PROVISION for corresponding
requirements.
Standards Rule 2-5. An appraiser who signs a real property appraisal
report prepared by another, even under the label of ''review
appraiser'', must accept full responsibility for the contents of the
report.
Comment: Departure from this binding requirement is not permitted.
This requirement is directed to the employer or supervisor signing the
report of an employee or subcontractor. The employer or supervisor
signing the report is as responsible as the individual preparing the
appraisal for the content and conclusions of the appraisal and the
report. Using a conditional label next to the signature of the employer
or supervisor or signing a form report on the line over the words
''review appraiser'' does not exempt that individual from adherence to
these standards.
This requirement does not address the responsibilities of a review
appraiser, the subject of Standard 3.
In reviewing an appraisal and reporting the results of that review,
an appraiser must form an opinion as to the adequacy and appropriateness
of the report being reviewed and must clearly disclose the nature of the
review process undertaken.
Comment: The function of reviewing an appraisal requires the
preparation of a separate report or a file memorandum by the appraiser
performing the review setting forth the results of the review process.
Review appraisers go beyond checking for a level of completeness and
consistency in the report under review by providing comment on the
content and conclusions of the report. They may or may not have
first-hand knowledge of the subject property or of data in the report.
The COMPETENCY PROVISION applies to the appraiser performing the review
as well as the appraiser who prepared the report under review.
Reviewing is a distinctly different function from that addressed in
Standards Rule 2-5. To avoid confusion in the marketplace between these
two functions, review appraisers should not sign the report under review
unless they intend to take the responsibility of a cosigner.
Review appraisers must take appropriate steps to indicate to third
parties the precise extent of the review process. A separate report or
letter is one method. Another appropriate method is a form or checklist
prepared and signed by the appraiser conducting the review and attached
to the report under review. It is also possible that a stamped
impression on the appraisal report under review, signed or initialed by
the reviewing appraiser, may be an appropriate method for separating the
review function from the actual signing of the report. To be effective,
however, the stamp must briefly indicate the extent of the review
process and refer to a file memorandum that clearly outlines the review
process conducted.
The review appraiser must exercise extreme care in clearly
distinguishing between the review process and the appraisal or
consulting process. Original work by the review appraiser may be
governed by STANDARD 1 rather than this standard. A misleading or
fraudulent review and/or report violates the ETHICS PROVISION.
Standards Rule 3-1. In reviewing an appraisal, an appraiser must:
(a) Identify the report under review, the real estate and real
property interest being appraised, the effective date of the opinion in
the report under review, and the date of the review;
(b) Identify the extent of the review process to be conducted;
(c) Form an opinion as to the completeness of the report under review
in light of the requirements in these standards;
Comment: The review should be conducted in the context of market
conditions as of the effective date of the opinion in the report being
reviewed.
(d) Form an opinion as to the apparent adequacy and relevance of the
data and the propriety of any adjustments to the data;
(e) Form an opinion as to the appropriateness of the appraisal
methods and techniques used and develop the reasons for any
disagreement;
(f) Form an opinion as to whether the analyses, opinions, and
conclusions in the report under review are appropriate and reasonable,
and develop the reasons for any disagreement.
Comment: Departure from binding requirements (a) through (f) above
is not permitted. An opinion of a different estimate of value from that
in the report under review may be expressed, provided the review
appraiser:
1. Satisfies the requirements of STANDARD 1;
2. Identifies and sets forth any additional data relied upon and the
reasoning and basis for the different estimate of value; and,
3. Clearly identifies and discloses all assumptions and limitations
connected with the different estimate of value to avoid confusion in the
marketplace.
Standards Rule 3-2. In reporting the results of an appraisal review,
an appraiser must:
(a) Disclose the nature, extent, and detail of the review process
undertaken;
(b) Disclose the information that must be considered in Standards
Rule 3-1 (a) and (b);
(c) Set forth the opinions, reasons, and conclusions required in
Standards Rule 3-1 (c), (d), (e) and (f);
(d) Include all know pertinent information;
(e) Include a signed certification similar in content to the
following:
I certify that, to the best of my knowledge and belief:
-- The facts and data reported by the review appraiser and used
in the review process are true and correct.
-- The analyses, opinions, and conclusions in this review report
are limited only by the assumptions and limiting conditions stated in
this review report, and are my personal, unbiased professional analyses,
opinions and conclusions.
-- I have no (or the specified) present or prospective interest
in the property that is the subject of this report and I have no (or the
specified) personal interest or bias with respect to the parties
involved.
-- My compensation is not contingent on an action or event
resulting from the analyses, opinions, or conclusions in, or the use of,
this review report.
-- My analyses, opinions, and conclusions were developed and this
review report was prepared in conformity with the Uniform Standards of
Professional Appraisal Practice.
-- I did not (did) personally inspect the subject property of the
report under review.
-- No one provided significant professional assistance to the
person signing this review report. (If there are exceptions, the name
of each individual providing significant professional assistance must be
stated.)
Comment: Departure from binding requirements (a) through (e) above
is not permitted.
(55 FR 53612, 53617, Dec. 31, 1990)
/1/ This document excludes portions of the Uniform Standards of
Professional Appraisal Practice (USPAP) that are not applicable to
federally related transactions. In addition, cross references to
excluded provisions have been removed and additional text added for
clarification only. The complete text of the USPAP is available from
the Appraisal Foundation, 1029 Vermont Ave., NW., suite 900, Washington,
DC 20005.
/2/ The Departure Provision that appears in the USPAP is not
applicable to federally related transactions.
12 CFR 225.67 Subpart H -- Notice of Addition or Change of Directors
And Senior Executive Officers
Source: Reg. Y, 55 FR 6790, Feb. 27, 1990, unless otherwise noted.
12 CFR 225.71 Definitions.
(a) Senior executive officer means a person who, without regard to
title, exercises the authority of one or more of the following
positions: chief executive officer, chief operating officer, chief
financial officer, chief lending officer, or chief investment officer.
Senior executive officer also includes any other person with significant
influence over major policymaking decisions of a state member bank or
bank holding company.
(b) Bank or bank holding company in troubled condition means any
state member bank or bank holding company that:
(1) Has a composite rating, as determined in the most recent report
of examination or inspection, of 4 or 5 under the commercial bank
Uniform Interagency Bank Rating System or under the Federal Reserve bank
holding company rating system;
(2) Is subject to a cease and desist order or formal written
agreement that requires action to improve the financial condition of the
institution, unless otherwise informed in writing by the Board or the
appropriate Reserve Bank; or,
(3) Is expressly informed by the Board or Reserve Bank that it is in
troubled condition for purposes of the requirements of this subpart on
the basis of the institution's most recent examination, report of
condition, or inspection, or other information available to the Board.
12 CFR 225.72 Director and officer appointments; prior notice
requirement.
(a) Prior notice. A state member bank or bank holding company shall
give the Board 30 days' written notice, as specified in 225.73, before
adding or replacing any member of the board of directors or employing or
changing the responsibilities of any individual to a position as a
senior executive officer of the bank or bank holding company, if:
(1) The bank has been chartered less than two years;
(2) Within the preceding two years, the bank or bank holding company
has undergone a change in control that required a notice to be filed
pursuant to the Change in Bank Control Act or subpart E of this part;
(3) Within the preceding two years, the bank holding company became a
registered bank holding company, unless the bank holding company is
owned or controlled by a registered bank holding company, or the bank
holding company was established in a reorganization in which
substantially all of the shareholders of the bank holding company were
shareholders of the bank prior to the bank holding company's formation;
or
(4) The bank or bank holding company is not in compliance with all
minimum capital requirements applicable to the institution as determined
on the basis of the institution's most recent report of condition,
examination or inspection, or is otherwise in troubled condition.
(b) Advisory directors. (1) For purposes of this subpart, except as
provided in paragraph (b)(2) of this section, the term member of the
board of directors does not include an advisory director who:
(i) Is not elected by the shareholders of the bank or bank holding
company;
(ii) Is not authorized to vote on any matters before the board of
directors; and
(iii) Provides solely general policy advice to the board of
directors.
(2) The Board or Reserve Bank may otherwise determine that an
advisory director is in fact functioning as a director or senior
executive officer for purposes of this subpart.
12 CFR 225.73 Procedures for filing, processing, and acting on notices;
standards for disapproval; waiver of notice.
(a)(1) Filing notice. The notice required in 225.72 shall be filed
with the appropriate Reserve Bank and shall contain the information
required by paragraph 6(A) of the Change in Bank Control Act (12 U.S.C.
1817(j)(6)(A)) or prescribed in the designated Board form, subject, in
either case, to the authority of the Reserve Bank or the Board to modify
these requirements or require additional information.
(2) Acceptance of notice. The 30-day notice period specified in
225.72 shall begin on the date all required information is received by
the appropriate Reserve Bank or the Board. The Reserve Bank shall
notify the bank or bank holding company submitting the notice of the
date all such required information is received and the notice is
accepted for processing, and of the date on which the 30-day notice
period will expire.
(b) Commencement of service -- (1) At expiration of period. A
proposed director or senior executive officer may begin service 30 days
after a complete notice under paragraph (a) of this section has been
accepted by the Reserve Bank unless the Board or Reserve Bank issues a
notice of disapproval of the proposed addition or employment before the
end of the 30-day period.
(2) Prior to expiration of period. A proposed director or senior
executive officer may begin service before the expiration of the 30-day
period if the Board or the Reserve Bank notifies the bank or bank
holding company in writing of the Board's intention not to disapprove
the addition or employment.
(c) Notice of disapproval. The Board or Reserve Bank must disapprove
a notice under 225.72 if the Board or Reserve Bank finds that the
competence, experience, character, or integrity of the individual with
respect to whom the notice is submitted indicates that it would not be
in the best interests of the depositors of the bank or in the best
interests of the public to permit the individual to be employed by, or
associated with, the bank or bank holding company. The notice of
disapproval shall contain a statement of the basis for disapproval.
(d) Appeal. (1) The disapproved individual or the state member bank
or bank holding company may appeal to the Board the disapproval of a
notice under this subpart within 15 calendar days of the effective date
of the notice of disapproval. An appeal shall be in writing and explain
the reasons for the appeal and include all facts, documents, and
arguments that the appealing party wishes to be considered in the
appeal.
(2) The Board may, in its sole discretion, order an informal hearing
if the hearing is requested in writing by the disapproved individual or
the notificant at the time of an appeal, and the Board finds that oral
argument is appropriate or that a hearing is necessary to resolve
disputes regarding material issues of fact.
(3) The disapproved individual may not serve as a director or senior
executive officer while the appeal is pending. Written notice of the
final decision of the Board shall be sent to the appealing party.
(e)(1) Waiver of notice. The Board or the Reserve Bank may waive the
prior notice required under this subpart if it finds that:
(i) Delay would threaten the safety or soundness of the state member
bank or the bank holding company or any of its bank subsidiaries;
(ii) Delay would not be in the public interest; or
(iii) Other extraordinary circumstances exist that justify waiver of
prior notice.
(2) Effect on disapproval authority. Any waiver issued by the Board
or Reserve Bank shall not affect the authority of the Board or Reserve
Bank to issue a notice of disapproval within 30 days after such waiver.
12 CFR 225.73 Interpretations
12 CFR 225.101 Bank holding company's subsidiary banks owning shares of
nonbanking companies.
(a) The Board's opinion has been requested on the following related
matters under the Bank Holding Company Act of 1956.
(b) The question is raised as to whether shares in a nonbanking
company which were acquired by a banking subsidiary of the bank holding
company many years ago when their acquisition was lawful and are now
held as investments, and which do not include more than 5 percent of the
outstanding voting securities of such nonbanking company and do not have
a value greater than 5 percent of the value of the bank holding
company's total assets, are exempted from the divestment requirements of
the Act by the provisions of section 4(c)(5) of the Act.
(c) In the Board's opinion, this exemption is as applicable to such
shares when held by a banking subsidiary of a bank holding company as
when held directly by the bank holding company itself. While the
exemption specifically refers only to shares held or acquired by the
bank holding company, the prohibition of the Act against retention of
nonbanking interests applies to indirect as well as direct ownership of
shares of a nonbanking company, and, in the absence of a clear mandate
to the contrary, any exception to this prohibition should be given equal
breadth with the prohibition. Any other interpretation would lead to
unwarranted results.
(d) Although certain of the other exemptions in section 4(c) of the
Act specifically refer to shares held or acquired by banking
subsidiaries, an analysis of those exemptions suggests that such
specific reference to banking subsidiaries was for the purpose of
excluding nonbanking subsidiaries from such exemptions, rather than for
the purpose of providing an inclusionary emphasis on banking
subsidiaries.
(e) It should be noted that the Board's view as to this question
should not be interpreted as meaning that each banking subsidiary could
own up to 5 percent of the stock of the same nonbanking organization.
In the Board's opinion the limitations set forth in section 4(c)(5)
apply to the aggregate amount of stock held in a particular organization
by the bank holding company itself and by all of its subsidiaries.
(f) Secondly, question is raised as to whether shares in a nonbanking
company acquired in satisfaction of debts previously contracted (d.p.c.)
by a banking subsidiary of the bank holding company may be retained if
such shares meet the conditions contained in section 4(c)(5) as to value
and amount, notwithstanding the requirement of section 4(c)(2) that
shares acquired d.p.c. be disposed of within two years after the date of
their acquisition or the date of the Act, whichever is later. In the
Board's opinion, the 5 percent exemption provided by section 4(c)(5)
covers any shares, including shares acquired d.p.c., that meet the
conditions set forth in that exemption, and, consequently, d.p.c. shares
held by a banking subsidiary of a bank holding company which meet such
conditions are not subject to the two-year disposition requirement
prescribed by section 4(c)(2), although any such shares would, of
course, continue to be subject to such requirement for disposition as
may be prescribed by provisions of any applicable banking laws or by the
appropriate bank supervisory authorities.
(g) Finally, question is raised as to whether shares held by banking
subsidiaries of the bank holding company in companies holding bank
premises of such subsidiaries are exempted from the divestment
requirements by section 4(c)(1) of the Act. It is the Board's view that
section 4(c)(1), exempting shares owned or acquired by a bank holding
company in any company engaged solely in holding or operating properties
used wholly or substantially by any subsidiary bank, is to be read and
interpreted, like section 4(c)(5), as applying to shares owned
indirectly by a bank holding company through a banking subsidiary as
well as to shares held directly by the bank holding company. A contrary
interpretation would impair the right that member banks controlled by
bank holding companies would otherwise have to invest, subject to the
limitations of section 24A of the Federal Reserve Act, in stock of
companies holding their bank premises; and such a result was not, in
the Board's opinion, intended by the Bank Holding Company Act.
(21 FR 10472, Dec. 29, 1956. Redesignated at 36 FR 21666, Nov. 12,
1971)
12 CFR 225.102 Bank holding company indirectly owning nonbanking
company through subsidiaries.
(a) The Board of Governors has been requested for an opinion
regarding the exemptions contained in section 4(c)(5) of the Bank
Holding Company Act of 1956. It is stated that Y Company is an
investment company which is not a bank holding company and which is not
engaged in any business other than investing in securities, which
securities do not include more than 5 per centum of the outstanding
voting securities of any company and do not include any asset having a
value greater than 5 per centum of the value of the total assets of X
Corporation, a bank holding company. It is stated that direct ownership
by X Corporation of voting shares of Y Company would be exempt by reason
of section 4(c)(5) from the prohibition of section 4 of the Act against
ownership by bank holding companies of nonbanking assets.
(b) It was asked whether it makes any difference that the shares of Y
Company are not owned directly by X Corporation but instead are owned
through Subsidiaries A and B. X Corporation owns all the voting shares
of Subsidiary A, which owns one-half of the voting shares of Subsidiary
B. Subsidiaries A and B each own one-third of the voting shares of Y
Company.
(c) Section 4(c)(5) is divided into two parts. The first part
exempts the ownership of securities of nonbanking companies when the
securities do not include more than 5 percent of the voting securities
of the nonbanking company and do not have a value greater than 5 percent
of the value of the total assets of the bank holding company. The
second part exempts the ownership of securities of an investment company
which is not a bank holding company and is not engaged in any business
other than investing in securities, provided the securities held by the
investment company meet the 5 percent tests mentioned above.
(d) In 225.101, the Board expressed the opinion that the first
exemption in section 4(c)(5):
* * * is as applicable to such shares when held by a banking
subsidiary of a bank holding company as when held directly by the bank
holding company itself. While the exemption specifically refers only to
shares held or acquired by the bank holding company, the prohibition of
the Act against retention of nonbanking interests applies to indirect as
well as direct ownership of shares of a nonbanking company, and, in the
absence of a clear mandate to the contrary, any exception to this
prohibition should be given equal breadth with the prohibition. Any
other interpretation would lead to unwarranted results.
(e) The Board is of the view that the principles stated in that
opinion are also applicable to the second exemption in section 4(c)(5),
and that they apply whether or not the subsidiary owning the shares is a
banking subsidiary. Accordingly, on the basis of the facts presented,
the Board is of the opinion that the second exemption in section 4(c)(5)
applies to the indirect ownership by X Corporation of shares of Y
Company through Subsidiaries A and B.
(22 FR 2533, Apr. 13, 1957. Redesignated at 36 FR 21666, Nov. 12,
1971)
12 CFR 225.103 Bank holding company acquiring stock by dividends, stock
splits or exercise of rights.
(a) The Board of Governors has been asked whether a bank holding
company may receive bank stock dividends or participate in bank stock
splits without the Board's prior approval, and whether such a company
may exercise, without the Board's prior approval, rights to subscribe to
new stock issued by banks in which the holding company already owns
stock.
(b) Neither a stock dividend nor a stock split results in any change
in a stockholder's proportional interest in the issuing company or any
increase in the assets of that company. Such a transaction would have
no effect upon the extent of a holding company's control of the bank
involved; and none of the five factors required by the Bank Holding
Company Act to be considered by the Board in approving a stock
acquisition would seem to have any application. In view of the
objectives and purposes of the act, the word ''acquire'' would not seem
reasonably to include transactions of this kind.
(c) On the other hand, the exercise by a bank holding company of the
right to subscribe to an issue of additional stock of a bank could
result in an increase in the holding company's proportional interest in
the bank. The holding company would voluntarily pay additional funds
for the extra shares and would ''acquire'' the additional stock even
under a narrow meaning of that term. Moreover, the exercise of such
rights would cause the assets of the issuing company to be increased and
in a sense, therefore, the ''size or extent'' of the bank holding
company system would be expanded.
(d) In the circumstances, it is the Board's opinion that receipt of
bank stock by means of a stock dividend or stock split, assuming no
change in the class of stock, does not require the Board's prior
approval under the act, but that purchase of bank stock by a bank
holding company through the exercise of rights does require the Board's
prior approval, unless one of the exceptions set forth in section 3(a)
is applicable.
(22 FR 7461, Sept. 19, 1957. Redesignated at 36 FR 21666, Nov. 12,
1971)
12 CFR 225.104 ''Services'' under section 4(c)(1) of Bank Holding
Company Act.
(a) Section 4(c)(1) of the Bank Holding Company Act, among other
things, exempts from the nonbanking divestment requirements of section
4(a) of the Act shares of a company engaged ''solely in the business of
furnishing services to or performing services for'' its bank holding
company or subsidiary banks thereof.
(b) The Board of Governors has had occasion to express opinions as to
whether this section of law applies to the following two sets of facts:
(1) In the first case, Corporation X, a nonbanking subsidiary of a
bank holding company (Holding Company A), was engaged in the business of
purchasing installment paper suitable for investment by banking
subsidiaries of Holding Company A. All installment paper purchased by
Corporation X was sold by it to a bank which is a subsidiary of Holding
Company A, without recourse, at a price equal to the cost of the
installment paper to Corporation X, and with compensation to the latter
based on the earnings from such paper remaining after certain reserves,
expenses and charges. The subsidiary bank sold participations in such
installment paper to the other affiliated banks of Holding Company A
which desired to participate. Purchases by Corporation X consisted
mainly of paper insured under Title I of the National Housing Act and,
in addition, Corporation X purchased time payment contracts covering
sales of appliances by dealers under contractual arrangements with
utilities, as well as paper covering home improvements which was not
insured. Pursuant to certain service agreements, Corporation X made all
collections, enforced guaranties, filed claims under Title I insurance
and performed other services for the affiliated banks. Also Corporation
X rendered to banking subsidiaries of Holding Company A various
accounting, statistical and advisory services such as payroll, life
insurance and budget loan installment account.
(2) In the second case, Corporation Y, a nonbanking subsidiary of a
bank holding company (Holding Company B, which was also a bank),
solicited business on behalf of Holding Company B from dealers,
throughout several adjoining or contiguous States, who made time sales
and desired to convert their time sales paper into cash; but
Corporation Y made no loans or purchases of sales contracts and did not
discount or advance money for time sales obligations. Corporation Y
investigated credit standings of purchasers obligated on time sale
contracts to be acquired by Holding Company B, Corporation Y received
from dealers the papers offered by them and inspected such papers to see
that they were in order, and transmitted to Holding Company B for its
determination to purchase, including, in some cases, issuance of drafts
in favor of dealers in order to facilitate their prompt receipt of
payment for installment paper purchased by Holding Company B.
Corporation Y made collections of delinquent paper or delinquent
installments, which sometimes involved repossession and resale of the
automobile or other property which secured the paper. Also, upon
request of purchasers obligated on paper held by Holding Company B,
Corporation Y transmitted installment payments to Holding Company B.
Holding Company B reimbursed Corporation Y for its actual costs and
expenses in performing the services mentioned above, including the
salaries and wages of all Corporation Y officers and employees.
(c) While the term ''services'' is sometimes used in a broad and
general sense, the legislative history of the Bank Holding Company Act
indicates that in section 4(c)(1) the word was meant to be somewhat more
limited in its application. An early version of the bill specifically
exempted companies engaged in serving the bank holding company and its
subsidiary banks in ''auditing, appraising, investment counseling''.
The statute as finally enacted does not expressly mention any specific
type of servicing activity for exemption. In recommending the change,
the Senate Banking and Currency Committee stated that the types of
services contemplated are ''in the fields of advertising, public
relations, developing new business, organizations, operations, preparing
tax returns, personnel, and many others'', which indicates that latitude
should be given to the range of activities contemplated by this section
beyond those specifically set forth in the early draft of the bill.
(84th Cong., 2d Sess., Senate Report 1095, Part 2, p. 3.) It
nevertheless seems evident that Congress intended such services to be
types of activities generally comparable to those mentioned above from
the early bill (''auditing, appraising, investment counseling'') and in
the excerpt from the Committee Report on the later bill (''advertising,
public relations, developing new business, organization, operations,
preparing tax returns, personnel, and many others''). This legislative
history and the context in which the term ''services'' is used in
section 4(c)(1) seem to suggest that the term was in general intended to
refer to servicing operations which a bank could carry on itself, but
which the bank or its holding company chooses to have done through
another organization. Moreover, the report of the Senate Banking and
Currency Committee indicated that the types of servicing permitted under
section 4(c)(1) are to be distinguished from activities of a
''financial, fiduciary, or insurance nature'', such as those which might
be considered for possible exemption under section 4(c)(6) of the Act.
(d) With respect to the first set of facts, the Board expressed the
opinion that certain of the activities of Corporation X, such as the
accounting, statistical and advisory services referred to above, may be
within the range of servicing activities contemplated by section
4(c)(1), but that this would not appear to be the case with the main
activity of Corporation X, which was the purchase of installment paper
and the resale of such paper at cost, without recourse, to banking
subsidiaries of Holding Company A. This latter and basic activity of
Corporation X appeared to involve essentially a financial relationship
between it and the banking subsidiaries of Holding Company A and
appeared beyond the category of servicing exemptions contemplated by
section 4(c)(1) of the Act. Accordingly, it was the Board's view that
Corporation X could not be regarded as qualifying under section 4 (c)(1)
as a company engaged ''solely in the business of furnishing services to
or performing services for'' Holding Company A or subsidiary banks
thereof.
(e) With respect to the second set of facts, the Board expressed the
opinion that some of the activities engaged in by Corporation Y were
clearly within the range of servicing activities contemplated by section
4(c)(1). There was some question as to whether or not some of the other
activities of Corporation Y mentioned above could meet the test, but on
balance, it seemed that all such activities probably were activities in
which Holding Company B, which as already indicated was a bank, could
itself engage, at the present locations of Corporation Y, without being
engaged in the operation of bank branches at those locations. In the
circumstances, while the question was not free from doubt, the Board
expressed the opinion that the activities of Corporation Y were those of
a company engaged ''solely in the business of furnishing services to or
performing services for'' Holding Company B within the meaning of
section 4(c)(1) of the act, and that, accordingly, the control by
Holding Company B of shares in Corporation Y was exempted under that
section.
(23 FR 2675, May 23, 1958. Redesignated at 36 FR 21666, Nov. 12,
1971)
12 CFR 225.107 Acquisition of stock in small business investment
company.
(a) A registered bank holding company requested an opinion by the
Board of Governors with respect to whether that company and its banking
subsidiaries may acquire stock in a small business investment company
organized pursuant to the Small Business Investment Act of 1958.
(b) It is understood that the bank holding company and its subsidiary
banks propose to organize and subscribe for stock in a small business
investment company which would be chartered pursuant to the Small
Business Investment Act of 1958 which provides for long-term credit and
equity financing for small business concerns.
(c) Section 302(b) of the Small Business Investment Act authorizes
national banks, as well as other member banks and nonmember insured
banks to the extent permitted by applicable State law, to invest capital
in small business investment companies not exceeding one percent of the
capital and surplus of such banks. Section 4(c)(4) of the Bank Holding
Company Act exempts from the prohibitions of section 4 of the Act
''shares which are of the kinds and amounts eligible for investment by
National banking associations under the provisions of section 5136 of
the Revised Statutes''. Section 5136 of the Revised Statutes (paragraph
''Seventh'') in turn provides, in part, as follows:
Except as hereinafter provided or otherwise permitted by law nothing
herein contained shall authorize the purchase by the association for its
own account of any shares of stock of any corporation.
Since the shares of a small business investment company are of a kind
and amount expressly made eligible for investment by a national bank
under the Small Business Investment Act of 1958, it follows, therefore,
that the ownership or control of such shares by a bank holding company
would be exempt from the prohibitions of section 4 of the Bank Holding
Company Act by virtue of the provisions of section 4(c)(4) of that Act.
Accordingly, the ownership or control of such shares by the bank holding
company would be exempt from the prohibitions of section 4 of the Bank
Holding Company Act.
(d) An additional question is presented, however, as to whether
section 6 of the Bank Holding Company Act prohibits banking subsidiaries
of the bank holding company from purchasing stock in a small business
investment company where the latter is a ''subsidiary'' under that Act.
(e) Section 6(a)(1) of the Act makes it unlawful for a bank to invest
any of its funds in the capital stock of any other subsidiary of the
bank holding company. However, section 6(a)(1) was, in effect, amended
by section 302(b) of the Small Business Investment Act (15 U.S.C. 682)
as amended by the Act of June 11, 1960 (Pub. L. 86-502) so as to nullify
this prohibition when the ''subsidiary'' is a small business investment
company.
(f) Accordingly, section 6 of the Bank Holding Company Act does not
prohibit banking subsidiaries of the bank holding company from
purchasing stock in a small business investment company organized
pursuant to the Small Business Investment Act of 1958, where that
company is or will be a subsidiary of the bank holding company.
(25 FR 7485, Aug. 9, 1960. Redesignated at 36 FR 21666, Nov. 12,
1971)
12 CFR 225.109 ''Services'' under section 4(c)(1) of Bank Holding
Company Act.
(a) The Board of Governors has been requested by a bank holding
company for an interpretation under section 4(c)(1) of the Bank Holding
Company Act which, among other things, exempts from the nonbanking
divestment requirements of section 4(a) of the Act, shares of a company
engaged ''solely in the business of furnishing services to or performing
services for'' its bank holding company or subsidiary banks thereof.
(b) It is understood that a nonbanking subsidiary of the holding
company engages in writing comprehensive automobile insurance (fire,
theft, and collision) which is sold only to customers of a subsidiary
bank of the holding company in connection with the bank's retail
installment loans; that when payment is made on a loan secured by a
lien on a motor vehicle, renewal policies are not issued by the
insurance company; and that the insurance company receives the usual
agency commissions on all comprehensive automobile insurance written for
customers of the bank.
(c) It is also understood that the insurance company writes credit
life insurance for the benefit of the bank and its installment-loan
customers; that each insured debtor is covered for an amount equal to
the unpaid balance of his note to the bank, not to exceed $5,000; that
as the note is reduced by regular monthly payments, the amount of
insurance is correspondingly reduced so that at all times the debtor is
insured for the unpaid balance of his note; that each insurance
contract provides for payment in full of the entire loan balance upon
the death or permanent disability of the insured borrower; and that
this credit life insurance is written only at the request of, and solely
for, the bank's borrowing customers. It is further understood that the
insurance company engages in no other activity.
(d) As indicated in 225.104 (23 FR 2675), the term ''services,''
while sometimes used in a broad and general sense, appears to be
somewhat more limited in its application in section 4(c)(1) of the Bank
Holding Company Act. Unlike an early version of the Senate bill (S.
2577, before amendment), the act as finally enacted does not expressly
mention any type of servicing activity for exemption. The legislative
history of the Act, however, as indicated in the relevant portion of the
record of the Senate Banking and Currency Committee on amended S. 2577
(84th Cong., 2d Sess., Senate Report 1095, Part 2, p. 3) makes it
evident that Congress had in mind the exemption of services comparable
to the types of activities mentioned expressly in the early Senate bill
(''auditing, appraising, investment counseling'') and in the Committee
Report on the later bill (''advertising, public relations, developing
new business, organization, operations, preparing tax returns,
personnel, and many others''). Furthermore, this Committee Report
expressly stated that the provision of section 4(c)(1) with respect to
''furnishing services to or performing services for'' was not intended
to supplant the exemption contained under section 4 (c)(6) of the Act.
(e) The only activity of the insurance company (writing comprehensive
automobile insurance and credit life insurance) appears to involve an
insurance relationship between it and a banking subsidiary of the
holding company which the legislative history clearly indicates does not
come within the meaning of the phrase ''furnishing services to or
performing services for'' a bank holding company or its banking
subsidiaries.
(f) Accordingly, it is the Board's view that the insurance company
could not be regarded as qualifying as a company engaged ''solely in the
business of furnishing services to or performing services for'' the bank
holding company or banks with respect to which the latter is a bank
holding company.
(23 FR 9017, Nov. 20, 1958. Redesignated at 36 FR 21666, Nov. 12,
1971)
12 CFR 225.111 Limit on investment by bank holding company system in
stock of small business investment companies.
(a) Under the provisions of section 4(c)(5) of the Bank Holding
Company Act, as amended (12 U.S.C. 1843), a bank holding company may
acquire shares of nonbank companies ''which are of the kinds and amounts
eligible for investment'' by national banks. Pursuant to section 302(b)
of the Small Business Investment Act of 1958 (15 U.S.C. 682(b)), as
amended by Title II of the Small Business Act Amendments of 1967 (Pub.
L. 90-104, 81 Stat. 268, 270), a national bank may invest in stock of
small business investment companies (SBICs) subject to certain
restrictions.
(b) On the basis of the foregoing statutory provisions, it is the
position of the Board that a bank holding company may acquire direct or
indirect ownership or control of stock of an SBIC subject to the
following limits:
(1) The total direct and indirect investments of a bank holding
company in stock of SBICs may not exceed:
(i) With respect to all stock of SBICs owned or controlled directly
or indirectly by a subsidiary bank, 5 percent of that bank's capital and
surplus;
(ii) With respect to all stock of SBICs owned directly by a bank
holding company that is a bank, 5 percent of that bank's capital and
surplus; and
(iii) With respect to all stock of SBICs otherwise owned or
controlled directly or indirectly by a bank holding company, 5 percent
of its proportionate interest in the capital and surplus of each
subsidiary bank (that is, the holding company's percentage of that
bank's stock times that bank's capital and surplus) less that bank's
investment in stock of SBICs; and
(2) A bank holding company may not acquire direct or indirect
ownership or control of 50 percent or more of the shares of any class of
equity securities of an SBIC that have actual or potential voting
rights.
