12 CFR Part 225 — Bank Holding Companies and Change in Bank Control (Regulation Y)

PART 225—BANK HOLDING COMPANIES AND CHANGE IN BANK CONTROL (REGULATION Y) Authority: 12 U.S.C. 1817(j)(13), 1818, 1828(o), 1831i, 1831p-1, 1843(c)(8), 1844(b), 1972(1), 3106, 3108, 3310, 3331-3351, 3354, 3906, 3907, and 3909; 15 U.S.C. 1681s, 1681w, 6801 and 6805. Source: Reg. Y, 49 FR 818, Jan. 5, 1984, unless otherwise noted. Editorial Note: Nomenclature changes to part 225 appear at 69 FR 77618, Dec. 28, 2004. Regulations Subpart A—General Provisions Source: Reg. Y, 62 FR 9319, Feb. 28, 1997, unless otherwise noted. § 225.1 Authority, purpose, and scope. (a) Authority. 1 Board BHC Act Bank Control Act et seq. 1 (b) Purpose. (1) Regulate the acquisition of control of banks by companies and individuals; (2) Define and regulate the nonbanking activities in which bank holding companies and foreign banking organizations with United States operations may engage; and (3) Set forth the procedures for securing approval for these transactions and activities. (c) Scope Subpart A (2) Subpart B (3) Subpart C (4) Subpart D (5) Subpart E (6) Subpart F (7) Subpart G (8) Subpart H (9) Subpart I establishes the procedure by which a bank holding company may elect to become a financial holding company, enumerates the consequences if a financial holding company ceases to meet a requirement applicable to a financial holding company, lists the activities in which a financial holding company may engage, establishes the procedure by which a person may request the Board to authorize additional activities as financial in nature or incidental thereto, and establishes the procedure by which a financial holding company may seek approval to engage in an activity that is complementary to a financial activity. (10) Subpart J (11) Subpart K (12)-(13) [Reserved] (14) Appendix D (15) [Reserved] (16) Appendix F [Reg. Y, 62 FR 9319, Feb. 28, 1997, as amended at 65 FR 16472, Mar. 28, 2000; 66 FR 414, Jan. 3, 2001; 66 FR 8484, Jan. 31, 2001; 66 FR 8636, Feb. 1, 2001; 76 FR 8275, Feb. 14, 2011; 79 FR 62290, Oct. 11, 2013] § 225.2 Definitions. Except as modified in this regulation or unless the context otherwise requires, the terms used in this regulation have the same meaning as set forth in the relevant statutes. (a) Affiliate (b)(1) Bank (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 laws 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 (c)(1) Bank holding company (i) Voting securities held in good faith in a fiduciary capacity (other than as provided in paragraphs (e)(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 part, or as otherwise provided in this regulation, bank holding company bank holding company (d)(1) Company (2) Company (3) Testamentary trusts exempt. (i) Terminates within 21 years and 10 months after the death of grantors or beneficiaries of the trust living on the effective date of the trust or within 25 years; (ii) Is a testamentary or inter vivos (iii) Contains only assets previously owned by the individual or individuals who established the trust; (iv) Is not a Massachusetts business trust; and (v) Does not issue shares, certificates, or any other evidence of ownership. (4) Qualified limited partnerships exempt. (e)(1) Control (i) Ownership, control, or power to vote 25 percent or more of the outstanding shares of any class of voting securities of the 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 company; (iii) The power to exercise, directly or indirectly, a controlling influence over the management or policies of the company, as determined by the Board after notice and opportunity for hearing in accordance with § 225.31 of subpart D of this part; 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 company upon the transfer of 25 percent or more of the outstanding shares of any class of voting securities of another company. (2) A company is deemed to control voting securities or assets owned, controlled, or held, directly or indirectly: (i) By the company, or by any subsidiary of the company; (ii) That the company has power to vote or to dispose of; (iii) In a fiduciary capacity for the benefit of the company or any of its subsidiaries; (iv) 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 company or any of its subsidiaries; or (v) According to the standards under § 225.9 of this part. (f) Foreign banking organization qualifying foreign banking organization (g) Insured depository institution (h) Lead insured depository institution (i) Management official (j) Nonbank bank (1) Became a bank as a result of enactment of the Competitive Equality Amendments of 1987 (Pub. L. 100-86), on the date of 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). (k) Outstanding shares (l) Person includes an individual, bank, corporation, partnership, trust, association, joint venture, pool, syndicate, sole proprietorship, unincorporated organization, or any other form of entity. (m) Savings association (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 that is deemed by the director of the Office of Thrift Supervision to be a savings association under section 10(l) of the Home Owners Loan Act. (n) Shareholder Controlling shareholder (2) Principal shareholder (o) Subsidiary (p) United States (q)(1) Voting securities (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) Nonvoting securities. voting securities (i) Any voting rights associated with the securities 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, such as the issuance of additional amounts or classes of senior securities, the modification of the terms of the security, the dissolution of the issuing company, or the payment of dividends by the issuing company when preferred dividends are in arrears; (ii) The securities represent an essentially passive investment or financing device and do not otherwise provide the holder with control over the issuing company; and (iii) The securities 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; except that limited partnership interests or membership interests in limited liability companies are not voting securities due to voting rights that are limited solely to voting for the removal of a general partner or managing member (or persons exercising similar functions at the company) for cause, to replace a general partner or managing member (or persons exercising similar functions at the company) due to incapacitation or following the removal of such person, or to continue or dissolve the company after removal of the general partner or managing member (or persons exercising similar functions at the company). (3) Class of voting shares. (r) Well-capitalized Bank holding company. 1 well-capitalized 1 (i) On a consolidated basis, the bank holding company maintains a total risk-based capital ratio of 10.0 percent or greater, as defined in 12 CFR 217.10; (ii) On a consolidated basis, the bank holding company maintains a tier 1 risk-based capital ratio of 6.0 percent or greater, as defined in 12 CFR 217.10; and (iii) The bank holding company is not subject to any written agreement, order, capital directive, or prompt corrective action directive issued by the Board to meet and maintain a specific capital level for any capital measure. (2) Insured and uninsured depository institution Insured depository institution. (ii) Uninsured depository institution. (3) Foreign banks Standards applied. (A) A foreign banking organization whose home country supervisor, as defined in § 211.21 of the Board's Regulation K (12 CFR 211.21), has adopted capital standards consistent in all respects with the Capital Accord of the Basle Committee on Banking Supervision (Basle Accord) may calculate its capital ratios under the home country standard; and (B) A foreign banking organization whose home country supervisor has not adopted capital standards consistent in all respects with the Basle Accord shall obtain a determination from the Board that its capital is equivalent to the capital that would be required of a U.S. banking organization under paragraph (r)(1) of this section. (ii) Branches and agencies. (4) Notwithstanding paragraphs (r)(1) through (3) of this section: (i) A bank holding company that is a qualifying community banking organization (as defined in § 217.12 of this chapter) that is subject to the community bank leverage ratio framework (as defined in § 217.12 of this chapter) is well capitalized if it satisfies the requirements of paragraph (r)(1)(iii) of this section. (ii) A depository institution that is a qualifying community banking organization (as defined in § 217.12 of this chapter) that is subject to the community bank leverage ratio framework (as defined in § 217.12 of this chapter) is well capitalized. (s) Well managed In general. (i) At its most recent inspection or examination or subsequent review by the appropriate Federal banking agency for the company or institution (or the appropriate state banking agency in an examination described in section 10(d) of the Federal Deposit Insurance Act (12 U.S.C. 1820(d)), the company or institution received: (A) At least a satisfactory composite rating; and (B) At least a satisfactory rating for management, if such rating is given. (ii) In the case of a company or depository institution that has not received an inspection or examination rating, the Board has determined, after a review of the managerial and other resources of the company or depository institution and after consulting with the appropriate Federal and state banking agencies, as applicable, for the company or institution, that the company or institution is well managed. (2) Merged depository institutions Merger involving well managed institutions. (ii) Merger involving a poorly rated institution. (3) Foreign banking organizations. (t) Depository institution. (u) Voting percentage. (1) The quotient, expressed as a percentage, of the number of shares of the class of voting securities controlled by the person, divided by the number of shares of the class of voting securities that are issued and outstanding, both as adjusted by § 225.9 of this part; and (2) The quotient, expressed as a percentage, of the number of votes that may be cast by the person on the voting securities controlled by the person, divided by the total votes that are legally entitled to be cast by the issued and outstanding shares of the class of voting securities, both as adjusted by § 225.9 of this part. [Reg. Y, 62 FR 9319, Feb. 28, 1997, as amended at 65 FR 3791, Jan. 25, 2000; 65 FR 15055, Mar. 21, 2000; 66 FR 414, Jan. 3, 2001; 71 FR 9901, Feb. 28, 2006; 78 FR 62290, Oct. 11, 2013; 80 FR 20157, Apr. 15, 2015; 80 FR 70673, Nov. 16, 2015; 83 FR 44198, Aug. 30, 2018; 84 FR 61799, Nov. 13, 2019; 85 FR 12421, Mar. 2, 2020] § 225.3 Administration. (a) Delegation of authority. (b) Appropriate Federal Reserve Bank. (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 part: 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. § 225.4 Corporate practices. (a) Bank holding company policy and operations. (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. (b) Purchase or redemption by bank holding company of its own securities Filing notice. (2) Contents of notice. (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 and sources of funding for 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) If the bank holding company has consolidated assets of $3 billion or more, consolidated pro forma pro forma (B) If the bank holding company has consolidated assets of less than $3 billion, a pro forma (3) Acting on notice. (4) Factors considered in acting on notice. (ii) In determining whether a proposal constitutes an unsafe or unsound practice, the Board shall 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 12 CFR part 217, and the Board's Policy Statement for Small Bank Holding Companies (appendix C of this part). (5) Disapproval and hearing. (ii) The Board shall order a hearing within 10 calendar days of receipt of the 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). (iii) 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. (6) Exception for well-capitalized bank holding companies. (i) Both before and immediately after the redemption, the bank holding company is well-capitalized; (ii) The bank holding company is well-managed; and (iii) The bank holding company is not the subject of any unresolved supervisory issues. (7) Exception for certain bank holding companies. (c) Deposit insurance. insured bank (d) Acting as transfer agent or clearing agent. (e) Reporting requirement for credit secured by certain bank holding company stock. (f) Suspicious activity report. (g) Requirements for financial holding companies engaged in securities underwriting, dealing, or market-making activities. (2) A foreign bank that is or is treated as a financial holding company under this part shall ensure that: (i) Any extension of credit by any U.S. branch or agency of such foreign bank to an affiliated company engaged in underwriting, dealing in, or making a market in securities pursuant to section 4(k)(4)(E) of the Bank Holding Company Act (12 U.S.C. 1843(k)(4)(E)), conforms to sections 23A and 23B of the Federal Reserve Act (12 U.S.C. 371c and 371c-1) as if the branch or agency were a member bank; (ii) Any purchase by any U.S. branch or agency of such foreign bank, as principal or fiduciary, of securities for which a securities affiliate described in paragraph (g)(2)(i) of this section is a principal underwriter conforms to sections 23A and 23B of the Federal Reserve Act (12 U.S.C. 371c and 371c-1) as if the branch or agency were a member bank; and (iii) Its U.S. branches and agencies not advertise or suggest that they are responsible for the obligations of a securities affiliate described in paragraph (g)(2)(i) of this section, consistent with section 23B(c) of the Federal Reserve Act (12 U.S.C. 371c-1(c)) as if the branches or agencies were member banks. (h) Protection of customer information and consumer information. [Reg. Y, 62 FR 9319, Feb. 28, 1997, as amended at 63 FR 58621, Nov. 2, 1998; 65 FR 14442, Mar. 17, 2000; 66 FR 8636, Feb. 1, 2001; 69 FR 77618, Dec. 28, 2004; 71 FR 9901, Feb. 28, 2006; 76 FR 74644, Dec. 1, 2011; 78 FR 62290, Oct. 11, 2013; 80 FR 20157, Apr. 15, 2015; 80 FR 70673, Nov. 16, 2015; 83 FR 44198, Aug. 30, 2018] § 225.5 Registration, reports, and inspections. (a) Registration of bank holding companies. (b) Reports of bank holding companies. (c) Examinations and inspections. § 225.6 Penalties for violations. (a) Criminal and civil penalties. (2) 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. et seq. § 225.7 Exceptions to tying restrictions. (a) Purpose. (b) Exceptions to statute. (1) Extension to affiliates of statutory exceptions preserving traditional banking relationships. (i) Obtain a loan, discount, deposit, or trust service from an affiliate of the bank; or (ii) Provide to an affiliate of the bank some additional credit, property, or service that the bank could require to be provided to itself pursuant to section 106(b)(1)(C) of the Bank Holding Company Act Amendments of 1970 (12 U.S.C. 1972(1)(C)). (2) Safe harbor for combined-balance discounts. (i) The bank offers deposits, and all such deposits are eligible products; and (ii) Balances in deposits count at least as much as nondeposit products toward the minimum balance. (3) Safe harbor for foreign transactions. (i) A corporation, business, or other person (other than an individual) that: (A) Is incorporated, chartered, or otherwise organized outside the United States; and (B) Has its principal place of business outside the United States; or (ii) An individual who is a citizen of a foreign country and is not resident in the United States. (c) Limitations on exceptions. (d) Extension of statute to electronic benefit transfer services. (e) For purposes of this section, bank § 225.8 Capital planning and stress capital buffer requirement. (a) Purpose. (b) Scope and reservation of authority Applicability. (i) Any top-tier bank holding company domiciled in the United States with average total consolidated assets of $100 billion or more ($100 billion asset threshold); (ii) Any other bank holding company domiciled in the United States that is made subject to this section, in whole or in part, by order of the Board; (iii) Any U.S. intermediate holding company subject to this section pursuant to 12 CFR 252.153; and (iv) Any nonbank financial company supervised by the Board that is made subject to this section pursuant to a rule or order of the Board. (2) Average total consolidated assets. (3) Ongoing applicability. (4) Reservation of authority. (5) Rule of construction. (6) Application of this section by order. (c) Transition periods for certain bank holding companies. (2) A bank holding company that meets the $100 billion asset threshold after September 30 of a calendar year must comply with the requirements of this section beginning on January 1 of the second calendar year after the bank holding company meets the $100 billion asset threshold, unless that time is extended by the Board in writing. Notwithstanding the previous sentence, the Board will not provide a bank holding company with notice of its stress capital buffer requirement until the first year in which the Board conducts an analysis of the bank holding company pursuant to 12 CFR 252.44. (3) The Board, or the appropriate Reserve Bank with the concurrence of the Board, may require a bank holding company described in paragraph (c)(1) or (2) of this section to comply with any or all of the requirements of this section if the Board, or appropriate Reserve Bank with concurrence of the Board, determines that the requirement is appropriate on a different date based on the company's risk profile, scope of operation, or financial condition and provides prior notice to the company of the determination. (d) Definitions. (1) Advanced approaches (2) Average total nonbank assets (3) Capital action (4) Capital distribution (5) Capital plan (6) C apital plan cycle (7) Capital policy (8) Category IV bank holding company (9) Common equity tier 1 capital (10) Effective capital distribution limitations (11) Final planned capital distributions (12) GSIB surcharge (13) Internal baseline scenario (14) Internal stress scenario (15) Nonbank financial company supervised by the Board (16) Planning horizon (17) Regulatory capital ratio (18) Severely adverse scenario (19) Stress capital buffer requirement (20) Supervisory stress test (21) U.S. intermediate holding company (e) Capital planning requirements and procedures Annual capital planning. (ii) A bank holding company must submit its complete capital plan to the Board and the appropriate Reserve Bank by April 5 of each calendar year, or such later date as directed by the Board or by the appropriate Reserve Bank with concurrence of the Board. (iii) The bank holding company's board of directors or a designated committee thereof must at least annually and prior to submission of the capital plan under paragraph (e)(1)(ii) of this section: (A) Review the robustness of the bank holding company's process for assessing capital adequacy; (B) Ensure that any deficiencies in the bank holding company's process for assessing capital adequacy are appropriately remedied; and (C) Approve the bank holding company's capital plan. (2) Mandatory elements of capital plan. (i) An assessment of the expected uses and sources of capital over the planning horizon that reflects the bank holding company's size, complexity, risk profile, and scope of operations, assuming both expected and stressful conditions, including: (A) Estimates of projected revenues, losses, reserves, and pro forma capital levels, including regulatory capital ratios, and any additional capital measures deemed relevant by the bank holding company, over the planning horizon under a range of scenarios, including: ( 1 ( 2 (B) A discussion of the results of any stress test required by law or regulation, and an explanation of how the capital plan takes these results into account; and (C) A description of all planned capital actions over the planning horizon. Planned capital actions must be consistent with effective capital distribution limitations, except as may be adjusted pursuant to paragraph (h) of this section. In determining whether a bank holding company's planned capital distributions are consistent with effective capital distribution limitations, a bank holding company must assume that: ( 1 ( 2 (ii) A detailed description of the bank holding company's process for assessing capital adequacy, including: (A) A discussion of how the bank holding company will, under expected and stressful conditions, maintain capital commensurate with its risks, maintain capital above the regulatory capital ratios, and serve as a source of strength to its subsidiary depository institutions; (B) A discussion of how the bank holding company will, under expected and stressful conditions, maintain sufficient capital to continue its operations by maintaining ready access to funding, meeting its obligations to creditors and other counterparties, and continuing to serve as a credit intermediary; (iii) The bank holding company's capital policy; and (iv) A discussion of any expected changes to the bank holding company's business plan that are likely