(c) A bank holding company or a bank subsidiary that acquired direct
or indirect ownership or control of 50 percent or more of any such class
of equity securities prior to January 9, 1968, is not required to divest
to a level below 50 percent. A bank that acquired 50 percent or more
prior to January 9, 1968, may become a subsidiary in a holding company
system without any necessity for divesting to a level below 50 percent:
Provided, That such action does not result in the bank holding company
acquiring control of a percentage greater than that controlled by such
bank.
(12 U.S.C. 248. Interprets 12 U.S.C. 1843, 15 U.S.C. 682)
(33 FR 6967, May 9, 1968. Redesignated at 36 FR 21666, Nov. 12, 1971)
12 CFR 225.112 Indirect control of small business concern through
convertible debentures held by small business investment company.
(a) A question has been raised concerning the applicability of
provisions of the Bank Holding Company Act of 1956 to the acquisition by
a bank holding company of stock of a small business investment company
(''SBIC'') organized pursuant to the Small Business Investment Act of
1958 (''SBI Act'').
(b) As indicated in the interpretation of the Board ( 225.107)
published at 23 FR 7813, it is the Board's opinion that, since stock of
an SBIC is eligible for purchase by national banks and since section
4(c)(4) of the Holding Company Act exempts stock eligible for investment
by national banks from the prohibitions of section 4 of that Act, a bank
holding company may lawfully acquire stock in such an SBIC.
(c) However, section 304 of the SBI Act provides that debentures of a
small business concern purchased by a small business investment company
may be converted at the option of such company into stock of the small
business concern. The question therefore arises as to whether, in the
event of such conversion, the parent bank holding company would be
regarded as having acquired ''direct or indirect ownership or control''
of stock of the small business concern in violation of section 4(a) of
the Holding Company Act.
(d) The Small Business Investment Act clearly contemplates that one
of the primary purposes of that Act was to enable SBICs to provide
needed equity capital to small business concerns through the purchase of
debentures convertible into stock. Thus, to the extent that a
stockholder in an SBIC might acquire indirect control of stock of a
small business concern, such control appears to be a natural and
contemplated incident of ownership of stock of the SBIC. The Office of
the Comptroller of the Currency has informally indicated concurrence
with this interpretation insofar as it affects investments by national
banks in stock of an SBIC.
(e) Since the exception as to stock eligible for investment by
national banks contained in section 4(c)(4) of the Holding Company Act
was apparently intended to permit a bank holding company to acquire any
stock that would be eligible for purchase by a national bank, it is the
Board's view that section 4(a)(1) of the Act does not prohibit a bank
holding company from acquiring stock of an SBIC, even though ownership
of such stock may result in the acquisition of indirect ownership or
control of stock of a small business concern which would not itself be
eligible for purchase directly by a national bank or a bank holding
company.
(24 FR 1584, Mar. 4, 1959. Redesignated at 36 FR 21666, Nov. 12,
1971)
12 CFR 225.113 Services under section 4(a) of Bank Holding Company Act.
(a) The Board of Governors has been requested for an opinion as to
whether the performance of certain functions by a bank holding company
for four banks of which it owns less than 25 percent of the voting
shares is in violation of section 4(a) of the Bank Holding Company Act.
(b) It is claimed that the holding company is engaged in ''managing''
four nonsubsidiary banks, for which services it receives ''management
fees.'' Specifically, the company engages in the following activities
for the four nonsubsidiary banks: (1) Establishment and supervision of
loaning policies; (2) direction of the purchase and sale of investment
securities; (3) selection and training of officer personnel; (4)
establishment and enforcement of operating policies; and (5) general
supervision over all policies and practices.
(c) The question raised is whether these activities are prohibited by
section 4(a)(2) of the Bank Holding Company Act, which permits a bank
holding company to engage in only three categories of business: (1)
Banking; (2) managing or controlling banks; and (3) furnishing
services to or performing services for any bank of which the holding
company owns or controls 25 percent or more of the voting shares.
(d) Clearly, the activities of the company with respect to the four
nonsubsidiary banks do not constitute ''banking.'' With respect to the
business of ''managing or controlling'' banks, it is the Board's view
that such business, within the purview of section 4(a)(2), is
essentially the exercise of a broad governing influence of the sort
usually exercised by bank stockholders, as distinguished from direct or
active participation in the establishment or carrying out of particular
policies or operations. The latter kinds of activities fall within the
third category of businesses in which a bank holding company is
permitted to engage. In the Board's view, the activities enumerated
above fall in substantial part within that third category.
(e) Section 4(a)(2), like all other sections of the Holding Company
Act, must be interpreted in the light of all of its provisions, as well
as in the light of other sections of the Act. The expression ''managing
* * * banks,'' if it could be taken by itself, might appear to include
activities of the sort enumerated. However, such an interpretation of
those words would virtually nullify the last portion of section 4(a)(2),
which permits a holding company to furnish services to or perform
services for ''any bank of which it owns or controls 25 per centum or
more of the voting shares.''
(f) Since Congress explicitly authorized the performance of services
for banks that are at least 25 percent owned by a holding company, it
obviously intended that the holding company should not perform services
for banks in which it owns less than 25 percent of the voting shares.
However, if the second category -- ''managing or controlling banks'' --
were interpreted to permit the holding company to perform services for
any bank, including a bank in which it held less than 25 percent of the
stock (or no stock whatsoever), the last clause of section 4(a)(2) would
be meaningless.
(g) It is principally for this reason -- that is, to give effective
meaning to the final clause of section 4(a)(2) -- that the Board
interprets ''managing or controlling banks'' in that provision as
referring to the exercise of a stockholder's management or control of
banks, rather than direct and active participation in their operations.
To repeat, such active participation in operations falls within the
third category (''furnishing services to or performing services for any
bank'') and consequently may be engaged in only with respect to banks in
which the holding company ''owns or controls 25 per centum or more of
the voting shares.''
(h) Accordingly, it is the Board's conclusion that, in performing the
services enumerated, the bank holding company is ''furnishing services
to or performing services for'' the four banks referred to. Under the
Act such furnishing or performing of services is permissible only if the
holding company owns or controls 25 percent of the voting shares of each
bank receiving such services, and, since the company owns less than 25
percent of the voting shares of these banks, it follows that these
activities are prohibited by section 4(a)(2).
(i) While this conclusion is required, in the Board's opinion, by the
language of the statute, it may be noted further that any other
conclusion would make it possible for bank holding company or any other
corporation, through arrangements for the ''managing'' of banks in the
manner here involved, to acquire effective control of banks without
acquiring bank stocks and thus to evade the underlying objectives of
section 3 of the Act.
(25 FR 281, Jan. 14, 1960. Redesignated at 36 FR 21666, Nov. 12,
1971)
12 CFR 225.115 Applicability of Bank Service Corporation Act in certain
bank holding company situations.
(a) Questions have been presented to the Board of Governors regarding
the applicability of the recently enacted Bank Service Corporation Act
(Pub. L. 87-856, approved October 23, 1962) in cases involving service
corporations that are subsidiaries of bank holding companies under the
Bank Holding Company Act of 1956. In addition to being charged with the
administration of the latter Act, the Board is named in the Bank Service
Corporation Act as the Federal supervisory agency with respect to the
performance of bank services for State member banks.
(b) Holding company-owned corporation serving only subsidiary banks.
(1) One question is whether the Bank Service Corporation Act is
applicable in the case of a corporation, wholly owned by a bank holding
company, which is engaged in performing ''bank services'', as defined in
section 1(b) of the Act, exclusively for subsidiary banks of the holding
company.
(2) Except as noted below with respect to section 5 thereof, the Bank
Service Corporation Act is not applicable in this case. This is true
because none of the stock of the corporation performing the services is
owned by any bank and the corporation, therefore, is not a ''bank
service corporation'' as defined in section 1(c) of the Act. A
corporation cannot meet that definition unless part of its stock is
owned by two or more banks. The situation clearly is unaffected by
section 2(b) of the Act which permits a corporation that fell within the
definition initially to continue to function as a bank service
corporation although subsequently only one of the banks remains as a
stockholder in the corporation.
(3) However, although it is not a bank service corporation, the
corporation in question and each of the banks for which it performs bank
services are subject to section 5 of the Bank Service Corporation Act.
That section, which requires the furnishing of certain assurances to the
appropriate Federal supervisory agency in connection with the
performance of bank services for a bank, is applicable whether such
services are performed by a bank service corporation or by others.
(4) Section 4(a)(1) of the Bank Holding Company Act prohibits the
acquisition by a bank holding company of ''direct or indirect ownership
or control'' of shares of a nonbanking company, subject to certain
exceptions. Section 4(c)(1) of the Act exempts from section 4(a)(1)
shares of a company engaged ''solely in the business of furnishing
services to or performing services for'' its bank holding company or
subsidiary banks thereof. Assuming that the bank services performed by
the corporation in question are ''services'' of the kinds contemplated
by section 4(c)(1) of the Bank Holding Company Act (as would be true,
for example, of the electronic data processing of deposit accounts), the
holding company's ownership of the corporation's shares in the situation
described above clearly is permissible under that section of the Act.
(c) Bank service corporation owned by holding company subsidiaries
and serving also other banks. (1) The other question concerns the
applicability of the Bank Service Corporation Act and the Bank Holding
Company Act in the case of a corporation, all the stock of which is
owned either by a bank holding company and its subsidiary banks together
or by the subsidiary banks alone, which is engaged in performing ''bank
services'', as defined in section 1(b) of the Bank Service Corporation
Act, for the subsidiary banks and for other banks, as well.
(2) In contrast to the situation under paragraph (b) of this section,
the corporation in this case is a ''bank service corporation'' within
the meaning of section 1(c) of the Bank Service Corporation Act because
of the ownership by each of the subsidiary banks of a part of the
corporation's stock. This stock ownership is one of the important facts
differentiating this case from the first one. Being a bank service
corporation, the corporation in question is subject to section 3 of the
Act concerning applications to bank service corporations by competitive
banks for bank services, and to section 4 forbidding a bank service
corporation from engaging in any activity other than the performance of
bank services for banks. Section 5, mentioned previously and relating
to ''assurances'', also is applicable in this case.
(3) The other important difference between this case and the
situation in paragraph (b) of this section is that here the bank service
corporation performs services for nonsubsidiary banks, as well as for
subsidiary banks. This is permissible because section 2(a) of the Bank
Service Corporation Act, which authorizes any two or more banks to
invest limited amounts in a bank service corporation, removes all
limitations and prohibitions of Federal law exclusively relating to
banks that otherwise would prevent any such investment. From the
legislative history of section 2(a), it is clear that section 6 of the
Bank Holding Company Act is among the limitations and prohibitions so
removed. But for such removal, section 6(a)(1) of that Act would make
it unlawful for any of the subsidiary banks of the bank holding company
in question to own stock in the bank service corporation subsidiary of
the holding company, as the exemption in section 6(b)(1) would not apply
because of the servicing by the bank service corporation of
nonsubsidiary banks.
(4) Because the bank service corporation referred to in the question
is serving banks other than the subsidiary banks, the bank holding
company is not exempt under section 4(c)(1) of the Bank Holding Company
Act from the prohibition of acquisition of nonbanking interests in
section 4(a)(1) of that Act. The bank holding company, however, is
entitled to the benefit of the exemption in section 4(c)(4) of the Act.
That section exempts from section 4(a) ''shares which are of the kinds
and amounts eligible for investment by National banking associations
under the provisions of section 5136 of the Revised Statutes''. Section
5136 provides, in part, that: ''Except as hereinafter provided or
otherwise permitted by law, nothing herein contained shall authorize the
purchase by the association for its own account of any shares of stock
of any corporation.'' As the provisions of section 2(a) of the Bank
Service Corporation Act and its legislative history make it clear that
shares of a bank service corporation are of a kind eligible for
investment by national banks under section 5136, it follows that the
direct or indirect ownership on control of such shares by a bank holding
company are permissible within the amount limitation discussed in
paragraph (d) of this section.
(d) Limit on investment by bank holding company system in stock of
bank service corporation. (1) In the situation presented by paragraph
(c) the bank holding company clearly owns or controls, directly or
indirectly, all of the stock of the bank service corporation. The
remaining question, therefore, is whether the total direct and indirect
investment of the bank holding company in the bank service corporation
exceeds the amount permissible under the Bank Holding Company Act.
(2) The effect of sections 4(a)(1) and 4(c)(4) of the Bank Holding
Company Act is to limit the amount of shares of a bank service
corporation that a bank holding company may own or control, directly or
indirectly, to the amount eligible for investment by a national bank, as
previously indicated. Under section 2(a) of the Bank Service
Corporation Act, the amount of shares of a bank service corporation
eligible for investment by a national bank may not exceed ''10 per
centum (of the bank's) * * * paid-in and unimpaired capital and
unimpaired surplus''.
(3) The Board's view is that this aspect of the matter should be
determined in accordance with the principles set forth in 225.111, as
revised (27 FR 12671), involving the application of sections 4(a)(1) and
4(c)(4) of the Bank Holding Company Act in the light of section 302(b)
of the Small Business Investment Act limiting the amount eligible for
investment by a national bank in the shares of a small business
investment company to two percent of the bank's ''capital and surplus''.
(4) Except for the differences in the percentage figures, the
investment limitation in section 302(b) of the Small Business Investment
Act is essentially the same as the investment limitation in section 2(a)
of the Bank Service Corporation Act since, as an accounting matter and
for the purposes under consideration, ''capital and surplus'' may be
regarded as equivalent in meaning to ''paid-in and unimpaired capital
and unimpaired surplus.'' Accordingly, the maximum permissible
investment by a bank holding company system in the stock of a bank
service corporation should be determined in accordance with the formula
prescribed in 222.111.
(27 FR 12918, Dec. 29, 1962. Redesignated at 36 FR 21666, Nov. 12,
1971)
12 CFR 225.118 Computer services for customers of subsidiary banks.
(a) The question has been presented to the Board of Governors whether
a wholly-owned nonbanking subsidiary (''service company'') of a bank
holding company, which is now exempt from the prohibitions of section 4
of the Bank Holding Company Act of 1956 (''the Act'') because its sole
business is the providing of services for the holding company and the
latter's subsidiary banks, would lose its exempt status if it should
provide data processing services for customers of the subsidiary banks.
(b) The Board understood from the facts presented that the service
company owns a computer which it utilizes to furnish data processing
services for the subsidiary banks of its parent holding company.
Customers of these banks have requested that the banks provide for them
computerized billing, accounting, and financial records maintenance
services. The banks wish to utilize the computer services of the
service company in providing these and other services of a similar
nature. It is proposed that, in each instance where a subsidiary bank
undertakes to provide such services, the bank will enter into a contract
directly with the customer and then arrange to have the service company
perform the services for it, the bank. In no case will the service
company provide services for anyone other than its affiliated banks.
Moreover, it will not hold itself out as, nor will its parent
corporation or affiliated banks represent it to be, authorized or
willing to provide services for others.
(c) Section 4(c)(1) of the Act permits a holding company to own
shares in ''any company engaged solely * * * in the business of
furnishing services to or performing services for such holding company
and banks with respect to which it is a bank holding company * * *.''
The Board has ruled heretofore that the term ''services'' as used in
section 4(c)(1) is to be read as relating to those services (excluding
''closely related'' activities of ''a financial, fiduciary, or insurance
nature'' within the meaning of section 4(c)(6)) which a bank itself can
provide for its customers ( 225.104). A determination as to whether a
particular service may legitimately be rendered or performed by a bank
for its customers must be made in the light of applicable Federal or
State statutory or regulatory provisions. In the case of a
State-chartered bank, the laws of the State in which the bank operates,
together with any interpretations thereunder rendered by appropriate
bank authorities, would govern the right of the bank to provide a
particular service. In the case of a national bank, a similar
determination would require reference to provisions of Federal law
relating to the establishment and operation of national banks, as well
as to pertinent rulings or interpretations promulgated thereunder.
(d) Accordingly, on the assumption that all of the services to be
performed are of the kinds that the holding company's subsidiary banks
may render for their customers under applicable Federal or State law,
the Board concluded that the rendition of such services by the service
company for its affiliated banks would not adversely affect its exempt
status under section 4(c)(1) of the Act.
(e) In arriving at the above conclusion, the Board emphasized that
its views were premised explicitly upon the facts presented to it, and
particularly its understanding that banks are permitted, under
applicable Federal or State law to provide the proposed computer
services. The Board emphasized also that in respect to the service
company's operations, there continues in effect the requirement under
section 4(c)(1) that the service company engage solely in the business
of furnishing services to or performing services for the bank holding
company and its subsidiary banks. The Board added that any substantial
change in the facts that had been presented might require re-examination
of the service company's status under section 4(c)(1).
(29 FR 12361, Aug. 28, 1964. Redesignated at 36 FR 21666, Nov. 12,
1971)
12 CFR 225.121 Acquisition of Edge corporation affiliate by State
member banks of registered bank holding company.
(a) The Board has been asked whether it is permissible for the
commercial banking affiliates of a bank holding company registered under
the Bank Holding Company Act of 1956, as amended, to acquire and hold
the shares of the holding company's Edge corporation subsidiary
organized under section 25(a) of the Federal Reserve Act.
(b) Section 9 of the Bank Holding Company Act amendments of 1966
(Pub. L. 89-485, approved July 1, 1966) repealed section 6 of the Bank
Holding Company Act of 1956. That rendered obsolete the Board's
interpretation of section 6 that was published in the March 1966 Federal
Reserve Bulletin, page 339 ( 225.120). Thus, so far as Federal Banking
law applicable to State member banks is concerned, the answer to the
foregoing question depends on the provisions of section 23A of the
Federal Reserve Act, as amended by the 1966 amendments to the Bank
Holding Company Act. By its specific terms, the provisions of section
23A do not apply to an affiliate organized under section 25(a) of the
Federal Reserve Act.
(c) Accordingly, the Board concludes that, except for such
restrictions as may exist under applicable State law, it would be
legally permissible by virtue of paragraph 20 of section 9 of the
Federal Reserve Act for any or all of the State member banks that are
affiliates of a registered bank holding company to acquire and hold
shares of the Edge corporation subsidiary of the bank holding company
within the amount limitation in the last sentence of paragraph 12 of
section 25(a) of the Federal Reserve Act.
(12 U.S.C. 24, 248, 335, 371c, 611, 618)
(31 FR 10263, July 29, 1966. Redesignated at 36 FR 21666, Nov. 12,
1971)
12 CFR 225.122 Bank holding company ownership of mortgage companies.
(a) The Board of Governors recently considered whether a bank holding
may acquire, either directly or through a subsidiary, the stock of a
so-called ''mortgage company'' that would be operated on the following
basis: The company would solicit mortgage loans on behalf of a bank in
the holding company system, assemble credit information, make property
inspections and appraisals, and secure title information. The company
would also participate in the preparation of applications for mortgage
loans, which it would submit, together with recommendations with respect
to action thereon, to the bank, which alone would decide whether to make
any or all of the loans requested. The company would in addition
solicit investors to purchase mortgage loans from the bank and would
seek to have such investors contract with the bank for the servicing of
such loans.
(b) Under section 4 of the Bank Holding Company Act (12 U.S.C.
1843), a bank holding company is generally prohibited from acquiring
''direct or indirect ownership'' of stock of nonbanking corporations.
The two exceptions principally involved in the question presented are
with respect to (1) stock that is eligible for investment by a national
bank (section 4(c)(5) of the Act) and (2) shares of a company
''furnishing services to or performing services for such bank holding
company or its banking subsidiaries'' (section 4(c)(1)(C) of the Act).
(c) The Board has previously indicated its view that a national bank
is forbidden by the so-called ''stock-purchase prohibition'' of
paragraph ''Seventh'' of section 5136 of the Revised Statutes (12 U.S.C.
24) to purchase ''for its own account * * * any shares of stock of any
corporation'' except (1) to the extent permitted by specific provisions
of Federal law or (2) as comprised within the concept of ''such
incidental powers as shall be necessary to carry on the business of
banking'' referred to in the first sentence of said paragraph
''Seventh''. There is no specific statutory provision authorizing a
national bank to purchase stock in a mortgage company, and in the
Board's view such purchase may not properly be regarded as authorized
under the ''incidental powers'' clause. (See 1966 Federal Reserve
Bulletin 1151; 12 CFR 208.119.) Accordingly, a bank holding company may
not acquire stock in a mortgage company on the basis of the section
4(c)(5) exemption.
(d) However, the Board does not believe that such conclusion
prejudices consideration of the question whether such a company is
within the section 4(c)(1)(C) ''servicing exemption''. The basic
purpose of section 4 of the Act is to confine a bank holding company's
activities to the management and control of banks. In determining
whether an activity in which a bank could itself engage is within the
servicing exemption, the question is simply whether such activity may
appropriately be considered as ''furnishing services to or performing
services for'' a bank.
(e) As indicated in the Board's interpretation published in the 1958
Federal Reserve Bulletin at page 431 (12 CFR 225.104), the legislative
history of the servicing exemption indicates that it includes the
following activities: ''auditing, appraising, investment counseling''
and ''advertising, public relations, developing new business,
organization, operations, preparing tax returns, and personnel''. The
legislative history further indicates that some other activities also
are within the scope of the exemption. However, the types of servicing
permitted under such exemption must be distinguished from activities of
a ''financial fiduciary, or insurance nature'', such as those that might
be considered for possible exemption under section 4(c)(8) of the Act.
(f) In considering the interrelation of these exemptions in the light
of the purpose of the prohibition against bank holding company interests
in nonbanking organizations, the Board has concluded that the
appropriate test for determining whether a mortgage company may be
considered as within the servicing exemption is whether the company will
perform as principal any banking activities -- such as receiving
deposits, paying checks, extending credit, conducting a trust
department, and the like. In other words, if the mortgage company is to
act merely as an adjunct to a bank for the purpose of facilitating the
banks operations, the company may appropriately be considered as within
the scope of the servicing exemption. 1211
(g) On this basis the Board concluded that, insofar as the Bank
Holding Company Act is concerned, a bank holding company may acquire,
either directly or through a subsidiary, the stock of a mortgage company
whose functions are as described in the question presented. On the
other hand, in the Board's view, a bank holding company may not acquire,
on the basis of the servicing exemption, a mortgage company whose
functions include such activities as extending credit for its own
account, arranging interim financing, entering into mortgage service
contracts on a fee basis, or otherwise performing functions other than
solely on behalf of a bank.
(12 U.S.C. 248)
(32 FR 15004, Oct. 3, 1967, as amended at 35 FR 19662, Dec. 29, 1970.
Redesignated at 36 FR 21666, Nov. 12, 1971)
2111Insofar as the 1958 interpretation referred to above suggested
that the branch banking laws are an appropriate general test for
determining the scope of the servicing exemption, such interpretation is
hereby modified. In view of the different purposes to be served by the
branch banking laws and by section 4 of the Bank Holding Company Act,
the Board has concluded that basing determinations under the latter
solely on the basis of determinations under the former is inappropriate.
12 CFR 225.123 Activities closely related to banking.
(a) Effective June 15, 1971, the Board of Governors has amended
225.4(a) of Regulation Y to implement its regulatory authority under
section 4(c)(8) of the Bank Holding Company Act. In some respects
activities determined by the Board to be closely related to banking are
described in general terms that will require interpretation from time to
time. The Board's views on some questions that have arisen are set
forth below.
(b) Section 225.4(a) states that a company whose ownership by a bank
holding company is authorized on the basis of that section may engage
solely in specified activities. That limitation refers only to
activities the authority for which depends on section 4(c)(8) of the
Act. It does not prevent a holding company from establishing one
subsidiary to engage, for example, in activities specified in 225.4(a)
and also in activities that fall within the scope of section 4(c)(1)(C)
of the Act -- the ''servicing'' exemption.
(c) The amendments to 225.4(a) do not apply to restrict the
activities of a company previously approved by the Board on the basis of
section 4(c)(8) of the Act. Activities of a company authorized on the
basis of section 4(c)(8) either before the 1970 Amendments or pursuant
to the amended 225.4(a) may be shifted in a corporate reorganization to
another company within the holding company system without complying with
the procedures of 225.4(b), as long as all the activities of such
company are permissible under one of the exemptions in section 4 of the
Act.
(d) Under the procedures in 225.4(a)(c), a holding company that
wishes to change the location at which it engages in activities
authorized pursuant to 225.4(a) must publish notice in a newspaper of
general circulation in the community to be served. The Board does not
regard minor changes in location as within the coverage of that
requirement. A move from one site to another within a 1-mile radius
would constitute such a minor change if the new site is in the same
State.
(e) Data processing. In providing packaged data processing and
transmission services for banking, financial and economic data for
installation on the premises of the customer, as authorized by
225.4(a)(8)(ii), a bank holding company should limit its activities to
providing facilities that perform banking functions, such as check
collection, or other similar functions for customers that are depository
or other similar institutions, such as mortgage companies. In addition,
the Board regards the following as incidental activities necessary to
carry on the permissible activities in this area:
(1) Providing excess capacity, not limited to the processing or
transmission of banking, financial or economic data on data processing
or transmission equipment or facilities used in connection with
permissible data processing and data transmission activities, where:
(A) Equipment is not purchased solely for the purpose of creating
excess capacity;
(B) Hardware is not offered in connection therewith; and
(C) Facilities for the use of the excess capacity do not include the
provision of any software, other than systems software (including
language), network communications support, and the operating personnel
and documentation necessary for the maintenance and use of these
facilities.
(2) Providing by-products of permissible data processing and data
transmission activities, where not designed, or appreciably enhanced,
for the purpose of marketability.
(3) Furnishing any data processing service upon request of a customer
if such data processing service is not otherwise reasonably available in
the relevant market area; and
In order to eliminate or reduce to an insignificant degree any
possibility of unfair competition where services, facilities,
by-products or excess capacity are provided by a bank holding company's
nonbank subsidiary or related entity, the entity providing the services,
facilities, by-products and/or excess capacity should have separate
books and financial statements, and should provide these books and
statements to any new or renewal customer requesting financial data.
Consolidated or other financial statements of the bank holding company
should not be provided unless specifically requested by the customer.
(Interprets and applies 12 U.S.C. 1843 (c)(8))
(36 FR 10778, June 3, 1971, as amended at 36 FR 11806, June 19, 1971.
Redesignated at 36 FR 21666, Nov. 12, 1971 and amended at 40 FR 13477,
Mar. 27, 1975; 47 FR 37372, Aug. 26, 1982; 52 FR 45161, Nov. 25,
1987)
12 CFR 225.124 Foreign bank holding companies.
(a) Effective December 1, 1971, the Board of Governors has added a
new 225.4(g) to Regulation Y implementing its authority under section
4(c)(9) of the Bank Holding Company Act. The Board's views on some
questions that have arisen in connection with the meaning of terms used
in 225.4(g) are set forth in paragraphs (b) through (g) of this
section.
(b) The term ''activities'' refers to nonbanking activities and does
not include the banking activities that foreign banks conduct in the
United States through branches or agencies licensed under the banking
laws of any State of the United States or the District of Columbia.
(c) A company (including a bank holding company) will not be deemed
to be engaged in ''activities'' in the United States merely because it
exports (or imports) products to (or from) the United States, or
furnishes services or finances goods or services in the United States,
from locations outside the United States. A company is engaged in
''activities'' in the United States if it owns, leases, maintains,
operates, or controls any of the following types of facilities in the
United States:
(1) A factory,
(2) A wholesale distributor or purchasing agency,
(3) A distribution center,
(4) A retail sales or service outlet,
(5) A network of franchised dealers,
(6) A financing agency, or
(7) Similar facility for the manufacture, distribution, purchasing,
furnishing, or financing of goods or services locally in the United
States.
A company will not be considered to be engaged in ''activities'' in
the United States if its products are sold to independent importers, or
are distributed through independent warehouses, that are not controlled
or franchised by it.
(d) In the Board's opinion, section 4 (a)(1) of the Bank Holding
Company Act applies to ownership or control of shares of stock as an
investment and does not apply to ownership or control of shares of stock
in the capacity of an underwriter or dealer in securities. Underwriting
or dealing in shares of stock are nonbanking activities prohibited to
bank holding companies by section 4(a)(2) of the Act, unless otherwise
exempted. Under 225.4(g) of Regulation Y, foreign bank holding
companies are exempt from the prohibitions of section 4 of the Act with
respect to their activities outside the United States; thus foreign
bank holding companies may underwrite or deal in shares of stock
(including shares of United States issuers) to be distributed outside
the United States, provided that shares so acquired are disposed of
within a reasonable time.
(e) A foreign bank holding company does not ''indirectly'' own voting
shares by reason of the ownership or control of such voting shares by
any company in which it has a noncontrolling interest. A foreign bank
holding company may, however, ''indirectly'' control such voting shares
if its noncontrolling interest in such company is accompanied by other
arrangements that, in the Board's judgment, result in control of such
shares by the bank holding company. The Board has made one exception to
this general approach. A foreign bank holding company will be
considered to indirectly own or control voting shares of a bank if that
bank holding company acquires more than 5 percent of any class of voting
shares of another bank holding company. A bank holding company may make
such an acquisition only with prior approval of the Board.
(f) A company is ''indirectly'' engaged in activities in the United
States if any of its subsidiaries (whether or not incorporated under the
laws of this country) is engaged in such activities. A company is not
''indirectly'' engaged in activities in the United States by reason of a
noncontrolling interest in a company engaged in such activities.
(g) Under the foregoing rules, a foreign bank holding company may
have a noncontrolling interest in a foreign company that has a U.S.
subsidiary (but is not engaged in the securities business in the United
States) if more than half of the foreign company's consolidated assets
and revenues are located and derived outside the United States. For the
purpose of such determination, the assets and revenues of the United
States subsidiary would be counted among the consolidated assets and
revenues of the foreign company to the extent required or permitted by
generally accepted accounting principles in the United States. The
foreign bank holding company would not, however, be permitted to
''indirectly'' control voting shares of the said U.S. subsidiary, as
might be the case if there are other arrangements accompanying its
noncontrolling interest in the foreign parent company that, in the
Board's judgment, result in control of such shares by the bank holding
company.
(Interprets and applies 12 U.S.C. 1843 (a) (1), (2), and (c)(9))
(36 FR 21808, Nov. 16, 1971)
12 CFR 225.125 Investment adviser activities.
(a) Effective February 1, 1972, the Board of Governors amended
225.4(a) of Regulation Y to add ''serving as investment adviser, as
defined in section 2(a)(20) of the Investment Company Act of 1940, to an
investment company registered under that Act'' to the list of activities
it has determined to be so closely related to banking or managing or
controlling banks as to be a proper incident thereto. During the course
of the Board's consideration of this amendment several questions arose
as to the scope of such activity, particularly in view of certain
restrictions imposed by sections 16, 20, 21, and 32 of the Banking Act
of 1933 (12 U.S.C. 24, 377, 378, 78) (sometimes referred to hereinafter
as the ''Glass-Steagall Act provisions'') and the U.S. Supreme Court's
decision in Investment Company Institute v. Camp, 401 U.S. 617 (1971).
The Board's views with respect to some of these questions are set forth
below.
(b) It is clear from the legislative history of the Bank Holding
Company Act Amendments of 1970 (84 Stat. 1760) that the Glass-Steagall
Act provisions were not intended to be affected thereby. Accordingly,
the Board regards the Glass-Steagall Act provisions and the Board's
prior interpretations thereof as applicable to a holding company's
activities as an investment adviser. Consistently with the spirit and
purpose of the Glass-Steagall Act, this interpretation applies to all
bank holding companies registered under the Bank Holding Company Act
irrespective of whether they have subsidiaries that are member banks.
(c) Under 225.4(a)(5), as amended, bank holding companies (which
term, as used herein, includes both their bank and nonbank subsidiaries)
may, in accordance with the provisions of 225.4 (b), act as investment
advisers to various types of investment companies, such as ''open-end''
investment companies (commonly referred to as ''mutual funds'') and
''closed-end'' investment companies. Briefly, a mutual fund is an
investment company which, typically, is continuously engaged in the
issuance of its shares and stands ready at any time to redeem the
securities as to which it is the issuer; a closed-end investment
company typically does not issue shares after its initial organization
except at infrequent intervals and does not stand ready to redeem its
shares.
(d) The Board intends that a bank holding company may exercise all
functions that are permitted to be exercised by an ''investment
adviser'' under the Investment Company Act of 1940, except to the extent
limited by the Glass-Steagall Act provisions, as described, in part,
hereinafter.
(e) The Board recognizes that presently most mutual funds are
organized, sponsored and managed by investment advisers with which they
are affiliated and that their securities are distributed to the public
by such affiliated investment advisers, or subsidiaries or affiliates
thereof. However, the Board believes that (1) The Glass-Steagall Act
provisions do not permit a bank holding company to perform all such
functions, and (2) It is not necessary for a bank holding company to
perform all such functions in order to engage effectively in the
described activity.
(f) In the Board's opinion, the Glass-Steagall Act provisions, as
interpreted by the U.S. Supreme Court, forbid a bank holding company to
sponsor, organize or control a mutual fund. However, the Board does not
believe that such restrictions apply to closed-end investment companies
as long as such companies are not primarily or frequently engaged in the
issuance, sale and distribution of securities. In no case, however,
should a bank holding company act as investment adviser to an investment
company which has a name that is similar to, or a variation of, the name
of the holding company or any of its subsidiary banks.
(g) In view of the potential conflicts of interests that may exist, a
bank holding company and its bank and nonbank subsidiaries should not
(1) purchase for their own account securities of any investment company
for which the bank holding company acts as investment adviser; (2)
purchase in their sole discretion, any such securities in a fiduciary
capacity (including as managing agent); (3) extend credit to any such
investment company; or (4) accept the securities of any such investment
company as collateral for a loan which is for the purpose of purchasing
securities of the investment company.
(h) A bank holding company should not engage, directly or indirectly,
in the sale or distribution of securities of any investment company for
which it acts as investment adviser. Prospectuses or sales literature
should not be distributed by the holding company, nor should any such
literature be made available to the public at any offices of the holding
company. In addition, officers and employees of bank subsidiaries
should be instructed not to express any opinion with respect to
advisability of purchase of securities of any investment company for
which the bank holding company acts as investment adviser. Customers of
banks in a bank holding company system who request information on an
unsolicited basis regarding any investment company for which the bank
holding company acts as investment adviser may be furnished the name and
address of the fund and its underwriter or distributing company, but the
names of bank customers should not be furnished by the bank holding
company to the fund or its distributor. Further, a bank holding company
should not act as investment adviser to a mutual fund which has offices
in any building which is likely to be identified in the public's mind
with the bank holding company.
(i) Acting in such capacities as registrar, transfer agent, or
custodian for an investment company is not a selling activity and is
permitted under 225.4(a)(4) of Regulation Y. However, in view of
potential conflicts of interests, a bank holding company which acts both
as custodian and investment adviser for an investment company should
exercise care to maintain at a minimal level demand deposit accounts of
the investment company which are placed with a bank affiliate and should
not invest cash funds of the investment company in time deposit accounts
(including certificates of deposit) of any bank affiliate.
(37 FR 1464, Jan. 29, 1972)
12 CFR 225.126 Activities not closely related to banking.
Pursuant to section 4(c)(8) of the Bank Holding Company Act and
225.4(a) of Regulation Y, the Board of Governors has determined that the
following activities are not so closely related to banking or managing
or controlling banks as to be a proper incident thereto:
(a) Insurance premium funding -- that is, the combined sale of mutual
funds and insurance.
(b) Underwriting life insurance that is not sold in connection with a
credit transaction by a bank holding company, or a subsidiary thereof.
(c) Real estate brokerage (see 1972 Fed. Res. Bulletin 428).
(d) Land development (see 1972 Fed. Res. Bulletin 429).
(e) Real estate syndication.
(f) Management consulting (see 1972 Fed. Res. Bulletin 571).
(g) Property management (see 1972 Fed. Res. Bulletin 652).
(Reg. Y, 37 FR 20329, Sept. 29, 1972; 37 FR 21938, Oct. 17, 1972, as
amended at 54 FR 37302, Sept. 8, 1989)
12 CFR 225.127 Investment in corporations or projects designed
primarily to promote community welfare.
(a) Under 225.4(a)(7) of Regulation Y, a bank holding company may,
in accordance with the provisions of 225.4 (b), engage in ''making
equity and debt investments in corporations or projects designed
primarily to promote community welfare, such as the economic
rehabilitation and development of low-income areas.'' The Board included
that activity among those the Board has determined to be so closely
related to banking or managing or controlling banks as be a proper
incident thereto, in order to permit bank holding companies to fulfill
their civic responsibilities. As indicated hereinafter in this
interpretation, the Board intends 225.4(a)(7) to enable bank holding
companies to take an active role in the quest for solutions to the
Nation's social problems. Although the interpretation primarily focuses
on low- and moderate-income housing, it is not intended to limit
projects under 225.4(a)(7) to that area. Other investments primarily
designed to promote community welfare are considered permissable, but
have not been defined in order to provide bank holding companies
flexibility in approaching community problems. For example, bank
holding companies may utilize this flexibility to provide new and
creative approaches to the promotion of employment opportunities for
low-income persons. Bank holding companies possess a unique combination
of financial and managerial resources making them particularly suited
for a meaningful and substantial role in remedying our social ills.
Section 225.4(a)(7) is intended to provide an opportunity for them to
assume such a role.
(b) Under the authority of 225.4(a) (7), a bank holding company may
invest in community development corporations established pursuant to
Federal or State law. A bank holding company may also participate in
other civic projects, such as a municipal parking facility sponsored by
a local civic organization as a means to promote greater public use of
the community's facilities.
(c) Within the category of permissible investments under 225.4(a)(7)
are investments in projects to construct or rehabilitate multifamily
low- or moderate-income housing with respect to which a mortgage is
insured under section 221(d)(3), 221(d)(4), or 236 of the National
Housing Act (12 U.S.C. 1701) and investments in projects to construct or
rehabilitate low- or moderate-income housing which is financed or
assisted by direct loan, tax abatement, or insurance under provisions of
State or local law, similar to the aforementioned Federal programs,
provided that, with respect to all such projects the owner is, by
statute, regulation, or regulatory authority, limited as to the rate of
return on his investment in the project, as to rentals or occupancy
charges for units in the project, and in such other respects as would be
a ''limited dividend corporation'' (as defined by the Secretary of
Housing and Urban Development).
(d) Investments in other projects that may be considered to be
designed primarily to promote community welfare include but are not
limited to: (1) Projects for the construction or rehabilitation of
housing for the benefit of persons of low- or moderate-income, (2)
projects for the construction or rehabilitation of ancillary local
commercial facilities necessary to provide goods or services principally
to persons residing in low- or moderate-income housing, and (3) projects
designed explicitly to create improved job opportunities for low- or
moderate-income groups (for example, minority equity investments, on a
temporary basis, in small or medium-sized locally-controlled businesses
in low-income urban or other economically depressed areas). In the case
of de novo projects, the copy of the notice with respect to such other
projects which is to be furnished to Reserve Banks in accordance with
the provisions of 225.4(b)(1) should be accompanied by a memorandum
which demonstrates that such projects meet the objectives of
225.4(a)(7).
(e) Investments in corporations or projects organized to build or
rehabilitate high-income housing, or commercial, office, or industrial
facilities that are not designed explicitly to create improved job
opportunities for low-income persons shall be presumed not to be
designed primarily to promote community welfare, unless there is
substantial evidence to the contrary, even though to some extent the
investment may benefit the community.
(37 FR 11316, June 7, 1972; 37 FR 13336, July 7, 1972)
12 CFR 225.129 Activities closely related to banking.
Courier activities. The Board's amendment of 225.4(a), which adds
courier services to the list of closely related activities is intended
to permit holding companies to transport time critical materials of
limited intrinsic value of the types utilized by banks and bank-related
firms in performing their business activities. Such transportation
activities are of particular importance in the check clearing process of
the banking system, but are also important to the performance of other
activities, including the processing of financially-related economic
data. The authority is not intended to permit holding companies to
engage generally in the provision of transportation services.
During the course of the Board's proceedings pertaining to courier
services, objections were made that courier activities were not a proper
incident to banking because of the possibility that holding companies
would or had engaged in unfair competitive practices. The Board
believes that adherence to the following principles will eliminate or
reduce to an insignificant degree any possibility of unfair competition:
a. A holding company courier subsidiary established under section
4(c)(8) should be a separate, independent corporate entity, not merely a
servicing arm of a bank.
b. As such, the subsidiary should exist as a separate,
profit-oriented operation and should not be subsidized by the holding
company system.
c. Services performed should be explicitly priced, and shall not be
paid for indirectly, for example, on the basis of deposits maintained at
or loan arrangements with affiliated banks.
Accordingly, entry of holding companies into courier activities on
the basis of section 4(c)(8) will be conditioned as follows:
1. The courier subsidiary shall perform services on an explicit fee
basis and shall be structured as an individual profit center designed to
be operated on a profitable basis. The Board may regard operating
losses sustained over an extended period as being inconsistent with
continued authority to engage in courier activities.
2. Courier services performed on behalf of an affiliate's customer
(such as the carriage of incoming cash letters) shall be paid for by the
customer. Such payments shall not be made indirectly, for example, on
the basis of imputed earnings on deposits maintained at or of loan
arrangements with subsidiaries of the holding company. Concern has also
been expressed that bank-affiliated courier services will be utilized to
gain a competitive advantage over firms competing with other holding
company affiliates. To reduce the possibility that courier affiliates
might be so employed, the Board will impose the following third
condition:
3. The courier subsidiary shall, when requested by any bank or any
data processing firm providing financially-related data processing
services which firm competes with a banking or data processing
subsidiary of Applicant, furnish comparable service at comparable rates,
unless compliance with such request would be beyond the courier
subsidiary's practical capacity. In this regard, the courier subsidiary
should make known to the public its minimum rate schedule for services
and its general pricing policies thereto. The courier subsidiary is
also expected to maintain for a reasonable period of time (not less than
two years) each request denied with the reasons for such denial.
(38 FR 32126, Nov. 21, 1973, as amended at 40 FR 36309, Aug. 20,
1975)
12 CFR 225.130 Issuance and sale of short-term debt obligations by bank
holding companies.
For text of interpretation, see 250.221 of this chapter.
(38 FR 35231, Dec. 26, 1973)
12 CFR 225.131 Activities closely related to banking.
(a) Bank management consulting advice. The Board's amendment of
225.4(a), which adds bank management consulting advice to the list of
closely related activities, described in general terms the nature of
such activity. This interpretation is intended to explain in greater
detail certain of the terms in the amendment.
(b) It is expected that bank management consulting advice would
include, but not be limited to, advice concerning: Bank operations,
systems and procedures; computer operations and mechanization;
implementation of electronic funds transfer systems; site planning and
evaluation; bank mergers and the establishment of new branches;
operation and management of a trust department; international banking;
foreign exchange transactions; purchasing policies and practices; cost
analysis, capital adequacy and planning; auditing; accounting
procedures; tax planning; investment advice (as authorized in
225.4(a)(5)); credit policies and administration, including credit
documentation, evaluation, and debt collection; product development,
including specialized lending provisions; marketing operations,
including research, market development and advertising programs;
personnel operations, including recruiting, training, evaluation and
compensation; and security measures and procedures.
(c) In permitting bank holding companies to provide management
consulting advice to nonaffiliated ''banks'', the Board intends such
advice to be given only to an institution that both accepts deposits
that the depositor has a legal right to withdraw on demand and engages
in the business of making commercial loans. It is also intended that
such management consulting advice may be provided to the ''operations
subsidiaries'' of a bank, since such subsidiaries perform functions that
a bank is empowered to perform directly at locations at which the bank
is authorized to engage in business ( 250.141 of this chapter).
(d) Although a bank holding company providing management consulting
advice is prohibited by the regulation from owning or controlling,
directly or indirectly, any equity securities in a client bank, this
limitation does not apply to shares of a client bank acquired, directly
or indirectly, as a result of a default on a debt previously contracted.
This limitation is also inapplicable to shares of a client bank
acquired by a bank holding company, directly or indirectly, in a
fiduciary capacity: Provided, That the bank holding company or its
subsidiary does not have sole discretionary authority to vote such
shares or shares held with sole voting rights constitute not more than
five percent of the outstanding voting shares of a client bank.
(39 FR 8318, Mar. 5, 1974; 39 FR 21120, June 19, 1974)
12 CFR 225.132 Acquisition of assets.
(a) From time to time questions have arisen as to whether and under
what circumstances a bank holding company engaged in nonbank activities,
directly or indirectly through a subsidiary, pursuant to section 4(c)(8)
of the Bank Holding Company Act of 1956, as amended (12 U.S.C.
1843(c)(3)), may acquire the assets and employees of another company,
without first obtaining Board approval pursuant to section 4(c) (8) and
the Board's Regulation Y (12 CFR 225.4(b)).
(b) In determining whether Board approval is required in connection
with the acquisition of assets, it is necessary to determine (a) whether
the acquisition is made in the ordinary course of business1213 or (b)
whether it constitutes the acquisition, in whole or in part, of a going
concern. 2 214
(c) The following examples illustrate transactions where prior Board
approval will generally be required:
(1) The transaction involves the acquisition of all or substantially
all of the assets of a company, or a subsidiary, division, department or
office thereof.
(2) The transaction involves the acquisition of less than
''substantially all'' of the assets of a company, or a subsidiary,
division, department or office thereof, the operations of which are
being terminated or substantially discontinued by the seller, but such
asset acquisition is significant in relation to the size of the same
line of nonbank activity of the holding company (e.g., consumer finance
mortgage banking, data processing). For purposes of this
interpretation, an acquisition would generally be presumed to be
significant if the book value of the nonbank assets being acquired
exceeds 20 percent of the book value of the nonbank assets of the
holding company or nonbank subsidiary comprising the same line of
activity.
(3) The transaction involves the acquisition of assets for resale and
the sale of such assets is not a normal business activity of the
acquiring holding company.
(4) The transaction involves the acquisition of the assets of a
company, or a subsidiary, division, department or office thereof, and a
major purpose of the transaction is to hire some of the seller's
principal employees who are expert, skilled and experienced in the
business of the company being acquired.
(d) In some cases it may be difficult, due to the wide variety of
circumstances involving possible acquisition of assets, to determine
whether such acquisitions require prior Board approval. Bank holding
companies are encouraged to contact their local Reserve Bank for
guidance where doubt exists as to whether such an acquisition is in the
ordinary course of business or an acquisition, in whole or in part, of a
going concern.
(39 FR 35128, Sept. 30, 1974)
2131Section 225.4(c)(3) of the Board's Regulation Y (12 CFR
225.4(c)(3)) generally prohibits a bank holding company or its
subsidiary engaged in activities pursuant to authority of section
4(c)(8) of the Act from being a party to any merger ''or acquisition of
assets other than in the ordinary course of business'' without prior
Board approval.
2142In accordance with the provisions of section 4(c)(8) of the Act
and 225.4(b) of Regulation Y, the acquisition of a going concern
requires prior Board approval.
12 CFR 225.133 Computation of amount invested in foreign corporations
under general consent procedures.
For text of this interpretation, see 211.111 of this subchapter.
(40 FR 43199, Sept. 19, 1975)
12 CFR 225.134 Escrow arrangements involving bank stock resulting in a
violation of the Bank Holding Company Act.
(a) In connection with a recent application to become a bank holding
company, the Board considered a situation in which shares of a bank were
acquired and then placed in escrow by the applicant prior to the Board's
approval of the application. The facts indicated that the applicant
company had incurred debt for the purpose of acquiring bank shares and
immediately after the purchase the shares were transferred to an
unaffiliated escrow agent with instructions to retain possession of the
shares pending Board action on the company's application to become a
bank holding company. The escrow agreement provided that, if the
application were approved by the Board, the escrow agent was to return
the shares to the applicant company; and, if the application were
denied, the escrow agent was to deliver the shares to the applicant
company's shareholders upon their assumption of debt originally incurred
by the applicant in the acquisition of the bank shares. In addition,
the escrow agreement provided that, while the shares were held in
escrow, the applicant could not exercise voting or any other ownership
rights with respect to those shares.
(b) On the basis of the above facts, the Board concluded that the
company had violated the prior approval provisions of section 3 of the
Bank Holding Company Act (''Act'') at the time that it made the initial
acquisition of bank shares and that, for purposes of the Act, the
company continued to control those shares in violation of the Act. In
view of these findings, individuals and bank holding companies should
not enter into escrow arrangements of the type described herein, or any
similar arrangement, without securing the prior approval of the Board,
since such action could constitute a violation of the Act.
(c) While the above represents the Board's conclusion with respect to
the particular escrow arrangement involved in the proposal presented,
the Board does not believe that the use of an escrow arrangement would
always result in a violation of the Act. For example, it appears that a
transaction whereby bank shares are placed in escrow pending Board
action on an application would not involve a violation of the Act so
long as title to such shares remains with the seller during the pendency
of the application; there are no other indicia that the applicant
controls the shares held in escrow; and, in the event of a Board denial
of the application, the escrow agreement provides that the shares would
be returned to the seller.
(41 FR 9859, Mar. 8, 1976. Correctly designated at 41 FR 12009, Mar.
23, 1976)
12 CFR 225.136 Utilization of foreign subsidiaries to sell long-term
debt obligations in foreign markets and to transfer the proceeds to
their United States parent(s) for domestic purposes.
For text of this interpretation, see 211.112 of this subchapter.
(42 FR 752, Jan. 4, 1977)
12 CFR 225.137 Acquisitions of shares pursuant to section 4(c)(6) of
the Bank Holding Company Act.
(a) The Board has received a request for an interpretation of section
4(c)(6) of the Bank Holding Company Act (''Act'')1 in connection with a
proposal under which a number of bank holding companies would purchase
interests in an insurance company to be formed for the purpose of
underwriting or reinsuring credit life and credit accident and health
insurance sold in connection with extensions of credit by the
stockholder bank holding companies and their affiliates.
(b) Each participating holding company would own no more than 5
percent of the outstanding voting shares of the company. However, the
investment of each holding company would be represented by a separate
class of voting security, so that each stockholder would own 100 percent
of its respective class. The participating companies would execute a
formal ''Agreement Among Stockholders'' under which each would agree to
use its best efforts at all times to direct or recommend to customers
and clients the placement of their life, accident and health insurance
directly or indirectly with the company. Such credit-related insurance
placed with the company would be identified in the records of the
company as having been originated by the respective stockholder. A
separate capital account would be maintained for each stockholder
consisting of the original capital contribution increased or decreased
from time to time by the net profit or loss resulting from the insurance
business attributable to each stockholder. Thus, each stockholder would
receive a return on its investment based upon the claims experience and
profitability of the insurance business that it had itself generated.
Dividends declared by the board of directors of the company would be
payable to each stockholder only out of the earned surplus reflected in
the respective stockholder's capital account.
(c) It has been requested that the Board issue an interpretation that
section 4(c)(6) of the Act provides an exemption under which
participating bank holding companies may acquire such interests in the
company without prior approval of the Board.
(d) On the basis of a careful review of the documents submitted, in
light of the purposes and provisions of the Act, the Board has concluded
that section 4(c)(6) of the Act is inapplicable to this proposal and
that a bank holding company must obtain the approval of the Board before
participating in such a proposal in the manner described. The Board's
conclusion is based upon the following considerations:
(1) Section 2(a)(2)(A) of the Act provides that a company is deemed
to have control over a second company if it owns or controls ''25 per
centum or more of any class of voting securities'' of the second
company. In the case presented, the stock interest of each participant
would be evidenced by a different class of stock and each would
accordingly, own 100 percent of a class of voting securities of the
company. Thus, each of the stockholders would be deemed to ''control''
the company and prior Board approval would be required for each
stockholder's acquisition of stock in the company.
The Board believes that this application of section 2(a)(2)(A) of the
Act is particularly appropriate on the facts presented here. The
company is, in practical effect, a conglomeration of separate business
ventures each owned 100 percent by a stockholder the value of whose
economic interest in the company is determined by reference to the
profits and losses attributable to its respective class of stock.
Furthermore, it is the Board's opinion that this application of section
2(a)(2)(A) is not inconsistent with section 4(c)(6). Even assuming that
section (4)(c)(6) is intended to refer to all outstanding voting shares,
and not merely the outstanding shares of a particular class of
securities, section 4(c)(6) must be viewed as permitting ownership of 5
percent of a company's voting stock only when that ownership does not
constitute ''control'' as otherwise defined in the Act. For example, it
is entirely possible that a company could exercise a controlling
influence over the management and policies of a second company, and thus
''control'' that company under the Act's definitions, even though it
held less than 5 percent of the voting stock of the second company. To
view section 4(c)(6) as an unqualified exemption for holdings of less
than 5 percent would thus create a serious gap in the coverage of the
Act.
(2) The Board believes that section 4(c)(6) should properly be
interpreted as creating an exemption from the general prohibitions in
section 4 on ownership of stock in nonbank companies only for passive
investments amounting to not more than 5 percent of a company's
outstanding stock, and that the exemption was not intended to allow a
group of holding companies, through concerted action, to engage in an
activity as entrepreneurs. Section 4 of the Act, of course, prohibits
not only owning stock in nonbank companies, but engaging in activities
other than banking or those activities permitted by the Board under
section 4(c)(8) as being closely related to banking. Thus, if a holding
company may be deemed to be engaging in an activity through the medium
of a company in which it owns less than 5 percent of the voting stock it
may nevertheless require Board approval, despite the section 4(c)(6)
exemption.
(e) To accept the argument that section 4(c)(6) is an unqualified
grant of permission to a bank holding company to own 5 percent of the
shares of any nonbanking company irrespective of the nature or extent of
the holding company's participation in the affairs of the nonbanking
company would, in the Board's view, create the potential for serious and
widespread evasion of the Act's controls over nonbanking activities.
Such a construction would allow a group of 20 bank holding companies --
or even a single bank holding company and one or more nonbank companies
-- to engage in entrepreneurial joint ventures in businesses prohibited
to bank holding companies, a result the Board believes to be contrary to
the intent of Congress.
(f) In this proposal, each of the participating stockholders must be
viewed as engaging in the business of insurance underwriting. Each
stockholder would agree to channel to the company the insurance business
it generates, and the value of the interest of each stockholder would be
determined by reference to the profitability of the business generated
by that stockholder itself. There is no sharing or pooling among
stockholders of underwriting risks assumed by the company, and profit or
loss from investments is allocated on the basis of each bank holding
company's allocable underwriting profit or loss. The interest of each
stockholder is thus clearly that of an entrepreneur rather than that of
an investor.
(g) Accordingly, on the basis of the factual situation before the
Board, and for the reasons summarized above, the Board has concluded
that section 4(c)(6) of the Act cannot be interpreted to exempt the
ownership of 5 percent of the voting stock of a company under the
circumstances described, and that a bank holding company wishing to
become a stockholder in a company under this proposal would be required
to obtain the Board's approval to do so.
(42 FR 1263, Jan. 6, 1977; 42 FR 2951, Jan. 14, 1977)
1It should be noted that every Board Order granting approval under
section 4(c)(8) of the Act contains the following paragraph:
''This determination is subject . . . to the Board's authority to
require such modification or termination of the activities of a holding
company or any of its subsidiaries as the Board finds necessary to
assure compliance with the provisions and purposes of the Act and the
Board's regulations and orders issued thereunder, or to prevent evasion
thereof.''
The Board believes that, even apart from this Interpretation, this
language preserves the authority of the Board to require the revisions
contemplated in this Interpretation.
12 CFR 225.138 Statement of policy concerning divestitures by bank
holding companies.
(a) From time to time the Board of Governors receives requests from
companies subject to the Bank Holding Company Act, or other laws
administered by the Board, to extend time periods specified either by
statute or by Board order for the divestiture of assets held or
activities engaged in by such companies. Such divestiture requirements
may arise in a number of ways. For example, divestiture may be ordered
by the Board in connection with an acquisition found to have been made
in violation of law. In other cases the divestiture may be pursuant to
a statutory requirement imposed at the time and amendment to the Act was
adopted, or it may be required as a result of a foreclosure upon
collateral held by the company or a bank subsidiary in connection with a
debt previously contracted in good faith. Certain divestiture periods
may be extended in the discretion of the Board, but in other cases the
Board may be without statutory authority, or may have only limited
authority, to extend a specified divestiture period.
(b) In the past, divestitures have taken many different forms, and
the Board has followed a variety of procedures in enforcing divestiture
requirements. Because divestitures may occur under widely disparate
factual circumstances, and because such forced dispositions may have the
potential for causing a serious adverse economic impact upon the
divesting company, the Board believes it is important to maintain a
large measure of flexibility in dealing with divestitures. For these
reasons, there can be no fixed rule as to the type of divestiture that
will be appropriate in all situations. For example, where divestiture
has been ordered to terminate a control relationship created or
maintained in violation of the Act, it may be necessary to impose
conditions that will assure that the unlawful relationship has been
fully terminated and that it will not arise in the future. In other
circumstances, however, less stringent conditions may be appropriate.
(1) Avoidance of delays in divestitures. Where a specific time
period has been fixed for accomplishing divestiture, the affected
company should endeavor and should be encouraged to complete the
divestiture as early as possible during the specific period. There will
generally be substantial advantages to divesting companies in taking
steps to plan for and accomplish divestitures well before the end of the
divestiture period. For example, delays may impair the ability of the
company to realize full value for the divested assets, for as the end of
the divestiture period approaches the ''forced sale'' aspect of the
divestiture may lead potential buyers to withhold firm offers and to
bargain for lower prices. In addition, because some prospective
purchasers may themselves require regulatory approval to acquire the
divested property, delay by the divesting company may -- by leaving
insufficient time to obtain such approvals -- have the effect of
narrowing the range of prospective purchases. Thus, delay in planning
for divestiture may increase the likelihood that the company will seek
an extension of the time for divestiture if difficulty is encountered in
securing a purchaser, and in certain situations, of course, the Board
may be without statutory authority to grant extensions.
(2) Submissions and approval of divestiture plans. When a
divestiture requirement is imposed, the company affected should
generally be asked to submit a divestiture plan promptly for review and
approval by the Reserve Bank or the Board. Such a requirement may be
imposed pursuant to the Board's authority under section 5(b) of the Bank
Holding Company Act to issue such orders as may be necessary to enable
the Board to administer and carry out the purposes of the Act and
prevent evasions thereof. A divestiture plan should be as specific as
possible, and should indicate the manner in which divestiture will be
accomplished -- for example, by a bulk sale of the assets to a third
party, by ''spinoff'' or distribution of shares to the shareholders of
the divesting company, or by termination of prohibited activities. In
addition, the plan should specify the steps the company expects to take
in effecting the divestiture and assuring its completeness, and should
indicate the time schedule for taking such steps. In appropriate
circumstances, the divestiture plan should make provision for assuring
that ''controlling influence'' relationships, such as management or
financial interlocks, will not continue to exist.
(3) Periodic progress reports. A company subject to a divestiture
requirement should generally be required to submit regular periodic
reports detailing the steps it has taken to effect divestiture. Such a
requirement may be imposed pursuant to the Board's authority under
section 5(b) of the Bank Holding Company Act, referred to above, as well
as its authority under section 5(c) of the Act to require reports for
the purpose of keeping the Board informed as to whether the Act and
Board regulations and order thereunder are being complied with. Reports
should set forth in detail such matters as the identities of potential
buyers who have been approached by the company, the dates of discussions
with potential buyers and the identities of the individuals involved in
such discussions, the terms of any offers received, and the reasons for
rejecting any offers. In addition, the reports should indicate whether
the company has employed brokers, investment bankers or others to assist
in the divestiture, or its reasons for not doing so, and should describe
other efforts by the company to seek out possible purchasers. The
purpose of requiring such reports is to insure that substantial and good
faith efforts being made by the company to satisfy its divestiture
obligations. The frequency of such reports may vary depending upon the
nature of the divestiture and the period specified for divestiture.
However, such reports should generally not be required less frequently
than every three months, and may in appropriate cases be required on a
monthly or even more frequent basis. Progress reports as well as
divestiture plans should be afforded confidential treatment.
(4) Extensions of divestiture periods. Certain divestiture periods
-- such as December 31, 1980 deadline for divestitures required by the
1970 Amendments to the Bank Holding Company Act -- are not extendable.
In such cases it is imperative that divestiture be accomplished in a
timely manner. In certain other cases, the Board may have discretion to
extend a statutorily prescribed divestiture period within specified
limits. For example, under section 4(c)(2) of the Act the Board may
extend for three one-year periods the two-year period in which a bank
subsidiary of a holding company is otherwise required to divest shares
acquired in satisfaction of a debt previously contracted in good faith.
In such cases, however, when the permissible extensions expire the Board
no longer has discretion to grant further extensions. In still other
cases, where a divestiture period is prescribed by the Board, in the
exercise of its regulatory judgment, the Board may have broader
discretion to grant extensions. Where extensions of specified
divestiture periods are permitted by law, extensions should not be
granted except under compelling circumstances. Neither unfavorable
market conditions, nor the possibility that the company may incur some
loss, should alone be viewed as constituting such circumstances --
particularly if the company has failed to take earlier steps to
accomplish a divestiture under more favorable circumstances. Normally,
a request for an extension will not be considered unless the company has
established that it has made substantial and continued good faith
efforts to accomplish the divestiture within the prescribed period.
Furthermore, requests for extensions of divestiture periods must be made
sufficiently in advance of the expiration of the prescribed period both
to enable the Board to consider the request in an orderly manner and to
enable the company to effect a timely divestiture in the event the
request for extension is denied. Companies subject to divestiture
requirements should be aware that a failure to accomplish a divestiture
within the prescribed period may in and of itself be viewed as a
separate violation of the Act.
(5) Use of trustees. In appropriate cases a company subject to a
divestiture requirement may be required to place the assets subject to
divestiture with an independent trustee under instructions to accomplish
a sale by a specified date, by public auction if necessary. Such a
trustee may be given the responsibility for exercising the voting rights
with respect to shares being divested. The use of such a trustee may be
particularly appropriate where the divestiture is intended to terminate
a control relationship established or maintained in violation of law, or
where the divesting company has demonstrated an inability or
unwillingness to take timely steps to effect a divestiture.
(6) Presumptions of control. Bank holding companies contemplating a
divestiture should be mindful of section 2(g)(3) of the Bank Holding
Company Act, which creates a presumption of continued control over the
transferred assets where the transferee is indebted to the transferor,
or where certain interlocks exist, as well as 225.2 of Regulation Y,
which sets forth certain additional control presumptions. Where one of
these presumptions has arisen with respect to divested assets, the
divestiture will not be considered as complete until the presumption has
been overcome. It should be understood that the inquiry into the
termination of control relationships is not limited by the statutory and
regulatory presumptions of control, and that the Board may conclude that
a control relationship still exists even though the presumptions do not
apply.
(7) Role of the Reserve Banks. The Reserve Banks have a
responsibility for supervising and enforcing divestitures.
Specifically, in coordination with Board staff they should review
divestiture plans to assure that proposed divestitures will result in
the termination of control relationships and will not create unsafe or
unsound conditions in any bank or bank holding company; they should
monitor periodic progress reports to assure that timely steps are being
taken to effect divestitures; and they should prompt companies to take
such steps when it appears that progress is not being made. Where
Reserve Banks have delegated authority to extend divestiture periods,
that authority should be exercised consistently with this policy
statement.
(42 FR 10969, Feb. 25, 1977)
12 CFR 225.139 Presumption of continued control under section 2(g)(3)
of the Bank Holding Company Act.