to have a material impact on the bank holding company's capital adequacy or liquidity. (3) Data collection. (i) The bank holding company's financial condition, including its capital; (ii) The bank holding company's structure; (iii) Amount and risk characteristics of the bank holding company's on- and off-balance sheet exposures, including exposures within the bank holding company's trading account, other trading-related exposures (such as counterparty-credit risk exposures) or other items sensitive to changes in market factors, including, as appropriate, information about the sensitivity of positions to changes in market rates and prices; (iv) The bank holding company's relevant policies and procedures, including risk management policies and procedures; (v) The bank holding company's liquidity profile and management; (vi) The loss, revenue, and expense estimation models used by the bank holding company for stress scenario analysis, including supporting documentation regarding each model's development and validation; and (vii) Any other relevant qualitative or quantitative information requested by the Board or by the appropriate Reserve Bank to facilitate review of the bank holding company's capital plan under this section. (4) Resubmission of a capital plan. (A) The bank holding company determines there has been or will be a material change in the bank holding company's risk profile, financial condition, or corporate structure since the bank holding company last submitted the capital plan to the Board and the appropriate Reserve Bank under this section; or (B) The Board, or the appropriate Reserve Bank with concurrence of the Board, directs the bank holding company in writing to revise and resubmit its capital plan for any of the following reasons: ( 1 ( 2 ( 3 (ii) The Board, or the appropriate Reserve Bank with concurrence of the Board, may extend the 30-day period in paragraph (e)(4)(i) of this section for up to an additional 60 calendar days, or such longer period as the Board or the appropriate Reserve Bank, with concurrence of the Board, determines appropriate. (iii) Any updated capital plan must satisfy all the requirements of this section; however, a bank holding company may continue to rely on information submitted as part of a previously submitted capital plan to the extent that the information remains accurate and appropriate. (5) Confidential treatment of information submitted. (f) Calculation of the stress capital buffer requirement General. (2) Stress capital buffer requirement calculation. (i) The following calculation: (A) The ratio of a bank holding company's common equity tier 1 capital to risk-weighted assets, as calculated under 12 CFR part 217, subpart D, as of the final quarter of the previous capital plan cycle, unless otherwise determined by the Board; minus (B) The lowest projected ratio of the bank holding company's common equity tier 1 capital to risk-weighted assets, as calculated under 12 CFR part 217, subpart D, in any quarter of the planning horizon under a supervisory stress test; plus (C) The ratio of: ( 1 ( 2 (ii) 2.5 percent. (3) Recalculation of stress capital buffer requirement. (4) Adjustment of stress capital buffer requirement. 1 (g) Review of capital plans by the Federal Reserve. (1) The comprehensiveness of the capital plan, including the extent to which the analysis underlying the capital plan captures and addresses potential risks stemming from activities across the bank holding company and the bank holding company's capital policy; (2) The reasonableness of the bank holding company's capital plan, the assumptions and analysis underlying the capital plan, and the robustness of its capital adequacy process; (3) Relevant supervisory information about the bank holding company and its subsidiaries; (4) The bank holding company's regulatory and financial reports, as well as supporting data that would allow for an analysis of the bank holding company's loss, revenue, and reserve projections; (5) The results of any stress tests conducted by the bank holding company or the Federal Reserve; and (6) Other information requested or required by the Board or the appropriate Reserve Bank, as well as any other information relevant, or related, to the bank holding company's capital adequacy. (h) Federal Reserve notice of stress capital buffer requirement; final planned capital distributions Notice. (2) Response to notice Request for reconsideration of stress capital buffer requirement. (ii) Adjustments to planned capital distributions. (A) Determine whether the planned capital distributions for the fourth through seventh quarters of the planning horizon under the Internal baseline scenario would be consistent with effective capital distribution limitations assuming the stress capital buffer requirement provided by the Board under paragraph (h)(1) or (i)(5) of this section, as applicable, in place of any stress capital buffer requirement in effect; and ( 1 ( 2 (B) Notify the Board of any adjustments made to planned capital distributions for the fourth through seventh quarters of the planning horizon under the Internal baseline scenario. (3) Final planned capital distributions. (i) The expiration of the time for requesting reconsideration under paragraph (i) of this section; and (ii) The expiration of the time for adjusting planned capital distributions pursuant to paragraph (h)(2)(ii) of this section. (4) Effective date of final stress capital buffer requirement. (ii) Unless otherwise determined by the Board, a bank holding company's final planned capital distributions and final stress capital buffer requirement shall: (A) Be effective on October 1 of the calendar year in which a capital plan was submitted pursuant to paragraph (e)(1)(ii) of this section; and (B) Remain in effect until superseded. (5) Publication. (i) The stress capital buffer requirement provided to a bank holding company under paragraph (h)(1) or (i)(5) of this section; (ii) Adjustments made pursuant to paragraph (h)(2)(ii); (iii) A summary of the results of the supervisory stress test; and (iv) Other information. (i) Administrative remedies; request for reconsideration. (1) General. (2) Timing of request. (3) Contents of request. (ii) A request for reconsideration may include a request for an informal hearing on the bank holding company's request for reconsideration. (4) Hearing. (ii) An informal hearing shall be held within 30 calendar days of a request, if granted, provided that the Board may extend this period upon notice to the requesting party. (5) Response to request. (6) Distributions during the pendency of a request for reconsideration. (j) Approval requirements for certain capital actions Circumstances requiring approval Resubmission of a capital plan. (2) Contents of request. (i) The bank holding company's capital plan or a discussion of changes to the bank holding company's capital plan since it was last submitted to the Federal Reserve; (ii) The purpose of the transaction; (iii) A description of the capital distribution, including for redemptions or repurchases of securities, the gross consideration to be paid and the terms and sources of funding for the transaction, and for dividends, the amount of the dividend(s); and (iv) Any additional information requested by the Board or the appropriate Reserve Bank (which may include, among other things, an assessment of the bank holding company's capital adequacy under a severely adverse scenario, a revised capital plan, and supporting data). (3) Approval of certain capital distributions. (ii) In acting on a request for prior approval of a capital distribution, the Board, or appropriate Reserve Bank with concurrence of the Board, will apply the considerations and principles in paragraph (g) of this section, as appropriate. In addition, the Board, or the appropriate Reserve Bank with concurrence of the Board, may disapprove the transaction if the bank holding company does not provide all of the information required to be submitted under paragraph (j)(2) of this section. (4) Disapproval and hearing. (ii) The Board may, in its sole discretion, order an informal hearing if the Board finds that a hearing is appropriate or necessary to resolve disputes regarding material issues of fact. An informal hearing shall be held within 30 calendar days of a request, if granted, provided that the Board may extend this period upon notice to the requesting party. (iii) Written notice of the final decision of the Board shall be given to the bank holding company within 60 calendar days of the conclusion of any informal hearing ordered by the Board, provided that the Board may extend this period upon notice to the requesting party. (iv) While the Board's decision is pending and until such time as the Board, or the appropriate Reserve Bank with concurrence of the Board, approves the capital distribution at issue, the bank holding company may not make such capital distribution. (k) Post notice requirement. (1) The capital distribution was approved pursuant to paragraph (j)(3) of this section; or (2) The dollar amount of the capital distribution will exceed the dollar amount of the bank holding company's final planned capital distributions, as measured on an aggregate basis beginning in the fourth quarter of the planning horizon through the quarter at issue. [85 FR 15599, Mar. 18, 2020, as amended at 86 FR 7940, Feb. 3, 2021] § 225.9 Control over securities. (a) Contingent rights, convertible securities, options, and warrants. (2) If a financial instrument of the type described in paragraph (a)(1) of this section is convertible into, exercisable for, exchangeable for, or otherwise may become a number of securities that varies according to a formula, rate, or other variable metric, the number of securities controlled under paragraph (a)(1) of this section is the maximum number of securities that the financial instrument could be converted into, be exercised for, be exchanged for, or otherwise become under the formula, rate, or other variable metric. (3) Notwithstanding paragraph (a)(1) of this section, a person does not control voting securities due to controlling a financial instrument if the financial instrument: (i) By its terms is not convertible into, is not exercisable for, is not exchangeable for, and may not otherwise become voting securities in the hands of the person or an affiliate of the person; and (ii) By its terms is only convertible into, exercisable for, exchangeable for, or may otherwise become voting securities in the hands of a transferee after a transfer: (A) In a widespread public distribution; (B) To the issuing company; (C) In transfers in which no transferee (or group of associated transferees) would receive 2 percent or more of the outstanding securities of any class of voting securities of the issuing company; or (D) To a transferee that would control more than 50 percent of every class of voting securities of the issuing company without any transfer from the person. (4) Notwithstanding paragraph (a)(1) of this section, a person that has agreed to acquire securities or other financial instruments pursuant to a securities purchase agreement does not control such securities or financial instruments until the person acquires the securities or financial instruments. (5) Notwithstanding paragraph (a)(1) of this section, a right that provides a person the ability to acquire securities in future issuances or to convert nonvoting securities into voting securities does not cause the person to control the securities that could be acquired under the right, so long as the right does not allow the person to acquire a higher percentage of the class of securities than the person controlled immediately prior to the future acquisition. (6) Notwithstanding paragraph (a)(1) of this section, a preferred security that would be a nonvoting security but for a right to vote on directors that activates only after six or more quarters of unpaid dividends is not considered to be a voting security until the security holder is entitled to exercise the voting right. (7) For purposes of determining the percentage of a class of voting securities or the total equity percentage of a company controlled by a person that controls a financial instrument of the type described in paragraph (a)(1) of this section: (i) The securities controlled by the person under paragraphs (a)(1) through (6) of this section are deemed to be issued and outstanding; and (ii) Any securities controlled by anyone other than the person under paragraph (a)(1) through (6) of this section are not deemed to be issued and outstanding, unless by the terms of the financial instruments the securities controlled by the other persons must be issued and outstanding in order for the securities of the person to be issued and outstanding. (b) Restriction on securities. (1) A requirement that the second person offer the securities for sale to the first person for a reasonable period of time prior to transferring the securities to a third party; (2) A requirement that, if the second person agrees to sell the securities, the second person provide the first person with the opportunity to participate in the sale of the securities by the second person; (3) A requirement under which the second person agrees to sell its securities to a third party if a majority of security holders agrees to sell their securities to the third party; (4) Incident to a bona fide loan transaction in which the securities serve as collateral; (5) A short-term and revocable proxy; (6) A restriction on transferability that continues only for a reasonable amount of time necessary to complete an acquisition by the first person of the securities from the second person, including the time necessary to obtain required approval from an appropriate government authority with respect to the acquisition; (7) A requirement that the second person vote the securities in favor of a specific acquisition of control of the issuing company, or against competing transactions, if the restriction continues only for a reasonable amount of time necessary to complete the transaction, including the time necessary to obtain required approval from an appropriate government authority with respect to an acquisition or merger; or (8) An agreement among security holders of the issuing company intended to preserve the tax status or tax benefits of the company, such as qualification of the issuing company as a Subchapter S corporation, as defined in 26 U.S.C. 1361(a)(1) or any successor statute, or prevention of events that could impair deferred tax assets, such as net operating loss carryforwards, as described in 26 U.S.C. 382 or any successor statute. (c) Securities held by senior management officials or controlling equity holders of a company. (d) Reservation of authority. [85 FR 12421, Mar. 2, 2020] § 225.10 Temporary relief for 2020 and 2021. (a) Except as provided in paragraph (c) of this section and subject to the provisions of paragraph (d) of this section, from December 2, 2020, through December 31, 2021, the consolidated assets, consolidated risk-weighted assets, total consolidated assets, and total assets of a bank holding company for purposes of §§ 225.4(b)(2)(iii)(A) and (B), 225.14(a)(1)(v)(A)( 1 2 1 2 (b) Except as provided in paragraph (c) of this section and subject to the provisions of paragraph (d) of this section, from December 2, 2020, through December 31, 2021, for purposes of determining the applicability of §§ 224.14(c)(6)(ii), 225.17(a)(6), and 225.23(c)(5)(ii) of this part and appendix C to this part, the pro forma (1) Such amount calculated as the sum of the assets of each company involved in the proposed business combination, as well as any company with which any such company has combined since December 31, 2019, as of December 31, 2019; and (2) Such amount calculated as the sum of the assets of each company involved in the proposed business combination as of the end of the most recent calendar quarter. (c) The relief provided under paragraphs (a) and (b) of this section does not apply to a bank holding company if the Board determines that permitting the bank holding company to determine its assets in accordance with that paragraph would not be commensurate with the risk profile of the bank holding company. When making this determination, the Board will consider all relevant factors, including the extent of asset growth of the bank holding company since December 31, 2019; the causes of such growth, including whether growth occurred as a result of mergers or acquisitions; whether such growth is likely to be temporary or permanent; whether the bank holding company has become involved in any additional activities since December 31, 2019; the asset size of any parent companies; and the type of assets held by the bank holding company. In making a determination pursuant to this section, the Board will apply notice and response procedures in the same manner and to the same extent as the notice and response procedures in 12 CFR 263.202. (d) Nothing in this section limits the discretion of the Board or its delegatee to disallow the use of any expedited action process, require the submission of additional information in connection with a notice or application, or consider the ability of a bank holding company filing a notice or application under this part to comply with any statutory or regulatory requirements that may be applicable to the bank holding company upon expiration of the relief provided by this section. [85 FR 77361, Dec. 2, 2020] Subpart B—Acquisition of Bank Securities or Assets Source: Reg. Y, 62 FR 9324, Feb. 28, 1997, unless otherwise noted. § 225.11 Transactions requiring Board approval. The following transactions require the Board's prior approval under section 3 of the Bank Holding Company Act except as exempted under § 225.12 or as otherwise covered by § 225.17 of this subpart: (a) Formation of bank holding company. (b) Acquisition of subsidiary bank. (c) Acquisition of control of bank or bank holding company securities. (2) 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. (e) Merger of bank holding companies. (f) Transactions by foreign banking organization. § 225.12 Transactions not requiring Board approval. The following transactions do not (a) Acquisition of securities in fiduciary capacity. (1) The acquiring bank or other company has sole discretionary authority to vote the securities and retains this 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. (c) Acquisition of securities by bank holding company with majority control. (d) Acquisitions involving bank mergers and internal corporate reorganizations Transactions subject to Bank Merger Act. (i) The merger of a nonsubsidiary bank and a nonoperating subsidiary bank formed by a company for the purpose of acquiring the nonsubsidiary bank; or (ii) 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. (2) Certain acquisitions subject to Bank Merger Act. (i) The bank merger, consolidation, or asset purchase occurs simultaneously with the acquisition of the shares of the bank or bank holding company or the merger of holding companies, and the bank is not operated by the acquiring bank holding company as a separate entity other than as the survivor of the merger, consolidation, or asset purchase; (ii) The transaction requires the prior approval of a federal supervisory agency under the Bank Merger Act (12 U.S.C. 1828(c)); (iii) The transaction does not involve the acquisition of any nonbank company that would require prior approval under section 4 of the BHC Act (12 U.S.C. 1843); (iv) Both before and after the transaction, the acquiring bank holding company meets the requirements of 12 CFR part 217; (v) At least 10 days prior to the transaction, the acquiring bank holding company has provided to the Reserve Bank written notice of the transaction that contains: (A) A copy of the filing made to the appropriate federal banking agency under the Bank Merger Act; and (B) A description of the holding company's involvement in the transaction, the purchase price, and the source of funding for the purchase price; and (vi) Prior to expiration of the period provided in paragraph (d)(2)(v) of this section, the Reserve Bank has not informed the bank holding company that an application under § 225.11 is required. (3) Internal corporate reorganizations. (A) The merger of holding companies that are subsidiaries of the bank holding company; (B) The formation of a subsidiary holding company; 1 1 (C) The transfer of control or ownership of a subsidiary bank or a subsidiary holding company between one subsidiary holding company and another subsidiary holding company or the bank holding company. (ii) A transaction described in paragraph (d)(3)(i) of this section qualifies for this exception if: (A) The transaction represents solely a corporate reorganization involving companies and insured depository institutions that, both preceding and following the transaction, are lawfully controlled and operated by the bank holding company; (B) The transaction does not involve the acquisition of additional voting shares of an insured depository institution that, prior to the transaction, was less than majority owned by the bank holding company; (C) The bank holding company is not organized in mutual form; and (D) Both before and after the transaction, the bank holding company meets the Board's Capital Adequacy Guidelines (appendices A, B, C, D, and E of this part). (e) Holding securities in escrow. (f) Acquisition of foreign banking organization. [ Reg. Y, 62 FR 9324, Feb. 28, 1997, as amended at 78 FR 62291, Oct. 11, 2013; 80 FR 70673, Nov. 16, 2015] § 225.13 Factors considered in acting on bank acquisition proposals. (a) Factors requiring denial. (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; (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 anti-competitive effects are clearly outweighed by its probable effect in meeting the convenience and needs of the community; (3) The applicant has failed to provide the Board with adequate assurances that it will make available such information on its operations or activities, and the operations or activities of any affiliate of the applicant, that the Board deems appropriate to determine and enforce compliance with the BHC Act and other applicable federal banking statutes, and any regulations thereunder; or (4) In the case of an application involving a foreign banking organization, the foreign banking organization is not subject to comprehensive supervision or regulation on a consolidated basis by the appropriate authorities in its home country, as provided in § 211.24(c)(1)(ii) of the Board's Regulation K (12 CFR 211.24(c)(1)(ii)). (b) Other factors. (1) Financial condition. (2) Managerial resources. (3) Convenience and needs of community. et seq. (c) Interstate transactions. (d) Conditional approvals. § 225.14 Expedited action for certain bank acquisitions by well-run bank holding companies. (a) Filing of notice Information required and public notice. (i) A certification that all of the criteria in paragraph (c) of this section are met; (ii) A description of the transaction that includes identification of the companies and insured depository institutions involved in the transaction 1 1 (iii) A description of the effect of the transaction on the convenience and needs of the communities to be served and of the actions being taken by the bank holding company to improve the CRA performance of any insured depository institution subsidiary that does not have at least a satisfactory CRA performance rating at the time of the transaction; (iv) Evidence that notice of the proposal has been published in accordance with § 225.16(b)(1); (v)(A) If the bank holding company is not a qualifying community banking organization (as defined in § 217.12 of this chapter) that is subject to the community bank leverage ratio framework (as defined in § 217.12 of this chapter), and: ( 1 pro forma pro forma ( 2 pro forma (B) If the bank holding company is a qualifying community banking organization (as defined in § 217.12 of this chapter) that is subject to the community bank leverage ratio framework (as defined in § 217.12 of this chapter), an abbreviated consolidated pro forma pro forma (vi) If the bank holding company has consolidated assets of less than $300 million, a list of and biographical information regarding any directors or senior executive officers of the resulting bank holding company that are not directors or senior executive officers of the acquiring bank holding company or of a company or institution to be acquired; (vii)(A) For each insured depository institution (that is not a qualifying community banking organization (as defined in § 217.12 of this chapter) that is subject to the community bank leverage ratio framework (as defined in § 217.12 of this chapter)) whose Tier 1 capital, total capital, total assets or risk-weighted assets change as a result of the transaction, the total risk-weighted assets, total assets, Tier 1 capital and total capital of the institution on a pro forma (B) For each insured depository institution that is a qualifying community banking organization (as defined in § 217.12 of this chapter) that is subject to the community bank leverage ratio framework (as defined in § 217.12 of this chapter), whose Tier 1 capital (as defined in § 217.2 of this chapter and calculated in accordance with § 217.12(b) of this chapter) or total assets change as a result of the transaction, the total assets and Tier 1 capital of the institution on a pro forma (viii) The market indexes for each relevant banking market reflecting the pro forma (2) Waiver of unnecessary information. (b)(1) Action on proposals under this section. (2) Acceptance of notice in event expedited procedure not available. (c) Criteria for use of expedited procedure. (1) Well-capitalized organization Bank holding company. (ii) Insured depository institutions. (A) The lead insured depository institution of the acquiring bank holding company is well-capitalized; (B) Well-capitalized insured depository institutions control at least 80 percent of the total risk-weighted assets of insured depository institutions controlled by the acquiring bank holding company; and (C) No insured depository institution controlled by the acquiring bank holding company is undercapitalized; (2) Well managed organization Satisfactory examination ratings. (ii) No poorly managed institutions. (iii) Recently acquired institutions excluded. (A) The bank holding company has developed a plan acceptable to the appropriate federal banking agency for the institution to restore the capital and management of the institution; and (B) All insured depository institutions excluded under this paragraph represent, in the aggregate, less than 10 percent of the aggregate total risk-weighted assets of all insured depository institutions controlled by the bank holding company; (3) Convenience and needs criteria Effect on the community. (ii) Established CRA performance record. (4) Public comment. (5) Competitive criteria Competitive screen. (A) Insured depository institutions controlled by the acquiring bank holding company to control in excess of 35 percent of market deposits in any relevant banking market; or (B) The Herfindahl-Hirschman index to increase by more than 200 points in any relevant banking market with a post-acquisition index of at least 1800; and (ii) Department of Justice. (6) Size of acquisition In general Limited growth. other qualifying transactions (B) Individual size limitation. (ii) Small bank holding companies. (iii) Qualifying community banking organizations. (A) The acquiring bank holding company is a qualifying community banking organization (as defined in § 217.12 of this chapter) that is subject to the community bank leverage ratio framework (as defined in § 217.12 of this chapter); (B) The sum of the total assets to be acquired in the proposal and the total assets acquired by the acquiring bank holding company in all other qualifying transactions does not exceed 35 percent of the average total consolidated assets (as used in § 217.12 of this chapter) of the acquiring bank holding company as last reported to the Board; and (C) The total assets to be acquired do not exceed $7.5 billion; (7) Supervisory actions. (8) Interstate acquisitions. (9) Other supervisory considerations. (10) Notification. (d) Comment by primary banking supervisor Notice. (2) Comment period. (3) Action subject to supervisor's comment. (4) Emergencies. (5) Primary banking supervisor. the primary banking supervisor (i) The Office of the Comptroller of the Currency, in the case of a national banking association or District bank; (ii) The appropriate supervisory authority for the State in which the bank is chartered, in the case of a State bank; (iii) The Director of the Office of Thrift Supervision, in the case of a savings association. (e) Branches and agencies of foreign banking organizations. (f) Qualifying community banking organizations. [Reg. Y, 62 FR 9324, Feb. 28, 1997, as amended at 66 FR 415, Jan. 3, 2001; 71 FR 9901, Feb. 28, 2006; 78 FR 62291, Oct. 11, 2013; 80 FR 20157, Apr. 15, 2015; 83 FR 44199, Aug. 30, 2018; 84 FR 61799, Nov. 13, 2019; 84 FR 70887, Dec. 26, 2019] § 225.15 Procedures for other bank acquisition proposals. (a) Filing application. (b) Notice to primary banking supervisor. (c) Accepting application for processing. (d) Action on applications Action under delegated authority. (2) Board action. § 225.16 Public notice, comments, hearings, and other provisions governing applications and notices. (a) In general. (b) Public notice Newspaper publication Location of publication. (ii) Contents of notice. (iii) Timing of publication. (2) Federal Register notice Publication by Board. Federal Register (ii) Request for advance publication. Federal Register. Federal Register Federal Register (3) Waiver or shortening of notice. (c) Public comment Timely comments. (2) Extension of comment period In general. (ii) Requests in connection with obtaining application or notice. (iii) Joint requests by interested person and acquiring company. (3) Substantive comment. (d) Notice to Attorney General. (e) Hearings. (f) Approval through failure to act Ninety-one day rule. (2) Complete record. (i) The date of receipt by the Board of an application or notice 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 or notice; (iii) The date of receipt by the Board of the last relevant material regarding the application or notice 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. (g) Exceptions to notice and hearing requirements Probable bank failure. (2) Emergency. (h) Waiting period. (1) Immediately upon approval, if the Board has determined under paragraph (g) of this section that the application or notice involves a probable bank failure; (2) On or after the 5th calendar day following the date of approval, if the Board has determined under paragraph (g) of this section that an emergency exists requiring expeditious action; or (3) On or after the 15th calendar day following the date of approval, if the Board has not received any adverse comments from the United States Attorney General relating to the competitive factors and the Attorney General has consented to the shorter waiting period. § 225.17 Notice procedure for one-bank holding company formations. (a) Transactions that qualify under this section. (1) The shareholder or shareholders who control at least 67 percent of the shares of the bank will control, immediately after the reorganization, at least 67 percent of the shares of the holding company in substantially the same proportion, except for changes in shareholders' interests resulting from the exercise of dissenting shareholders' rights under state or federal law; 4 4 pro rata (2) No shareholder, or group of shareholders acting in concert, will, following the reorganization, own or control 10 percent or more of any class of voting shares of the bank holding company, unless that shareholder or group of shareholders was authorized, after review under the Change in Bank Control Act of 1978 (12 U.S.C. 1817(j)) by the appropriate federal banking agency for the bank, to own or control 10 percent or more of any class of voting shares of the bank; 5 5 (3) The bank is adequately capitalized (as defined in section 38 of the Federal Deposit Insurance Act (12 U.S.C. 1831o)); (4) The bank received at least a composite “satisfactory” rating at its most recent examination, in the event that the bank was examined; (5) At the time of the reorganization, neither the bank nor any of its officers, directors, or principal shareholders is involved in any unresolved supervisory or enforcement matters with any appropriate federal banking agency; (6) The company demonstrates that any debt that it incurs at the time of the reorganization, and the proposed means of retiring this debt, will not place undue burden on the holding company or its subsidiary on a pro forma 6 6 pro forma (7) The holding company will not, as a result of the reorganization, acquire control of any additional bank or engage in any activities other than those of managing and controlling banks; and (8) During this period, neither the appropriate Reserve Bank nor the Board objected to the proposal or required the filing of an application under § 225.15 of this subpart. (b) Contents of notice. (1) Certification by the notificant's board of directors that the requirements of 12 U.S.C. 1842(a)(C) and this section are met by the proposal; (2) A list identifying all principal shareholders of the bank prior to the reorganization and of the holding company following the reorganization, and specifying the percentage of shares held by each principal shareholder in the bank and proposed to be held in the new holding company; (3) A description of the resulting management of the proposed bank holding company and its subsidiary bank, including: (i) Biographical information regarding any senior officers and directors of the resulting bank holding company who were not senior officers or directors of the bank prior to the reorganization; and (ii) A detailed history of the involvement of any officer, director, or principal shareholder of the resulting bank holding company in any administrative or criminal proceeding; and (4) Pro forma (c) Acknowledgment of notice. (d) Application required upon objection. [Reg. Y, 62 FR 9319, Feb. 28, 1997, as amended at 71 FR 9902, Feb. 28, 2006; 78 FR 62291, Oct. 11, 2013; 80 FR 20157, Apr. 15, 2015; 83 FR 44199, Aug. 30, 2018] Subpart C—Nonbanking Activities and Acquisitions by Bank Holding Companies Source: Reg. Y, 62 FR 9329, Feb. 28, 1997, unless otherwise noted. § 225.21 Prohibited nonbanking activities and acquisitions; exempt bank holding companies. (a) Prohibited nonbanking activities and acquisitions. (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 the requirements of this regulation. (b) Exempt bank holding companies. (1) Family-owned companies. (2) Labor, agricultural, and horticultural organizations. (3) Companies granted hardship exemption. (4) Companies granted exemption on other grounds. demand deposit commercial loan, (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 part 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 part do not apply to a company exempt under this paragraph. § 225.22 Exempt nonbanking activities and acquisitions. (a) Certain de novo activities. de novo (1) Meets the requirements of paragraphs (c) (1), (2), and (6) of § 225.23; (2) Conducts the activity in compliance with all Board orders and regulations governing the activity; and (3) Within 10 business days after commencing the activity, provides written notice to the appropriate Reserve Bank describing the activity, identifying the company or companies engaged in the activity, and certifying that the activity will be conducted in accordance with the Board's orders and regulations and that the bank holding company meets the requirements of paragraphs (c) (1), (2), and (6) of § 225.23. (b) Servicing activities. (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. (c) Safe deposit business. (d) Nonbanking acquisitions not requiring prior Board approval. (1) DPC acquisitions. (ii) The Board may, upon request, extend this two-year period for up to three additional years. The Board may permit additional extensions for up to 5 years (for a total of 10 years), for shares, real estate or other assets where the holding company demonstrates that each extension would not be detrimental to the public interest and either the bank holding company has made good faith attempts to dispose of such shares, real estate or other assets or disposal of the shares, real estate or other assets during the initial period would have been detrimental to the company. (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. (3) Fiduciary investments. (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 national bank. (5) Securities or property representing 5 percent or less of a company. (6) Securities of investment company. (7) Assets acquired in ordinary course of business. (8) Asset acquisitions by lending company or industrial bank. (i) The acquiring company has previously received Board approval under this regulation or is not required to obtain prior Board approval under this regulation to engage in lending activities or industrial banking activities; (ii) The assets acquired during any 12-month period do not represent more than 50 percent of the risk-weighted assets (on a consolidated basis) of the acquiring lending company or industrial bank, or more than $100 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 lending activities 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 requirements of 12 CFR part 217, and the Board has not previously notified the acquiring company that it may not acquire assets under the exemption in this paragraph (d). (vi) Qualifying community banking organizations. (A) Its average total consolidated assets (as used in § 217.12 of this chapter) as most recently reported to its primary banking supervisor (as defined in § 225.14(d)(5)); or (B) Its total assets, if the company or industrial bank does not report such average total consolidated assets. (e) Acquisition of securities by subsidiary banks National bank. (2) State bank. (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. (f) Activities and securities of new bank holding companies. (g) Grandfathered activities and securities. (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. (h) Securities or activities exempt under Regulation K. [ Reg. Y, 62 FR 9329, Feb. 28, 1997, as amended at 78 FR 62291, Oct. 11, 2013; 80 FR 70673, Nov. 16, 2015; 84 FR 61800, Nov. 13, 2019] § 225.23 Expedited action for certain nonbanking proposals by well-run bank holding companies. (a) Filing of notice Information required. 1 de novo, 1 (i) A certification that all of the criteria in paragraph (c) of this section are met; (ii) A description of the transaction that includes identification of the companies involved in the transaction, the activities to be conducted, and a commitment to conduct the proposed activities in conformity with the Board's regulations and orders governing the conduct of the proposed activity; (iii) If the proposal involves an acquisition of a going concern: (A) If the acquiring bank holding company is not a qualifying community banking organization (as defined in § 217.12 of this chapter) that is subject to the community bank leverage ratio framework (as defined in § 217.12 of this chapter): ( 1 pro forma pro forma ( 2 pro forma (B) If the acquiring bank holding company is a qualifying community banking organization (as defined in § 217.12 of this chapter) that is subject to the community bank leverage ratio framework (as defined in § 217.12 of this chapter), an abbreviated consolidated pro forma pro forma (C) For each insured depository institution (that is not a qualifying community banking organization (as defined in § 217.12 of this chapter) that is subject to the community bank leverage ratio framework (as defined in § 217.12 of this chapter)) whose Tier 1 capital, total capital, total assets or risk-weighted assets change as a result of the transaction, the total risk-weighted assets, total assets, Tier 1 capital and total capital of the institution on a pro forma (D) For each insured depository institution that is a qualifying community banking organization (as defined in § 217.12 of this chapter) that is subject to the community bank leverage ratio framework (as defined in § 217.12 of this chapter) whose Tier 1 capital (as defined in § 217.2 of this chapter and calculated in accordance with § 217.12(b) of this chapter) or total assets change as a result of the transaction, the total assets and Tier 1 capital of the institution on a pro forma (iv) Identification of the geographic markets in which competition would be affected by the proposal, a description of the effect of the proposal on competition in the relevant markets, a list of the major competitors in that market in the proposed activity if the affected market is local in nature, and, if requested, the market indexes for the relevant market; and (v) A description of the public benefits that can reasonably be expected to result from the transaction. (2) Waiver of unnecessary information. (b)(1) Action on proposals under this section. (2) Acceptance of notice if expedited procedure not available. (c) Criteria for use of expedited procedure. (1) Well-capitalized organization Bank holding company. (ii) Insured depository institutions. (A) The lead insured depository institution of the acquiring bank holding company is well-capitalized; (B) Well-capitalized insured depository institutions control at least 80 percent of the total risk-weighted assets of insured depository institutions controlled by the acquiring bank holding company; and (C) No insured depository institution controlled by the acquiring bank holding company is undercapitalized; (2) Well managed organization Satisfactory examination ratings. (ii) No poorly managed institutions. (iii) Recently acquired institutions excluded. (A) The bank holding company has developed a plan acceptable to the appropriate federal banking agency for the institution to restore the capital and management of the institution; and (B) All insured depository institutions excluded under this paragraph represent, in the aggregate, less than 10 percent of the aggregate total risk-weighted assets of all insured depository institutions controlled by the bank holding