(a) Section 2(g)(3) of the Bank Holding Company Act (the ''Act'')
establishes a statutory presumption that where certain specified
relationships exist between a transferor and transferee of shares, the
transferor (if it is a bank holding company, or a company that would be
such but for the transfer) continues to own or control indirectly the
transferred shares. 1 This presumption arises by operation of law, as of
the date of the transfer, without the need for any order or
determination by the Board. Operation of the presumption may be
terminated only by the issuance of a Board determination, after
opportunity for hearing, ''that the transferor is not in fact capable of
controlling the transferee.''2
(b) The purpose of section 2(g)(3) is to provide the Board an
opportunity to assess the effectiveness of divestitures in certain
situations in which there may be a risk that the divestiture will not
result in the complete termination of a control relationship. By
presuming control to continue as a matter of law, section 2(g)(3)
operates to allow the effectiveness of the divestiture to be assessed
before the divesting company is permitted to act on the assumption that
the divestiture is complete. Thus, for example, if a holding company
divests its banking interest under circumstances where the presumption
of continued control arises, the divesting company must continue to
consider itself bound by the Act until an appropriate order is entered
by the Board dispelling the presumption. Section 2(g)(3) does not
establish a substantive rule that invalidates transfers to which it
applies, and in a great many cases the Board has acted favorably on
applications to have the presumption dispelled. It merely provides a
procedural opportunity for Board consideration of the effect of such
transfers in advance of their being deemed effective. Whether or not
the statutory presumption arises, the substantive test for assessing the
effectiveness of a divestiture is the same -- that is, the Board must be
assured that all control relationships between the transferor and the
transferred property have been terminated and will not be
reestablished.3
(c) In the course of administering section 2(g)(3) the Board has had
several occasions to consider the scope of that section. In addition,
questions have been raised by and with the Board's staff as to coverage
of the section. Accordingly, the Board believes it would be useful to
set forth the following interpretations of section 2(g)(3):
(1) The terms transferor and transferee, as used in section 2(g)(3),
include parents and subsidiaries of each. Thus, for example, where a
transferee is indebted to a subsidiary of the transferor, or where a
specified interlocking relationship exists between the transferor or
transferee and a subsidiary of the other (or between subsidiaries of
each), the presumption arises. Similarly, if a parent of the transferee
is indebted to a parent of the transferor, the presumption arises. The
presumption of continued control also arises where an interlock or debt
relationship is retained between the divesting company and the company
being divested, since the divested company will be or may be viewed as a
subsidiary of the transferee or group of transferees.
(2) The terms officers, directors, and trustees, as used in section
2(g)(3), include persons performing functions normally associated with
such positions (including general partners in a partnership and limited
partners having a right to participate in the management of the affairs
of the partnership) as well as persons holding such positions in an
advisory or honorary capacity. The presumption arises not only where
the transferee or transferred company has an officer, director or
trustee in common with the transferor, but where the transferee himself
holds such a position with the transferor. 4 It should be noted that
where a transfer takes the form of a pro-rata distribution, or spin-off,
of shares to a company's shareholders, officers and directors of the
transferor company are likely to receive a portion of such shares. The
presumption of continued control would, of course, attach to any shares
transferred to officers and directors of the divesting company, whether
by spinoff or outright sale. However, the presumption will be of legal
significance -- and will thus require an application under section
2(g)(3) -- only where the total number of shares subject to the
presumption exceeds one of the applicable thresholds in the Act. For
example, where officers and directors of a one-bank holding company
receive in the aggregate 25 percent or more of the stock of a bank
subsidiary being divested by the holding company, the holding company
would be presumed to continue to control the divested bank. In such a
case it would be necessary for the divesting company to demonstrate that
it no longer controls either the divested bank or the officer/director
transferees. However, if officers and directors were to receive in the
aggregate less than 25 percent of the bank's stock (and no other shares
were subject to the presumption), section 2(g)(3) would not have the
legal effect of presuming continued control of the bank. 5 In the case
of a divestiture of nonbank shares, an application under section 2(g)(3)
would be required whenever officers and directors of the divesting
company received in the aggregate more than 5 percent of the shares of
the company being divested.
(3) Although section 2(g)(3) refers to transfers of shares it is not,
in the Board's view, limited to disposition of corporate stock. General
or limited partnership interests, for example, are included within the
term shares. Furthermore, the transfer of all or substantially all of
the assets of a company, or the transfer of such a significant volume of
assets that the transfer may in effect constitute the disposition of a
separate activity of the company, is deemed by the Board to involve a
transfer of shares of that company.
(4) The term indebtedness giving rise to the presumption of continued
control under section 2(g)(3) of the Act is not limited to debt incurred
in connection with the transfer; it includes any debt outstanding at
the time of transfer from the transferee to the transferor or its
subsidiaries. However, the Board believes that not every kind of
indebtedness was within the contemplation of the Congress when section
2(g)(3) was adopted. Routine business credit of limited amounts and
loans for personal or household purposes are generally not the kinds of
indebtedness that, standing alone, support a presumption that the
creditor is able to control the debtor. Accordingly, the Board does not
regard the presumption of section 2(g)(3) as applicable to the following
categories of credit, provided the extensions of credit are not secured
by the transferred property and are made in the ordinary course of
business of the transferor (or its subsidiary) that is regularly engaged
in the business of extending credit:
(i) Consumer credit extended for personal or household use to an
individual transferee; (ii) student loans made for the education of the
individual transferee or a spouse or child of the transferee; (iii) a
home mortgage loan made to an individual transferee for the purchase of
a residence for the individual's personal use and secured by the
residence; and (iv) loans made to companies (as defined in section 2(b)
of the Act) in an aggregate amount not exceeding ten per cent of the
total purchase price (or if not sold, the fair market value) of the
transferred property. The amounts and terms of the preceding categories
of credit should not differ substantially from similar credit extended
in comparable circumstances to others who are not transferees. It
should be understood that, while the statutory presumption in situations
involving these categories of credit may not apply, the Board is not
precluded in any case from examining the facts of a particular transfer
and finding that the divestiture of control was ineffective based on the
facts of record.
(d) Section 2(g)(3) provides that a Board determination that a
transferor is not in fact capable of controlling a transferee shall be
made after opportunity for hearing. It has been the Board's routine
practice since 1966 to publish notice in the Federal Register of
applications filed under section 2(g)(3) and to offer interested parties
an opportunity for a hearing. Virtually without exception no comments
have been submitted on such applications by parties other than the
applicant and, with the exception of one case in which the request was
later withdrawn, no hearings have been requested in such cases. Because
the Board believes that the hearing provision in section 2(g)(3) was
intended as a protection for applicants who are seeking to have the
presumption overcome by a Board order, a hearing would not be of use
where an application is to be granted. In light of the experience
indicating that the publication of Federal Register notice of such
applications has not served a useful purpose, the Board has decided to
alter its procedures in such cases. In the future, Federal Register
notice of section 2(g)(3) applications will be published only in cases
in which the Board's General Counsel, acting under delegated authority,
has determined not to grant such an application and has referred the
matter to the Board for decision. 6
(12 U.S.C. 1841, 1844)
(43 FR 6214, Feb. 14, 1978; 43 FR 15147, Apr. 11, 1978; 43 FR
15321, Apr. 12, 1978, as amended at 45 FR 8280, Feb. 7, 1980; 45 FR
11125, Feb. 20, 1980)
1The presumption arises where the transferee ''is indebted to the
transferor, or has one or more officers, directors, trustees, or
beneficiaries in common with or subject to control by the transferor.''
2The Board has delegated to its General Counsel the authority to
issue such determinations, 12 CFR 265.2(b)(1).
3It should be noted, however, that the Board will require termination
of any interlocking management relationships between the divesting
company and the transferee or the divested company as a precondition of
finding that a divestiture is complete. Similarly, the retention of an
economic interest in the divested company that would create an incentive
for the divesting company to attempt to influence the management of the
divested company will preclude a finding that the divestiture is
complete. (See the Board's Order in the matter of ''International
Bank'', 1977 Federal Reserve Bulletin 1106, 1113.)
4It has been suggested that the words in common with in section
2(g)(3) evidence an intent to make the presumption applicable only where
the transferee is a company having an interlock with the transferor.
Such an interpretation would, in the Board's view, create an unwarranted
gap in the coverage of section 2(g)(3). Furthermore, because the
presumption clearly arises where the transferee is an individual who is
indebted to the transferor such an interpretation would result in an
illogical internal inconsistency in the statute.
5Of course, the fact that section 2(g)(3) would not operate to
presume continued control would not necessarily mean that control had in
fact been terminated if control could be exercised through other means.
6It should be noted that in the event a third party should take
exception to a Board order under section 2(g)(3) finding that control
has been terminated, any rights such party might have would not be
prejudiced by the order. If such party brought facts to the Board's
attention indicating that control had not been terminated the Board
would have ample authority to revoke its order and take necessary
remedial action.
Orders issued under section 2(g)(3) are published in the Federal
Reserve ''Bulletin.''
12 CFR 225.140 Disposition of property acquired in satisfaction of
debts previously contracted.
(a) The Board recently considered the permissibility, under section 4
of the Bank Holding Company Act, of a subsidiary of a bank holding
company acquiring and holding assets acquired in satisfaction of a debt
previously contracted in good faith (a ''dpc'' acquisition). In the
situation presented, a lending subsidiary of a bank holding company made
a ''dpc'' acquisition of assets and transferred them to a wholly-owned
subsidiary of the bank holding company for the purpose of effecting an
orderly divestiture. The question presented was whether such ''dpc''
assets could be held indefinitely by a bank holding company subsidiary
as incidental to its permissible lending activity.
(b) While the Board believes that ''dpc'' acquisitions may be
regarded as normal, necessary and incidental to the business of lending,
the Board does not believe that the holding of assets acquired ''dpc''
without any time restrictions is appropriate from the standpoint of
prudent banking and in light of the prohibitions in section 4 of the Act
against engaging in nonbank activities. If a nonbanking subsidiary of a
bank holding company were permitted, either directly or through a
subsidiary, to hold ''dpc'' assets of substantial amount over an
extended period of time, the holding of such property could result in an
unsafe or unsound banking practice or in the holding company engaging in
an impermissible activity in connection with the assets, rather than
liquidating them.
(c) The Board notes that section 4(c)(2) of the Bank Holding Company
Act provides an exemption from the prohibitions of section 4 of the Act
for bank holding company subsidiaries to acquire shares ''dpc''. It
also provides that such ''dpc'' shares may be held for a period of two
years, subject to the Board's authority to grant three one-year
extensions up to a maximum of five years. 1 Viewed in light of the
Congressional policy evidenced by section 4(c)(2), the Board believes
that a lending subsidiary of a bank holding company or the holding
company itself, should be permitted, as an incident to permissible
lending activities, to make acquisitions of ''dpc'' assets. Consistent
with the principles underlying the provisions of section 4(c)(2) of the
Act and as a matter of prudent banking practice, such assets may be held
for no longer than five years from the date of acquisition. Within the
divestiture period it is expected that the company will make good faith
efforts to dispose of ''dpc'' shares or assets at the earliest
practicable date. While no specific authorization is necessary to hold
such assets for the five-year period, after two years from the date of
acquisition of such assets, the holding company should report annually
on its efforts to accomplish divestiture to its Reserve Bank. The
Reserve Bank will monitor the efforts of the company to effect an
orderly divestiture, and may order divestiture before the end of the
five-year period if supervisory concerns warrant such action.
(d) The Board recognizes that there are instances where a company may
encounter particular difficulty in attempting to effect an orderly
divestiture of ''dpc'' real estate holdings within the divestiture
period, notwithstanding its persistent good faith efforts to dispose of
such property. In the Depository Institutions Deregulation and Monetary
Control Act of 1980, (Pub. L. 96-221) Congress, recognizing that real
estate possesses unusual characteristics, amended the National Banking
Act to permit national banks to hold real estate for five years and for
an additional five-year period subject to certain conditions.
Consistent with the policy underlying the recent Congressional
enactment, and as a matter of supervisory policy, a bank holding company
may be permitted to hold real estate acquired ''dpc'' beyond the initial
five-year period provided that the value of the real estate on the books
of the company has been written down to fair market value, the carrying
costs are not significant in relation to the overall financial position
of the company, and the company has made good faith efforts to effect
divestiture. Companies holding real estate for this extended period are
expected to make active efforts to dispose of it, and should keep the
Reserve Bank advised on a regular basis concerning their ongoing
efforts. Fair market value should be derived from appraisals,
comparable sales or some other reasonable method. In any case, ''dpc''
real estate would not be permitted to be held beyond 10 years from the
date of its acquisition.
(e) With respect to the transfer by a subsidiary of other ''dpc''
shares or assets to another company in the holding company system,
including a section 4(c)(1)(D) liquidating subsidiary, or to the holding
company itself, such transfers would not alter the original divestiture
period applicable to such shares or assets at the time of their
acquisition. Moreover, to ensure that assets are not carried at
inflated values for extended periods of time, the Board expects, in the
case of all such intracompany transfers, that the shares or assets will
be transferred at a value no greater than the fair market value at the
time of transfer and that the transfer will be made in a normal
arms-length transaction.
(f) With regard to ''dpc'' assets acquired by a banking subsidiary of
a holding company, so long as the assets continue to be held by the bank
itself, the Board will regard them as being solely within the regulatory
authority of the primary supervisor of the bank.
(12 U.S.C. 1843 (c)(1)(d), (c)(2), (c)(8), and 1844 (b); 12 U.S.C.
1818)
(45 FR 49905, July 28, 1980)
1The Board notes that where the dpc shares or other similar interests
represent less than 5 percent of the total of such interests
outstanding, they may be retained on the basis of section 4(c)(6), even
if originally acquired dpc.
12 CFR 225.141 Operations subsidiaries of a bank holding company.
In orders approving the retention by a bank holding company of a
4(c)(8) subsidiary, the Board has stated that it would permit, without
any specific regulatory approval, the formation of a wholly owned
subsidiary of an approved 4(c)(8) company to engage in activities that
such a company could itself engage in directly through a division or
department. (Northwestern Financial Corporation, 65 Federal Reserve
Bulletin 566 (1979).) Section 4(a)(2) of the Act provides generally that
a bank holding company may engage directly in the business of managing
and controlling banks and permissible nonbank activities, and in
furnishing services directly to its subsidiaries. Even though section 4
of the Act generally prohibits the acquisition of shares of nonbanking
organizations, the Board does not believe that such prohibition should
apply to the formation by a holding company of a wholly-owned subsidiary
to engage in activities that it could engage in directly. Accordingly,
as a general matter, the Board will permit without any regulatory
approval a bank holding company to form a wholly-owned subsidiary to
perform servicing activities for subsidiaries that the holding company
itself could perform directly or through a department or a division
under section 4(a)(2) of the Act. The Board believes that permitting
this type of subsidiary is not inconsistent with the nonbanking
prohibitions of section 4 of the Act, and is consistent with the
authority in section 4(c)(1)(C) of the Act, which permits a bank holding
company, without regulatory approval, to form a subsidiary to perform
services for its banking subsidiaries. The Board notes, however, that a
servicing subsidiary established by a bank holding company in reliance
on this interpretation will be an affiliate of the subsidiary bank of
the holding company for the purposes of the lending restrictions of
section 23A of the Federal Reserve Act. (12 U.S.C. 371c)
(12 U.S.C. 1843(a)(2) and 1844(b))
(45 FR 54326, July 15, 1980)
12 CFR 225.142 Statement of policy concerning bank holding companies
engaging in futures, forward and options contracts on U.S. Government
and agency securities and money market instruments.
(a) Purpose of financial contract positions. In supervising the
activities of bank holding companies, the Board has adopted and
continues to follow the principle that bank holding companies should
serve as a source of strength for their subsidiary banks. Accordingly,
the Board believes that any positions that bank holding companies or
their nonbank subsidiaries take in financial contracts should reduce
risk exposure, that is, not be speculative.
(b) Establishment of prudent written policies, appropriate
limitations and internal controls and audit programs. If the parent
organization or nonbank subsidiary is taking or intends to take
positions in financial contracts, that company's board of directors
should approve prudent written policies and establish appropriate
limitations to insure that financial contract activities are performed
in a safe and sound manner with levels of activity reasonably related to
the organization's business needs and capacity to fulfill obligations.
In addition, internal controls and internal audit programs to monitor
such activity should be established. The board of directors, a duly
authorized committee thereof or the internal auditors should review
periodically (at least monthly) all financial contract positions to
insure conformity with such policies and limits. In order to determine
the company's exposure, all open positions should be reviewed and market
values determined at least monthly, or more often, depending on volume
and magnitude of positions.
(c) Formulating policies and recording financial contracts. In
formulating its policies and procedures, the parent holding company may
consider the interest rate exposure of its nonbank subsidiaries, but not
that of its bank subsidiaries. As a matter of policy, the Board
believes that any financial contracts executed to reduce the interest
rate exposure of a bank affiliate of a holding company should be
reflected on the books and records of the bank affiliate (to the extent
required by the bank policy statements), rather than on the books and
records of the parent company. If a bank has an interest rate exposure
that management believes requires hedging with financial contracts, the
bank should be the direct beneficiary of any effort to reduce that
exposure. The Board also believes that final responsibility for
financial contract transactions for the account of each affiliated bank
should reside with the management of that bank.
(d) Accounting. The joint bank policy statements of March 12, 1980
include accounting guidelines for banks that engage in financial
contract activities. Since the Financial Accounting Standards Board is
presently considering accounting standards for contract activities, no
specific accounting requirements for financial contracts entered into by
parent bank holding companies and nonbank subsidiaries are being
mandated at this time. The Board expects to review further developments
in this area.
(e) Board to monitor bank holding company transactions in financial
contracts. The Board intends to monitor closely bank holding company
transactions in financial contracts to ensure that any such activity is
consistent with maintaining a safe and sound banking system. In any
cases where bank holding companies are found to be engaging in
speculative practices, the Board is prepared to institute appropriate
action under the Financial Institutions Supervisory Act of 1966, as
amended.
(f) Federal Reserve Bank notification. Bank holding companies should
furnish written notification to their District Federal Reserve Bank
within 10 days after financial contract activities are begun by the
parent or a nonbank subsidiary. Holding companies in which the parent
or a nonbank subsidiary currently engage in financial contract activity
should furnish notice by March 31, 1983.
(Secs. 5(b) and 8 of the Bank Holding Company Act (12 U.S.C. 1844 and
1847); sec. 8(b) of the Financial Institutions Supervisory Act (12
U.S.C. 1818(b))
(48 FR 7720, Feb. 24, 1983)
12 CFR 225.143 Policy statement on nonvoting equity investments by bank
holding companies.
(a) Introduction. (1) In recent months, a number of bank holding
companies have made substantial equity investments in a bank or bank
holding company (the ''acquiree'') located in states other than the home
state of the investing company through acquisition of preferred stock or
nonvoting common shares of the acquiree. Because of the evident
interest in these types of investments and because they raise
substantial questions under the Bank Holding Company Act (the ''Act''),
the Board believes it is appropriate to provide guidance regarding the
consistency of such arrangements with the Act.
(2) This statement sets out the Board's concerns with these
investments, the considerations the Board will take into account in
determining whether the investments are consistent with the Act, and the
general scope of arrangements to be avoided by bank holding companies.
The Board recognizes that the complexity of legitimate business
arrangements precludes rigid rules designed to cover all situations and
that decisions regarding the existence or absence of control in any
particular case must take into account the effect of the combination of
provisions and covenants in the agreement as a whole and the particular
facts and circumstances of each case. Nevertheless, the Board believes
that the factors outlined in this statement provide a framework for
guiding bank holding companies in complying with the requirements of the
Act.
(b) Statutory and regulatory provisions. (1) Under section 3(a) of
the Act, a bank holding company may not acquire direct or indirect
ownership or control of more than 5 per cent of the voting shares of a
bank without the Board's prior approval. (12 U.S.C. 1842(a)(3)). In
addition, this section of the Act provides that a bank holding company
may not, without the Board's prior approval, acquire control of a bank:
That is, in the words of the statute, ''for any action to be taken that
causes a bank to become a subsidiary of a bank holding company.'' (12
U.S.C. 1842(a)(2)). Under the Act, a bank is a subsidiary of a bank
holding company if:
(i) The company directly or indirectly owns, controls, or holds with
power to vote 25 per cent or more of the voting shares of the bank;
(ii) The company controls in any manner the election of a majority of
the board of directors of the bank; or
(iii) The Board determines, after notice and opportunity for hearing,
that the company has the power, directly or indirectly, to exercise a
controlling influence over the management or policies of the bank. (12
U.S.C. 1841(d)).
(2) In intrastate situations, the Board may approve bank holding
company acquisitions of additional banking subsidiaries. However, where
the acquiree is located outside the home state of the investing bank
holding company, section 3(d) of the Act prevents the Board from
approving any application that will permit a bank holding company to
''acquire, directly or indirectly, any voting shares of, interest in, or
all or substantially all of the assets of any additional bank.'' (12
U.S.C. 1842(d)(1)).
(c) Review of agreements. (1) In apparent expectation of statutory
changes that might make interstate banking permissible, bank holding
companies have sought to make substantial equity investments in other
bank holding companies across state lines, but without obtaining more
than 5 per cent of the voting shares or control of the acquiree. These
investments involve a combination of the following arrangements:
(i) Options on, warrants for, or rights to convert nonvoting shares
into substantial blocks of voting securities of the acquiree bank
holding company or its subsidiary bank(s);
(ii) Merger or asset acquisition agreements with the out-of-state
bank or bank holding company that are to be consummated in the event
interstate banking is permitted;
(iii) Provisions that limit or restrict major policies, operations or
decisions of the acquiree; and
(iv) Provisions that make acquisition of the acquiree or its
subsidiary bank(s) by a third party either impossible or economically
impracticable.
The various warrants, options, and rights are not exercisable by the
investing bank holding company unless interstate banking is permitted,
but may be transferred by the investor either immediately or after the
passage of a period of time or upon the occurrence of certain events.
(2) After a careful review of a number of these agreements, the Board
believes that investments in nonvoting stock, absent other arrangements,
can be consistent with the Act. Some of the agreements reviewed appear
consistent with the Act since they are limited to investments of
relatively moderate size in nonvoting equity that may become voting
equity only if interstate banking is authorized.
(3) However, other agreements reviewed by the Board raise substantial
problems of consistency with the control provisions of the Act because
the investors, uncertain whether or when interstate banking may be
authorized, have evidently sought to assure the soundness of their
investments, prevent takeovers by others, and allow for sale of their
options, warrants, or rights to a person of the investor's choice in the
event a third party obtains control of the acquiree or the investor
otherwise becomes dissatisfied with its investment. Since the Act
precludes the investors from protecting their investments through
ownership or use of voting shares or other exercise of control, the
investors have substituted contractual agreements for rights normally
achieved through voting shares.
(4) For example, various covenants in certain of the agreements seek
to assure the continuing soundness of the investment by substantially
limiting the discretion of the acquiree's management over major policies
and decisions, including restrictions on entering into new banking
activities without the investor's approval and requirements for
extensive consultations with the investor on financial matters. By
their terms, these covenants suggest control by the investing company
over the management and policies of the acquiree.
(5) Similarly, certain of the agreements deprive the acquiree bank
holding company, by covenant or because of an option, of the right to
sell, transfer, or encumber a majority or all of the voting shares of
its subsidiary bank(s) with the aim of maintaining the integrity of the
investment and preventing takeovers by others. These long-term
restrictions on voting shares fall within the presumption in the Board's
Regulation Y that attributes control of shares to any company that
enters into any agreement placing long-term restrictions on the rights
of a holder of voting securities. (12 CFR 225.2(b)(4)).
(6) Finally, investors wish to reserve the right to sell their
options, warrants or rights to a person of their choice to prevent being
locked into what may become an unwanted investment. The Board has taken
the position that the ability to control the ultimate disposition of
voting shares to a person of the investor's choice and to secure the
economic benefits therefrom indicates control of the shares under the
Act. 1 Moreover, the ability to transfer rights to large blocks of
voting shares, even if nonvoting in the hands of the investing company,
may result in such a substantial position of leverage over the
management of the acquiree as to involve a structure that inevitably
results in control prohibited by the Act.
(d) Provisions that avoid control. (1) In the context of any
particular agreement, provisions of the type described above may be
acceptable if combined with other provisions that serve to preclude
control. The Board believes that such agreements will not be consistent
with the Act unless provisions are included that will preserve
management's discretion over the policies and decisions of the acquiree
and avoid control of voting shares.
(2) As a first step towards avoiding control, covenants in any
agreement should leave management free to conduct banking and
permissible nonbanking activities. Another step to avoid control is the
right of the acquiree to ''call'' the equity investment and options or
warrants to assure that covenants that may become inhibiting can be
avoided by the acquiree. This right makes such investments or
agreements more like a loan in which the borrower has a right to escape
covenants and avoid the lender's influence by prepaying the loan.
(3) A measure to avoid problems of control arising through the
investor's control over the ultimate disposition of rights to
substantial amounts of voting shares of the acquiree would be a
provision granting the acquiree a right of first refusal before
warrants, options or other rights may be sold and requiring a public and
dispersed distribution of these rights if the right of first refusal is
not exercised.
(4) In this connection, the Board believes that agreements that
involve rights to less than 25 percent of the voting shares, with a
requirement for a dispersed public distribution in the event of sale,
have a much greater prospect of achieving consistency with the Act than
agreements involving a greater percentage. This guideline is drawn by
analogy from the provision in the Act that ownership of 25 percent or
more of the voting securities of a bank constitutes control of the bank.
(5) The Board expects that one effect of this guideline would be to
hold down the size of the nonvoting equity investment by the investing
company relative to the acquiree's total equity, thus avoiding the
potential for control because the investor holds a very large proportion
of the acquiree's total equity. Observance of the 25 percent guideline
will also make provisions in agreements providing for a right of first
refusal or a public and widely dispersed offering of rights to the
acquiree's shares more practical and realistic.
(6) Finally, certain arrangements should clearly be avoided
regardless of other provisions in the agreement that are designed to
avoid control. These are:
(i) Agreements that enable the investing bank holding company (or its
designee) to direct in any manner the voting of more than 5 per cent of
the voting shares of the acquiree;
(ii) Agreements whereby the investing company has the right to direct
the acquiree's use of the proceeds of an equity investment by the
investing company to effect certain actions, such as the purchase and
redemption of the acquiree's voting shares; and
(iii) The acquisition of more than 5 per cent of the voting shares of
the acquiree that ''simultaneously'' with their acquisition by the
investing company become nonvoting shares, remain nonvoting shares while
held by the investor, and revert to voting shares when transferred to a
third party.
(e) Review by the Board. This statement does not constitute the
exclusive scope of the Board's concerns, nor are the considerations with
respect to control outlined in this statement an exhaustive catalog of
permissible or impermissible arrangements. The Board has instructed its
staff to review agreements of the kind discussed in this statement and
to bring to the Board's attention those that raise problems of
consistency with the Act. In this regard, companies are requested to
notify the Board of the terms of such proposed merger or asset
acquisition agreements or nonvoting equity investments prior to their
execution or consummation.
(47 FR 30966, July 16, 1982)
1See Board letter dated March 18, 1982, to C. A. Cavendes, Sociedad
Financiera.
12 CFR 225.144 Application required for the relocation of a subsidiary
bank to another State.
(a) The Board has recently considered whether a bank holding company
may relocate one of its subsidiary banks, pursuant to the approval of
the Comptroller of the Currency under 12 U.S.C. 30, from the holding
company's home state1 to another state without the approval of the Board
under section 3 of the Bank Holding Company Act (''BHC Act'') and
without compliance with the interstate banking provisions of the Douglas
Amendment to the BHC Act. (12 U.S.C. 1842 (a) and (d)). After a review
of the terms and purposes of the BHC Act, the Board concludes that the
relocation of a subsidiary bank of a bank holding company from the
holding company's home state to another state requires the Board's prior
approval under the BHC Act and is subject to the interstate banking
provisions of the Douglas Amendment to the BHC Act. The retention by a
bank holding company of control of a bank after its relocation outside
of the holding company's home state, while simultaneously controlling a
bank in its home state, creates a multi-state bank holding company, and,
in the Board's view, is inconsistent with, and constitutes an evasion
of, the terms and intent of the BHC Act that a bank holding company not
expand its banking operations outside its home state without the express
approval of the other state.
(b) The BHC Act establishes a comprehensive Federal framework
governing the operations and acquisitions of bank holding companies.
Section 3(a) of the BHC Act provides that a bank holding company must
obtain the approval of the Board, under specified competitive,
financial, managerial and convenience and need factors before acquiring
control of a bank. 12 U.S.C. 1842(a). The Douglas Amendment provides
that the Board may not approve any application under section 3 that
would allow a bank holding company to acquire control of or any interest
in a bank located outside of the holding company's home state, unless
the acquisition is specifically authorized by the state in which the
bank to be acquired is located.
(c) The Douglas Amendment was adopted to prevent the creation or
expansion of interstate banking networks through acquisition by a bank
holding company of control of a bank located outside of the holding
company's home state, without the explicit approval of the state in
which the bank is located. (See Florida Dep't of Banking v. Board of
Governors, 760 F.2d 1135, 1141 (11th Cir. 1985); Credit and Commerce
American Holdings, N.V., 65 Federal Reserve Bulletin 254, 255-56
(1979)). Under the terms of the BHC Act, the Board's authority to grant
approval to a bank holding company to control a bank is limited to banks
located within the holding company's home state or in states that have
specifically authorized the acquisition. The Board has no authority to
grant approval to a bank holding company to control a bank outside of
the holding company's home state, without appropriate state statutory
authorization. Thus, a bank holding company's authority to control a
bank, which derives from the Board's approval under the BHC Act for the
acquisition of the bank, must necessarily be limited by, and cannot be
broader than, the Board's authority to grant approval for the
acquisition in the first place. In other words, a bank holding
company's authority to continue to control a bank acquired pursuant to
the terms of the BHC Act is subject to the limitation of the BHC Act
that the bank remain located in the state specified in its application
to the Board to acquire the bank. A change in the location of the bank
to a place outside of the holding company's home state constitutes a
material change in an essential predicate for the Board's approval for
the acquisition of the bank, transforming the proposal from one that the
Board could approve to one that the Board did not and could not have
lawfully approved.
(d) Accordingly, the Board believes that a bank holding company's
authority to continue to control a bank is limited by the requirements
of the Douglas Amendment such that the bank must remain in the state in
which it was located at the time the Board granted approval for its
acquisition and that a bank holding company may not, without the Board's
prior approval under the BHC Act and compliance with the state
authorization provisions of the Douglas Amendment, take action that
would cause it to control a bank outside of its home state.
(e) The Board believes that this interpretation of the Act is not
only consistent with the terms of the BHC Act, but is necessary in order
to give effect to the Congressional intent underlying the Douglas
Amendment to maintain state control over the acquisition of banks within
their borders. As the legislative history of the Douglas Amendment
indicates, prior to the enactment of the BHC Act, the acquisition and
control of banks by bank holding companies was not regulated, and thus
bank holding companies could establish networks of subsidiary banks in
numerous states, while their subsidiary banks were limited by the
McFadden Act and state law to branching in a single state. (102 Cong.
Rec. 6858 (1956); H.R. No. 609, 84th Cong., 1st Sess. 3-4 (1955)). The
United States Supreme Court has stated that the Douglas Amendment was
enacted for the express purpose of eliminating this ''loophole'' in
order to maintain ''local, community-based control over banking.
(Northeast Bancorp, Inc. v. Board of Governors, 105 S. Ct. 2545, 2553
(1985)).
(f) In the debate surrounding the enactment of the amendment, Senator
Douglas described the amendment as intended ''to prevent bank holding
companies from expanding across State lines, unless the States give them
explicit permission to do so,'' and that the ''immediate practical
effect (of the Amendment) would be to bar the expansion of bank holding
companies across State lines.''2 The Senator stated that his proposal
was ''a logical continuation of the McFadden Act, which tried to prevent
the Federal power from being used to permit national banks to expand
across State lines in a way contrary to State policy . . . .'' Id. and
that it would ''carry over into the field of holding companies the same
provisions which already apply for branch banking under the McFadden Act
. . . .'' (102 Cong. Rec. 6858 (1956)).
(g) The principle of the McFadden Act, as applied to bank holding
companies, requires that a bank holding company may not establish a
subsidiary bank outside of its home state, unless authorized by the host
state. While Congress has phrased the Douglas Amendment in terms of the
application requirements of the BHC Act, it is clear that Congress was
concerned with the substance of preventing further interstate expansion
through the bank holding company device without express state
authorization.
(h) In the Board's view, an interpretation of the BHC Act that would
allow a bank holding company to acquire a bank in its home state and,
without further approval under the BHC Act, relocate that bank to
another state would nullify the stated purpose of the Douglas Amendment
to ensure that the holding company form is not used to evade state
restrictions against interstate banking. (Northeast Bancorp, 105 S. Ct.
at 2550-52). Using the relocation device, a multi-bank holding company
could expand into the adjoining state by relocating the main office of a
subsidiary national bank located within thirty miles of a state border,
while retaining control of its other subsidiary banks in its home state,
regardless of whether the adjoining state has consented to entry by
out-of-state bank holding companies.
(i) The Board has found no evidence that Congress intended section
30, which governs the relocation of the main office of a national bank,
to create an exception to the provisions of the Douglas Amendment.
Section 30 was enacted in 1886, and provided that a national bank may
change its place of operations to any other place within the same state,
not more than thirty miles distant, with the approval of the Comptroller
of the Currency and shareholders. 24 Stat. 18. The Comptroller had
interpreted this provision as not requiring the Comptroller's approval
if the bank's place of operations was only moved within the city in
which it was located. (S. Rep. No. 121, 85th Cong., 1st Sess. 17
(1957)). In 1959, Congress overturned this interpretation by amending
section 30 to subject all changes of location by a national bank to the
Comptroller's approval. Id.
(j) The amended section 30 does not contain the language in the
previous version limiting changes in office location to within the state
where the bank is located. The omission of this provision is not
explained in the legislative history. There is, however, no indication
in the relevant history that Congress affirmatively intended that the
amendment to section 30, which was part of a package of technical
amendments to the Federal banking laws, create a specific exception to
the provisions or general policy of the Douglas Amendment -- adopted
three years earlier -- against the establishment of new interstate bank
holding companies without the consent of the states involved. The Board
cannot attribute to a technical amendment, in the absence of compelling
legislative history, any intention to abandon one of the central
policies behind the enactment of the BHC Act in 1956.
(k) Finally, the Board believes that the relocation by a bank holding
company of a subsidiary bank from the holding company's home state to
another state, while continuing to retain a bank in its home state,
would constitute an evasion of the Douglas Amendment that would warrant,
if not require, the exercise by the Board of its authority under section
5(b) of the BHC Act to take necessary action to carry out the purposes
and prevent evasions of the Act. 12 U.S.C. 1844(b).
(50 FR 33913, Aug. 22, 1985; 50 FR 34802, Aug. 28, 1985)
1A bank holding company's home state under the BHC Act is that state
in which the total deposits of its banking subsidiaries were largest on
the day the company became a bank holding company or on July 1, 1966,
whichever date is later. 12 U.S.C. 1842(d).
2102 Cong. Rec. 6859-60 (1956). Accord, (Remarks of Senator
Bennett) (the Douglas Amendment constitutes ''a flat, unequivocal
prohibition against bank holding companies crossing State lines . . . a
blanket prohibition which can only be lifted by specific affirmative
action by the States. . . .'')
12 CFR 225.145 Limitations established by the Competitive Equality
Banking Act of 1987 on the activities and growth of nonbank banks.
(a) Introduction. Effective August 10, 1987, the Competitive
Equality Banking Act of 1987 (''CEBA'') redefined the term ''bank'' in
the Bank Holding Company Act (''BHC Act'' or ''Act'') to include any
bank the deposits of which are insured by the Federal Deposit Insurance
Corporation as well as any other institution that accepts demand or
checkable deposit accounts and is engaged in the business of making
commercial loans. 12 U.S.C. 1841(c). CEBA also contained a grandfather
provision for certain companies affected by this redefinition. CEBA
amended section 4 of the BHC Act to permit a company that on March 5,
1987, controlled a nonbank bank (an institution that became a bank as a
result of enactment of CEBA) and that was not a bank holding company on
August 9, 1987, to retain its nonbank bank and not be treated as a bank
holding company for purposes of the BHC Act if the company and its
subsidiary nonbank bank observe certain limitations imposed by CEBA.
/1/ Certain of these limitations are codified in section 4(f)(3) of the
BHC Act and generally restrict nonbank banks from commencing new
activities or certain cross-marketing activities with affiliates after
March 5, 1987, increasing their assets at an annual rate exceeding 7
percent during any 12 month period after August 10, 1988, or permitting
overdrafts for affiliates or incurring overdrafts on behalf of
affiliates at a Federal Reserve Bank. 12 U.S.C. 1843(f)(3). /2/ The
Board's views regarding the meaning and scope of these limitations are
set forth below and in provisions of the Board's Regulation Y (12 CFR
225.51 and 225.52).
(b) Congressional findings. (1) At the outset, the Board notes that
the scope and application of the Act's limitations on nonbank banks must
be guided by the Congressional findings set out in section 4(f)(3) of
the BHC Act. Congress was aware that these nonbank banks had been
acquired by companies that engage in a wide range of nonbanking
activities, such as retailing and general securities activities that are
forbidden to bank holding companies under section 4 of the BHC Act. In
section 4(f)(3), Congress found that nonbank banks controlled by
grandfathered nonbanking companies may, because of their relationships
with affiliates, be involved in conflicts of interest, concentration of
resources, or other effects adverse to bank safety and soundness.
Congress also found that nonbank banks may be able to compete unfairly
against banks controlled by bank holding companies by combining banking
services with financial services not permissible for bank holding
companies. Section 4(f)(3) states that the purpose of the nonbank bank
limitations is to minimize any such potential adverse effects or
inequities by restricting the activities of nonbank banks until further
Congressional action in the area of bank powers could be undertaken.
Similarly, the Senate Report accompanying CEBA states that the
restrictions CEBA places on nonbank banks ''will help prevent existing
nonbank banks from changing their basic character * * * while Congress
considers proposals for comprehensive legislation; from drastically
eroding the separation of banking and commerce; and from increasing the
potential for unfair competition, conflicts of interest, undue
concentration of resources, and other adverse effects.'' S. Rep. No.
100-19, 100th Cong., 1st Sess. 12 (1987). See also H. Rep. No.
100-261, 100th Cong., 1st Sess. 124 (1987) (the ''Conference Report'').
(2) Thus, Congress explicitly recognized in the statute itself that
nonbanking companies controlling grandfathered nonbank banks, which
include the many of the nation's largest commercial and financial
organizations, were being accorded a significant competitive advantage
that could not be matched by bank holding companies because of the
general prohibition against nonbanking activities in section 4 of the
BHC Act. Congress recognized that this inequality in regulatory
approach could inflict serious competitive harm on regulated bank
holding companies as the grandfathered entities sought to exploit
potential synergies between banking and commercial products and
services. See Conference Report at 125-126. The basic and stated
purpose of the restrictions on grandfathered nonbank banks is to
minimize these potential anticompetitive effects.
(3) The Board believes that the specific CEBA limitations should be
implemented in light of these Congressional findings and the legislative
intent reflected in the plain meaning of the terms used in the statute.
In those instances when the language of the statute did not provide
clear guidance, legislative materials and the Congressional intent
manifested in the overall statutory structure were considered. The
Board also notes that prior precedent requires that grandfather
exceptions in the BHC Act, such as the nonbank bank limitations and
particularly the exceptions thereto, are to be interpreted narrowly in
order to ensure the proper implementation of Congressional intent. /3/
(c) Activity limitation -- (1) Scope of activity. (i) The first
limitation established under section 4(f)(3) provides that a nonbank
bank shall not ''engage in any activity in which such bank was not
lawfully engaged as of March 5, 1987.'' The term activity as used in
this provision of CEBA is not defined. The structure and placement of
the CEBA activity restriction within section 4 of the BHC Act and its
legislative history do, however, provide direction as to certain
transactions that Congress intended to treat as separate activities,
thereby providing guidance as to the meaning Congress intended to
ascribe to the term generally. First, it is clear that the term
activity was not meant to refer to banking as a single activity. To the
contrary, the term must be viewed as distinguishing between deposit
taking and lending activities and treating demand deposit-taking as a
separate activity from general deposit-taking and commercial lending as
separate from the general lending category.
(ii) Under the activity limitation, a nonbank bank may engage only in
activities in which it was ''lawfully engaged'' as of March 5, 1987. As
of that date, a nonbank bank could not have been engaged in both demand
deposit-taking and commercial lending activity without placing it and
its parent holding company in violation of the BHC Act. Thus, under the
activity limitations, a nonbank bank could not after March 5, 1987,
commence the demand deposit-taking or commercial lending activity that
it did not conduct as of March 5, 1987. The debates and Senate and
Conference Reports on CEBA confirm that Congress intended the activity
limitation to prevent a grandfathered nonbank bank from converting
itself into a full-service bank by both offering demand deposits and
engaging in the business of making commercial loans. /4/ Thus, these
types of transactions provide a clear guide as to the type of banking
transactions that would constitute activities under CEBA and the degree
of specificity intended by Congress in interpreting that term.
(iii) It is also clear that the activity limitation was not intended
simply to prevent a nonbank bank from both accepting demand deposits and
making commercial loans; it has a broader scope and purpose. If
Congress had meant the term to refer to just these two activities, it
would have used the restriction it used in another section of CEBA
dealing with nonbank banks owned by bank holding companies which has
this result, i.e., the nonbank bank could not engage in any activity
that would have caused it to become a bank under the prior bank
definition in the Act. See 12 U.S.C. 1843(g)(1)(A). Indeed, an earlier
version of CEBA under consideration by the Senate Banking Committee
contained such a provision for nonbank banks owned by commercial holding
companies, which was deleted in favor of the broader activity limitation
actually enacted. Committee Print No. 1, (Feb. 17, 1987). In this
regard, both the Senate Report and Conference Report refer to demand
deposit-taking and commercial lending as examples of activities that
could be affected by the activity limitation, not as the sole activities
to be limited by the provision. /5/
(iv) Finally, additional guidance as to the meaning of the term
activity is provided by the statutory context in which the term appears.
The activity limitation is contained in section 4 of the BHC Act, which
regulates the investments and activities of bank holding companies and
their nonbank subsidiaries. The Board believes it reasonable to
conclude that by placing the CEBA activity limitation in section 4 of
the BHC Act, Congress meant that Board and judicial decisions regarding
the meaning of the term activity in that section be looked to for
guidance. This is particularly appropriate given the fact that
grandfathered nonbank banks, whether owned by bank holding companies or
unregulated holding companies, were treated as nonbank companies and not
banks before enactment of CEBA.
(v) This interpretation of the term activity draws support from
comments by Senator Proxmire during the Senate's consideration of the
provision that the term was not intended to apply ''on a
product-by-product, customer-by-customer basis.'' 133 Cong. Rec.
S4054-5 (daily ed. March 27, 1987). This is the same manner in which
the Board has interpreted the term activity in the nonbanking provision
of section 4 as referring to generic categories of activities, not to
discrete products and services.
(vi) Accordingly, consistent with the terms and purposes of the
legislation and the Congressional intent to minimize unfair competition
and the other adverse effects set out in the CEBA findings, the Board
concludes that the term activity as used in section 4(f)(3) means any
line of banking or nonbanking business. This definition does not,
however, envision a product-by-product approach to the activity
limitation. The Board believes it would be helpful to describe the
application of the activity limitation in the context of the following
major categories of activities: deposit-taking, lending, trust, and
other activities engaged in by banks.
(2) Deposit-taking activities. (i) With respect to deposit-taking,
the Board believes that the activity limitation in section 4(f)(3)
generally refers to three types of activity: demand deposit-taking;
non-demand deposit-taking with a third party payment capability; and
time and savings deposit-taking without third party payment powers. As
previously discussed, it is clear from the terms and intent of CEBA that
the activity limitation would prevent, and was designed to prevent,
nonbank banks that prior to the enactment of CEBA had refrained from
accepting demand deposits in order to avoid coverage as a bank under the
BHC Act, from starting to take these deposits after enactment of CEBA
and thus becoming full-service banks. Accordingly, CEBA requires that
the taking of demand deposits be treated as a separate activity.
(ii) The Board also considers nondemand deposits withdrawable by
check or other similar means for payment to third parties or others to
constitute a separate line of business for purposes of applying the
activity limitation. In this regard, the Board has previously
recognized that this line of businesss constitutes a permissible but
separate activity under section 4 of the BHC Act. Furthermore, the
offering of accounts with transaction capability requires different
expertise and systems than non-transaction deposit-taking and
represented a distinct new activity that traditionally separated banks
from thrift and similar institutions.
(iii) Support for this view may also be found in the House Banking
Committee report on proposed legislation prior to CEBA that contained a
similar prohibition on new activities for nonbank banks. In discussing
the activity limitation, the report recognized a distinction between
demand deposits and accounts with transaction capability and those
without transaction capability:
With respect to deposits, the Committee recognizes that it is
legitimate for an institution currently involved in offering demand
deposits or other third party transaction accounts to make use of new
technologies that are in the process of replacing the existing
check-based, paper payment system. Again, however, the Committee does
not believe that technology should be used as a lever for an institution
that was only incidentally involved in the payment system to transform
itself into a significant offeror of transaction account capability.
/6/
(iv) Finally, this distinction between demand and nondemand checkable
accounts and accounts not subject to withdrawal by check was
specifically recognized by Congress in the redefinition of the term bank
in CEBA to include an institution that takes demand deposits or
''deposits that the depositor may withdraw by check or other means for
payment to third parties or others'' as well as in various exemptions
from that definition for trust companies, credit card banks, and certain
industrial banks. /7/
(v) Thus, an institution that as of March 5, 1987, offered only time
and savings accounts that were not withdrawable by check for payment to
third parties could not thereafter begin offering accounts with
transaction capability, for example, NOW accounts or other types of
transaction accounts.
(3) Lending. As noted, the CEBA activity limitation does not treat
lending as a single activity; it clearly distinguishes between
commercial and other types of lending. This distinction is also
reflected in the definition of bank in the BHC Act in effect both prior
to and after enactment of CEBA as well as in various of the exceptions
from this definition. In addition, commercial lending is a specialized
form of lending involving different techniques and analysis from other
types of lending. Based upon these factors, the Board would view
commercial lending as a separate and distinct activity for purposes of
the activity limitation in section 4(f)(3). The Board's decisions under
section 4 of the BHC Act have not generally differentiated between types
of commercial lending, and thus the Board would view commercial lending
as a single activity for purposes of CEBA. Thus, a nonbank bank that
made commercial loans as of March 5, 1987, could make any type of
commercial loan thereafter.
(i) Commercial lending. For purposes of the activity limitation, a
commercial loan is defined in accordance with the Supreme Court's
decision in Board of Governors v. Dimension Financial Corporation, 474
U.S. 361 (1986), as a direct loan to a business customer for the purpose
of providing funds for that customer's business. In this regard, the
Board notes that whether a particular transaction is a commercial loan
must be determined not from the face of the instrument, but from the
application of the definition of commercial loan in the Dimension
decision to that transaction. Thus, certain transactions of the type
mentioned in the Board's ruling at issue in Dimension and in the Senate
and Conference Reports in the CEBA legislation /8/ would be commercial
loans if they meet the test for commercial loans established in
Dimension. Under this test, a commercial loan would not include, for
example, an open-market investment in a commercial entity that does not
involve a borrower-lender relationship or negotiation of credit terms,
such as a money market transaction.
(ii) Other lending. Based upon the guidance in the Act as to the
degree of specificity required in applying the activity limitation with
respect to lending, the Board believes that, in addition to commercial
lending, there are three other types of lending activities: consumer
mortgage lending, consumer credit card lending, and other consumer
lending. Mortgage lending and credit card lending are recognized,
discrete lines of banking and business activity, involving techniques
and processes that are different from and more specialized than those
required for general consumer lending. For example, these activities
are, in many cases, conducted by specialized institutions, such as
mortgage companies and credit card institutions, or through separate
organizational structures within an institution, particularly in the
case of mortgage lending. Additionally, the Board's decisions under
section 4 of the Act have recognized mortgage banking and credit card
lending as separate activities for bank holding companies. The Board's
Regulation Y reflects this specialization, noting as examples of
permissible lending activity: consumer finance, credit card and
mortgage lending. 12 CFR 225.25(b)(1). Finally, CEBA itself recognizes
the specialized nature of credit card lending by exempting an
institution specializing in that activity from the bank definition. For
purpose of the activity limitation, a consumer mortgage loan will mean
any loan to an individual that is secured by real estate and that is not
a commercial loan. A credit card loan would be any loan made to an
individual by means of a credit card that is not a commercial loan.
(4) Trust activities. Under section 4 of the Act, the Board has
historically treated trust activities as a single activity and has not
differentiated the function on the basis of whether the customer was an
individual or a business. See 12 CFR 225.25(b)(3). Similarly, the trust
company exemption from the bank definition in CEBA makes no distinction
between various types of trust activities. Accordingly, the Board would
view trust activities as a separate activity without additional
differentiation for purposes of the activity limitation in section
4(f)(3).
(5) Other activities. With respect to activities other than the
various traditional deposit-taking, lending or trust activities, the
Board believes it appropriate, for the reasons discussed above, to apply
the activity limitation in section 4(f)(3) as the term activity
generally applies in other provisions of section 4 of the BHC Act.
Thus, a grandfathered nonbank bank could not, for example, commence
after March 5, 1987, any of the following activities (unless it was
engaged in such an activity as of that date): discount securities
brokerage, full-service securities brokerage investment advisory
services, underwriting or dealing in government securities as
permissible for member banks, foreign exchange transaction services,
real or personal property leasing, courier services, data processing for
third parties, insurance agency activities, /9/ real estate development,
real estate brokerage, real estate syndication, insurance underwriting,
management consulting, futures commission merchant, or activities of the
general type listed in 225.25(b) of Regulation Y.
(6) Meaning of engaged in. In order to be engaged in an activity, a
nonbank bank must demonstrate that it had a program in place to provide
a particular product or service included within the grandfathered
activity to a customer and that it was in fact offering the product or
service to customers as of March 5, 1987. Thus, a nonbank bank is not
engaged in an activity as of March 5, 1987, if the product or service in
question was in a planning state as of that date and had not been
offered or delivered to a customer. Consistent with prior Board
interpretations of the term activity in the grandfather provisions of
section 4, the Board does not believe that a company may be engaged in
an activity on the basis of a single isolated transaction that was not
part of a program to offer the particular product or to conduct in the
activity on an ongoing basis. For example, a nonbank bank that held an
interest in a single real estate project would not thereby be engaged in
real estate development for purposes of this provision, unless evidence
was presented indicating the interest was held under a program to
commence a real estate development business.
(7) Meaning of as of The Board believes that the grandfather date
''as of March 5, 1987'' as used throughout section 4(f)(3) should refer
to activities engaged in on March 5, 1987, or a reasonably short period
preceding this date not exceeding 13 months. 133 Cong. Rec. S3957
(daily ed. March 26, 1987). (Remarks of Senators Dodd and Proxmire).
Activities that the institution had terminated prior to March 5, 1988,
however, would not be considered to have been conducted or engaged in as
of March 5. For example, if within 13 months of March 5, 1987, the
nonbank bank had terminated its commercial lending activity in order to
avoid the bank definition in the Act, the nonbank bank could not
recommence that activity after enactment of CEBA.
(d) Cross-marketing limitation -- (1) In general. Section 4(f)(3)
also limits cross-marketing activities by nonbank banks and their
affiliates. Under this provision, a nonbank bank may not offer or
market a product or service of an affiliate unless the product or
service may be offered by bank holding companies generally under section
4(c)(8) of the BHC Act. In addition, a nonbank bank may not permit any
of its products or services to be offered or marketed by or through a
nonbank affiliate unless the affiliate engages only in activities
permissible for a bank holding company under section 4(c)(8). These
limitations are subject to an exception for products or services that
were being so offered or marketed as of March 5, 1987, but only in the
same manner in which they were being offered or marketed as of that
date.
(2) Examples of impermissible cross-marketing. The Conference Report
illustrates the application of this limitation to the following two
covered transactions: (i) products and services of an affiliate that
bank holding companies may not offer under the BHC Act, and (ii)
products and services of the nonbank bank. In the first case, the
restrictions would prohibit, for example, a company from marketing life
insurance or automotive supplies through its affiliate nonbank bank
because these products are not generally permissible under the BHC Act.
Conference Report at 126. In the second case, a nonbank bank may not
permit its products or services to be offered or marketed through a life
insurance affiliate or automobile parts retailer because these
affiliates engage in activities prohibited under the BHC Act. Id.
(3) Permissible cross-marketing. On the other hand, a nonbank bank
could offer to its customers consumer loans from an affiliated mortgage
banking or consumer finance company. These affiliates could likewise
offer their customers the nonbank bank's products or services provided
the affiliates engaged only in activities permitted for bank holding
companies under the closely-related-to-banking standard of section
4(c)(8) of the BHC Act. If the affiliate is engaged in both permissible
and impermissible activities within the meaning of section 4(c)(8) of
the BHC Act, however, the affiliate could not offer or market the
nonbank bank's products or services.
(4) Product approach to cross-marketing restriction. (i) Unlike the
activity restrictions, the cross-marketing restrictions of CEBA apply by
their terms to individual products and services. Thus, an affiliate of
a nonbank bank that was engaged in activities that are not permissible
for bank holding companies and that was marketing a particular product
or service of a nonbank bank on the grandfather date could continue to
market that product and, as discussed below, could change the terms and
conditions of the loan. The nonbank affiliate could not, however, begin
to offer or market another product or service of the nonbank bank.
(ii) The Board believes that the term product or service must be
interpreted in light of its accepted ordinary commercial usage. In some
instances, commercial usage has identified a group of products so
closely related that they constitute a product line (e.g., certificates
of deposit) and differences in versions of the product (e.g., a one-year
certificate of deposit) simply represent a difference in the terms of
the product. /10/ This approach is consistent with the treatment in
CEBA's legislative history of certificates of deposit as a product line
rather than each particular type of CD as a separate product. /11/
(iii) In the area of consumer lending, the Board believes the
following provide examples of different consumer loan products:
mortgage loans to finance the purchase of the borrower's residence,
unsecured consumer loans, consumer installment loans secured by the
personal property to be purchased (e.g. automobile, boat or home
appliance loans), or second mortgage loans. /1/ /2/ Under this
interpretation, a nonbank bank that offered automobile loans through a
nonbank affiliate on the grandfather date could market boat loans,
appliance loans or any type of secured consumer installment loan through
that affiliate. It could not, however, market unsecured consumer loans,
home mortgage loans or other types of consumer loans.
(iv) In other areas, the Board believes that the determination as to
what constitutes a product or service should be made on a case-by-case
basis consistent with the principles that the terms product or service
must be interpreted in accordance with their ordinary commercial usage
and must be narrower in scope than the definition of activity.
Essentially, the concept applied in this analysis is one of permitting
the continuation of the specific product marketing activity that was
undertaken as of March 5, 1987. Thus, for example, while insurance
underwriting may constitute a separate activity under CEBA, a nonbank
bank could not market a life insurance policy issued by the affiliate if
on the grandfather date it had only marketed homeowners' policies issued
by the affiliate.
(5) Change in terms and conditions permitted. (i) The
cross-marketing restrictions would not limit the ability of the
institution to change the specific terms and conditions of a particular
grandfathered product or service. The Conference Report indicates a
legislative intent not to lock into place the specific terms or
conditions of a grandfathered product or service. Conference Report at
126. For example, a nonbank bank marketing a three-year, $5,000
certificate of deposit through an affiliate under the exemption could
offer a one-year $2,000 certificate of deposit with a different interest
rate after the grandfather date. See footnote 11 above. Modifications
that alter the type of product, however, are not permitted. Thus, a
nonbank bank that marketed through affiliates on March 5, 1987, only
certificates of deposit could not commence marketing MMDA's or NOW
accounts after the grandfather date.
(ii) General changes in the character of the product or service as
the result of market or technological innovation are similarly permitted
to the extent that they do not transform a grandfathered product into a
new product. Thus, an unsecured line of credit could not be modified to
include a lien on the borrower's residence without becoming a new
product.
(6) Meaning of offer or market. In the Board's opinion, the terms
offer or market in the cross-marketing restrictions refer to the
presentation to a customer of an institution's products or service
through any type of program, including telemarketing, advertising
brochures, direct mailing, personal solicitation, customer referrals, or
joint-marketing agreements or presentations. An institution must have
offered or actually marketed the product or service on March 5 or
shortly before that date (as discussed above) to qualify for the
grandfather privilege. Thus, if the cross-marketing program was in the
planning stage on March 5, 1987, the program would not quality for
grandfather treatment under CEBA.
(7) Limitations on cross-marketing to in the same manner. (i) The
cross-marketing restriction in section 4(f)(3) contains a grandfather
provision that permits products or services that would otherwise be
prohibited from being offered or marketed under the provision to
continue to be offered or marketed by a particular entity if the
products or services were being so offered or marketed as of March 5,
1987, but ''only in the same manner in which they were being offered or
marketed as of that date.'' Thus, to qualify for the grandfather
provision, the manner of offering or marketing the otherwise prohibited
product or service must remain the same as on the grandfather date.
(ii) In interpreting this provision, the Board notes that Congress
designed the joint-marketing restrictions to prevent the significant
risk to the public posed by the conduct of such activities by insured
banks affiliated with companies engaged in general commerce, to ensure
objectivity in the credit-granting process and to ''minimize the unfair
competitive advantage that grandfathered commercial companies owning
nonbank banks might otherwise engage over regulated bank holding
companies and our competing commercial companies that have no subsidiary
bank.'' Conference Report at 125-126. The Board believes that
determinations regarding the manner of cross-marketing of a particular
product or service may best be accomplished by applying the limitation
to the particular facts in each case consistent with the stated purpose
of this provision of CEBA and the general principle that grandfather
restrictions and exceptions to general prohibitions must be narrowly
construed in order to prevent the exception from nullifying the rule.
Essentially, as in the scope of the term ''product or service'', the
guiding principle of Congressional intent with respect to this term is
to permit only the continuation of the sepcific types of cross-marketing
activity that were undertaken as of March 5, 1987.
(8) Eligibility for cross-marketing grandfather exemption. The
Conference Report also clarifies that entitlement to an exemption to
continue to cross-market products and services otherwise prohibited by
the statute applies only to the specific company that was engaged in the
activity as of March 5, 1987. Conference Report at 126. Thus, an
affiliate that was not engaged in cross-marketing products or services
as of the grandfather date may not commence these activities under the
exemption even if such activities were being conducted by another
affiliate. Id.; see also S. Rep. No. 100-19 at 33-34.
(e) Eligibility for grandfathered nonbank bank status. In reviewing
the reports required by CEBA, the Board notes that a number of
institutions that had not commenced business operations on August 10,
1987, the date of enactment of CEBA, claimed grandfather privileges
under section 4(f)(3) of CEBA. To qualify for grandfather privileges
under section 4(f)(3), the institution must have ''bec(o)me a bank as a
result of the enactment of (CEBA)'' and must have been controlled by a
nonbanking company on March 5, 1987. 12 U.S.C. 1843(f)(1)(A). An
institution that did not have FDIC insurance on August 10, 1987, and
that did not accept demand deposits or transaction accounts or engage in
the business of commercial lending on that date, would not have become a
bank as a result of enactment of CEBA. Thus, institutions that had not
commenced operations on August 10, 1987, could not qualify for
grandfather privileges under section 4(f)(3) of CEBA. This view is
supported by the activity limitations of section 4(f)(3), which, as
noted, limit the activities of grandfathered nonbank banks to those in
which they were lawfully engaged as of March 5, 1987. A nonbank bank
that had not commenced conducting business activities on March 5, 1987,
could not after enactment of CEBA engage in any activities under this
provision.
(Reg. Y, 53 FR 37746, Sept. 28, 1988)
/1/ 12 U.S.C. 1843(f). Such a company is treated as a bank holding
company, however, for purposes of the anti-tying provisions in section
106 of the BHC Act Amendments of 1970 (12 U.S.C. 1971 et seq.) and the
insider lending limitations of secton 22(h) of the Federal Reserve Act
(12 U.S.C. 375b). The company is also subject to certain examination and
enforcement provisions to assure compliance with CEBA.
/2/ CEBA also prohibits, with certain limited exceptions, a company
controlling a grandfathered nonbank bank from acquiring control of an
additional bank or thrift institution or acquiring, directly or
indirectly after March 5, 1987, more than 5 percent of the assets or
shares of a bank or thrift institution. 12 U.S.C. 1843(f)(2).
/3/ E.g., Maryland National Corporation, 73 Federal Reserve Bulletin
310, 313-314 (1987). Cf., Spokane & Inland Empire Railroad Co. v.
United States, 241 U.S. 344, 350 (1915).
/4/ Conference Report at 124-25; S. Rep. No. 100-19 at 12, 32; H.
Rep. No. 99-175, 99th Cong., 1st Sess. 3 (1985) (''the activities
limitation is to prevent an institution engaged in a limited range of
functions from expanding into new areas and becoming, in essence, a
full-service bank''); 133 Cong. Rec. S4054 (daily ed. March 27, 1987);
(Comments of Senator Proxmire).
/5/ Conference Report at 124-125; S. Rep. No. 100-19 at 32.
/6/ H. Rep. No. 99-175, 99th Cong., 1st Sess. 13 (1985).
/7/ See 12 U.S.C. 1841(c)(2) (D), (F), (H), and (I).
/8/ S. Rep. No. 100-19 at 31; Conference Report at 123.
/9/ In this area, section 4 of the Act does not treat all insurance
agency activities as a single activity. Thus, for example, the Act
treats the sale of credit-related life, accident and health insurance as
a separate activity from general insurance agency activities. See 12
U.S.C. 1843(c)(8).
/10/ American Bankers Association, Banking Terminology (1981).
/11/ During the Senate debates on CEBA, Senator Proxmire in response
to a statement from Senator Cranston that the joint-marketing
restrictions do not lock into place the specific terms or conditions of
the particular grandfathered product or service, stated:
That is correct. For example, if a nonbank bank was jointly
marketing on March 5, 1987, a 3 year, $5,000 certificate of deposit,
this bill would not prohibit offering in the same manner a 1 year,
$2,000 certificate of deposit with a different interest rate. 133 Cong.
Rec. S3959 (daily ed. March 26, 1987).
/1/ /2/ In this regard, the Supreme Court in United States v.
Philadelphia National Bank, noted that ''the principal banking products
are of course various types of credit, for example: unsecured personal
and business loans, mortgage loans, loans secured by securities or
accounts receivable, automobile installment and consumer goods,
installment loans, tuition financing, bank credit cards, revolving
credit funds.'' 374 U.S. 321, 326 n.5 (1963).
12 CFR 225.145 Pt. 225, App. A
12 CFR 225.145 Appendix A to Part 225 -- Capital Adequacy Guidelines
for Bank Holding Companies: Risk-Based Measure
The Board of Governors of the Federal Reserve System has adopted a
risk-based capital measure to assist in the assessment of the capital
adequacy of bank holding companies (banking organizations). 1The
principal objectives of this measure are to: (i) Make regulatory
capital requirements more sensitive to differences in risk profiles
among banking organizations; (ii) factor off-balance sheet exposures
into the assessment of capital adequacy; (iii) minimize disincentives
to holding liquid, low-risk assets; and (iv) achieve greater
consistency in the evaluation of the capital adequacy of major banking
organizations throughout the world. 2
The risk-based capital guidelines include both a definition of
capital and a framework for calculating weighted risk assets by
assigning assets and off-balance sheet items to broad risk categories.
An institution's risk-based capital ratio is calculated by dividing its
qualifying capital (the numerator of the ratio) by its weighted risk
assets (the denominator). 3 The definition of qualifying capital is
outlined below in section II, and the procedures for calculating
weighted risk assets are discussed in section III. Attachment I
illustrates a sample calculation of weighted risk assets and the
risk-based capital ratio.
The risk-based capital guidelines also establish a schedule for
achieving a minimum supervisory standard for the ratio of qualifying
capital to weighted risk assets and provide for transitional
arrangements during a phase-in period to facilitate adoption and
implementation of the measure at the end of 1992. These interim
standards and transitional arrangements are set forth in section IV.