company; (3) Permissible activity. (ii) The Board has not indicated that proposals to engage in the activity are subject to the notice procedure provided in § 225.24; (4) Competitive criteria Competitive screen. (A) The acquiring bank holding company to control in excess of 35 percent of the market share in any relevant market; or (B) The Herfindahl-Hirschman index to increase by more than 200 points in any relevant market with a post-acquisition index of at least 1800; and (ii) Other competitive factors. (5) Size of acquisition In general Limited growth. (B) Consideration paid. (C) Individual size limitation. (ii) Small bank holding companies. (iii) Qualifying community banking organizations. (A) The acquiring bank holding company is a qualifying community banking organization (as defined in § 217.12 of this chapter) that is subject to the community bank leverage ratio framework (as defined in § 217.12 of this chapter); and (B) The sum of the total assets to be acquired in the proposal and the total assets acquired by the acquiring bank holding company in all other qualifying transactions does not exceed 35 percent of the average total consolidated assets (as used in § 217.12 of this chapter) of the acquiring bank holding company as last reported to the Board; (C) The gross consideration to be paid by the acquiring bank holding company in the proposal does not exceed 15 percent of the Tier 1 capital (as defined in § 217.2 of this chapter and calculated in accordance with § 217.12(b) of this chapter) of the acquiring bank holding company; and (D) The total assets to be acquired do not exceed $7.5 billion; (6) Supervisory actions. (7) Notification. (d) Branches and agencies of foreign banking organizations. (e) Qualifying community banking organizations. [Reg. Y, 62 FR 9329, Feb. 28, 1997, as amended at 66 FR 415, Jan. 3, 2001; 71 FR 9902, Feb. 28, 2006; 78 FR 62291, Oct. 11, 2013; 80 FR 20157, Apr. 15, 2015; 83 FR 44199, Aug. 30, 2018; 84 FR 61800, Nov. 13, 2019] § 225.24 Procedures for other nonbanking proposals. (a) Notice required for nonbanking activities. (1) Engaging de novo in listed activities. de novo, (2) Acquiring company engaged in listed activities. (i) A description of the proposal, including a description of each proposed activity, and the effect of the proposal on competition among entities engaging in each proposed activity in each relevant market with relevant market indexes; (ii) The identity of any entity involved in the proposal, and, if the notificant proposes to conduct the activity through an existing subsidiary, a description of the existing activities of the subsidiary; (iii) A statement of the public benefits that can reasonably be expected to result from the proposal; (iv) If the bank holding company has consolidated assets of $150 million or more: (A) Parent company and consolidated pro forma (B) Consolidated pro forma pro forma (C) A description of the purchase price and the terms and sources of funding for the transaction; (v) If the bank holding company has consolidated assets of less than $150 million: (A) A pro forma (B) A description of the purchase price and the terms and sources of funding for the transaction and, if the transaction is debt funded, one-year income statement and cash flow projections for the parent company, and the sources and schedule for retiring any debt incurred in the transaction; (vi)(A) For each insured depository institution (that is not a qualifying community banking organization (as defined in § 217.12 of this chapter) that is subject to the community bank leverage ratio framework (as defined in § 217.12 of this chapter)) whose Tier 1 capital, total capital, total assets or risk-weighted assets change as a result of the transaction, the total risk-weighted assets, total assets, Tier 1 capital and total capital of the institution on a pro forma (B) For each insured depository institution that is a qualifying community banking organization (as defined in § 217.12 of this chapter) that is subject to the community bank leverage ratio framework (as defined in § 217.12 of this chapter) whose Tier 1 capital (as defined in § 217.2 of this chapter and calculated in accordance with § 217.12(b) of this chapter) or total assets change as a result of the transaction, the total assets and Tier 1 capital of the institution on a pro forma (vii) A description of the management expertise, internal controls and risk management systems that will be utilized in the conduct of the proposed activities; and (viii) A copy of the purchase agreements, and balance sheet and income statements for the most recent quarter and year-end for any company to be acquired. (b) Notice provided to Board. (c) Notice to public Listed activities and activities approved by order. Federal Register (A) A notice under this section; or (B) A written request that notice of a proposal under this section or § 225.23 be published in the Federal Register. Federal Register (ii) The Federal Register (2) New activities In general. Federal Register Federal Register (ii) Time for publication. Federal Register (d) Action on notices Reserve Bank action In general. (A) Approve the notice; or (B) Refer the notice to the Board for decision because action under delegated authority is not appropriate. (ii) Return of incomplete notice. (iii) Notice of action. (iv) Close of public comment period. (2) Board action; internal schedule. (3)(i) Required time limit for System action. (ii) Extension of required period for action In general. (B) Unlisted activities. (4) Requests for additional information. (5) Tolling of period. [Reg. Y, 62 FR 9332, Feb. 28, 1997, as amended at 62 FR 60640, Nov. 12, 1997; 65 FR 14438, Mar. 17, 2000; 84 FR 61801, Nov. 13, 2019] § 225.25 Hearings, alteration of activities, and other matters. (a) Hearings Procedure to request hearing. (2) Determination to hold hearing. (3) Extension of period for hearing. (b) Approval through failure to act. (2) Complete notice. (c) Notice to expand or alter nonbanking activities De novo expansion. (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 this subpart is required. (2) Activities outside United States. (3) Alteration of nonbanking activity. (d) Emergency savings association acquisitions. [Reg. Y, 62 FR 9333, Feb. 28, 1997, as amended by Reg. Y, 62 FR 60640, Nov. 12, 1997] § 225.26 Factors considered in acting on nonbanking proposals. (a) In general. (b) Financial and managerial resources. (c) Competitive effect of de novo proposals. de novo (d) Denial for lack of information. (e) Conditional approvals. § 225.27 Procedures for determining scope of nonbanking activities. (a) Advisory opinions regarding scope of previously approved nonbanking activities Request for advisory opinion. (2) Response to request. (b) Procedure for consideration of new activities Initiation of proceeding. (2) Requests for determination. (3) Publication. Federal Register (4) Comments and hearing requests. § 225.28 List of permissible nonbanking activities. (a) Closely related nonbanking activities. (b) Activities determined by regulation to be permissible Extending credit and servicing loans. (2) Activities related to extending credit. (i) Real estate and personal property appraising. (ii) Arranging commercial real estate equity financing. (iii) Check-guaranty services. (iv) Collection agency services. (v) Credit bureau services. (vi) Asset management, servicing, and collection activities. 3 3 (vii) Acquiring debt in default. (A) Divests shares or assets securing debt in default that are not permissible investments for bank holding companies, within the time period required for divestiture of property acquired in satisfaction of a debt previously contracted under § 225.12(b); 4 4 (B) Stands only in the position of a creditor and does not purchase equity of obligors of debt in default (other than equity that may be collateral for such debt); and (C) Does not acquire debt in default secured by shares of a bank or bank holding company. (viii) Real estate settlement servicing. 5 5 (3) Leasing personal or real property. (i) The lease is on a nonoperating basis; 6 6 (ii) The initial term of the lease is at least 90 days; (iii) In the case of leases involving real property: (A) At the inception of the initial lease, the effect of the transaction 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 from rental payments, estimated tax benefits, and the estimated residual value of the property at the expiration of the initial lease; and (B) The estimated residual value of property for purposes of paragraph (b)(3)(iii)(A) of this section shall not exceed 25 percent of the acquisition cost of the property to the lessor. (4) Operating nonbank depository institutions Industrial banking. (ii) Operating savings association. (5) Trust company functions. (6) Financial and investment advisory activities. (i) 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; (ii) Furnishing general economic information and advice, general economic statistical forecasting services, and industry studies; (iii) Providing advice in connection with mergers, acquisitions, divestitures, investments, joint ventures, leveraged buyouts, recapitalizations, capital structurings, financing transactions and similar transactions, and conducting financial feasibility studies; 7 7 (iv) Providing information, statistical forecasting, and advice with respect to any transaction in foreign exchange, swaps, and similar transactions, commodities, and any forward contract, option, future, option on a future, and similar instruments; (v) Providing educational courses, and instructional materials to consumers on individual financial management matters; and (vi) Providing tax-planning and tax-preparation services to any person. (7) Agency transactional services for customer investments Securities brokerage. (ii) Riskless principal transactions. (A) Selling bank-ineligible securities 8 8 (B) Acting as a riskless principal in any transaction involving a bank-ineligible security for which the company or any of its affiliates acts as underwriter (during the period of the underwriting or for 30 days thereafter) or dealer. 9 9 (iii) Private placement services. (iv) Futures commission merchant. (A) The activity is conducted through a separately incorporated subsidiary of the bank holding company, which may engage in activities other than FCM activities (including, but not limited to, permissible advisory and trading activities); and (B) The parent bank holding company does not provide a guarantee or otherwise become liable to the exchange or clearing association other than for those trades conducted by the subsidiary for its own account or for the account of any affiliate. (v) Other transactional services. (8) Investment transactions as principal Underwriting and dealing in government obligations and money market instruments. (ii) Investing and trading activities. (A) Foreign exchange; (B) Forward contracts, options, futures, options on futures, swaps, and similar contracts, whether traded on exchanges or not, based on any rate, price, financial asset (including gold, silver, platinum, palladium, copper, or any other metal approved by the Board), nonfinancial asset, or group of assets, other than a bank-ineligible security, 10 10 ( 1 ( 2 ( 3 ( i ( ii ( 4 ( i ( ii (C) Forward contracts, options, 11 11 (iii) Buying and selling bullion, and related activities. (9) Management consulting and counseling activities Management consulting. 12 12 ( 1 ( 2 (B) A company conducting management consulting activities under this subparagraph and any affiliate of such company may not: ( 1 ( 2 (C) A company conducting management consulting activities may provide management consulting services to customers not described in paragraph (b)(9)(i)(A)( 1 2 (ii) Employee benefits consulting services. (iii) Career counseling services. (A) A financial organization 13 13 Financial organization (B) Individuals who are seeking employment at a financial organization; and (C) Individuals who are currently employed in or who seek positions in the finance, accounting, and audit departments of any company. (10) Support services Courier services. (A) Checks, commercial papers, documents, and written instruments (excluding currency or bearer-type negotiable instruments) that are exchanged among banks and financial institutions; and (B) Audit and accounting media of a banking or financial nature and other business records and documents used in processing such media. 14 14 (ii) Printing and selling MICR-encoded items. (11) Insurance agency and underwriting Credit insurance. (A) Directly related to an extension of credit by the bank holding company or any of its subsidiaries; and (B) Limited to ensuring the repayment of the outstanding balance due on the extension of credit 15 15 Extension of credit (ii) Finance company subsidiary. 16 16 Finance company (A) The insurance is limited to ensuring 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 17 17 (C) The applicant commits to notify borrowers in writing that: ( 1 ( 2 ( 3 (iii) Insurance in small towns. (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. 18 19 18 19 (A) Engage in such specific insurance agency activity only at locations: ( 1 ( 2 ( 3 (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 the bank holding company or subsidiary. (v) Supervision of retail insurance agents. (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. (vii) Insurance-agency activities conducted before 1971. (12) Community development activities Financing and investment activities. (ii) Advisory activities. (13) Money orders, savings bonds, and traveler's checks. (14) Data processing. (A) The data to be processed, stored or furnished are financial, banking or economic; and (B) The hardware provided in connection therewith is offered only in conjunction with software designed and marketed for the processing, storage 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. (ii) A company conducting data processing, data storage, and data transmission activities may conduct data processing, data storage, and data transmission activities not described in paragraph (b)(14)(i) of this section if the total annual revenue derived from those activities does not exceed 49 percent of the company's total annual revenues derived from data processing, data storage and data transmission activities. [Reg. Y, 62 FR 9329, Feb. 28, 1997, as amended at 68 FR 39810, July 3, 2003; 68 FR 41901, July 16, 2003; 68 FR 68499, Dec. 9, 2003] Subpart D—Control and Divestiture Proceedings Source: 85 FR 12422, Mar. 2, 2020, unless otherwise noted. § 225.31 Control proceedings. (a) Preliminary determination of control. (2) If the Board makes a preliminary determination of control under this section, the Board shall send notice to the first company containing a statement of the facts upon which the preliminary determination is based. (b) Response to preliminary determination of control. (i) Consent to the preliminary determination of control and either: (A) Submit for the Board's approval a specific plan for the prompt termination of the control relationship; or (B) File an application or notice under this part, as applicable; or (ii) 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. (2) If the first company fails to respond to the preliminary determination of control within 30 days or such longer period permitted by the Board in its discretion, the first company will be deemed to have waived its right to present additional information to the Board or to request a hearing or other proceeding regarding the preliminary determination of control. (c) Hearing and final determination. (2) At a hearing or other proceeding, any applicable presumptions established under this subpart 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 first company and other evidence, including the record of any hearing or other proceeding, the Board will issue a final order determining whether the first company has the power to exercise a controlling influence over the management or policies of the second company. If a controlling influence is found, the Board may direct the first company to terminate the control relationship or to file an application or notice for the Board's approval to retain the control relationship. (d) Submission of evidence. (2) Evidence or other relevant information submitted to the Board pursuant to paragraph (d)(1) of this section must be in writing and may include a description of all current and proposed relationships between the first company and the second company, including relationships of the type that are identified under any of the rebuttable presumptions in §§ 225.32 and 225.33 of this part, copies of any formal agreements related to such relationships, and a discussion regarding why the Board should not determine the first company to control the second company. (e) Definitions. (1) Board of directors (2) Director representative (i) A current officer, employee, or director of the first company; (ii) An individual who was an officer, employee, or director of the first company within the prior two years; and (iii) An individual who was nominated or proposed to be a director of the second company by the first company. (iv) A director representative does not include a nonvoting observer. (3) First company (4) Investment adviser (i) Is registered as an investment adviser with the Securities and Exchange Commission under the Investment Advisers Act of 1940 (15 U.S.C. 80b-1 et seq. (ii) Is registered as a commodity trading advisor with the Commodity Futures Trading Commission under the Commodity Exchange Act (7 U.S.C. 1 et seq. (iii) Is a foreign equivalent of an investment adviser or commodity trading advisor, as described in paragraph (e)(4)(i) or (ii) of this section; or (iv) Engages in any of the activities set forth in § 225.28(b)(6)(i) through (iv) of this part. (5) Limiting contractual right (i) Examples of limiting contractual rights may include, but are not limited to, a right that allows the first company to restrict or to exert significant influence over decisions related to: (A) Activities in which the second company may engage, including a prohibition on entering into new lines of business, making substantial changes to or discontinuing existing lines of business, or entering into a contractual arrangement with a third party that imposes significant financial obligations on the second company; (B) How the second company directs the proceeds of the first company's investment; (C) Hiring, firing, or compensating one or more senior management officials of the second company, or modifying the second company's policies or budget concerning the salary, compensation, employment, or benefits plan for its employees; (D) The second company's ability to merge or consolidate, or its ability to acquire, sell, lease, transfer, spin-off, recapitalize, liquidate, dissolve, or dispose of subsidiaries or assets; (E) The second company's ability to make investments or expenditures; (F) The second company achieving or maintaining a financial target or limit, including, for example, a debt-to-equity ratio, a fixed charges ratio, a net worth requirement, a liquidity target, a working capital target, or a classified assets or nonperforming loans limit; (G) The second company's payment of dividends on any class of securities, redemption of senior instruments, or voluntary prepayment of indebtedness; (H) The second company's ability to authorize or issue additional junior equity or debt securities, or amend the terms of any equity or debt securities issued by the second company; (I) The second company's ability to engage in a public offering or to list or de-list securities on an exchange, other than a right that allows the securities of the first company to have the same status as other securities of the same class; (J) The second company's ability to amend its articles of incorporation or by-laws, other than in a way that is solely defensive for the first company; (K) The removal or selection of any independent accountant, auditor, investment adviser, or investment banker employed by the second company; or (L) The second company's ability to significantly alter accounting methods and policies, or its regulatory, tax, or liability status ( e.g., (ii) A limiting contractual right does not include a contractual right that would not allow the first company to significantly restrict, directly or indirectly, the discretion of the second company over operational and policy decisions of the second company. Examples of contractual rights that are not limiting contractual rights may include: (A) A right that allows the first company to restrict or to exert significant influence over decisions relating to the second company's ability to issue securities senior to securities owned by the first company; (B) A requirement that the first company receive financial reports or other information of the type ordinarily available to common stockholders; (C) A requirement that the second company maintain its corporate existence; (D) A requirement that the second company consult with the first company on a reasonable periodic basis; (E) A requirement that the second company provide notices of the occurrence of material events affecting the second company; (F) A requirement