The risk-based guidelines apply on a consolidated basis to bank
holding companies with consolidated assets of $150 million or more. For
bank holding companies with less than $150 million in consolidated
assets, the guidelines will be applied on a bank-only basis unless: (a)
The parent bank holding company is engaged in nonbank activity involving
significant leverage; 4 or (b) the parent company has a significant
amount of outstanding debt that is held by the general public.
The risk-based guidelines are to be used in the inspection and
supervisory process as well as in the analysis of applications acted
upon by the Federal Reserve. Thus, in considering an application filed
by a bank holding company, the Federal Reserve will take into account
the organization's risk-based capital ratio, the reasonableness of its
capital plans, and the degree of progress it has demonstrated toward
meeting the interim and final risk-based capital standards.
The risk-based capital ratio focuses principally on broad categories
of credit risk, although the framework for assigning assets and
off-balance sheet items to risk categories does incorporate elements of
transfer risk, as well as limited instances of interest rate and market
risk. The risk-based ratio does not, however, incorporate other factors
that can affect an organization's financial condition. These factors
include overall interest rate exposure; liquidity, funding and market
risks; the quality and level of earnings; investment or loan portfolio
concentrations; the quality of loans and investments; the
effectiveness of loan and investment policies; and management's ability
to monitor and control financial and operating risks.
In addition to evaluating capital ratios, an overall assessment of
capital adequacy must take account of these other factors, including, in
particular, the level and severity of problem and classified assets.
For this reason, the final supervisory judgment on an organization's
capital adequacy may differ significantly from conclusions that might be
drawn solely from the level of the organization's risk-based capital
ratio.
The risk-based capital guidelines establish minimum ratios of capital
to weighted risk assets. In light of the considerations just discussed,
banking organizations generally are expected to operate well above the
minimum risk-based ratios. In particular, banking organizations
contemplating significant expansion proposals are expected to maintain
strong capital levels substantially above the minimum ratios and should
not allow significant diminution of financial strength below these
strong levels to fund their expansion plans. Institutions with high or
inordinate levels of risk are also expected to operate above minimum
capital standards. In all cases, institutions should hold capital
commensurate with the level and nature of the risks to which they are
exposed. Banking organizations that do not meet the minimum risk-based
standard, or that are otherwise considered to be inadequately
capitalized, are expected to develop and implement plans acceptable to
the Federal Reserve for achieving adequate levels of capital within a
reasonable period of time.
The Board will monitor the implementation and effect of these
guidelines in relation to domestic and international developments in the
banking industry. When necessary and appropriate, the Board will
consider the need to modify the guidelines in light of any significant
changes in the economy, financial markets, banking practices, or other
relevant factors.
An institution's qualifying total capital consists of two types of
capital components: ''core capital elements'' (comprising Tier 1
capital) and ''supplementary capital elements'' (comprising Tier 2
capital). These capital elements and the various limits, restrictions,
and deductions to which they are subject, are discussed below and are
set forth in Attachment II.
To qualify as an element of Tier 1 or Tier 2 capital, a capital
instrument may not contain or be covered by any convenants, terms, or
restrictions that are inconsistent with safe and sound banking
practices.
Redemptions of permanent equity or other capital instruments before
stated maturity could have a significant impact on an organization's
overall capital structure. Consequently, an organization considering
such a step should consult with the Federal Reserve before redeeming any
equity or debt capital instrument (prior to maturity) if such redemption
could have a material effect on the level or composition of the
organization's capital base. 5
1. Core capital elements (Tier 1 capital). The Tier 1 component of
an institution's qualifying capital must represent at least 50 percent
of qualifying total capital and may consist of the following items that
are defined as core capital elements:
(i) Common stockholders' equity.
(ii) Qualifying perpetual preferred stock (including related
surplus), subject to certain limitations described below.
(iii) Minority interest in the equity accounts of consolidated
subsidiaries.
Tier 1 capital is generally defined as the sum of the core capital
elements less goodwill. 6 (See section II(B) below for a more detailed
discussion of the treatment of goodwill, including an explanation of
certain limited grandfathering arrangements.)
a. Common stockholders' equity. Common stockholders' equity
includes: common stock; related surplus; and retained earnings,
including capital reserves and adjustments for the cumulative effect of
foreign currency translation, net of any treasury stock.
b. Perpetual preferred stock. Perpetual preferred stock is defined
as preferred stock that does not have a maturity date, that cannot be
redeemed at the option of the holder of the instrument, and that has no
other provisions that will require future redemption of the issue.
Consistent with these provisions, any perpetual preferred stock with a
feature permitting redemption at the option of the issuer may qualify as
capital only if the redemption is subject to prior approval of the
Federal Reserve. In general, preferred stock will qualify for inclusion
in capital only if it can absorb losses while the issuer operates as a
going concern (a fundamental characteristic of equity capital) and only
if the issuer has the ability and legal right to defer or eliminate
preferred dividends.
Perpetual preferred stock in which the dividend is reset periodically
based, in whole or in part, upon the banking organization's current
credit standing (that is, auction rate perpetual preferred stock,
including so-called Dutch auction money market, and remarketable
preferred) will not qualify for inclusion in Tier 1 capital. 7 Such
instruments, however, qualify for inclusion in Tier 2 capital.
For bank holding companies, both cumulative and noncumulative
perpetual preferred stock qualify for inclusion in Tier 1. However, the
aggregate amount of such stock (whether cumulative or noncumulative)
that may be included in a holding company's Tier 1 is limited to
one-third of the sum of core capital elements, excluding the perpetual
preferred stock (that is, items (i) and (iii) above). Stated
differently, the aggregate amount may not exceed 25 percent of the sum
of all core capital elements, including perpetual preferred stock (that
is, items (i), (ii) and (iii) above). Any perpetual preferred stock
outstanding in excess of this limit may be included in Tier 2 capital
without any sublimits within that Tier (see discussion below).
The limits on preferred stock are consistent with the Board's
long-standing view that common equity should remain the dominant form of
a banking organization's capital structure. In addition to these
limits, the Board believes that, in general, banking organizations
should avoid overreliance on other nonvoting equity instruments in their
Tier 1 capital.
c. Minority interest in equity accounts of consolidated subsidiaries.
This element is included in Tier 1 because, as a general rule, it
represents equity that is freely available to absorb losses in operating
subsidiaries. While not subject to an explicit sublimit within Tier 1,
banking organizations are expected to avoid using minority intererst in
the equity accounts of consolidated subsidiaries as an avenue for
introducing into their capital structures elements that might not
otherwise qualify as Tier 1 capital or that would, in effect, result in
an excessive reliance on perferred stock within Tier 1.
2. Supplementary capital elements (Tier 2 capital). The Tier 2
component of an institution's qualifying total capital may consist of
the following items that are defined as supplementary capital elements:
(i) Allowance for loan and lease losses (subject to limitations
discussed below).
(ii) Perpetual preferred stock and related surplus (subject to
conditions discussed below).
(iii) Hybrid capital instruments (as defined below), perpetual debt,
and mandatory convertible debt securities.
(iv) Term subordinated debt and intermediate-term preferred stock,
including related surplus (subject to limitations discussed below).
The maximum amount of Tier 2 capital that may be included in an
organization's qualifying total capital is limited to 100 percent of
Tier 1 capital (net of goodwill).
The elements of supplementary capital are discussed in greater detail
below. 8
a. Allowance for loan and lease losses. Allowances for loan and
lease losses are reserves that have been established through a charge
against earnings to absorb future losses on loans or lease financing
receivables. Allowances for loan and lease losses exclude ''allocated
transfer risk reserves,''9 and reserves created against identified
losses.
During the transition period, the risk-based capital guidelines
provide for reducing the amount of this allowance that may be included
in an institution's total capital. Initially, it is unlimited.
However, by year-end 1990, the amount of the allowance for loan and
lease losses that will qualify as capital will be limited to 1.5 percent
of an institution's weighted risk assets. By the end of the transition
period, the amount of the allowance qualifying for inclusion in Tier 2
capital may not exceed 1.25 percent of weighted risk assets. 10
b. Perpetual preferred stock. Perpetual preferred stock, as noted
above, is defined as preferred stock that has no maturity date, that
cannot be redeemed at the option of the holder, and that has no other
provisions that will require future redemption of the issue. Such
instruments are eligible for inclusion in Tier 2 capital without limit.
11
c. Hybrid capital instruments, perpetual debt, and mandatory
convertible debt securities. Hybrid capital instruments include
instruments that are essentially permanent in nature and that have
certain characteristics of both equity and debt. Such instruments may
be included in Tier 2 without limit. The general criteria hybrid
capital instruments must meet in order to qualify for inclusion in Tier
2 capital are listed below:
(1) The instrument must be unsecured; fully paid-up and subordinated
to general creditors. If issued by a bank, it must also be subordinated
to claims or depositors.
(2) The instrument must not be redeemable at the option of the holder
prior to maturity, except with the prior approval of the Federal
Reserve. (Consistent with the Board's criteria for perpetual debt and
mandatory convertible securities, this requirement implies that holders
of such instruments may not accelerate the payment of principal except
in the event of bankruptcy, insolvency, or reorganization.)
(3) The instrument must be available to participate in losses while
the issuer is operating as a going concern. (Term subordinated debt
would not meet this requirement.) To satisfy this requirement, the
instrument must convert to common or perpetual preferred stock in the
event that the accumulated losses exceed the sum of the retained
earnings and capital surplus accounts of the issuer.
(4) The instrument must provide the option for the issuer to defer
interest payments if: a) the issuer does not report a profit in the
preceding annual period (defined as combined profits for the most recent
four quarters), and b) the issuer eliminates cash dividends on common
and preferred stock.
Perpetual debt and mandatory convertible debt securities that meet
the criteria set forth in 12 CFR Part 225, Appendix B, also qualify as
unlimited elements of Tier 2 capital for bank holding companies.
d. Subordinated debt and intermediate-term preferred stock. The
aggregate amount of term subordinated debt (excluding mandatory
convertible debt) and intermediate-term preferred stock that may be
treated as supplementary capital is limited to 50 percent of Tier 1
capital (net of goodwill). Amounts in excess of these limits may be
issued and, while not included in the ratio calculation, will be taken
into account in the overall assessment of an organization's funding and
financial condition.
Subordinated debt and intermediate-term preferred stock must have an
original weighted average maturity of at least five years to qualify as
supplementary capital. 12 (If the holder has the option to require the
issuer to redeem, repay, or repurchase the instrument prior to the
original stated maturity, maturity would be defined, for risk-based
capital purposes, as the earliest possible date on which the holder can
put the instrument back to the issuing banking organization.)
In the case of subordinated debt, the instrument must be unsecured
and must clearly state on its face that it is not a deposit and is not
insured by a Federal agency. Bank holding company debt must be
subordinated in right of payment to all senior indebtedness of the
company.
e. Discount of supplementary capital instruments. As a limited-life
capital instrument approaches maturity it begins to take on
characteristics of a short-term obligation. For this reason, the
outstanding amount of term subordinated debt and any long- or
intermediate-life, or term, preferred stock eligible for inclusion in
Tier 2 is reduced, or discounted, as these instruments approach
maturity: one-fifth of the original amount, less any redemptions, is
excluded each year during the instrument's last five years before
maturity. 13
f. Revaluation reserves. Such reserves reflect the formal balance
sheet restatement or revaluation for capital purposes of asset carrying
values to reflect current market values. In the United States, banking
organizations, for the most part, follow GAAP when preparing their
financial statements, and GAAP generally does not permit the use of
market-value accounting. For this and other reasons, the Federal
banking agencies generally have not included unrealized asset values in
capital ratio calculations, although they have long taken such values
into account as a separate factor in assessing the overall financial
strength of a banking organization.
Consistent with long-standing supervisory practice, the excess of
market values over book values for assets held by bank holding companies
will generally not be recognized in supplementary capital or in the
calculation of the risk-based capital ratio. However, all banking
organizations are encouraged to disclose their equivalent of premises
(building) and equity revaluation reserves. Such values will be taken
into account as additional considerations in assessing overall capital
strength and financial condition.
Certain assets are deducted from an organization's capital for the
purpose of calculating the risk-based capital ratio. 14 These assets
include: 15
(i) Goodwill -- deducted from the sum of core capital elements. (See
discussion below of limited grandfathering of bank holding company
goodwill during the transition period.)
(ii) Investments in banking and finance subsidiaries that are not
consolidated for accounting or supervisory purposes, and investments in
other designated subsidiaries or associated companies at the discretion
of the Federal Reserve -- deducted from total capital components (as
described in greater detail below).
(iii) Reciprocal holdings of capital instruments of banking
organizations -- deducted from total capital components.
1. Goodwill and other intangible assets -- a. Goodwill. Goodwill is
an intangible asset that represents the excess of the purchase price
over the fair market value of identifiable assets acquired less
liabilities assumed in acquisitions accounted for under the purchase
method of accounting. Any goodwill carried on the balance sheet of a
bank holding company after December 31, 1992, will be deducted from the
sum of core capital elements in determining Tier 1 capital for ratio
calculation purposes. Any goodwill in existence before March 12, 1988,
is ''grandfathered'' during the transition period and is not deducted
from core capital elements until after December 31, 1992. However, bank
holding company goodwill acquired as a result of a merger or acquisition
that was consummated on or after March 12, 1988, is deducted
immediately.
b. Other intangible assets. The Federal Reserve is not proposing, as
a matter of general policy, to deduct automatically any other intangible
assets from the capital of bank holding companies. The Federal Reserve,
however, will continue to monitor closely the level and quality of other
intangible assets -- including purchased mortgage servicing rights,
leaseholds, and core deposit value -- and take them into account in
assessing the capital adequacy and overall asset quality of banking
institutions.
Generally, banking organizations should review all intangible assets
at least quarterly and, if necessary, make appropriate reductions in
their carrying values. In addition, in order to conform with prudent
banking practice, an organization should reassess such values during its
annual audit. Banking organizations should use appropriate amortization
methods and assign prudent amortization periods for intangible assets.
Examiners will review the carrying value of these assets, together with
supporting documentation, as well as the appropriateness of including
particular intangible assets in a banking organization's capital
calculation. In making such evaluations, examiners will consider a
number of factors, including:
(1) The reliability and predictability of any cash flows associated
with the asset and the degree of certainty that can be achieved in
periodically determining the asset's useful life and value;
(2) The existence of an active and liquid market for the asset; and
(3) The feasibility of selling the asset apart from the banking
organization or from the bulk of its assets.
While all intangible assets will be monitored, intangible assets
(other than goodwill) in excess of 25 percent of Tier 1 capital (which
is defined net of goodwill) will be subject to particularly close
scrutiny, both through the inspection process and by other appropriate
means. Whenever necessary -- in particular, when assessing applications
to expand or to engage in other activities that could entail unusual or
higher-than-normal risks -- the Board will, on a case-by-case basis,
continue to consider the level of an individual organization's tangible
capital ratios (after deducting all intangible assets), together with
the quality and value of the organization's tangible and intangible
assets, in making an overall assessment of capital adequacy.
Consistent with long-standing Board policy, banking organizations
experiencing substantial growth, whether internally or by acquisition,
are expected to maintain strong capital positions substantially above
minimum supervisory levels, without significant reliance on intangible
assets.
2. Investments in certain subsidiaries. -- a. Unconsolidated banking
or finance subsidiaries. The aggregate amount of investments in banking
or finance subsidiaries16 whose financial statements are not
consolidated for accounting or regulatory reporting purposes, regardless
of whether the investment is made by the parent bank holding company or
its direct or indirect subsidiaries, will be deducted from the
consolidated parent banking organization's total capital components. 17
Generally, investments for this purpose are defined as equity and debt
capital investments and any other instruments that are deemed to be
capital in the particular subsidiary.
Advances (that is, loans, extensions of credit, guarantees,
commitments, or any other forms of credit exposure) to the subsidiary
that are not deemed to be capital will generally not be deducted from an
organization's capital. Rather, such advances generally will be
included in the parent banking organization's consolidated assets and be
assigned to the 100 percent risk category, unless such obligations are
backed by recognized collateral or guarantees, in which case they will
be assigned to the risk category appropriate to such collateral or
guarantees. These advances may, however, also be deducted from the
consolidated parent banking organization's capital if, in the judgment
of the Federal Reserve, the risks stemming from such advances are
comparable to the risks associated with capital investments or if the
advances involve other risk factors that warrant such an adjustment to
capital for supervisory purposes. These other factors could include,
for example, the absence of collateral support.
Inasmuch as the assets of unconsolidated banking and finance
subsidiaries are not fully reflected in a banking organization's
consolidated total assets, such assets may be viewed as the equivalent
of off-balance sheet exposures since the operations of an unconsolidated
subsidiary could expose the parent organization and its affiliates to
considerable risk. For this reason, it is generally appropriate to view
the capital resources invested in these unconsolidated entities as
primarily supporting the risks inherent in these off-balance sheet
assets, and not generally available to support risks or absorb losses
elsewhere in the organization.
b. Other subsidiaries and investments. The deduction of investments,
regardless of whether they are made by the parent bank holding company
or by its direct or indirect subsidiaries, from a consolidated banking
organization's capital will also be applied in the case of any
subsidiaries, that, while consolidated for accounting purposes, are not
consolidated for certain specified supervisory or regulatory purposes,
such as to facilitate functional regulation. For this purpose,
aggregate capital investments (that is, the sum of any equity or debt
instruments that are deemed to be capital) in these subsidiaries will be
deducted from the consolidated parent banking organization's total
capital components. 18
Advances (that is, loans, extensions of credit, guarantees,
commitments, or any other forms of credit exposure) to such subsidiaries
that are not deemed to be capital will generally not be deducted from
capital. Rather, such advances will normally be included in the parent
banking organization's consolidated assets and assigned to the 100
percent risk category, unless such obligations are backed by recognized
collateral or guarantees, in which case they will be assigned to the
risk category appropriate to such collateral or guarantees. These
advances may, however, be deducted from the consolidated parent banking
organization's capital if, in the judgment of the Federal Reserve, the
risks stemming from such advances are comparable to the risks associated
with capital investments or if such advances involve other risk factors
that warrant such an adjustment to capital for supervisory purposes.
These other factors could include, for example, the absence of
collateral support. 19
In general, when investments in a consolidated subsidiary are
deducted from a consolidated parent banking organization's capital, the
subsidiary's assets will also be excluded from the consolidated assets
of the parent banking organization in order to assess the latter's
capital adequacy. 20
The Federal Reserve may also deduct from a banking organization's
capital, on a case-by-case basis, investments in certain other
subsidiaries in order to determine if the consolidated banking
organization meets minimum supervisory capital requirements without
reliance on the resources invested in such subsidiaries.
The Federal Reserve will not automatically deduct investments in
other unconsolidated subsidiaries or investments in joint ventures and
associated companies. 21 Nonetheless, the resources invested in these
entities, like investments in unconsolidated banking and finance
subsidiaries, support assets not consolidated with the rest of the
banking organization's activities and, therefore, may not be generally
available to support additional leverage or absorb losses elsewhere in
the banking organization. Moreover, experience has shown that banking
organizations stand behind the losses of affiliated institutions, such
as joint ventures and associated companies, in order to protect the
reputation of the organization as a whole. In some cases, this has led
to losses that have exceeded the investments in such organizations.
For this reason, the Federal Reserve will monitor the level and
nature of such investments for individual banking organizations and may,
on a case-by-case basis, deduct such investments from total capital
components, apply an appropriate risk-weighted capital charge against
the organization's proportionate share of the assets of its associated
companies, require a line-by-line consolidation of the entity (in the
event that the parent's control over the entity makes it the functional
equivalent of a subsidiary), or otherwise require the organization to
operate with a risk-based capital ratio above the minimum.
In considering the appropriateness of such adjustments or actions,
the Federal Reserve will generally take into account whether:
(1) The parent banking organization has significant influence over
the financial or managerial policies or operations of the subsidiary,
joint venture, or associated company;
(2) The banking organization is the largest investor in the
affiliated company; or
(3) Other circumstances prevail that appear to closely tie the
activities of the affiliated company to the parent banking organization.
3. Reciprocal holdings of banking organizations' capital instruments.
Reciprocal holdings of banking organizations' capital instruments (that
is, instruments that qualify as Tier 1 or Tier 2 capital) will be
deducted from an organization's total capital components for the purpose
of determining the numerator of the risk-based capital ratio.
Reciprocal holdings are cross-holdings resulting from formal or
informal arrangements in which two or more banking organizations swap,
exchange, or otherwise agree to hold each other's capital instruments.
Generally, deductions will be limited to intentional cross-holdings. At
present, the Board does not intend to require banking organizations to
deduct non-reciprocal holdings of such capital instruments. 2223
Assets and credit equivalent amounts of off-balance sheet items of
bank holding companies are assigned to one of several broad risk
categories, according to the obligor, or, if relevant, the guarantor or
the nature of the collateral. The aggregate dollar value of the amount
in each category is then multiplied by the risk weight associated with
that category. The resulting weighted values from each of the risk
categories are added together, and this sum is the banking
organization's total weighted risk assets that comprise the denominator
of the risk-based capital ratio. Attachment I provides a sample
calculation.
Risk weights for all off-balance sheet items are determined by a
two-step process. First, the ''credit equivalent amount'' of
off-balance sheet items is determined, in most cases, by multiplying the
off-balance sheet item by a credit conversion factor. Second, the
credit equivalent amount is treated like any balance sheet asset and
generally is assigned to the appropriate risk category according to the
obligor, or, if relevant, the guarantor or the nature of the collateral.
In general, if a particular item qualifies for placement in more than
one risk category, it is assigned to the category that has the lowest
risk weight. A holding of a U.S. municipal revenue bond that is fully
guaranteed by a U.S. bank, for example, would be assigned the 20 percent
risk weight appropriate to claims guaranteed by U.S. banks, rather than
the 50 percent risk weight appropriate to U.S. municipal revenue bonds.
24
The terms claims and securities used in the context of the discussion
of risk weights, unless otherwise specified, refer to loans or debt
obligations of the entity on whom the claim is held. Assets in the form
of stock or equity holdings in commercial or financial firms are
assigned to the 100 percent risk category, unless some other treatment
is explicitly permitted.
1. Collateral. The only forms of collateral that are formally
recognized by the risk-based capital framework are: Cash on deposit in
a subsidiary lending institution; securities issued or guaranteed by
the central governments of the OECD-based group of countries,25 U.S.
Government agencies, or U.S. Government-sponsored agencies; and
securities issued by multilateral lending institutions or regional
development banks. Claims fully secured by such collateral are assigned
to the 20 percent risk category.
The extent to which qualifying securities are recognized as
collateral is determined by their current market value. If a claim is
only partially secured, that is, the market value of the pledged
securities is less than the face amount of a balance sheet asset or an
off-balance sheet item, the portion that is covered by the market value
of qualifying collateral is assigned to the 20 percent risk category,
and the portion of the claim that is not covered by collateral in the
form of cash or a qualifying security is assigned to the risk category
appropriate to the obligor or, if relevant, the guarantor. For example,
to the extent that a claim on a private sector obligor is collateralized
by the current market value of U.S. Government securities, it would be
placed in the 20 percent risk category and the balance would be assigned
to the 100 percent risk category.
2. Guarantees. Guarantees of the OECD and non-OECD central
governments, U.S. Government agencies, U.S. Government-sponsored
agencies, state and local governments of the OECD-based group of
countries, multilateral lending institutions and regional development
banks, U.S. depository institutions, and foreign banks are also
recognized. If a claim is partially guaranteed, that is, coverage of
the guarantee is less than the face amount of a balance sheet asset or
an off-balance sheet item, the portion that is not fully covered by the
guarantee is assigned to the risk category appropriate to the obligor
or, if relevant, to any collateral. The face amount of a claim covered
by two types of guarantees that have different risk weights, such as a
U.S. Government guarantee and a state guarantee, is to be apportioned
between the two risk categories appropriate to the guarantors.
The existence of other forms of collateral or guarantees that the
risk-based capital framework does not formally recognize may be taken
into consideration in evaluating the risks inherent in an organization's
loan portfolio -- which, in turn, would affect the overall supervisory
assessment of the organization's capital adequacy.
3. Mortgage-backed securities. Mortgage-backed securities, including
pass-throughs and collateralized mortgage obligations (but not stripped
mortgage-backed securities), that are issued or guaranteed by a U.S.
Government agency or U.S. Government-sponsored agency are assigned to
the risk weight category appropriate to the issuer or guarantor.
Generally, a privately-issued mortgage-backed security meeting certain
criteria set forth in the accompanying footnote26 is treated as
essentially an indirect holding of the underlying assets, and is
assigned to the same risk category as the underlying assets, but in no
case to the zero percent risk category. Privately-issued
mortgage-backed securities whose structures do not qualify them to be
regarded as indirect holdings of the underlying assets are assigned to
the 100 percent risk category. During the inspection process,
privately-issued mortgage-backed securities that are assigned to a lower
risk weight category will be subject to examiner review to ensure that
they meet the appropriate criteria.
While the risk category to which mortgage-backed securities is
assigned will generally be based upon the issuer or guarantor or, in the
case of privately-issued mortgage-backed securities, the assets
underlying the security, any class of a mortgage-backed security that
can absorb more than its pro rata share of loss without the whole issue
being in default (for example, a so-called subordinated class or
residual interest), is assigned to the 100 percent risk category.
Furthermore, all stripped mortgage-backed securities, including
interest-only strips (IOs), principal-only strips (POs), and similar
instruments, are also assigned to the 100 percent risk weight category,
regardless of the issuer or guarantor.
4. Maturity. Maturity is generally not a factor in assigning items to
risk categories with the exception of claims on non-OECD banks,
commitments, and interest rate and foreign exchange rate contracts.
Except for commitments, short-term is defined as one year or less
remaining maturity and long-term is defined as over one year remaining
maturity. In the case of commitments, short-term is defined as one year
or less original maturity and long-term is defined as over one year
original maturity. 27
Attachment III contains a listing of the risk categories, a summary
of the types of assets assigned to each category and the risk weight
associated with each category, that is, 0 percent, 20 percent, 50
percent, and 100 percent. A brief explanation of the components of each
category follows.
1. Category 1: zero percent. This category includes cash (domestic
and foreign) owned and held in all offices of subsidiary depository
institutions or in transit and gold bullion held in either a subsidiary
depository institution's own vaults or in another's vaults on an
allocated basis, to the extent it is offset by gold bullion liabilities.
28 The category also includes all direct claims (including securities,
loans, and leases) on, and the portions of claims that are directly and
unconditionally guaranteed by, the central governments29 of the OECD
countries and U.S. Government agencies,30 as well as all direct local
currency claims on, and the portions of local currency claims that are
directly and unconditionally guaranteed by, the central governments of
non-OECD countries, to the extent that subsidiary depository
institutions have liabilities booked in that currency. A claim is not
considered to be unconditionally guaranteed by a central government if
the validity of the guarantee is dependent upon some affirmative action
by the holder or a third party. Generally, securities guaranteed by the
U.S. Government or its agencies that are actively traded in financial
markets, such as GNMA securities, are considered to be unconditionally
guaranteed.
2. Category 2: 20 percent. This category includes cash items in the
process of collection, both foreign and domestic; short-term claims
(including demand deposits) on, and the portions of short-term claims
that are guaranteed by,31 U.S. depository institutions32 and foreign
banks33; and long-term claims on, and the portions of long-term claims
that are guaranteed by, U.S. depository institutions and OECD banks. 34
This category also includes the portions of claims that are
conditionally guaranteed by OECD central governments and U.S.
Government agencies, as well as the portions of local currency claims
that are conditionally guaranteed by non-OECD central governments, to
the extent that subsidiary depository institutions have liabilities
booked in that currency. In addition, this category also includes
claims on, and the portions of claims that are guaranteed by, U.S.
Government-sponsored agencies35 and claims on, and the portions of
claims guaranteed by, the International Bank for Reconstruction and
Development (World Bank), the Interamerican Development Bank, the Asian
Development Bank, the African Development Bank, the European Investment
Bank, and other multilateral lending institutions or regional
development banks in which the U.S. Government is a shareholder or
contributing member. General obligation claims on, or portions of
claims guaranteed by the full faith and credit of, states or other
political subdivisions of the U.S. or other countries of the OECD-based
group are also assigned to this category. 36
This category also includes the portions of claims (including
repurchase agreements) collateralized by cash on deposit in the
subsidiary lending institution; by securities issued or guaranteed by
OECD central governments, U.S. Government agencies or U.S.
Government-sponsored agencies; or by securities issued by multilateral
lending institutions or regional development banks in which the U.S.
Government is a shareholder or contributing member.
3. Category 3: 50 percent. This category includes loans fully
secured by first liens37 on 1-4 family residential properties,38 either
owner-occupied or rented, provided that such loans have been made in
accordance with prudent underwriting standards, including a conservative
loan-to-value ratio; 39 are performing in accordance with their
original terms; and are not 90 days or more past due or carried in
nonaccrual status. 40 Also included in this category are
privately-issued mortgage-backed securities provided that: (1) The
structure of the security meets the criteria described in section
III(B)(3) above; (2) if the security is backed by a pool of
conventional mortgages, each underlying mortgage meets the criteria
described above in this section for eligibility for the 50 percent risk
weight category at the time the pool is originated; and (3) if the
security is backed by privately-issued mortgage-backed securities, each
underlying security qualifies for the 50 percent risk category.
Privately-issued mortgage-backed securities that do not meet these
criteria or that do not qualify for a lower risk weight are generally
assigned to the 100 percent risk weight category.
Also assigned to this category are revenue (non-general obligation)
bonds or similar obligations, including loans and leases, that are
obligations of states or other political subdivisions of the U.S. (for
example, municipal revenue bonds) or other countries of the OECD-based
group, but for which the government entity is committed to repay the
debt with revenues from the specific projects financed, rather than from
general tax funds.
Credit equivalent amounts of interest rate and foreign exchange rate
contracts involving standard risk obligors (that is, obligors whose
loans or debt securities would be assigned to the 100 percent risk
category) are included in the 50 percent category, unless they are
backed by collateral or guarantees that allow them to be placed in a
lower risk category.
4. Category 4: 100 percent. All assets not included in the
categories above are assigned to this category, which comprises standard
risk assets. The bulk of the assets typically found in a loan portfolio
would be assigned to the 100 percent category.
This category includes long-term claims on, and the portions of
long-term claims that are guaranteed by, non-OECD banks, and all claims
on non-OECD central governments that entail some degree of transfer
risk. 41 This category also includes all claims on foreign and domestic
private sector obligors not included in the categories above (including
loans to nondepository financial institutions and bank holding
companies); claims on commercial firms owned by the public sector;
customer liabilities to the bank on acceptances outstanding involving
standard risk claims; 42 investments in fixed assets, premises, and
other real estate owned; common and preferred stock of corporations,
including stock acquired for debts previously contracted; commercial
and consumer loans (except those assigned to lower risk categories due
to recognized guarantees or collateral and loans for residential
property that qualify for a lower risk weight); mortage-backed
securities that do not meet criteria for assignment to a lower risk
weight (including any classes of mortgage-backed securities that can
absorb more than their pro rata share of loss without the whole issue
being in default); and all stripped mortgage-backed and similar
securities.
Also included in this category are industrial development bonds and
similar obligations issued under the auspices of states or political
subdivisions of the OECD-based group of countries for the benefit of a
private party or enterprise where that party or enterprise, not the
government entity, is obligated to pay the principal and interest, and
all obligations of states or political subdivisions of countries that do
not belong to the OECD-based group.
The following assets also are assigned a risk weight of 100 percent
if they have not been deducted from capital: investments in
unconsolidated companies, joint ventures or associated companies;
instruments that qualify as capital issued by other banking
organizations; and any intangibles, including grandfathered goodwill.
The face amount of an off-balance sheet item is incorporated into the
risk-based capital ratio by multiplying it by a credit conversion
factor. The resultant credit equivalent amount is assigned to the
appropriate risk category according to the obligor, or, if relevant, the
guarantor or the nature of the collateral. 43 Attachment IV sets forth
the conversion factors for various types of off-balance sheet items.