that the second company comply with applicable statutory and regulatory requirements; (G) A market standard requirement that the first company receive similar contractual rights as those held by other investors in the second company; (H) A requirement that the first company be able to purchase additional securities issued by the second company in order to maintain the first company's percentage ownership in the second company; (I) A requirement that the second company ensure that any security holder who intends to sell its securities of the second company provide other security holders of the second company or the second company itself the opportunity to purchase the securities before the securities can be sold to a third party; or (J) A requirement that the second company take reasonable steps to ensure the preservation of tax status or tax benefits, such as status of the second company as a Subchapter S corporation or the protection of the value of net operating loss carry-forwards. (6) Second company (7) Senior management official (f) Reservation of authority. § 225.32 Rebuttable presumptions of control of a company. (a) General. (2) For purposes of the presumptions in this section, any company that is a subsidiary of the first company and also a subsidiary of the second company is considered to be a subsidiary of the first company and not a subsidiary of the second company. (b) Management contract or similar agreement. (c) Total equity. (d) Ownership or control of 5 percent or more of voting securities. (1)(i) Director representatives of the first company or any of its subsidiaries comprise 25 percent or more of the board of directors of the second company or any of its subsidiaries; or (ii) Director representatives of the first company or any of its subsidiaries are able to make or block the making of major operational or policy decisions of the second company or any of its subsidiaries; (2) Two or more employees or directors of the first company or any of its subsidiaries serve as senior management officials of the second company or any of its subsidiaries; (3) An employee or director of the first company or any of its subsidiaries serves as the chief executive officer, or serves in a similar capacity, of the second company or any of its subsidiaries; (4) The first company or any of its subsidiaries enters into transactions or has business relationships with the second company or any of its subsidiaries that generate in the aggregate 10 percent or more of the total annual revenues or expenses of the second company, each on a consolidated basis; or (5) The first company or any of its subsidiaries has any limiting contractual right with respect to the second company or any of its subsidiaries, unless such limiting contractual right is part of an agreement to merge with or make a controlling investment in the second company that is reasonably expected to close within one year and such limiting contractual right is designed to ensure that the second company continues to operate in the ordinary course until the merger or investment is consummated or such limiting contractual right requires the second company to take an action necessary for the merger or investment to be consummated. (e) Ownership or control of 10 percent or more of voting securities. (1) The first company or any of its subsidiaries propose a number of director representatives to the board of directors of the second company or any of its subsidiaries in opposition to nominees proposed by the management or board of directors of the second company or any of its subsidiaries that, together with any director representatives of the first company or any of its subsidiaries on the board of directors of the second company or any of its subsidiaries, would comprise 25 percent or more of the board of directors of the second company or any of its subsidiaries; (2) Director representatives of the first company and its subsidiaries comprise more than 25 percent of any committee of the board of directors of the second company or any of its subsidiaries that can take action that binds the second company or any of its subsidiaries; or (3) The first company or any of its subsidiaries enters into transactions or has business relationships with the second company or any of its subsidiaries that: (i) Are not on market terms; or (ii) Generate in the aggregate 5 percent or more of the total annual revenues or expenses of the second company, each on a consolidated basis. (f) Ownership or control of 15 percent or more of voting securities. (1) A director representative of the first company or of any of its subsidiaries serves as the chair of the board of directors of the second company or any of its subsidiaries; (2) One or more employees or directors of the first company or any of its subsidiaries serves as a senior management official of the second company or any of its subsidiaries; or (3) The first company or any of its subsidiaries enters into transactions or has business relationships with the second company or any of its subsidiaries that generate in the aggregate 2 percent or more of the total annual revenues or expenses of the second company, each on a consolidated basis. (g) Accounting consolidation. (h) Control of an investment fund. (i) Controls 5 percent or more of the outstanding securities of any class of voting securities of the second company; or (ii) Controls 25 percent or more of the total equity of the second company. (2) The presumption of control in paragraph (h)(1) of this section does not apply if the first company organized and sponsored the second company within the preceding 12 months. (i) Divestiture of control. (2) Notwithstanding paragraph (i)(1) of this section, a first company will not be presumed to control a second company under this paragraph if 50 percent or more of the outstanding securities of each class of voting securities of the second company is controlled by a person that is not a senior management official or director of the first company, or by a company that is not an affiliate of the first company. (j) Securities held in a fiduciary capacity. § 225.33 Rebuttable presumption of noncontrol of a company. (a) In any proceeding under § 225.31(b) or (c) of this part, a first company is presumed not to control a second company if: (1) The first company controls less than 10 percent of the outstanding securities of each class of voting securities of the second company; and (2) The first company is not presumed to control the second company under § 225.32 of this part. (b) In any proceeding under this subpart, or judicial proceeding under the Bank Holding Company Act, other than a proceeding in which the Board has made a preliminary determination that a first company has the power to exercise a controlling influence over the management or policies of a second company, a first company may not be held to have had control over a second company at any given time, unless the first company, at the time in question, controlled 5 percent or more of the outstanding securities of any class of voting securities of the second company, or had already been found to have control on the basis of the existence of a controlling influence relationship. § 225.34 Total equity. (a) General. (b) Calculation of total equity Total equity. (i) The sum of Investor Common Equity and, for each class of preferred stock issued by the second company, Investor Preferred Equity, divided by (ii) Issuer Shareholders' Equity. (2) Investor Common Equity (i) Zero, and (ii) The quotient of the number of shares of common stock of the second company that are controlled by the first company divided by the total number of shares of common stock of the second company that are issued and outstanding, multiplied by the amount of shareholders' equity of the second company not allocated to preferred stock under U.S. generally accepted accounting principles. 1 1 (3) Investor Preferred Equity (i) Zero, and (ii) The quotient of the number of shares of the class of preferred stock of the second company that are controlled by the first company divided by the total number of shares of the class of preferred stock that are issued and outstanding, multiplied by the amount of shareholders' equity of the second company allocated to the class of preferred stock under U.S. generally accepted accounting principles. 2 2 i.e., pari passu pari passu pari passu pari passu (c) Consideration of debt instruments and other interests in total equity. (2) For purposes of paragraph (b)(1) of this section, the principal amount of all debt instruments and the market value of all other interests that are functionally equivalent to equity that are controlled by the first company are added to the sum under paragraph (b)(1)(i) of this section, and the principal amount of all debt instruments and the market value of all other interests that are functionally equivalent to equity that are outstanding are added to Issuer Shareholders' Equity. (3) For purposes of paragraph (c)(1) of this section, a debt instrument issued by the second company may be considered functionally equivalent to equity if it has equity-like characteristics, such as: (i) Extremely long-dated maturity; (ii) Subordination to other debt instruments issued by the second company; (ii) Qualification as regulatory capital under any regulatory capital rules applicable to the second company; (iii) Qualification as equity under applicable tax law; (iv) Qualification as equity under U.S. generally accepted accounting principles or other applicable accounting standards; (v) Inadequacy of the equity capital underlying the debt at the time of the issuance of the debt; or (vi) Issuance not on market terms. (4) For purposes of paragraph (c)(1) of this section, an interest that is not a debt instrument issued by the second company may be considered functionally equivalent to equity if it has equity-like characteristics, such as entitling its owner to a share of the profits of the second company. (d) Exclusion of certain equity instruments from total equity. (2) For purposes of paragraph (d)(1) of this section, an equity instrument issued by the second company may be considered functionally equivalent to debt if it has debt-like characteristics, such as protections generally provided to creditors, a limited term, a fixed rate of return or a variable rate of return linked to a reference interest rate, classification as debt for tax purposes, or classification as debt for accounting purposes. (e) Frequency of total equity calculation. Editorial Note: At 85 FR 12426, Mar. 2, 2020, subpart D was revised, including § 225.34 which contains 2 paragraphs designated (c)(3)(ii). Subpart E—Change in Bank Control Source: Reg. Y, 62 FR 9338, Feb. 28, 1997, unless otherwise noted. § 225.41 Transactions requiring prior notice. (a) Prior notice requirement. (b) Definitions. (1) Acquisition (2) Acting in concert (3) Immediate family (c) Acquisitions requiring prior notice Acquisition of control. (2) Rebuttable presumption of control. (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, control, or hold the power to vote a greater percentage of that class of voting securities immediately after the transaction. 1 1 (d) Rebuttable presumption of concerted action. (1) A company and any controlling shareholder, partner, trustee, or management official of the company, if both the company and the person own voting securities of the state member bank or bank holding company; (2) An individual and the individual's immediate family; (3) Companies under common control; (4) Persons that are parties to any agreement, contract, understanding, relationship, or other arrangement, whether written or otherwise, regarding the acquisition, voting, or transfer of control of voting securities of a state member bank or bank holding company, other than through a revocable proxy as described in § 225.42(a)(5) of this subpart; (5) Persons that have made, or propose to make, a joint filing under sections 13 or 14 of the Securities Exchange Act of 1934 (15 U.S.C. 78m or 78n), and the rules promulgated thereunder by the Securities and Exchange Commission; and (6) A person and any trust for which the person serves as trustee. (e) Acquisitions of loans in default. (f) Other transactions. (g) Rebuttal of presumptions. § 225.42 Transactions not requiring prior notice. (a) Exempt transactions. (1) Existing control relationships. (i) Continuously since March 9, 1979 (or since the institution commenced business, if later), held power to vote 25 percent or more of any class of voting securities of the institution; or (ii) Is presumed, under § 225.41(c)(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 or more of any class of voting securities of the institution or, in other cases, where the Board determines that the person has controlled the bank continuously since March 9, 1979; (2) Increase of previously authorized acquisitions. (3) Acquisitions subject to approval under BHC Act or Bank Merger Act. (4) Transactions exempt under BHC Act. (5) Proxy solicitation. (6) Stock dividends. (7) Acquisition of foreign banking organization. (b) Prior notice exemption. (i) Acquisition of voting securities through inheritance; (ii) Acquisition of voting securities as a bona fide (iii) Acquisition of voting securities in satisfaction of a debt previously contracted (DPC) in good faith. (2) The following acquisitions of voting securities of a state member bank or bank holding company, which would otherwise require prior notice under this subpart, are not subject to the prior notice requirements if the acquiring person does not reasonably have advance knowledge of the transaction, and provides the written notice required under section 225.43 to the appropriate Reserve Bank within 90 calendar days after the transaction occurs: (i) Acquisition of voting securities resulting from a redemption of voting securities by the issuing bank or bank holding company; and (ii) Acquisition of voting securities as a result of actions (including the sale of securities) by any third party that is not within the control of the acquiror. (3) Nothing in paragraphs (b)(1) or (b)(2) of this section limits the authority of the Board to disapprove a notice pursuant to § 225.43(h) of this subpart. § 225.43 Procedures for filing, processing, publishing, and acting on notices. (a) Filing notice. (2) The Board may waive any of the informational requirements of the notice if the Board determines that it is in the public interest. (3) A notificant shall notify the appropriate Reserve Bank or the Board immediately of any material changes in a notice submitted to the Reserve Bank, including changes in financial or other conditions. (4) When the acquiring person is an individual, or group of individuals acting in concert, the requirement to provide personal financial data may be satisfied by a current statement of assets and liabilities and an income summary, as required in the designated Board form, together with a statement of any material changes since the date of the statement or summary. The Reserve Bank or the Board, nevertheless, may request additional information, if appropriate. (b) Acceptance of notice. (c) Publication Newspaper Announcement. (2) Contents of newspaper announcement. (i) The name of each person identified in the notice as a proposed acquiror of the bank or bank holding company; (ii) The name of the bank or bank holding company to be acquired, including the name of each of the bank holding company's subsidiary banks; and (iii) A statement that interested persons may submit comments on the notice to the Board or the appropriate Reserve Bank for a period of 20 days, or such shorter period as may be provided, pursuant to paragraph (c)(5) of this section. (3) Federal Register announcement. Federal Register Federal Register Federal Register, (4) Delay of publication. (5) Shortening or waiving notice. (6) Consideration of public comments. Federal Register (7) Standing. (d) Time period for Board action Consummation of acquisition. (ii) The notificant(s) may consummate the proposed transaction before the expiration of the 60-day period if the Board notifies the notificant(s) in writing of the Board's intention not to disapprove the acquisition. (2) Extensions of time period. (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) The Board 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. (e) Advice to bank supervisory agencies. (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. (f) Investigation and report. (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. (g) Factors considered in acting on notices. (h) Disapproval and hearing Disapproval of notice. i.e., (2) Disapproval notification. (3) Hearing. § 225.44 Reporting of stock loans. (a) Requirements. (2) The foreign bank or its affiliate also shall file a copy of the report with its appropriate Federal banking agency. (3) Any shares of the state member bank held by the foreign bank or any affiliate of the foreign bank as principal must be included in the calculation of the number of shares in which the foreign bank or its affiliate has a security interest for purposes of paragraph (a) of this section. (b) Definitions. (1) Foreign bank (2) Credit outstanding (3) Group of persons (i) Are acting together, in concert, or with one another to acquire or control shares of the same insured depository institution, including an acquisition of shares of the same depository institution at approximately the same time under substantially the same terms; or (ii) Have made, or propose to make, a joint filing under section 13 or 14 of the Securities Exchange Act of 1934 (15 U.S.C. 78m or 78n), and the rules promulgated thereunder by the Securities and Exchange Commission regarding ownership of the shares of the same insured depository institution. (c) Exceptions. (1) The person or group of persons referred to in that paragraph has disclosed the amount borrowed and the security interest therein to the Board or appropriate Reserve Bank in connection with a notice filed under § 225.41 of this subpart, or another application filed with the Board or Reserve Bank as a substitute for a notice under § 225.41 of this subpart, including an application filed under section 3 of the BHC Act (12 U.S.C. 1842) or section 18(c) of the Federal Deposit Insurance Act (Bank Merger Act, 12 U.S.C. 1828(c)), or an application for membership in the Federal Reserve System; or (2) The transaction involves a person or group of persons that has been the owner or owners of record of the stock for a period of one year or more; or, if the transaction involves stock issued by a newly chartered bank, before the bank is opened for business. (d) Report requirements. (2) A foreign bank, or any affiliate of a foreign bank, shall file the consolidated report in writing within 30 days of the date on which the foreign bank or affiliate first believes that the security for any outstanding credit consists of 25 percent or more of any class of voting securities of a state member bank. (e) Other reporting requirements. Subpart F—Limitations on Nonbank Banks § 225.52 Limitation on overdrafts. (a) Definitions. (1) Account (2) Cash item (3) Discount window loan (4) Industrial bank (5) Noncash item e.g., (6) Other nonelectronic transactions e.g., (7) An overdraft (8) Transfer item et seq (b) Restriction on overdrafts Affiliates. (2) Nonbank banks or industrial banks. (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. (1) Inadvertent error. (2) Fully secured primary dealer affiliate overdrafts. provided: (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. (1) Funds transfers. (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. (3) Discount window loans. (4) Other transactions. (e) Posting by nonbank banks and industrial banks. (1) Funds transfers. (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. (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 Credits. i.e., (ii) Debits. e.g., [Reg. Y, 53 FR 37744, Sept. 28, 1988] Subpart G—Appraisal Standards for Federally Related Transactions Source: Reg. Y, 55 FR 27771, July 5, 1990, unless otherwise noted. § 225.61 Authority, purpose, and scope. (a) Authority. Board FlRREA (b) Purpose and scope. 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. § 225.62 Definitions. (a) Appraisal (b) Appraisal Foundation (c) Appraisal Subcommittee (d) Business loan (e) Commercial real estate transaction (f) Complex appraisal for a residential real estate transaction (g) Federally related transaction (1) The Board or any regulated institution engages in or contracts for; and (2) Requires the services of an appraiser. (h) Market value (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. (i) Real estate real property (j) Real estate-related financial transaction (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. (k) Residential real estate transaction (l) State certified appraiser (m) State licensed appraiser (n) Tract development (o) Transaction value (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. [Reg. Y, 55 FR 27771, July 5, 1990, as amended at 59 FR 29500, June 7, 1994; 83 FR 15035, Apr. 9, 2018; 84 FR 53597, Oct. 8, 2019] § 225.63 Appraisals required; transactions requiring a State certified or licensed appraiser. (a) Appraisals required. (1) The transaction is a residential real estate transaction that has a transaction value of $400,000 or less; (2) A lien on real estate has been taken as collateral in an abundance of caution; (3) The transaction is not secured by real estate; (4) A lien on real estate has been taken for purposes other than the real estate's value; (5) The transaction is a business loan that: (i) Has a transaction value of $1 million or less; and (ii) Is not dependent on the sale of, or rental income derived from, real estate as the primary source of repayment; (6) 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; (7) The transaction involves an existing extension of credit at the lending institution, provided that: (i) There has been no obvious and material change in market conditions or physical aspects of the property that threatens the adequacy of the institution's real estate collateral protection after the transaction, even with the advancement of new monies; or (ii) There is no advancement of new monies, other than funds necessary to cover reasonable closing costs; (8) The transaction involves the purchase, sale, investment in, exchange of, or extension of credit secured by, a loan or interest in a loan, pooled loans, or interests in real property, including mortgaged-backed securities, and each loan or interest in a loan, pooled loan, or real property interest met Board regulatory requirements for appraisals at the time of origination; (9) The transaction is wholly or partially insured or guaranteed by a United States government agency or United States government sponsored agency; (10) The transaction either: (i) Qualifies for sale to a United States government agency or United States government sponsored agency; or (ii) Involves a residential real estate transaction in which the appraisal conforms to the Federal National Mortgage Association or Federal Home Loan Mortgage Corporation appraisal standards applicable to that category of real estate; (11) The regulated institution is acting in a fiduciary capacity and is not required to obtain an appraisal under other law; (12) The transaction involves underwriting or dealing in mortgage-backed securities; (13) The Board determines that the services of an appraiser are not necessary in order to protect Federal financial and public policy interests in real estate-related financial transactions or to protect the safety and soundness of the institution; (14) The transaction is a commercial real estate transaction that has a transaction value of $500,000 or less; or (15) The transaction is exempted from the appraisal requirement pursuant to the rural residential exemption under 12 U.S.C. 3356. (b) Evaluations required. (c) Appraisals to address safety and soundness concerns. (d) Transactions requiring a State certified appraiser All transactions of $1,000,000 or more. (2) Commercial real estate transactions of more than $500,000. (3) Complex appraisals for residential real estate transactions of more than $400,000. (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. (e) Transactions requiring either a State certified or licensed appraiser. [Reg. Y, 55 FR 27771, July 5, 1990, as amended at 58 FR 15077, Mar. 19, 1993; 59 FR 29500, June 7, 1994; 63 FR 65532, Nov. 27, 1998; 83 FR 15035, Apr. 9, 2018; 84 FR 53597, 53598, Oct. 8, 2019] § 225.64 Minimum appraisal standards. For federally related transactions, all appraisals shall, at a minimum: (a) Conform to generally accepted appraisal standards as evidenced by the Uniform Standards of Professional Appraisal Practice promulgated by the Appraisal Standards Board of the Appraisal Foundation, 1029 Vermont Ave., NW., Washington, DC 20005, unless principles of safe and sound banking require compliance with stricter standards; (b) Be written and contain sufficient information and analysis to support the institution's decision to engage in the transaction; (c) Be subject to appropriate review for compliance with the Uniform Standards of Professional Appraisal Practice; (d) Analyze and report appropriate deductions and discounts for proposed construction or renovation, partially leased buildings, non-market lease terms, and tract developments with unsold units; (e) Be based upon the definition of market value as set forth in this subpart; and (f) Be performed by State licensed or certified appraisers in accordance with requirements set forth in this subpart. [Reg. Y, 59 FR 29501, June 7, 1994, as amended at 84 FR 53598, Oct. 8, 2019] § 225.65 Appraiser independence. (a) Staff appraisers. (b) Fee appraisers. (2) A regulated institution also may accept an appraisal that was prepared by an appraiser engaged directly by another financial services institution, if: (i) The appraiser has no direct or indirect interest, financial or otherwise, in the property or the transaction; and (ii) The regulated institution determines that the appraisal conforms to the requirements of this subpart and is otherwise acceptable. [Reg. Y, 55 FR 27771, July 5, 1990, as amended at 59 FR 29501, June 7, 1994] § 225.66 Professional association membership; competency. (a) Membership in appraisal organizations. (b) Competency. § 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., Subpart H—Notice of Addition or Change of Directors and Senior Executive Officers Source: Reg. Y, 62 FR 9341, Feb. 28, 1997, unless otherwise noted. § 225.71 Definitions. (a) Director (1) Is not elected by the shareholders of the regulated institution; (2) Is not authorized to vote on any matters before the board of directors or any committee thereof; (3) Solely provides general policy advice to the board of directors and any committee thereof; and (4) Has not been identified by the Board or Reserve Bank as a person who performs the functions of a director for purposes of this subpart. (b) Regulated institution (c) Senior executive officer Senior executive officer (d) Troubled condition (1) Has a composite rating, as determined in its most recent report of examination or inspection, of 4 or 5 under the Uniform Financial Institutions 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 Reserve Bank; or (3) Is informed in writing 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 report of condition or report of examination or inspection, or other information available to the Board or Reserve Bank. § 225.72 Director and officer appointments; prior notice requirement. (a) Prior notice by regulated institution. (1) The regulated institution 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 or report of examination or inspection; (2) The regulated institution is in troubled condition; or (3) The Board determines, in connection with its review of a capital restoration plan required under section 38 of the Federal Deposit Insurance Act or subpart B of the Board's Regulation H, or otherwise, that such notice is appropriate. (b) Prior notice by individual. § 225.73 Procedures for filing, processing, and acting on notices; standards for disapproval; waiver of notice. (a) Filing notice Content. (i) The information required by paragraph 6(A) of the Change in Bank Control Act (12 U.S.C. 1817(j)(6)(A)) as may be prescribed in the designated Board form; (ii) Additional information consistent with the Federal Financial Institutions Examination Council's Joint Statement of Guidelines on Conducting Background Checks and Change in Control Investigations, as set forth in the designated Board form; and (iii) Such other information as may be required by the Board or Reserve Bank. (2) Modification. (3) Acceptance and processing of notice. (b) Commencement of service At expiration of period. (2) Prior to expiration of period. (c) Notice of disapproval. (d) Appeal of a notice of disapproval. (2) Written notice of the final decision of the Board shall be sent to the appealing party within 60 days of the receipt of an appeal, unless the appealing party's request for an informal hearing is granted. (3) The disapproved individual may not serve as a director or senior executive officer of the state member bank or bank holding company while the appeal is pending. (e) Informal hearing. (2) An informal hearing shall be held within 30 days of a request, if granted, unless the requesting party agrees to a later date. (3) Written notice of the final decision of the Board shall be given to the individual and the regulated institution within 60 days of the conclusion of any informal hearing ordered by the Board, unless the requesting party agrees to a later date. (f) Waiver of notice Waiver requests. (i) Delay would threaten the safety or soundness of the regulated institution or a bank controlled by a bank holding company; (ii) Delay would not be in the public interest; or (iii) Other extraordinary circumstances exist that justify waiver of prior notice. (2) Automatic waiver. (i) Is not proposed by the management of the regulated institution; (ii) Is elected as a new member of the board of directors at a meeting of the regulated institution; and (iii) Provides to the appropriate Reserve Bank all the information required in § 225.73(a) within two (2) business days after the individual's election. (3) Effect on disapproval authority. Subpart I—Financial Holding Companies Source: Reg. Y, 66 FR 415, Jan. 3, 2001, unless otherwise noted. § 225.81 What is a financial holding company? (a) Definition. (b) Requirements to be a financial holding company. (1) All depository institutions controlled by the bank holding company must be and remain well capitalized; (2) All depository institutions controlled by the bank holding company must be and remain well managed; and (3) The bank holding company must have made an effective election to become a financial holding company. (c) Requirements for foreign banks that are or are owned by bank holding companies Foreign banks with U.S. branches or agencies that also own U.S. banks. (2) Bank holding companies that own foreign banks with U.S. branches or agencies. § 225.82 How does a bank holding company elect to become a financial holding company? (a) Filing requirement. (b) Contents of declaration. (1) State that the bank holding company elects to be a financial holding company; (2) Provide the name and head office address of the bank holding company and of each depository institution controlled by the bank holding company; (3) Certify that each depository institution controlled by the bank holding company is well capitalized as of the date the bank holding company submits its declaration; (4) Provide the capital ratios as of the close of the previous quarter for all relevant capital measures, as defined in section 38 of the Federal Deposit Insurance Act (12 U.S.C. 1831o), for each depository institution controlled by the company on the date the company submits its declaration; and (5) Certify that each depository institution controlled by the company is well managed as of the date the company submits its declaration. (c) Effectiveness of election. (1) Any insured depository institution controlled by the bank holding company (except an institution excluded under paragraph (d) of this section) has not achieved at least a rating of “satisfactory record of meeting community credit needs” under the Community Reinvestment Act at the institution's most recent examination; or (2) Any depository institution controlled by the bank holding company is not both well capitalized and well managed. (d) Consideration of the CRA performance of a recently acquired insured depository institution. (1) The bank holding company acquired the insured depository institution during the 12-month period preceding the filing of an election under paragraph (a) of this section; (2) The bank holding company has submitted an affirmative plan to the appropriate Federal banking agency for the institution to take actions necessary for the institution to achieve at least a rating of “satisfactory record of meeting community credit needs” under the Community Reinvestment Act at the next examination of the institution; and (3) The appropriate Federal banking agency for the institution has accepted the plan described in paragraph (d)(2) of this section. (e) Effective date of election In general. (2) Earlier notification that an election is effective. (f) Requests to become a financial holding company submitted as part of an application to become a bank holding company In general. (2) Contents of request. (i) State that the company seeks to become a financial holding company on consummation of its proposal to become a bank holding company; and (ii) Certify that each depository institution that would be controlled by the company on consummation of its proposal to become a bank holding company will be both well capitalized and well managed as of the date the company consummates the proposal. (3) Request becomes a declaration and an effective election on date of consummation of bank holding company proposal. (i) Any depository institution that would be controlled by the company on consummation of the proposal will not be both well capitalized and well managed on the date of consummation; or (ii) Any insured depository institution that would be controlled by the company on consummation of the proposal has not achieved at least a rating of “satisfactory record of meeting community credit needs” under the Community Reinvestment Act at the institution's most recent examination. (4) Limited exclusion for recently acquired institutions not available. (g) Board's authority to exercise supervisory authority over a financial holding company. § 225.83 What are the consequences of failing to continue to meet applicable capital and management requirements? (a) Notice by the Board. (b) Notification by a financial holding company required Notice to Board. (2) Triggering events for notice to the Board Well capitalized. See (ii) Well managed. (c) Execution of agreement acceptable to the Board Agreement required; time period. (2) Extension of time for executing agreement. (3) Agreement requirements. (i) Explain the specific actions that the company will take to correct all areas of noncompliance; (ii) Provide a schedule within which each action will be taken; (iii) Provide any other information that the Board may require; and (iv) Be acceptable to the Board. (d) Limitations during period of noncompliance. (1) The Board may impose any limitations or conditions on the conduct or activities of the company or any of its affiliates as the Board finds to be appropriate and consistent with the purposes of the BHC Act; and (2) The company and its affiliates may not commence any additional activity or acquire control or shares of any company under section 4(k) of the BHC Act without prior approval from the Board. (e) Consequences of failure to correct conditions within 180 days Divestiture of depository institutions. (2) Alternative method of complying with a divestiture order. (f) Consultation with other agencies. § 225.84 What are the consequences of failing to maintain a satisfactory or better rating under the Community Reinvestment Act at all insured depository institution subsidiaries? (a) Limitations on activities In general. (i) Commence any additional activity under section 4(k) or 4(n) of the BHC Act (12 U.S.C. 1843(k) or (n)); or (ii) Directly or indirectly acquire control, including all or substantially all of the assets, of a company engaged in any activity under section 4(k) or 4(n) of the BHC Act (12 U.S.C. 1843(k) or (n)). (2) Notification. (b) Exceptions for certain activities Continuation of investment activities. (i) The financial holding company lawfully was a financial holding company and commenced the merchant banking activity under section 4(k)(4)(H) of the BHC Act (12 U.S.C. 1843(k)(4)(H)) or the insurance company investment activity under section 4(k)(4)(I) of the BHC Act (12 U.S.C. 1843(k)(4)(I)) prior to the time that an insured depository institution controlled by the financial holding company received a rating below “satisfactory record of meeting community credit needs” under the Community Reinvestment Act; and (ii) The Board has not, in the exercise of its supervisory authority, advised the financial holding company that these activities must be restricted. (2) Activities that are closely related to banking. (c) Duration of prohibitions. § 225.85 Is notice to or approval from the Board required prior to engaging in a financial activity? (a) No prior approval required generally In general. (2) Acquisitions by a financial holding company of a company engaged in other permissible activities. (3) Acquisition by a financial holding company of a company engaged in limited nonfinancial activities Mixed acquisitions generally permitted. (A) The company to be acquired is substantially engaged in activities that are financial in nature, incidental to a financial activity, or otherwise permissible for the financial holding company under section 4(c) of the BHC Act (12 U.S.C. 1843(c)); (B) The financial holding company complies with the notice requirements of § 225.87, if applicable; and (C) The company conforms, terminates, or divests, within 2 years of the date the financial holding company acquires shares or control of the company, all activities that are not financial in nature, incidental to a financial activity, or otherwise permissible for the financial holding company under section 4(c) (12 U.S.C. 1843(c))of the BHC Act. (ii) Definition of “substantially engaged.” (b) Locations in which a financial holding company may conduct financial activities. (c) Circumstances under which prior notice to the Board is required Acquisition of more than 5 percent of the shares of a savings association. (2) Supervisory actions. § 225.86 What activities are permissible for any financial holding company? The following activities are financial in nature or incidental to a financial activity: (a) Activities determined to be closely related to banking. (2) Any activity that the Board had determined by an order that was in effect on November 12, 1999, to be so closely related to banking as to be a proper incident thereto, subject to the terms and conditions contained in this part and those in the authorizing orders. These activities are: (i) Providing administrative and other services to mutual funds ( Societe Generale, (ii) Owning shares of a securities exchange ( J.P. Morgan & Co, Inc., and UBS AG, (iii) Acting as a certification authority for digital signatures and authenticating the identity of persons conducting financial and nonfinancial transactions ( Bayerische Hypo- und Vereinsbank AG, et al., (iv) Providing employment histories to third parties for use in making credit decisions and to depository institutions and their affiliates for use in the ordinary course of business ( Norwest Corporation, (v) Check cashing and wire transmission services ( Midland Bank, PLC, Norwest Corporation, (vi) In connection with offering banking services, providing notary public services, selling postage stamps and postage-paid envelopes, providing vehicle registration services, and selling public transportation tickets and tokens ( Popular, Inc., (vii) Real estate title abstracting ( The First National Company, (b) Activities determined to be usual in connection with the transaction of banking abroad. see (1) Providing management consulting services, including to any person with respect to nonfinancial matters, so long as the management consulting services are advisory and do not allow the financial holding company to control the person to which the services are provided; (2) Operating a travel agency in connection with financial services offered by the financial holding company or others; and (3) Organizing, sponsoring, and managing a mutual fund, so long as: (i) The fund does not exercise managerial control over the entities in which the fund invests; and (ii) The financial holding company reduces its ownership in the fund, if any, to less than 25 percent of the equity of the fund within one year of sponsoring the fund or such additional period as the Board permits. (c) Activities permitted under section 4(k)(4) of the BHC Act (d) Activities determined to be financial in nature or incidental to financial activities by the Board Acting as a finder (i) What is the scope of finder activities? (A) Identifying potential parties, making inquiries as to interest, introducing and referring potential parties to each other, and arranging contacts between and meetings of interested parties; (B) Conveying between interested parties expressions of interest, bids, offers, orders and confirmations relating to a transaction; and (C) Transmitting information concerning products and services to potential parties in connection with the activities described in paragraphs (d)(1)(i)(A) and (B) of this section. (ii) What are some examples of finder services? (A) Hosting an electronic marketplace on the financial holding company's Internet web site by providing hypertext or similar links to the web sites of third party buyers or sellers. (B) Hosting on the financial holding company's servers the Internet web site of— ( 1 ( 2 (C) Operating an Internet web site that allows multiple buyers and sellers to exchange information concerning the products and services that they are willing to purchase or sell, locate potential counterparties for transactions, aggregate