1. Items with a 100 percent conversion factor. A 100 percent
conversion factor applies to direct credit substitutes, which include
guarantees, or equivalent instruments, backing financial claims, such as
outstanding securities, loans, and other financial liabilities, or that
back off-balance sheet items that require capital under the risk-based
capital framework. Direct credit substitutes include, for example,
financial standby letters of credit, or other equivalent irrevocable
undertakings or surety arrangements, that guarantee repayment of
financial obligations such as: commercial paper, tax-exempt securities,
commercial or individual loans or debt obligations, or standby or
commercial letters of credit. Direct credit substitutes also include
the acquisition of risk participations in bankers acceptances and
standby letters of credit, since both of these transactions, in effect,
constitute a guarantee by the acquiring banking organization that the
underlying account party (obligor) will repay its obligation to the
originating, or issuing, institution. 44 (Standby letters of credit that
are performance-related are discussed below and have a credit conversion
factor of 50 percent.)
The full amount of a direct credit substitute is converted at 100
percent and the resulting credit equivalent amount is assigned to the
risk category appropriate to the obligor or, if relevant, the guarantor
or the nature of the collateral. In the case of a direct credit
substitute in which a risk participation45 has been conveyed, the full
amount is still converted at 100 percent. However, the credit
equivalent amount that has been conveyed is assigned to whichever risk
category is lower: the risk category appropriate to the obligor, after
giving effect to any relevant guarantees or collateral, or the risk
category appropriate to the institution acquiring the participation.
Any remainder is assigned to the risk category appropriate to the
obligor, guarantor, or collateral. For example, the portion of a direct
credit substitute conveyed as a risk participation to a U.S. domestic
depository institution or foreign bank is assigned to the risk category
appropriate to claims guaranteed by those institutions, that is, the 20
percent risk category. 46 This approach recognizes that such conveyances
replace the originating banking organization's exposure to the obligor
with an exposure to the institutions acquiring the risk participations.
47
In the case of direct credit substitutes that take the form of a
syndication, that is, where each banking organization if obligated only
for its pro rata share of the risk and there is no recourse to the
originating banking organization, each banking organization will only
include its pro rata share of the direct credit substitute in its
risk-based capital calculation.
Financial standby letters of credit are distinguished from loan
commitments (discussed below) in that standbys are irrevocable
obligations of the banking organization to pay a third-party beneficiary
when a customer (account party) fails to repay an outstanding loan or
debt instrument (direct credit substitute). Performance standby letters
of credit (performance bonds) are irrevocable obligations of the banking
organization to pay a third-party beneficiary when a customer (account
party) fails to perform some other contractual non-financial obligation.
The distinguishing characteristic of a standby letter of credit for
risk-based capital purposes is the combination of irrevocability with
the fact that funding is triggered by some failure to repay or perform
an obligation. Thus, any commitment (by whatever name) that involves an
irrevocable obligation to make a payment to the customer or to a third
party in the event the customer fails to repay an outstanding debt
obligation or fails to perform a contractual obligation is treated, for
risk-based capital purposes, as respectively, a financial guarantee
standby letter of credit or a performance standby.
A loan commitment, on the other hand, involves an obligation (with or
without a material adverse change or similar clause) of the banking
organization to fund its customer in the normal course of business
should the customer seek to draw down the commitment.
Sale and repurchase agreements and asset sales with recourse (to the
extent not included on the balance sheet) and forward agreements also
are converted at 100 percent. 48 So-called ''loan strips'' (that is,
short-term advances sold under long-term commitments without direct
recourse) are treated for risk-based capital purposes as assets sold
with recourse and, accordingly, are also converted at 100 percent.
Forward agreements are legally binding contractual obligations to
purchase assets with certain drawdown at a specified future date. Such
obligations include forward purchases, forward forward deposits
placed,49 and partly-paid shares and securities; they do not include
commitments to make residential mortage loans or forward foreign
exchange contracts.
Securities lent by a banking organization are treated in one of two
ways, depending upon whether the lender is at risk of loss. If a
banking organization, as agent for a customer, lends the customer's
securities and does not indemnify the customer against loss, then the
transaction is excluded from the risk-based capital calculation. If,
alternatively, a banking organization lends its own securities or,
acting as agent for a customer, lends the customer's securities and
indemnifies the customer against loss, the transaction is converted at
100 percent and assigned to the risk weight category appropriate to the
obligor, to any collateral delivered to the lending banking
organization, or, if applicable, to the independent custodian acting on
the lender's behalf.
2. Items with a 50 percent conversion factor. Transaction-related
contingencies are converted at 50 percent. Such contingencies include
bid bonds, performance bonds, warranties, standby letters of credit
related to particular transactions, and performance standby letters of
credit, as well as acquisitions of risk participation in performance
standby letters of credit. Peformance standby letters of credit
represent obligations backing the performance of nonfinancial or
commercial contracts or undertakings. To the extent permitted by law or
regulation, performance standby letters of credit include arrangements
backing, among other things, subcontractors' and suppliers' performance,
labor and materials contracts, and construction bids.
The unused portion of commitments with an original maturity exceeding
one year,50 including underwriting commitments, and commercial and
consumer credit commitments also are converted at 50 percent. Original
maturity is defined as the length of time between the date the
commitment is issued and the earliest date on which: (1) The banking
organization can, at its option, unconditionally (without cause) cancel
the commitment; 51 and (2) the banking organization is scheduled to
(and as a normal practice actually does) review the facility to
determine whether or not it should be extended. Such reviews must
continue to be conducted at least annually for such a facility to
qualify as a short-term commitment.
Commitments are defined as any legally binding arrangements that
obligate a banking organization to extend credit in the form of loans or
leases; to purchase loans, securities, or other assets; or to
participate in loans and leases. They also include overdraft
facilities, revolving credit, home equity and mortgage lines of credit,
and similar transactions. Normally, commitments involve a written
contract or agreement and a commitment fee, or some other form of
consideration. Commitments are included in weighted risk assets
regardless of whether they contain ''material adverse change'' clauses
or other provisions that are intended to relieve the issuer of its
funding obligation under certain conditions. In the case of commitments
structured as syndications, where the banking organization is obligated
solely for its pro rata share, only the banking organization's
proportional share of the syndicated commitment is taken into account in
calculating the risk-based capital ratio.
Facilities that are unconditionally cancellable (without cause) at
any time by the banking organization are not deemed to be commitments,
provided the banking organization makes a separate credit decision
before each drawing under the facility. Commitments with an original
maturity of one year or less are deemed to involve low risk and,
therefore, are not assessed a capital charge. Such short-term
commitments are defined to include the unused portion of lines of credit
on retail credit cards and related plans (as defined in the instructions
to the FR Y-9C Report) if the banking organization has the unconditional
right to cancel the line of credit at any time, in accordance with
applicable law.
Once a commitment has been converted at 50 percent, any portion that
has been conveyed to U.S. depository institutions or OECD banks as
participations in which the originating banking organization retains the
full obligation to the borrower if the participating bank fails to pay
when the instrument is drawn, is assigned to the 20 percent risk
category. This treatment is analogous to that accorded to conveyances
of risk participations in standby letters of credit. The acquisition of
a participation in a commitment by a banking organization is converted
at 50 percent and assigned to the risk category appropriate to the
account party obligor or, if relevant, the nature of the collateral or
guarantees.
Revolving underwriting facilities (RUFs), note issuance facilities
(NIFs), and other similar arrangements also are converted at 50 percent
regardless of maturity. These are facilities under which a borrower can
issue on a revolving basis short-term paper in its own name, but for
which the underwriting organizations have a legally binding commitment
either to purchase any notes the borrower is unable to sell by the
roll-over date or to advance funds to the borrower.
3. Items with a 20 percent conversion factor. Short-term,
self-liquidating trade-related contingencies which arise from the
movement of goods are converted at 20 percent. Such contingencies
generally include commercial letters of credit and other documentary
letters of credit collateralized by the underlying shipments.
4. Items with a zero percent conversion factor. These include unused
portions of commitments with an original maturity of one year or less,52
or which are unconditionally cancellable at any time, provided a
separate credit decision is made before each drawing under the facility.
Unused portions of lines of credit on retail credit cards and related
plans are deemed to be short-term commitments if the banking
organization has the unconditional right to cancel the line of credit at
any time, in accordance with applicable law.
1. Scope. Credit equivalent amounts are computed for each of the
following off-balance sheet interest rate and foreign exchange rate
instruments:
I. Interest Rate Contracts
A. Single currency interest rate swaps.
B. Basis swaps.
C. Forward rate agreements.
D. Interest rate options purchased (including caps, collars, and
floors purchased).
E. Any other instrument that gives rise to similar credit risks
(including when-issued securities and forward forward deposits
accepted).
II. Exchange Rate Contracts
A. Cross-currency interest rate swaps.
B. Forward foreign exchange contracts.
C. Currency options purchased.
D. Any other instrument that gives rise to similar credit risks.
Exchange rate contracts with an original maturity of fourteen
calendar days or less and instruments traded on exchanges that require
daily payment of variation margin are excluded from the risk-based ratio
calculation. Over-the-counter options purchased, however, are included
and treated in the same way as the other interest rate and exchange rate
contracts.
2. Calculation of credit equivalent amounts. Credit equivalent
amounts are calculated for each individual contract of the types listed
above. To calculate the credit equivalent amount of its off-balance
sheet interest rate and exchange rate instruments, a banking
organization sums these amounts:
(1) The mark-to-market value53 (positive values only) of each
contract (that is, the current exposure); and
(2) An estimate of the potential future credit exposure over the
remaining life of each contract.
The potential future credit exposure on a contract, including
contracts with negative mark-to-market values, is estimated by
multiplying the notional principal amount by one of the following credit
conversion factors, as appropriate:
Examples of the calculation of credit equivalent amounts for these
instruments are contained in Attachment V.
Because exchange rate contracts involve an exchange of principal upon
maturity, and exchange rates are generally more volatile than interest
rates, higher conversion factors have been established for foreign
exchange contracts than for interest rate contracts.
No potential future credit exposure is calculated for single currency
interest rate swaps in which payments are made based upon two floating
rate indices, so-called floating/floating or basis swaps; the credit
exposure on these contracts is evaluated solely on the basis of their
mark-to-market values.
3. Risk weights. Once the credit equivalent amount for interest rate
and exchange rate instruments has been determined, that amount is
assigned to the risk weight category appropriate to the counterparty,
or, if relevant, the nature of any collateral or guarantees. 54However,
the maximum weight that will be applied to the credit equivalent amount
of such instruments is 50 percent.
4. Avoidance of double counting. In certain cases, credit exposures
arising from the interest rate and exchange instruments covered by these
guidelines may already be reflected, in part, on the balance sheet. To
avoid double counting such exposures in the assessment of capital
adequacy and, perhaps, assigning inappropriate risk weights,
counterparty credit exposures arising form the types of instruments
covered by these guidelines may need to be excluded from balance sheet
assets in calculating banking organizations' risk-based capital ratios.
5. Netting. Netting of swaps and similar contracts is recognized for
purposes of calculating the risk-based capital ratio only when
accomplished through netting by novation. 55 While the Federal Reserve
encourages any reasonable arrangements designed to reduce the risks
inherent in these transactions, other types of netting arrangements are
not recognized for purposes of calculating the risk-based ratio at this
time.
The interim and final supervisory standards set forth below specify
minimum supervisory ratios based primarily on broad credit risk
considerations. As noted above, the risk-based ratio does not take
explicit account of the quality of individual asset portfolios or the
range of other types of risks to which banking organizations may be
exposed, such as interest rate, liquidity, market or operational risks.
For this reason, banking organizations are generally expected to operate
with capital positions well above the minimum ratios.
Institutions with high or inordinate levels of risk are expected to
operate well above minimum capital standards. Banking organizations
experiencing or anticipating significant growth are also expected to
maintain capital, including tangible capital positions, well above the
minimum levels. For example, most such organizations generally have
operated at capital levels ranging from 100 to 200 basis points above
the stated minimums. Higher capital ratios could be required if
warranted by the particular circumstances or risk profiles of individual
banking organizations. In all cases, organizations should hold capital
commensurate with the level and nature of all of the risks, including
the volume and severity of problem loans, to which they are exposed.
Upon adoption of the risk-based framework, any organization that does
not meet the interim or final supervisory ratios, or whose capital is
otherwise considered inadequate, is expected to develop and implement a
plan acceptable to the Federal Reserve for achieving an adequate level
of capital consistent with the provisions of these guidelines or with
the special circumstances affecting the individual organization. In
addition, such organizations should avoid any actions, including
increased risk-taking or unwarranted expansion, that would lower or
further erode their capital positions.
As reflected in Attachment VI, by year-end 1992, all bank holding
companies56 should meet a minimum ratio of qualifying total capital to
weighted risk assets of 8 percent, of which at least 4.0 percentage
points should be in the form of Tier 1 capital. (Section II above
contains detailed definitions of capital and related terms used in this
section.) The maximum amount of supplementary capital elements that
qualifies as Tier 2 capital is limited to 100 percent of Tier 1 capital
net of goodwill. In addition, the combined maximum amount of
subordinated debt and intermediate-term preferred stock that qualifies
as Tier 2 capital is limited to 50 percent of Tier 1 capital net of
goodwill. The maximum amount of the allowance for loan and lease losses
that qualifies as Tier 2 capital is limited to 1.25 percent of gross
weighted risk assets. Allowances for loan and lease losses in excess of
this limit may, of course, be maintained, but would not be included in
an organization's total capital. The Federal Reserve will continue to
require bank holding companies to maintain reserves at levels fully
sufficient to cover losses inherent in their loan portfolios.
Qualifying total capital is calculated by adding Tier 1 capital and
Tier 2 capital (limited to 100 percent of Tier 1 capital) and then
deducting from this sum certain investments in banking or finance
subsidiaries that are not consolidated for accounting or supervisory
purposes, reciprocal holdings of banking organizations' capital
securities, or other items at the direction of the Federal Reserve. The
conditions under which these deductions are to be made and the
procedures for making the deductions are discussed above in section
II(B).
The transition period for implementing the risk-based capital
standard ends on December 31, 1992. 57 Initially, the risk-based capital
guidelines do not establish a minimum level of capital. However, by
year-end 1990, banking organizations are expected to meet a minimum
interim target ratio for qualifying total capital to weighted risk
assets of 7.25 percent, at least one-half of which should be in the form
of Tier 1 capital. For purposes of meeting the 1990 interim target, the
amount of loan loss reserves that may be included in capital is limited
to 1.5 percent of weighted risk assets and up to 10 percent of an
organization's Tier 1 capital may consist of supplementary capital
elements. Thus, the 7.25 percent interim target ratio implies a minimum
ratio of Tier 1 capital to weighted risk assets of 3.6 percent (one-half
of 7.25) and a minimum ratio of core capital elements to weighted risk
assets ratio of 3.25 percent (nine-tenths of the Tier 1 capital ratio).
Through year-end 1990, banking organizations have the option of
complying with the minimum 7.25 percent year-end 1990 risk-based capital
standard, in lieu of the minimum 5.5 percent primary and 6 percent total
capital to total assets ratios set forth in appendix B of this part. In
addition, as more fully set forth in appendix D to this part, banking
organizations are expected to maintain a minimum ratio of Tier 1 capital
to total assets during this transition period.
1. Cash (domestic and foreign) held in subsidiary depository
institutions or in transit.
2. Balances due from Federal Reserve Banks (including Federal Reserve
Bank stock) and central banks in other OECD countries.
3. Direct claims on, and the portions of claims that are
unconditionally guaranteed by, the U.S. Treasury and U.S. Government
agencies1 and the central governments of other OECD countries, and local
currency claims on, and the portions of local currency claims that are
unconditionally guaranteed by, the central governments of non-OECD
countries (including the central banks of non-OECD countries), to the
extent that subsidiary depository institutions have liabilities booked
in that currency.
4. Gold bullion held in the vaults of a subsidiary depository
institution or in another's vaults on an allocated basis, to the extent
offset by gold bullion liabilities.
1. Cash items in the process of collection.
2. All claims (long- or short-term) on, and the portions of claims
(long- or short-term) that are guaranteed by, U.S. depository
institutions and OECD banks.
3. Short-term claims (remaining maturity of one year or less) on, and
the portions of short-term claims that are guaranteed by, non-OECD
banks.
4. The portions of claims that are conditionally guaranteed by the
central governments of OECD countries and U.S. Government agencies, and
the portions of local currency claims that are conditionally guaranteed
by the central governments of non-OECD countries, to the extent that
subsidiary depository institutions have liabilities booked in that
currency.
5. Claims on, and the portions of claims that are guaranteed by, U.S.
Government-sponsored agencies. 2
6. General obligation claims on, and the portions of claims that are
guaranteed by the full faith and credit of, local governments and
political subdivisions of the U.S. and other OECD local governments.
7. Claims on, and the portions of claims that are guaranteed by,
official multilateral lending institutions or regional development
banks.
8. The portions of claims that are collateralized /3/ by securities
issued or guaranteed by the U.S. Treasury the central governments of
other OECD countries, U.S. Government agencies, U.S.
Government-sponsored agencies, or by cash on deposit in the subsidiary
depository institution.
9. The portions of claims that are collateralized3 by securities
issued by official multilateral lending institutions or regional
development banks.
10. Certain privately-issued securities representing indirect
ownership of mortgage-backed U.S. Government agency or U.S.
Government-sponsored agency securities.
11. Investments in shares of a fund whose portfolio is permitted to
hold only securities that would qualify for the zero or 20 percent risk
categories.
1. Loans fully secured by first liens on 1-4 family residential
properties that have been made in accordance with prudent underwriting
standards, that are performing in accordance with their original terms,
and are not past due or in nonaccrual status, and certain
privately-issued mortgage-backed securities representing indirect
ownership of such loans. (Loans made for speculative purposes are
excluded.)
2. Revenue bonds or similar claims that are obligations of U.S.
state or local governments, or other OECD local governments, but for
which the government entity is committed to repay the debt only out of
revenues from the facilities financed.
3. Credit equivalent amounts of interest rate and foreign exchange
rate related contracts, except for those assigned to a lower risk
category.
1. All other claims on private obligors.
2. Claims on, or guaranteed by, non-OECD foreign banks with a
remaining maturity exceeding one year.
3. Claims on, or guaranteed by, non-OECD central governments that are
not included in item 3 of Category 1 of item 4 of Category 2; all
claims on non-OECD state or local governments.
4. Obligations issued by U.S. state of local governments, or other
OECD local governments (including industrial development authorities and
similar entities), repayable solely by a private party or enterprise.
5. Premises, plant, and equipment; other fixed assets; and other
real estate owned.
6. Investments in any unconsolidated subsidiaries, joint ventures, or
associated companies -- if not deducted from capital.
7. Instruments issued by other banking organizations that qualify as
capital -- if not deducted from capital.
8. Claims on commercial firms owned by a government.
9. All other assets, including any intangible assets that are not
deducted from capital.
1. Direct credit substitutes. (These include general guarantees of
indebtedness and all guarantee-type instruments, including standby
letters of credit backing the financial obligations of other parties.)
2. Risk participations in bankers acceptances and direct credit
substitutes, such as standby letters of credit.
3. Sale and repurchase agreements and assets sold with recourse that
are not included on the balance sheet.
4. Forward agreements to purchase assets, including financing
facilities, on which drawdown is certain.
5. Securities lent for which the banking organization is at risk.
1. Transaction-related contingencies. (These include bid bonds,
performance bonds, warranties, and standby letters of credit backing the
nonfinancial performance of other parties.)
2. Unused portions of commitments with an original maturity1
exceeding one year, including underwriting commitments and commercial
credit lines.
3. Revolving underwriting facilities (RUFs), note issuance facilities
(NIFs), and similar arrangements.
1. Short-term, self-liquidating trade-related contingencies,
including commercial letters of credit.
1. Unused portions of commitments with an original maturity /1/ of
one year or less, or which are unconditionally cancellable at any time,
provided a separate credit decision is made before each drawing.
The total replacement cost of contracts (obtained by summing the
positive mark-to-market values of contracts) is added to a measure of
future potential increases in credit exposure. This future potential
exposure measure is calculated by multiplying the total notional value
of contracts by one of the following credit conversion factors, as
appropriate:
No potential exposure is calculated for single currency interest rate
swaps in which payments are made based upon two floating rate indices,
that is, so called floating/floating or basis swaps. The credit
exposure on these contracts is evaluated solely on the basis of their
mark-to-market value. Exchange rate contracts with an original maturity
of fourteen days or less are excluded. Instruments traded on exchanges
that require daily payment of variation margin are also excluded. The
only form of netting recognized is netting by novation.
(Reg. Y, 54 FR 4209, Jan. 27, 1989; 54 FR 12531, Mar. 27, 1989, as
amended at 55 FR 32832, Aug. 10, 1990; 56 FR 51156, Oct. 10, 1991)
/1/ Supervisory ratios that relate capital to total assets for bank
holding companies are outlined in appendices B and D of this part.
/2/ The risk-based capital measure is based upon a framework
developed jointly by supervisory authorities from the countries
represented on the Basle Committee on Banking Regulations and
Supervisory Practices (Basle Supervisors' Committee) and endorsed by the
Group of Ten Central Bank Governors. The framework is described in a
paper prepared by the BSC entitled ''International Convergence of
Capital Measurement,'' July 1988.
/3/ Banking organizations will initially be expected to utilize
period-end amounts in calculating their risk-based capital ratios. When
necessary and appropriate, ratios based on average balances may also be
calculated on a case-by-case basis. Moreover, to the extent banking
organizations have data on average balances that can be used to
calculate risk-based ratios, the Federal Reserve will take such data
into account.
/4/ A parent company that is engaged in significant off-balance sheet
activities would generally be deemed to be engaged in activities that
involve significant leverage.
/5/ Consultation would not ordinarily be necessary if an instrument
were redeemed with the proceeds of, or replaced by, a like amount of a
similar or higher quality capital instrument and the organization's
capital position is considered fully adequate by the Federal Reserve.
In the case of limited-life Tier 2 instruments, consultation would
generally be obviated if the new security is of equal or greater
maturity than the one it replaces.
/6/ During the transition period and subject to certain limitations
set forth in Section IV below, Tier 1 capital may also include items
defined as supplementary capital elements.
/7/ Adjustable rate perpetual preferred stock (that is, perpetual
preferred stock in which the dividend rate is not affected by the
issuer's credit standing or financial condition but is adjusted
periodically according to a formula based solely on general market
interest rates) may be included in Tier 1 up to the limits specified for
perpetual preferred stock.
/8/ The Basle capital framework also provides for the inclusion of
''undisclosed reserves'' in Tier 2. As defined in the framework,
undisclosed reserves represent accumulated after-tax retained earnings
that are not disclosed on the balance sheet of a banking organization.
Apart from the fact that these reserves are not disclosed publicly, they
are essentially of the same quality and character as retained earnings,
and, to be included in capital, such reserves must be accepted by the
banking organization's home supervisor. Although such undisclosed
reserves are common in some countries, under generally accepted
accounting principles (GAAP) and long-standing supervisory practice,
these types of reserves are not recognized for banking organizations in
the United States. Foreign banking organizations seeking to make
acquisitions or conduct business in the United States would generally be
expected to disclose publicly at least the degree or reliance on such
reserves in meeting supervisory capital requirements.
/9/ Allocated transfer risk reserves are reserves that have been
established in accordance with Section 905(a) of the International
Lending Supervision Act of 1983, 12 U.S.C. 3904(a), against certain
assets whose value U.S. supervisory authorities have found to be
significantly impaired by protracted transfer risk problems.
/10/ The amount of the allowance for loan and lease losses that may
be included in Tier 2 capital is based on a percentage of gross weighted
risk assets. A banking organization may deduct reserves for loan and
lease losses in excess of the amount permitted to be included in Tier 2
capital, as well as allocated transfer risk reserves, from the sum of
gross weighted risk assets and use the resulting net sum of weighted
risk assets in computing the denominator of the risk-based capital
ratio.
/11/ Long-term preferred stock with an original maturity of 20 years
or more (including related surplus) will also qualify in this category
as an element of Tier 2. If the holder of such an instrument has a
right to require the issuer to redeem, repay, or repurchase the
instrument prior to the original stated maturity, maturity would be
defined, for risk-based capital purposes, as the earliest possible date
on which the holder can put the instrument back to the issuing banking
organization.
/12/ Unsecured term debt issued by bank holding companies prior to
March 12, 1988, and qualifying as secondary capital at the time of
issuance would continue to qualify as an element of supplementary
capital under the risk-based framework, subject to the 50 percent of
Tier 1 capital limitation. Bank holding company term debt issued on or
after March 12, 1988, must be subordinated in order to qualify as
capital.
/13/ For example, outstanding amounts of these instruments that count
as supplementary capital include: 100 percent of the outstanding
amounts with remaining maturities of more than five years; 80 percent
of outstanding amounts with remaining maturities of four to five years;
60 percent of outstanding amounts with remaining maturities of three to
four years; 40 percent of outstanding amounts with remaining maturities
of two to three years; 20 percent of outstanding amounts with remaining
maturities of one to two years; and 0 percent of outstanding amounts
with remaining maturities of less than one year. Such instruments with
a remaining maturity of less than one year are excluded from Tier 2
capital.
/14/ Any assets deducted from capital in computing the numerator of
the ratio are not included in weighted risk assets in computing the
denominator of the ratio.
/15/ (Reserved)
/1/ /6/ For this purpose, a banking and finance subsidiary generally
is defined as any company engaged in banking or finance in which the
parent institution holds directly or indirectly more than 50 percent of
the outstanding voting stock, or which is otherwise controlled or
capable of being controlled by the parent institution.
/1/ /7/ An exception to this deduction would be made in the case of
shares acquired in the regular course of securing or collecting a debt
previously contracted in good faith. The requirements for consolidation
are spelled out in the instructions to the Consolidated Financial
Statements for Bank Holding Companies (FR Y-9C Report).
/18/ Investments in unconsolidated subsidiaries will be deducted from
both Tier 1 and Tier 2 capital. As a general rule, one-half (50
percent) of the aggregate amount of capital investments will be deducted
from the bank holding company's Tier 1 capital and one-half (50 percent)
from its Tier 2 capital. However, the Federal Reserve may, on a
case-by-case basis, deduct a proportionately greater amount from Tier 1
if the risks associated with the subsidiary so warrant. If the amount
deductible from Tier 2 capital exceeds actual Tier 2 capital, the excess
would be deducted from Tier 1 capital. Bank holding companies'
risk-based capital ratios, net of these deductions, must exceed the
minimum standards set forth in section IV.
/19/ In assessing the overall capital adequacy of a banking
organization, the Federal Reserve may also consider the organization's
fully consolidated capital position.
/20/ If the subsidiary's assets are consolidated with the parent
banking organization for financial reporting purposes, this adjustment
will involve excluding the subsidiary's assets on a line-by-line basis
from the consolidated parent organization's assets. The parent banking
organization's capital ratio will then be calculated on a consolidated
basis with the exception that the assets of the excluded subsidiary will
not be consolidated with the remainder of the parent banking
organization.
/21/ The definition of such entities is contained in the instructions
to the Consolidated Financial Statements for Bank Holding Companies.
Under regulatory reporting procedures, associated companies and joint
ventures generally are defined as companies in which the banking
organization owns 20 to 50 percent of the voting stock.
/22/ Deductions of holdings of capital securities also would not be
made in the case of interstate ''stake out'' investments that comply
with the Board's Policy Statement on Nonvoting Equity Investments, 12
CFR 225.143. In addition, holdings of capital instruments issued by
other banking organizations but taken in satisfaction of debts
previously contracted would be exempt from any deduction from capital.
/23/ The Board intends to monitor non-reciprocal holdings of other
banking organizations' capital instruments and to provide information on
such holdings to the Basle Supervisors' Committee as called for under
the Basle capital framework.
/24/ An investment in shares of a fund whose portfolio consists
solely of various securities or money market instruments that, if held
separately, would be assigned to different risk categories, is generally
assigned to the risk category appropriate to the highest risk-weighted
security or instrument that the fund is permitted to hold in accordance
with its stated investment objectives. However, in no case will
indirect holdings through shares in such funds be assigned to the zero
percent risk category. For example, if a fund is permitted to hold U.S.
Treasuries and commercial paper, shares in that fund would generally be
assigned the 100 percent risk weight appropriate to commercial paper,
regardless of the actual composition of the fund's investments at any
particular time. Shares in a fund that may invest only in U.S. Treasury
securities would generally be assigned to the 20 percent risk category.
If, in order to maintain a necessary degree of short-term liquidity, a
fund is permitted to hold an insignificant amount of its assets in
short-term, highly liquid securities of superior credit quality that do
not qualify for a preferential risk weight, such securities will
generally not be taken into account in determining the risk category
into which the banking organization's holding in the overall fund should
be assigned. Regardless of the composition of the fund's securities, if
the fund engages in any activities that appear speculative in nature
(for example, use of futures, forwards, or option contracts for purposes
other than to reduce interest rate risk) or has any other
characteristics that are inconsistent with the preferential risk
weighting assigned to the fund's investments, holdings in the fund will
be assigned to the 100 percent risk category. During the examination
process, the treatment of shares in such funds that are assigned to a
lower risk weight will be subject to examiner review to ensure that they
have been assigned an appropriate risk weight.
/2/ /5/ The OECD-based group of countries comprises all full members
of the Organization for Economic Cooperation and Development (OECD), as
well as countries that have concluded special lending arrangements with
the International Monetary Fund (IMF) associated with the Fund's General
Arrangements to Borrow. The OECD includes the following countries:
Australia, Austria, Belgium, Canada, Denmark, the Federal Republic of
Germany, Finland, France, Greece, Iceland, Ireland, Italy, Japan,
Luxembourg, Netherlands, New Zealand, Norway, Portugal, Spain, Sweden,
Switzerland, Turkey, the United Kingdom, and the United States. Saudi
Arabia has concluded special lending arrangements with the IMF
associated with the Fund's General Arrangements to Borrow.
/2/ /6/ A privately-issued mortgage-backed security may be treated as
an indirect holding of the underlying assets provided that: (1) The
underlying assets are held by an independent trustee and the trustee has
a first priority, perfected security interest in the underlying assets
on behalf of the holders of the security; (2) either the holder of the
security has an undivided pro rata ownership interest in the underlying
mortgage assets or the trust or single purpose entity (or conduit) that
issues the security has no liabilities unrelated to the issued
securities; (3) the security is structured such that the cash flow from
the underlying assets in all cases fully meets the cash flow
requirements of the security without undue reliance on any reinvestment
income; and (4) there is no material reinvestment risk associated with
any funds awaiting distribution to the holders of the security. In
addition, if the underlying assets of a mortgage-backed security are
composed of more than one type of asset, for example, U.S.
Government-sponsored agency securities and privately-issued pass-through
securities that qualify for the 50 percent risk weight category, the
entire mortgage-backed security is generally assigned to the category
appropriate to the highest risk-weighted asset underlying the issue, but
in no case to the zero percent risk category. Thus, in this example,
the security would receive the 50 percent risk weight appropriate to the
privately-issued pass-through securities.
/2/ /7/ Through year-end 1992, remaining, rather than original,
maturity may be used for determining the maturity of commitments.
/2/ /8/ All other holdings of bullion are assigned to the 100 percent
risk category.
/2/ /9/ A central government is defined to include departments and
ministries, including the central bank, of the central government. The
U.S. central bank includes the 12 Federal Reserve Banks, and stock held
in these banks as a condition of membership is assigned to the zero
percent risk category. The definition of central government does not
include state, provincial, or local governments; or commercial
enterprises owned by the central government. In addition, it does not
include local government entities or commercial enterprises whose
obligations are guaranteed by the central government, although any
claims on such entities guaranteed by central governments are placed in
the same general risk category as other claims guaranteed by central
governments. OECD central governments are defined as central
governments of the OECD-based group of countries; non-OECD central
governments are defined as central governments of countries that do not
belong to the OECD-based group of countries.