orders for goods or services with those made by other parties, and enter into transactions between themselves. (D) Operating a telephone call center that provides permissible finder services. (iii) What limitations are applicable to a financial holding company acting as a finder? (B) A finder may not bind any buyer or seller to the terms of a specific transaction or negotiate the terms of a specific transaction on behalf of a buyer or seller, except that a finder may— ( 1 ( 2 ( i ( ii (C) A finder may not— ( 1 ( 2 ( 3 ( 4 (D) A finder may not engage in any activity that would require the company to register or obtain a license as a real estate agent or broker under applicable law. (iv) What disclosures are required? (2) [Reserved] (e) Activities permitted under section 4(k)(5) of the Bank Holding Company Act (12 U.S.C. 1843(k)(5)). (i) Lending, exchanging, transferring, investing for others, or safeguarding financial assets other than money or securities; (ii) Providing any device or other instrumentality for transferring money or other financial assets; and (iii) Arranging, effecting, or facilitating financial transactions for the account of third parties. (2) Review of specific activities Is a specific request required? (ii) Consultation with the Secretary of the Treasury. (iii) Board action on requests. (3) What factors will the Board consider? (4) What information must the request contain? (i) Identify and define the activity for which the determination is sought, specifically describing what the activity would involve and how the activity would be conducted; and (ii) Provide information supporting the requested determination, including information regarding how the proposed activity falls into one of the categories listed in paragraph (e)(1) of this section, and any other information required by the Board concerning the proposed activity. [Reg. Y, 66 FR 415, Jan. 3, 2001, as amended at 66 FR 19081, Apr. 13, 2001] § 225.87 Is notice to the Board required after engaging in a financial activity? (a) Post-transaction notice generally required to engage in a financial activity. (b) Cases in which notice to the Board is not required Acquisitions that do not involve control of a company. (2) No additional notice required to engage de novo in an activity for which a financial holding company already has provided notice. de novo (3) Conduct of certain investment activities. (4) Notice of large merchant banking or insurance company investments. (i) As part of a merchant banking activity conducted under section 4(k)(4)(H) of the BHC Act (12 U.S.C. 1843(k)(4)(H)), the financial holding company acquires more than 5 percent of the shares, assets, or ownership interests of any company at a total cost that exceeds the lesser of 5 percent of the financial holding company's Tier 1 capital or $200 million; (ii) As part of an insurance company investment activity conducted under section 4(k)(4)(I) of the BHC Act (12 U.S.C. 1843(k)(4)(I)), the financial holding company acquires more than 5 percent of the shares, assets, or ownership interests of any company at a total cost that exceeds the lesser of 5 percent of the financial holding company's Tier 1 capital or $200 million; or (iii) The Board in the exercise of its supervisory authority notifies the financial holding company that a notice is necessary. (iv) For purposes of this paragraph (b)(4), a financial holding company that is a qualifying community banking organization (as defined in § 217.12 of this chapter) that is subject to the community bank leverage ratio framework (as defined in § 217.12 of this chapter) calculates its Tier 1 capital (as defined in § 217.2 of this chapter) in accordance with § 217.12(b) of this chapter. [Reg. Y, 66 FR 415, Jan. 3, 2001, as amended at 84 FR 61801, Nov. 13, 2019] § 225.88 How to request the Board to determine that an activity is financial in nature or incidental to a financial activity? (a) Requests regarding activities that may be financial in nature or incidental to a financial activity. (b) Required information. (1) Identify and define the activity for which the determination is sought, specifically describing what the activity would involve and how the activity would be conducted; (2) Explain in detail why the activity should be considered financial in nature or incidental to a financial activity; and (3) Provide information supporting the requested determination and any other information required by the Board concerning the proposed activity. (c) Board procedures for reviewing requests Consultation with the Secretary of the Treasury. (2) Public notice. Federal Register (d) Board action. (e) Advisory opinions regarding scope of financial activities Written request. (i) A detailed description of the particular activity in which the company proposes to engage or the product or service the company proposes to provide; (ii) An explanation supporting an interpretation regarding the scope of the permissible financial activity; and (iii) Any additional information requested by the Board regarding the activity. (2) Board response. § 225.89 How to request approval to engage in an activity that is complementary to a financial activity? (a) Prior Board approval is required. (1) Identify and define the proposed complementary activity, specifically describing what the activity would involve and how the activity would be conducted; (2) Identify the financial activity for which the proposed activity would be complementary and provide detailed information sufficient to support a finding that the proposed activity should be considered complementary to the identified financial activity; (3) Describe the scope and relative size of the proposed activity, as measured by the percentage of the projected financial holding company revenues expected to be derived from and assets associated with conducting the activity; (4) Discuss the risks that conducting the activity may reasonably be expected to pose to the safety and soundness of the subsidiary depository institutions of the financial holding company and to the financial system generally; (5) Describe the potential adverse effects, including potential conflicts of interest, decreased or unfair competition, or other risks, that conducting the activity could raise, and explain the measures the financial holding company proposes to take to address those potential effects; (6) Describe the potential benefits to the public, such as greater convenience, increased competition, or gains in efficiency, that the proposal reasonably can be expected to produce; and (7) Provide any information about the financial and managerial resources of the financial holding company and any other information requested by the Board. (b) Factors for consideration by the Board. (1) The proposed activity is complementary to a financial activity; (2) The proposed activity would pose a substantial risk to the safety or soundness of depository institutions or the financial system generally; and (3) The proposal could be expected to produce benefits to the public that outweigh possible adverse effects. (c) Board action. § 225.90 What are the requirements for a foreign bank to be treated as a financial holding company? (a) Foreign banks as financial holding companies. (1) The foreign bank, any other foreign bank that maintains a U.S. branch, agency, or commercial lending company and is controlled by the foreign bank or company, and any U.S. depository institution subsidiary that is owned or controlled by the foreign bank or company, is and remains well capitalized and well managed; and (2) The foreign bank, and any company that owns or controls the foreign bank, has made an effective election to be treated as a financial holding company under this subpart. (b) Standards for “well capitalized.” (1)(i) Its home country supervisor, as defined in § 211.21 of the Board's Regulation K (12 CFR 211.21), has adopted risk-based capital standards consistent with the Capital Accord of the Basel Committee on Banking Supervision (Basel Accord); (ii) The foreign bank maintains a Tier 1 capital to total risk-based assets ratio of 6 percent and a total capital to total risk-based assets ratio of 10 percent, as calculated under its home country standard; and (iii) The foreign bank's capital is comparable to the capital required for a U.S. bank owned by a financial holding company; or (2) The foreign bank has obtained a determination from the Board under § 225.91(c) that the foreign bank's capital is otherwise comparable to the capital that would be required of a U.S. bank owned by a financial holding company. (c) Standards for “well managed.” (1) The foreign bank has received at least a satisfactory composite rating of its U.S. branch, agency, and commercial lending company operations at its most recent assessment; (2) The home country supervisor of the foreign bank consents to the foreign bank expanding its activities in the United States to include activities permissible for a financial holding company; and (3) The management of the foreign bank meets standards comparable to those required of a U.S. bank owned by a financial holding company. § 225.91 How may a foreign bank elect to be treated as a financial holding company? (a) Filing requirement. (b) Contents of declaration. (1) State that the foreign bank or the company elects to be treated as a financial holding company; (2) Provide the risk-based capital ratios and amount of Tier 1 capital and total assets of the foreign bank, and of each foreign bank that maintains a U.S. branch, agency, or commercial lending company and is controlled by the foreign bank or company, as of the close of the most recent quarter and as of the close of the most recent audited reporting period; (3) Certify that the foreign bank, and each foreign bank that maintains a U.S. branch, agency, or commercial lending company and is controlled by the foreign bank or company, meets the standards of well capitalized set out in § 225.90(b)(1)(i) and (ii) or § 225.90(b)(2) as of the date the foreign bank or company files its election; (4) Certify that the foreign bank, and each foreign bank that maintains a U.S. branch, agency, or commercial lending company and is controlled by the foreign bank or company, is well managed as defined in § 225.90(c)(1) as of the date the foreign bank or company files its election; (5) Certify that all U.S. depository institution subsidiaries of the foreign bank or company are well capitalized and well managed as of the date the foreign bank or company files its election; and (6) Provide the capital ratios for all relevant capital measures (as defined in section 38 of the Federal Deposit Insurance Act (12 U.S.C. 1831(o))) as of the close of the previous quarter for each U.S. depository institution subsidiary of the foreign bank or company. (c) Pre-clearance process. § 225.92 How does an election by a foreign bank become effective? (a) In general. (1) The election is ineffective; or (2) The period is extended with the consent of the foreign bank or company making the election. (b) Earlier notification that an election is effective. (c) Under what circumstances will the Board find an election to be ineffective? (1) The foreign bank certificant, or any foreign bank that operates a branch or agency or owns or controls a commercial lending company in the United States and is controlled by a foreign bank or company certificant, is not both well capitalized and well managed; (2) Any U.S. insured depository institution subsidiary of the foreign bank or company (except an institution excluded under paragraph (d) of this section) or any U.S. branch of a foreign bank that is insured by the Federal Deposit Insurance Corporation has not achieved at least a rating of “satisfactory record of meeting community needs” under the Community Reinvestment Act at the institution's most recent examination; (3) Any U.S. depository institution subsidiary of the foreign bank or company is not both well capitalized and well managed; or (4) The Board does not have sufficient information to assess whether the foreign bank or company making the election meets the requirements of this subpart. (d) How is CRA performance of recently acquired insured depository institutions considered? (e) Factors used in the Board's determination regarding comparability of capital and management In general. (2) Assessment of consolidated supervision. (i) The home country has made significant progress in establishing arrangements for comprehensive supervision on a consolidated basis; and (ii) The foreign bank is in strong financial condition as demonstrated, for example, by capital levels that significantly exceed the minimum levels that are required for a well capitalized determination and strong asset quality. § 225.93 What are the consequences of a foreign bank failing to continue to meet applicable capital and management requirements? (a) Notice by the Board. (b) Notification by a financial holding company required Notice to Board. (2) Triggering events for notice to the Board Well capitalized. (ii) Well managed. (c) Execution of agreement acceptable to the Board Agreement required; time period. (2) Extension of time for executing agreement. (3) Agreement requirements. (i) Explain the specific actions that the foreign bank or company will take to correct all areas of noncompliance; (ii) Provide a schedule within which each action will be taken; (iii) Provide any other information that the Board may require; and (iv) Be acceptable to the Board. (d) Limitations during period of noncompliance (1) The Board may impose any limitations or conditions on the conduct or the U.S. activities of the foreign bank or company or any of its affiliates as the Board finds to be appropriate and consistent with the purposes of the Bank Holding Company Act; and (2) The foreign bank or company and its affiliates may not commence any additional activity in the United States or acquire control or shares of any company under section 4(k) of the Bank Holding Company Act (12 U.S.C. 1843(k)) without prior approval from the Board. (e) Consequences of failure to correct conditions within 180 days Termination of Offices and Divestiture. (2) Alternative method of complying with a divestiture order. (f) Consultation with other agencies. § 225.94 What are the consequences of an insured branch or depository institution failing to maintain a satisfactory or better rating under the Community Reinvestment Act? (a) Insured branch as an “insured depository institution.” (b) Applicability. Interpretations § 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] § 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] § 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] § 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] § 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] § 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] § 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, (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] § 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] § 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] § 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. (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. (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. (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] § 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] § 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] § 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. 1 1 (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] § 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] § 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] § 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. A bank holding company should not act as investment adviser to an investment company that has a name similar to the name of the holding company or any of its subsidiary banks, unless the prospectus of the investment company contains the disclosures required in paragraph (h) of this section. In no case should a bank holding company act as investment adviser to an investment company that has either the same name as the name of the holding company or any of its subsidiary banks, or a name that contains the word “bank.” (g) In view of the potential conflicts of interests that may exist, a bank holding company and its bank and nonbank subsidiaries should not purchase in their sole discretion, in a fiduciary capacity (including as managing agent), securities of any investment company for which the bank holding company acts as investment adviser unless, the purchase is specifically authorized by the terms of the instrument creating the fiduciary relationship, by court order, or by the law of the jurisdiction under which the trust is administered. (h) Under section 20 of the Glass-Steagall Act, a member bank is prohibited from being affiliated with a company that directly, or through a subsidiary, engages principally in the issue, flotation, underwriting, public sale, or distribution of securities. A bank holding company or its nonbank subsidiary may not engage, directly or indirectly, in the underwriting, public sale or distribution of securities of any investment company for which the holding company or any nonbank subsidiary provides investment advice except in compliance with the terms of section 20, and only after obtaining the Board's approval under section 4 of the Bank Holding Company Act and subject to the limitations and disclosures required by the Board in those cases. The Board has determined, however, that the conduct of securities brokerage activities by a bank holding company or its nonbank subsidiaries, when conducted individually or in combination with investment advisory activities, is not deemed to be the underwriting, public sale, or distribution of securities prohibited by the Glass-Steagall Act, and the U.S. Supreme Court has upheld that determination. See Securities Industry Ass'n Board of Governors, see also Securities Industry Ass'n Board of Governors, cert. denied, (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, as amended by Reg. Y, 57 FR 30391, July 9, 1992; 61 FR 45875, Aug. 30, 1996; Reg. Y, 62 FR 9343, Feb. 28, 1997] § 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] § 225.127 Investment in corporations or projects designed primarily to promote community welfare. (a) Under § 225.28(b)(12) of Regulation Y, a bank holding company may, in accordance with the provisions of § 225.23 or § 225.24, 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 § 225.28(b)(12) 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 § 225.28(b)(12) to that area. Other investments primarily designed to promote community welfare are considered permissible, 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 225.28(b)(12) is intended to provide an opportunity for them to assume such a role. (b) Under the authority of § 225.28(b)(12), 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 § 225.28(b)(12) 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 § 225.23 or § 225.24 should be accompanied by a memorandum which demonstrates that such projects meet the objectives of § 225.28(b)(12). (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. (f) Section 6 of the Depository Institutions Disaster Relief Act of 1992 permits state member banks (12 U.S.C. 338a) and national banks (12 U.S.C. 24 (Eleventh)) to invest in the stock of community development corporations that are designed primarily to promote the public welfare of low- and moderate-income communities and persons in the areas of housing, services and employment. The Board and the Office of the Comptroller of the Currency have adopted rules that permit state member banks and national banks to make certain investments without prior approval. The Board believes that these rules are consistent with the Board's interpretation of, and decisions regarding, the scope of community welfare activities permissible for bank holding companies. Accordingly, approval received by a bank holding company to conduct activities designed to promote the community welfare under section 4(c)(8) of the Bank Holding Company Act (12 U.S.C. 1843(c)(8)) and § 225.28(b)(12) of the Board's Regulation Y (12 CFR 225.28(b)(12)) includes approval to engage, either directly or through a subsidiary, in the following activities, up to five percent of the bank holding company's total consolidated capital stock and surplus, without additional Board or Reserve Bank approval: (1) Invest in and provide financing to a corporation or project or class of corporations or projects that the Board previously has determined is a public welfare project pursuant to paragraph 23 of section 9 of the Federal Reserve Act (12 U.S.C. 338a); (2) Invest in and provide financing to a corporation or project that the Office of the Comptroller of the Currency previously has determined, by order or regulation, is a public welfare investment pursuant to section 5136 of the Revised Statutes (12 U.S.C. 24 (Eleventh)); (3) Invest in and provide financing to a community development financial institution pursuant to section 103(5) of the Community Development Banking and Financial Institutions Act of 1994 (12 U.S.C. 4702(5)); (4) Invest in, provide financing to, develop, rehabilitate, manage, sell, and rent residential property if a majority of the units will be occupied by low- and moderate-income persons or if the property is a “qualified low-income building” as defined in section 42(c)(2) of the Internal Revenue Code (26 U.S.C. 42(c)(2)); (5) Invest in, provide financing to, develop, rehabilitate, manage, sell, and rent nonresidential real property or other assets located in a low- or moderate-income area provided the property is used primarily for low- and moderate-income persons; (6) Invest in and provide financing to one or more small businesses located in a low- or moderate-income area to stimulate economic development; (7) Invest in, provide financing to, develop, and otherwise assist job training or placement facilities or programs designed primarily for low- and moderate-income persons; (8) Invest in and provide financing to an entity located in a low- or moderate-income area if that entity creates long-term employment opportunities, a majority of which (based on full time equivalent positions) will be held by low- and moderate-income persons; and (9) Provide technical assistance, credit counseling, research, and program development assistance to low- and moderate-income persons, small businesses, or nonprofit corporations to help achieve community development. (g) For purposes of paragraph (f) of this section, low- and moderate-income persons or areas means individuals and communities whose incomes do not exceed 80 percent of the median income of the area involved, as determined by the U.S. Department of Housing and Urban Development. Small businesses are businesses that are smaller than the maximum size eligibility standards established by the Small Business Administration (SBA) for the Small Business Investment Company and Development Company Programs or the SBA section 7A loan program; and specifically include those businesses that are majority-owned by members of minority groups or by women. (h) For purposes of paragraph (f) of this section, five percent of the total consolidated capital stock and surplus of a bank holding company includes its total investment in projects described in paragraph (f) of this section, when aggregated with similar types of investments made by depository institutions controlled by the bank holding company. The term total consolidated capital stock and surplus of the bank holding company means total equity capital and the allowance for loan and lease losses or adjusted allowance for credit losses, as applicable, based on the bank holding company's most recent FR Y-9C (Consolidated Financial Statements for Holding Companies) or FR Y-9SP (Parent Company Only Financial Statements for Small Holding Companies). [37 FR 11316, June 7, 1972; 37 FR 13336, July 7, 1972, as amended at Reg. Y, 59 FR 63713, Dec. 9, 1994; 84 FR 4244, Feb. 14, 2019] § 225.129 Activities closely related to banking. Courier activities. 