/3/ /0/ A U.S. Governmnt agency is defined as an instrumentality of
the U.S. Government whose obligations are fully and explicitly
guaranteed as to the timely payment of principal and interest by the
full faith and credit of the U.S. Government. Such agencies include the
Government National Mortgage Association (GNMA), the Veterans
Administration (VA), the Federal Housing Administration (FHA), the
Export-Import Bank (Exim Bank), the Overseas Private Investment
Corporation (OPIC), the Commodity Credit Corporation (CCC), and the
Small Business Administration (SBA).
/3/ /1/ Claims guaranteed by U.S. depository institutions and foreign
banks include risk participations in both bankers acceptances and
standby letters of credit, as well as participations in commitments,
that are conveyed to U.S. depository institutions or foreign banks.
/3/ /2/ U.S. depository institutions are defined to include branches
(foreign and domestic) of federally-insured banks and depository
institutions chartered and headquartered in the 50 states of the United
States, the District of Columbia, Puerto Rico, and U.S. territories and
possessions. The definition encompasses banks, mutual or stock savings
banks, savings or building and loan associations, cooperative banks,
credit unions, and international banking facilities or domestic banks.
U.S.-chartered depository institutions owned by foreigners are also
included in the definition. However, branches and agencies of foreign
banks located in the U.S., as well as all bank holding companies, are
excluded.
/3/ /3/ Foreign banks are distinguished as either OECD banks or
non-OECD banks. OECD banks include banks and their branches (foreign
and domestic) organized under the laws of countries (other than the
U.S.) that belong to the OECD-based group of countries. Non-OECD banks
include banks and their branches (foreign and domestic) organized under
the laws of countries that do not belong to the OECD-based group of
countries. For this purpose, a bank is defined as an institution that
engages in the business of banking; is recognized as a bank by the bank
supervisory or monetary authorities of the country of its organization
or principal banking operations; receives deposits to a substantial
extent in the regular course of business; and has the power to accept
demand deposits.
/3/ /4/ Long-term claims on, or guaranteed by, non-OECD banks and all
claims on bank holding companies are assigned to the 100 percent risk
category, as are holdings of bank-issued securities that qualify as
capital of the issuing banks.
/3/ /5/ For this purpose, U.S. Government-sponsored agencies are
defined as agencies originally established or chartered by the Federal
government to serve public purposes specified by the U.S. Congress but
whose obligations are not explicitly guaranteed by the full faith and
credit of the U.S. Government. These agencies include the Federal Home
Loan Mortgage Corporation (FHLMC), the Federal National Mortgage
Association (FNMA), the Farm Credit System, the Federal Home Loan Bank
System, and the Student Loan Marketing Association (SLAM). Claims on
U.S. Government-sponsored agencies include capital stock in a Federal
Home Loan Bank that is held as a condition of membership in that Bank.
/3/ /6/ Claims on, or guaranteed by, states or other political
subdivisions of countries that do not belong to the OECD-based group of
countries are placed in the 100 percent risk category.
/3/ /7/ If a banking organization holds the first and junior lien(s)
on a residential property and no other party holds an intervening lien,
the transaction is treated as a single loan secured by a first lien for
the purpose of determining the loan-to-value ratio.
/3/ /8/ The types of properties that qualify as 1-4 family residences
are listed in the instructions to the FR Y-9C Report.
/3/ /9/ The loan-to-value ratio is based upon the most current
appraised value of the property. All the appraisals must be made in a
manner consistent with the Federal banking agencies' real estate
appraisal guidelines and with the banking organization's own appraisal
guidelines.
/4/ /0/ Residential property loans that do not meet all the specified
criteria or that are made for the purpose of speculative property
development are placed in the 100 percent risk category.
/41/ Such assets include all non-local currency claims on, and the
portions of claims that are guaranteed by, non-OECD central governments
and those portions of local currency claims on, or guaranteed by,
non-OECD central governments that exceed the local currency liabilities
held by subsidiary depository institutions.
/42/ Customer liabilities on acceptances outstanding involving
non-standard risk claims, such as claims on U.S. depository
institutions, are assigned to the risk category appropriate to the
identity of the obligor or, if relevant, the nature of the collateral or
guarantees backing the claims. Portions of acceptances conveyed as risk
participations to U.S. depository institutions or foreign banks are
assigned to the 20 percent risk category appropriate to short-term
claims guaranteed by U.S. depository institutions and foreign banks.
/4/ /3/ The sufficiency of collateral and guarantees for off-balance
sheet items is determined by the market value of the collateral or the
amount of the guarantee in relation to the face amount of the item,
except for interest and foreign exchange rate contracts, for which this
determination is made in relation to the credit equivalent amount.
Collateral and guarantees are subject to the same provisions noted under
section III(B).
/4/ /4/ Credit equivalent amounts of acquisitions of risk
participations are assigned to the risk category appropriate to the
account party obligor, or, if relevant, the nature of the collateral or
guarantees.
/4/ /5/ That is, a participation in which the originating banking
organization remains liable to the beneficiary for the full amount of
the direct credit substitute if the party that has acquired the
participation fails to pay when the instrument is drawn.
/4/ /6/ Risk participations with a remaining maturity of over one
year that are conveyed to non-OECD banks are to be assigned to the 100
percent risk category, unless a lower risk category is appropriate to
the obligor, guarantor, or collateral.
/4/ /7/ A risk participation in bankers acceptances conveyed to other
institutions is also assigned to the risk category appropriate to the
institution acquiring the participation or, if relevant, the guarantor
or nature of the collateral.
/48/ In regulatory reports and under GAAP, bank holding companies are
permitted to treat some asset sales with recourse as ''true'' sales.
For risk-based capital purposes, however, such assets sold with recourse
and reported as ''true'' sales by bank holding companies are converted
at 100 percent and assigned to the risk category appropriate to the
underlying obligor, or, if relevant the guarantor or nature of the
collateral, provided that the transactions meet the definition of assets
sold with recourse, including the sale of 1-4 family residential
mortgages, that is contained in the instructions to the commercial bank
Consolidated Reports of Condition and Income (Call Report).
Accordingly, the entire amount of any assets transferred with recourse
that are not already included on the balance sheet, including pools of
one-to-four family residential mortgaqes, are to be converted at 100
percent and assigned to the risk weight appropriate to the obligor, or
if relevant, the nature of any collateral or guarantees. The only
exception involves transfers of pools of residential mortgages that have
been made with insignificant recourse for which a liability or specific
non-capital reserve has been established and is maintained for the
maximum amount of possible loss under the recourse provision.
/49/ Forward forward deposits accepted are treated as interest rate
contracts.
/50/ Through year-end 1992, remaining maturity may be used for
determining the maturity of off-balance sheet loan commitments;
thereafter, original maturity must be used.
/51/ In the case of consumer home equity or mortgage lines of credit
secured by liens on 1-4 family residential properties, the bank is
deemed able to unconditionally cancel the commitment for the purpose of
this criterion if, at its option, it can prohibit additional extensions
of credit, reduce the credit line, and terminate the commitment to the
full extent permitted by relevant Federal law.
/52/ Through year-end 1992, remaining maturity may be used for
determining term to maturity for off-balance sheet loan commitments;
thereafter, original maturity must be used.
/53/ Mark-to-market values are measured in dollars, regardless of the
currency or currencies specified in the contract, and should reflect
changes in both interest rates and counterparty credit quality.
/5/ /4/ For interest and exchange rate contracts, sufficiency of
collateral or guarantees is determined by the market value of the
collateral or the amount of the guarantee in relation to the credit
equivalent amount. Collateral and guarantees are subject to the same
provisions noted under section III (B).
/5/ /5/ Netting by novation, for this purpose, is a written bilateral
contract between two counterparties under which any obligation to each
other to deliver a given currency on a given date is automatically
amalgamated with all other obligations for the same currency and value
date, legally substituting one single net amount for the previous gross
obligations.
/5/ /6/ As noted in Section I above, bank holding companies with less
than $150 million in consolidated assets would generally be exempt from
the calculation and analysis of risk-based ratios on a consolidated
holding company basis, subject to certain terms and conditions.
/5/ /7/ The Basle capital framework does not establish an initial
minimum standard for the risk-based capital ratio before the end of
1990. However, for the purpose of calculating a risk-based capital
ratio prior to year-end 1990, no sublimit is placed on the amount of the
allowance for loan and lease losses includable in Tier 2. In addition,
this framework permits, under temporary transition arrangements, a
certain percentage of an organization's Tier 1 capital to be made up of
supplementary capital elements. In particular, supplementary elements
may constitute 25 percent of an organization's Tier 1 capital (before
the deduction of goodwill) up to the end of 1990; from year-end 1990 up
to the end of 1992, this allowable percentage of supplementary elements
in Tier 1 declines to 10 percent of Tier 1 (before the deduction of
goodwill). Beginning on December 31, 1992, supplementary elements may
not be included in Tier 1. The amount of subordinated debt and
intermediate-term preferred stock temporarily included in Tier 1 under
these arrangements will not be subject to the sublimit on the amount of
such instruments includable in Tier 2 capital. While the transitional
arrangements allow an organization to include supplementary elements in
Tier 1 on a temporary basis, the amount of perpetual preferred stock
that may be included in a bank holding company's Tier 1 -- both during
and after the transition period -- is, as described in section II(A),
based solely upon a specified percentage of the organization's permanent
core capital elements (that is, common equity, perpetual preferred
stock, and minority interest in the equity of consolidated
subsidiaries), not upon total Tier 1 elements that temporarily include
Tier 2 items. Once the amount of supplementary items that may
temporarily qualify as Tier 1 elements is determined, goodwill must be
deducted from the sum of this amount and the amount of the
organization's permanent core capital elements for the purpose of
calculating Tier 1 (net of goodwill), Tier 2, and total capital.
/1/ For the purpose of calculating the risk-based capital ratio, a
U.S. Government agency is defined as an instrumentality of the U.S.
Government whose obligations are fully and explicitly guaranteed as to
the timely payment of principal and interest by the full faith and
credit of the U.S. Government.
/2/ For the purpose of calculating the risk-based capital ratio, a
U.S. Government-sponsored agency is defined as an agency originally
established or chartered to serve public purposes specified by the U.S.
Congress but whose obligations are not explicitly guaranteed by the full
faith and credit of the U.S. Government.
/3/ The extent of collateralization is determined by current market
value.
/1/ Remaining maturity may be used until year-end 1992.
12 CFR 225.145 Pt. 225, App. B
12 CFR 225.145 Appendix B to Part 225 -- Capital Adequacy Guidelines
for Bank Holding Companies and State Member Banks: Leverage Measure
The Board of Governors of the Federal Reserve System has adopted
minimum capital ratios and guidelines to provide a framework for
assessing the adequacy of the capital of bank holding companies and
state member banks (collectively ''banking organizations''). The
guidelines generally apply to all state member banks and bank holding
companies regardless of size and are to be used in the examination and
supervisory process as well as in the analysis of applications acted
upon by the Federal Reserve. The Board of Governors will review the
guidelines from time to time for possible adjustment commensurate with
changes in the economy, financial markets, and banking practices. In
this regard, the Board has determined that during the transition period
through year-end 1990 for implementation of the risk-based capital
guidelines contained in appendix A to this part and in appendix A to
part 208, a banking organization may choose to fulfill the requirements
of the guidelines relating capital to total assets contained in this
Appendix in one of two manners. Until year-end 1990, a banking
organization may choose to conform to either the 5.5 percent and 6
percent minimum primary and total capital standards set forth in this
Appendix, or the 7.25 percent year-end 1990 minimum risk-based capital
standard set forth in appendix A to this part and appendix A to part
208. Those organizations that choose to conform during this period to
the 7.25 percent year-end 1990 risk-based capital standard will be
deemed to be in compliance with the capital adequacy guidelines set
forth in this appendix.
Two principal measurements of capital are used -- the primary capital
ratio and the total capital ratio. The definitions of primary and total
capital for banks and bank holding companies and formulas for
calculating the capital ratios are set forth below in the definitional
sections of these guidelines.
The Board has established a minimum level of primary capital to total
assets of 5.5 percent and a minimum level of total capital to total
assets of 6.0 percent. Generally, banking organizations are expected to
operate above the minimum primary and total capital levels. Those
organizations whose operations involve or are exposed to high or
inordinate degrees of risk will be expected to hold additional capital
to compensate for these risks.
In addition, the Board has established the following three zones for
total capital for banking organizations of all sizes:
The capital guidelines assume adequate liquidity and a moderate
amount of risk in the loan and investment portfolios and in off-balance
sheet activities. The Board is concerned that some banking
organizations may attempt to comply with the guidelines in ways that
reduce their liquidity or increase risk. Banking organizations should
avoid the practice of attempting to meet the guidelines by decreasing
the level of liquid assets in relation to total assets. In assessing
compliance with the guidelines, the Federal Reserve will take into
account liquidity and the overall degree of risk associated with an
organization's operations, including the volume of assets exposed to
risk.
The Federal Reserve will also take into account the sale of loans or
other assets with recourse and the volume and nature of all off-balance
sheet risk. Particularly close attention will be directed to risks
associated with standby letters of credit and participation in joint
venture activities. The Federal Reserve will review the relationship of
all on- and off-balance sheet risks to capital and will require those
institutions with high or inordinate levels of risk to hold additional
primary capital. In addition, the Federal Reserve will continue to
review the need for more explicit procedures for factoring on- and
off-balance sheet risks into the assessment of capital adequacy.
The capital guidelines apply to both banks and bank holding companies
on a consolidated basis. 1 Some banking organizations are engaged in
significant nonbanking activities that typically require capital ratios
higher than those of commercial banks alone. The Board believes that,
as a matter of both safety and soundness and competitive equity, the
degree of leverage common in banking should not automatically extend to
nonbanking activities. Consequently, in evaluating the consolidated
capital positions of banking organizations, the Board is placing greater
weight on the building-block approach for assessing capital
requirements. This approach generally provides that nonbank
subsidiaries of a banking organization should maintain levels of capital
consistent with the levels that have been established by industry norms
or standards, by Federal or State regulatory agencies for similar firms
that are not affiliated with banking organizations, or that may be
established by the Board after taking into account risk factors of a
particular industry. The assessment of an organization's consolidated
capital adequacy must take into account the amount and nature of all
nonbank activities, and an institution's consolidated capital position
should at least equal the sum of the capital requirements of the
organization's bank and nonbank subsidiaries as well as those of the
parent company.
The nature and intensity of supervisory action will be determined by
an organization's compliance with the required minimum primary capital
ratio as well as by the zone in which the company's total capital ratio
falls. Banks and bank holding companies with primary capital ratios
below the 5.5 percent minimum will be considered undercapitalized unless
they can demonstrate clear extenuating circumstances. Such banking
organizations will be required to submit an acceptable plan for
achieving compliance with the capital guidelines and will be subject to
denial of applications and appropriate supervisory enforcement actions.
The zone in which an organization's total capital ratio falls will
normally trigger the following supervisory responses, subject to
qualitative analysis:
For institutions operating in Zone 1, the Federal Reserve will:
-- Consider that capital is generally adequate if the primary
capital ratio is acceptable to the Federal Reserve and is above the 5.5
percent minimum.
For institutions operating in Zone 2, the Federal Reserve will:
-- Pay particular attention to financial factors, such as asset
quality, liquidity, off-balance sheet risk, and interest rate risk, as
they relate to the adequacy of capital. If these areas are deficient
and the Federal Reserve concludes capital is not fully adequate, the
Federal Reserve will intensify its monitoring and take appropriate
supervisory action.
For institutions operating in Zone 3, the Federal Reserve will:
-- Consider that the institution is undercapitalized, absent
clear extenuating circumstances;
-- Require the institution to submit a comprehensive capital
plan, acceptable to the Federal Reserve, that includes a program for
achieving compliance with the required minimum ratios within a
reasonable time period; and
-- Institute appropriate supervisory and/or administrative
enforcement action, which may include the issuance of a capital
directive or denial of applications, unless a capital plan acceptable to
the Federal Reserve has been adopted by the institution.
In considering the treatment of intangible assets for the purpose of
assessing capital adequacy, the Federal Reserve recognizes that the
determination of the future benefits and useful lives of certain
intangible assets may involve a degree of uncertainty that is not
normally associated with other banking assets. Supervisory concern over
intangible assets derives from this uncertainty and from the possibility
that, in the event an organization experiences financial difficulties,
such assets may not provide the degree of support generally associated
with other assets. For this reason, the Federal Reserve will carefully
review the level and specific character of intangible assets in
evaluating the capital adequacy of state member banks and bank holding
companies.
The Federal Reserve recognizes that intangible assets may differ with
respect to predictability of any income stream directly associated with
a particular asset, the existence of a market for the asset, the ability
to sell the asset, or the reliability of any estimate of the asset's
useful life. Certain intangible assets have predictable income streams
and objectively verifiable values and may contribute to an
organization's profitability and overall financial strength. The value
of other intangibles, such as goodwill, may involve a number of
assumptions and may be more subject to changes in general economic
circumstances or to changes in an individual institution's future
prospects. Consequently, the value of such intangible assets may be
difficult to ascertain. Consistent with prudent banking practices and
the principle of the diversification of risks, banking organizations
should avoid excessive balance sheet concentration in any category or
related categories of intangible assets.
While the Federal Reserve will consider the amount and nature of all
intangible assets, those holding companies with aggregate intangible
assets in excess of 25 percent of tangible primary capital (i.e., stated
primary capital less all intangible assets) or those institutions with
lesser, although still significant, amounts of goodwill will be subject
to close scrutiny. For the purpose of assessing capital adequacy, the
Federal Reserve may, on a case-by-case basis, make adjustments to an
organization's capital ratios based upon the amount of intangible assets
in excess of the 25 percent threshold level or upon the specific
character of the organization's intangible assets in relation to its
overall financial condition. Such adjustments may require some
organizations to raise additional capital.
The Board expects banking organizations (including state member
banks) contemplating expansion proposals to ensure that pro forma
capital ratios exceed the minimum capital levels without significant
reliance on intangibles, particularly goodwill. Consequently, in
reviewing acquisition proposals, the Board will take into consideration
both the stated primary capital ratio (that is, the ratio without any
adjustment for intangible assets) and the primary capital ratio after
deducting intangibles. In acting on applications, the Board will take
into account the nature and amount of intangible assets and will, as
appropriate, adjust capital ratios to include certain intangible assets
on a case-by-case basis.
State member banks with intangible assets in excess of 25 percent of
intangible primary capital will be subject to close scrutiny. In
addition, for the purpose of calculating capital ratios of state member
banks, the Federal Reserve will deduct goodwill from primary capital and
total capital. The Federal Reserve may, on a case-by-case basis, make
further adjustments to a bank's capital ratios based on the amount of
intangible assets (aside from goodwill) in excess of the 25 percent
threshold level or on the specific character of the bank's intangible
assets in relation to its overall financial condition. Such adjustments
may require some banks to raise additional capital.
In addition, state member banks and bank holding companies are
expected to review periodically the value at which intangible assets are
carried on their balance sheets to determine whether there has been any
impairment of value or whether changing circumstances warrant a
shortening of amortization periods. Institutions should make
appropriate reductions in carrying values and amortization periods in
light of this review, and examiners will evaluate the treatment of
intangible assets during on-site examinations.
The components of primary capital are:
-- Common stock, -- Perpetual preferred stock (preferred stock
that does not have
a stated maturity date and that may not be redeemed at the option of the
holder),
-- Surplus (excluding surplus relating to limited-life preferred
stock),
-- Undivided profits, -- Contingency and other capital reserves,
-- Mandatory convertible instruments, /2/ -- Allowance for
possible loan and lease losses (exclusive of
allocated transfer risk reserves),
-- Minority interest in equity accounts of consolidated
subsidiaries,
-- Perpetual debt instruments (for bank holding companies but not
for state member banks).
Bank Holding Companies. The maximum composite amount of mandatory
convertible securities, perpetual debt, and perpetual preferred stock
that may be counted as primary capital for bank holding companies is
limited to 33.3 percent of all primary capital, including these
instruments. Perpetual preferred stock issued prior to November 20,
1985 (or determined by the Federal Reserve to be in the process of heing
issued prior to that date), shall continue to be included as primary
capital.
The maximum composite amount of mandatory convertible securities and
perpetual debt that may be counted as primary capital for bank holding
companies is limited to 20 percent of all primary capital, including
these instruments. The maximum amount of equity commitment notes (a
form of mandatory convertible securities) that may be counted as primary
capital for a bank holding company is limited to 10 percent of all
primary capital, including mandatory convertible securities. Amounts
outstanding in excess of these limitations may be counted as secondary
capital provided they meet the requirements of secondary capital
instruments.
State Member Banks. The composite limitations on the amount of
mandatory convertible securities and perpetual preferred stock
(perpetual debt is not primary capital for state member banks) that may
serve as primary capital for bank holding companies shall not be applied
formally to state member banks, although the Board shall determine
appropriate limits for these forms of primary capital on a case-by-case
basis.
The maximum amount of mandatory convertible securities that may be
counted as primary capital for state member banks is limited to 16 2/3
percent of all primary capital, including mandatory convertible
securities. Equity commitment notes, one form of mandatory convertible
securities, shall not be included as primary capital for state member
banks, except that notes issued by state member banks prior to May 15,
1985, will continue to be included in primary capital. Amounts of
mandatory convertible securities in excess of these limitations may be
counted as secondary capital if they meet the requirements of secondary
capital instruments.
The components of secondary capital are:
-- Limited-life preferred stock (including related surplus) and --
Bank subordinated notes and debentures and unsecured long-term
debt of the parent company and its nonbank subsidiaries.
To qualify as primary or secondary capital, a capital instrument
should not contain or be covered by any convenants, terms, or
restrictions that are inconsistent with safe and sound banking
practices. Examples of such terms are those regarded as unduly
interfering with the ability of the bank or holding company to conduct
normal banking operations or those resulting in significantly higher
dividends or interest payments in the event of a deterioration in the
financial condition of the issuer.
The secondary components must meet the following conditions to
qualify as capital:
-- The instrument must have an original weighted-average maturity
of at least seven years.
-- The instrument must be unsecured. -- The instrument must
clearly state on its face that it is not a
deposit and is not insured by a Federal agency.
-- Bank debt instruments must be subordinated to claims of
depositors.
-- For banks only, the aggregate amount of limited-life preferred
stock and subordinate debt qualifying as capital may not exceed 50
percent of the amount of the bank's primary capital.
As secondary capital components approach maturity, the banking
organization must plan to redeem or replace the instruments while
maintaining an adequate overall capital position. Thus, the remaining
maturity of secondary capital components will be an important
consideration in assessing the adequacy of total capital.
The primary and total capital ratios for bank holding companies are
computed as follows:
Primary capital ratio:
Primary capital components/Total assets + Allowance for loan and
lease losses (exclusive of allocated transfer risk reserves)
Total capital ratio:
Primary capital components + Secondary capital components/Total
assets + Allowance for loan and lease losses (exclusive of allocated
transfer risk reserves)
The primary and total capital ratios for state member banks are
computed as follows:
Primary capital ratio:
Primary capital components -- Goodwill/Average total assets +
Allowance for loan and lease losses (exclusive of allocated transfer
risk reserves) -- Goodwill
Total capital ratio:
Primary capital components + Secondary capital components --
Goodwill/Average total assets + Allowance for loan and lease losses
(exclusive of allocated transfer risk reserves) -- Goodwill
Generally, period-end amounts will be used to calculate bank holding
company ratios. However, the Federal Reserve will discourage temporary
balance sheet adjustments or any other ''window dressing'' practices
designed to achieve transitory compliance with the guidelines. Banking
organizations are expected to maintain adequate capital positions at all
times. Thus, the Federal Reserve will, on a case-by-case basis, use
average total assets in the calculation of bank holding company capital
ratios whenever this approach provides a more meaningful indication of
an individual holding company's capital position.
For the calculation of bank capital ratios, ''average total assets''
will generally be defined as the quarterly average total assets figure
reported on the bank's Report of Condition. If warranted, however, the
Federal Reserve may calculate bank capital ratios based upon total
assets as of period-end. All other components of the bank's capital
ratios will be based upon period-end balances.
Mandatory convertible securities are subordinated debt instruments
that are eventually transformed into common or perpetual preferred stock
within a specified period of time, not to exceed 12 years. To be
counted as primary capital, mandatory convertible securities must meet
the criteria set forth below. These criteria cover the two basic types
of mandatory convertible securities: ''equity contract notes'' --
securities that obligate the holder to take common or perpetual
preferred stock of the issuer in lieu of cash for repayment of
principal, and ''equity commitment notes'' -- securities that are
redeemable only with the proceeds from the sale of common or perpetual
preferred stock. Both equity commitment notes and equity contract notes
qualify as primary capital for bank holding companies, but only equity
contract notes qualify as primary capital for banks.
a. The securities must mature in 12 years or less.
b. The issuer may redeem securities prior to maturity only with the
proceeds from the sale of common or perpetual preferred stock of the
bank or bank holding company. Any exception to this rule must be
approved by the Federal Reserve. The securities may not be redeemed
with the proceeds of another issue of mandatory convertible securities.
Nor may the issuer repurchase or acquire its own mandatory convertible
securities for resale or reissuance.
c. Holders of the securities may not accelerate the payment of
principal except in the event of bankruptcy, insolvency, or
reorganization.
d. The securities must be subordinate in right of payment to all
senior indebtedness of the issuer. In the event that the proceeds of
the securities are reloaned to an affiliate, the loan must be
subordinated to the same degree as the original issue.
e. An issuer that intends to dedicate the proceeds of an issue of
common or perpetual preferred stock to satisfy the funding requirements
of an issue of mandatory convertible securities (i.e. the requirement to
retire or redeem the notes with the proceeds from the issuance of common
or perpetual preferred stock) generally must make such a dedication
during the quarter in which the new common or preferred stock is issued.
3 As a general rule, if the dedication is not made within the prescribed
period, then the securities issued may not at a later date be dedicated
to the retirement or redemption of the mandatory convertible securities.
4
a. The note must contain a contractual provision (or must be issued
with a mandatory stock purchase contract) that requires the holder of
the instrument to take the common or perpetual stock of the issuer in
lieu of cash in satisfaction of the claim for principal repayment. The
obligation of the holder to take the common or perpetual preferred stock
of the issuer may be waived if, and to the extent that, prior to the
maturity date of the obligation, the issuer sells new common or
perpetual preferred stock and dedicates the proceeds to the retirement
or redemption of the notes. The dedication generally must be made
during the quarter in which the new common or preferred stock is issued.
b. A stock purchase contract may be separated from a security only
if: (1) The holder of the contract provides sufficient collateral5 to
the issuer, or to an independent trustee for the benefit of the issuer,
to assure performance under the contract and (2) the stock purchase
contract requires the purchase of common or perpetual preferred stock.
a. The indenture or note agreement must contain the following two
provisions:
1. The proceeds of the sale of common or perpetual preferred stock
will be the sole source of repayment for the notes, and the issuer must
dedicate the proceeds for the purpose of repaying the notes.
(Documentation certified by an authorized agent of the issued showing
the amount of common or perpetual preferred stock issued, the dates of
issue, and amounts of such issues dedicated to the retirement or
redemption of mandatory convertible securities will satisfy the
dedication requirement.)
2. By the time that one-third of the life of the securities has run,
the issuer must have raised and dedicated an amount equal to one-third
of the original principal of the securities. By the time that
two-thirds of the life of the securities has run, the issuer must have
raised and dedicated an amount equal to two-thirds of the original
principal of the securities. At least 60 days prior to the maturity of
the securities, the issuer must have raised and dedicated an amount
equal to the entire original principal of the securities. Proceeds
dedicated to redemption or retirement of the notes must come only from
the sale of common or perpetual preferred stock. 6
b. If the issuer fails to meet any of these periodic funding
requirements, the Federal Reserve immediately will cease to treat the
unfunded securities as primary capital and will take appropriate
supervisory action. In addition, failure to meet the funding
requirements will be viewed as a breach of a regulatory commitment and
will be taken into consideration by the Board in acting on statutory
applications.
c. If a security is issued by a subsidiary of a bank or bank holding
company, any guarantee of the principal by that subsidiary's parent bank
or bank holding company must be subordinate to the same degree as the
security issued by the subsidiary and limited to repayment of the
principal amount of the security at its final maturity.
1. The instrument must be unsecured and, if issued by a bank, must be
subordinated to the claims of depositors.
2. The instrument may not provide the noteholder with the right to
demand repayment of principal except in the event of bankruptcy,
insolvency, or reorganization. The instrument must provide that
nonpayment of interest shall not trigger repayment of the principal of
the perpetual debt note or any other obligation of the issuer, nor shall
it constitute prima facie evidence of insolvency or bankruptcy.
3. The issuer shall not voluntarily redeem the debt issue without
prior approval of the Federal Reserve, except when the debt is converted
to, exchanged for, or simultaneously replaced in like amount by an issue
of common or perpetual preferred stock of the issuer or the issuer's
parent company.
4. If issued by a bank holding company, a bank subsidiary, or a
subsidiary with substantial operations, the instrument must contain a
provision that allows the issuer to defer interest payments on the
perpetual debt in the event of, and at the same time as the elimination
of dividends on all outstanding common or preferred stock of the issuer
(or in the case of a guarantee by a parent company at the same time as
the elimination of the dividends of the parent company's common and
preferred stock). In the case of a nonoperating subsidiary (a funding
subsidiary or one formed to issue securities), the deferral of interest
payments must be triggered by elimination of dividends by the parent
company.
5. If issued by a bank holding company or a subsidiary with
substantial operations, the instrument must convert automatically to
common or perpetual preferred stock of the issuer when the issuer's
retained earnings and surplus accounts become negative. If an operating
subsidiary's perpetual debt is guaranteed by its parent, the debt may
convert to the shares of the issuer or guarantor and such conversion may
be triggered when the issuer's or parent's retained earnings and surplus
accounts become negative. If issued by a nonoperating subsidiary of a
bank holding company or bank, the instrument must convert automatically
to common or preferred stock of the issuer's parent when the retained
earnings and surplus accounts of the issuer's parent become negative.
(Reg. Y, 50 FR 16066, Apr. 24, 1985, as amended at 51 FR 40969, Nov.
12, 1986. Redesignated and amended at 54 FR 4209, Jan. 27, 1989; 55 FR
32832, Aug. 10, 1990)
/1/ The guidelines will apply to bank holding companies with less
than $150 million in consolidated assets on a bank-only basis unless (1)
the holding company or any nonbank subsidiary is engaged directly or
indirectly in any nonbank activity involving significant leverage or (2)
the holding company or any nonbank subsidiary has outstanding
significant debt held by the general public. Debt held by the general
public is defined to mean debt held by parties other than financial
institutions, officers, directors, and principal shareholders of the
banking organization or their related interests.
/2/ See the definitional section below that lists the criteria for
mandatory convertible instruments to qualify as primary capital.
3Common or perpetual preferred stock issued under dividend
reinvestment plans or issued to finance acquisitions, including
acquisitions of business entities, may be dedicated to the retirement or
redemption of the mandatory convertible securities. Documentation
certified by an authorized agent of the issuer showing the amount of
common stock or perpetual preferred stock issued, the dates of issue,
and amounts of such issues dedicated to the retirement or redemption of
mandatory convertible securities will satisfy the dedication
requirement.
4The dedication procedure is necessary to ensure that the primary
capital of the issuer is not overstated. For each dollar of common or
perpetual preferred proceeds dedicated to the retirement or redemption
of the notes, there is a corresponding reduction in the amount of
outstanding mandatory securities that may qualify as primary capital.
De minimis amounts (in relation to primary capital) of common or
perpetual preferred stock issued under arrangements in which the amount
of stock issued is not predictable, such as dividend reinvestment plans
and employee stock option plans (but excluding public stock offerings
and stock issued in connection with acquisitions), should be dedicated
by no later than the company's fiscal year end.
5Collateral is defined as: (1) Cash or certificates of deposit; (2)
U.S. government securities that will mature prior to or simultaneous
with the maturity of the equity contract and that have a par or maturity
value at least equal to the amount of the holder's obligation under the
stock purchase contract; (3) standby letters of credit issued by an
insured U.S. bank that is not an affiliate of the issuer; or (4) other
collateral as may be designated from time to time by the Federal
Reserve.
6The funded portions of the securities will be deducted from primary
capital to avoid double counting.