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. 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. 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 [38 FR 32126, Nov. 21, 1973, as amended at 40 FR 36309, Aug. 20, 1975] § 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] § 225.131 Activities closely related to banking. (a) Bank management consulting advice. (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, [39 FR 8318, Mar. 5, 1974; 39 FR 21120, June 19, 1974] § 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 business 1 2 1 2 (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 50 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, as amended at Reg. Y, 57 FR 28779, June 29, 1992] § 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] § 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, as amended at 41 FR 12009, Mar. 23, 1976] § 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] § 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 1 “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. (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] § 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. (2) Submissions and approval of divestiture plans. (3) Periodic progress reports. (4) Extensions of divestiture periods. (5) Use of trustees. (6) Presumptions of control. (7) Role of the Reserve Banks. [42 FR 10969, Feb. 25, 1977] § 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 2 1 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 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 transferee, subsidiary (2) The terms officers, directors, trustees, in common with 4 spin-off, spinoff divested 5 4 in common with company 5 (3) Although section 2(g)(3) refers to transfers of shares shares. shares (4) The term indebtedness (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 Federal Register Federal Register 6 6 Orders issued under section 2(g)(3) are published in the Federal Reserve “Bulletin.” (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] § 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 1 assets. 1 (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] § 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, banking (12 U.S.C. 1843(a)(2) and 1844(b)) [45 FR 54326, July 15, 1980] § 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. (b) Establishment of prudent written policies, appropriate limitations and internal controls and audit programs. (c) Formulating policies and recording financial contracts. (d) Accounting. (e) Board to monitor bank holding company transactions in financial contracts. (f) Federal Reserve Bank notification. (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] § 225.143 Policy statement on nonvoting equity investments by bank holding companies. (a) Introduction. (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. (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. (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 1 See (d) Provisions that avoid control. (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. [47 FR 30966, July 16, 1982] § 225.145 Limitations established by the Competitive Equality Banking Act of 1987 on the activities and growth of nonbank banks. (a) Introduction. 1 2 1 et seq. 2 (b) Congressional findings. See also (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 (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 3 E.g., Maryland National Corporation, Cf., Spokane & Inland Empire Railroad Co. United States, (c) Activity limitation Scope of activity. activity activity (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 4 (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., See 5 5 (iv) Finally, additional guidance as to the meaning of the term activity activity (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 (2) Deposit-taking activities. bank (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 business 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 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 7 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. bank (i) Commercial lending. Board of Governors Dimension Financial Corporation, Dimension Dimension 8 Dimension. 8 (ii) Other lending. (4) Trust activities. See (5) Other activities. activity 9 9 (6) Meaning of engaged in. engaged in (7) Meaning of as of as of bank (d) Cross-marketing limitation In general. (2) Examples of impermissible cross-marketing. Id. (3) Permissible cross-marketing. (4) Product approach to cross-marketing restriction. (ii) The Board believes that the term product or service e.g., e.g., 10 11 10 Banking Terminology 11 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). (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. 12 12 United States Philadelphia National Bank, (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 (5) Change in terms and conditions permitted. See (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. offer or market (7) Limitations on cross-marketing to in the same manner. (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 specific types of cross-marketing activity that were undertaken as of March 5, 1987. (8) Eligibility for cross-marketing grandfather exemption. Id. see also (e) Eligibility for grandfathered nonbank bank status. bank [Reg. Y, 53 FR 37746, Sept. 28, 1988, as amended by Reg. Y, 62 FR 9343, Feb. 28, 1997] Subpart J—Merchant Banking Investments Source: Reg. Y, 66 FR 8484, Jan. 31, 2001, unless otherwise noted. § 225.170 What type of investments are permitted by this subpart, and under what conditions may they be made? (a) What types of investments are permitted by this subpart? (b) Must the investment be a bona fide merchant banking investment? (c) What types of ownership interests may be acquired? (d) Where in a financial holding company may merchant banking investments be made? (e) May assets other than shares be held directly? (1) The assets are held by or promptly transferred to a portfolio company; (2) The portfolio company maintains policies, books and records, accounts, and other indicia of corporate, partnership or limited liability organization and operation that are separate from the financial holding company and limit the legal liability of the financial holding company for obligations of the portfolio company; and (3) The portfolio company has management that is separate from the financial holding company to the extent required by § 225.171. (f) What type of affiliate is required for a financial holding company to make merchant banking investments? (1) Securities affiliate. (i) A broker or dealer; or (ii) A municipal securities dealer, including a separately identifiable department or division of a bank that is registered as a municipal securities dealer. (2) Insurance affiliate with an investment adviser affiliate. (i) An insurance company that is predominantly engaged in underwriting life, accident and health, or property and casualty insurance (other than credit-related insurance), or providing and issuing annuities; and (ii) A company that: (A) Is registered with the Securities and Exchange Commission as an investment adviser under the Investment Advisers Act of 1940 (15 U.S.C. 80b-1 et seq. (B) Provides investment advice to an insurance company. § 225.171 What are the limitations on managing or operating a portfolio company held as a merchant banking investment? (a) May a financial holding company routinely manage or operate a portfolio company? (b) When does a financial holding company routinely manage or operate a company? Examples of routine management or operation Executive officer interlocks at the portfolio company. (ii) Interlocks by executive officers of the financial holding company. (A) Prohibition. (B) Definition. ( 1 ( 2 ( 3 ( 4 ( 5 (iii) Covenants regarding ordinary course of business. (2) Presumptions of routine management or operation. (i) Any director, officer, or employee of the financial holding company serves as or has the responsibilities of an officer (other than an executive officer) or employee of the portfolio company; or (ii) Any officer or employee of the portfolio company is supervised by any director, officer, or employee of the financial holding company (other than in that individual's capacity as a director of the portfolio company). (c) How may a financial holding company rebut a presumption that it is routinely managing or operating a portfolio company? (d) What arrangements do not involve routinely managing or operating a portfolio company? Director representation at portfolio companies. (i) The portfolio company employs officers and employees responsible for routinely managing and operating the company; and (ii) The financial holding company does not routinely manage or operate the portfolio company, except as permitted in paragraph (e) of this section. (2) Covenants or other provisions regarding extraordinary events. (i) The acquisition of significant assets or control of another company by the portfolio company or any of its subsidiaries; (ii) Removal or selection of an independent accountant or auditor or investment banker by the portfolio company; (iii) Significant changes to the business plan or accounting methods or policies of the portfolio company; (iv) Removal or replacement of any or all of the executive officers of the portfolio company; (v) The redemption, authorization or issuance of any equity or debt securities (including options, warrants or convertible shares) of the portfolio company or any borrowing by the portfolio company outside of the ordinary course of business; (vi) The amendment of the articles of incorporation or by-laws (or similar governing documents) of the portfolio company; and (vii) The sale, merger, consolidation, spin-off, recapitalization, liquidation, dissolution or sale of substantially all of the assets of the portfolio company or any of its significant subsidiaries. (3) Providing advisory and underwriting services to, and having consultations with, a portfolio company. (i) Provide financial, investment and management consulting advice to a portfolio company in a manner consistent with and subject to any restrictions on such activities contained in §§ 225.28(b)(6) or 225.86(b)(1) of this part (12 CFR 225.28(b)(6) and 225.86(b)(1)); (ii) Provide assistance to a portfolio company in connection with the underwriting or private placement of its securities, including acting as the underwriter or placement agent for such securities; and (iii) Meet with the officers or employees of a portfolio company to monitor or provide advice with respect to the portfolio company's performance or activities. (e) When may a financial holding company routinely manage or operate a portfolio company? Special circumstances required. (2) Duration Limited. (3) Notice required for extended involvement. (4) Documentation required. (f) May a depository institution or its subsidiary routinely manage or operate a portfolio company? In general. (2) Definition applying provisions governing routine management or operation. (3) Exception for certain subsidiaries of depository institutions. et seq. § 225.172 What are the holding periods permitted for merchant banking investments? (a) Must investments be made for resale? (b) What period of time is generally permitted for holding merchant banking investments? In general. (2) Ownership interests acquired from or transferred to companies held under this subpart. (i) Acquired by a financial holding company from a company in which the financial holding company held an interest under this subpart will be considered to have been acquired by the financial holding company on the date that the share, asset or ownership interest was acquired by the company; and (ii) Acquired by a company from a financial holding company will be considered to have been acquired by the company on the date that the share, asset or ownership interest was acquired by the financial holding company if— (A) The financial holding company held the share, asset, or ownership interest under this subpart; and (B) The financial holding company holds an interest in the acquiring company under this subpart. (3) Interests previously held by a financial holding company under limited authority. (4) Approval required to hold interests held in excess of time limit. (i) Be submitted to the Board at least 90 days prior to the expiration of the applicable time period; (ii) Provide the reasons for the request, including information that addresses the factors in paragraph (b)(5) of this section; and (iii) Explain the financial holding company's plan for divesting the shares, assets or ownership interests. (5) Factors governing Board determinations. (i) The cost to the financial holding company of disposing of the investment within the applicable period; (ii) The total exposure of the financial holding company to the company and the risks that disposing of the investment may pose to the financial holding company; (iii) Market conditions; (iv) The nature of the portfolio company's business; (v) The extent and history of involvement by the financial holding company in the management and operations of the company; and (vi) The average holding period of the financial holding company's merchant banking investments. (6) Restrictions applicable to investments held beyond time period. (i) For purposes of determining the financial holding company's regulatory capital, apply to the financial holding company's adjusted carrying value of such shares, assets, or ownership interests a capital charge determined by the Board that must be: (A) Higher than the maximum marginal tier 1 capital charge applicable under part 217 to merchant banking investments held by that financial holding company; and (B) In no event less than 25 percent of the adjusted carrying value of the investment; and (ii) Abide by any other restrictions that the Board may impose in connection with granting approval under paragraph (b)(4) of this section. [Reg. Y, 62 FR 9329, Feb. 28, 1997, as amended at 78 FR 62291, Oct. 11, 2013; 80 FR 70673, Nov. 16, 2015] § 225.173 How are investments in private equity funds treated under this subpart? (a) What is a private equity fund? (1) Is formed for the purpose of and is engaged exclusively in the business of investing in shares, assets, and ownership interests of financial and nonfinancial companies for resale or other disposition; (2) Is not an operating company; (3) No more than 25 percent of the total equity of which is held, owned or controlled, directly or indirectly, by the financial holding company and its directors, officers, employees and principal shareholders; (4) Has a maximum term of not more than 15 years; and (5) Is not formed or operated for the purpose of making investments inconsistent with the authority granted under section 4(k)(4)(H) of the Bank Holding Company Act (12 U.S.C. 1843(k)(4)(H)) or evading the limitations governing merchant banking investments contained in this subpart. (b) What form may a private equity fund take? (c) What is the holding period permitted for interests in private equity funds? In general. (2) Request to hold interest for longer period. (3) Application of rules. (d) How do the restrictions on routine management and operation apply to private equity funds and investments held through a private equity fund? Portfolio companies held through a private equity fund. (2) Private equity funds controlled by a financial holding company. (3) Private equity funds that are not controlled by a financial holding company. (4) When does a financial holding company control a private equity fund? (i) Serves as a general partner, managing member, or trustee of the private equity fund (or serves in a similar role with respect to the private equity fund); (ii) Owns or controls 25 percent or more of any class of voting shares or similar interests in the private equity fund; (iii) In any manner selects, controls or constitutes a majority of the directors, trustees or management of the private equity fund; or (iv) Owns or controls more than 5 percent of any class of voting shares or similar interests in the private equity fund and is the investment adviser to the fund. § 225.174 What aggregate thresholds apply to merchant banking investments? (a) In general. (1) 30 percent of the Tier 1 capital of the financial holding company; or (2) After excluding interests in private equity funds, 20 percent of the Tier 1 capital of the financial holding company. (b) How do these thresholds apply to a private equity fund? (c) How long do these thresholds remain in effect? (d) Qualifying community banking organizations. [Reg. Y, 66 FR 8484, Jan. 31, 2001, as amended at 84 FR 61801, Nov. 13, 2019] § 225.175 What risk management, record keeping and reporting policies are required to make merchant banking investments? (a) What internal controls and records are necessary? General. (i) Monitor and assess the carrying value, market value and performance of each investment and the aggregate portfolio; (ii) Identify and manage the market, credit, concentration and other risks associated with such investments; (iii) Identify, monitor and assess the terms, amounts and risks arising from transactions and relationships (including contingent fees or contingent interests) with each company in which the financial holding company holds an interest under this subpart; (iv) Ensure the maintenance of corporate separateness between the financial holding company and each company in which the financial holding company holds an interest under this subpart and protect the financial holding company and its depository institution subsidiaries from legal liability for the operations conducted and financial obligations of each such company; and (v) Ensure compliance with this part and any other provisions of law governing transactions and relationships with companies in which the financial holding company holds an interest under this subpart ( e.g., (2) Availability of records. (b) What periodic reports must be filed? (c) Is notice required for the acquisition of companies? Fulfillment of statutory notice requirement. (2) Notice of large individual investments. (3) Qualifying community banking organizations. [Reg. Y, 66 FR 8484, Jan. 31, 2001, as amended at 84 FR 61801, Nov. 13, 2019] § 225.176 How do the statutory cross marketing and sections 23A and B limitations apply to merchant banking investments? (a) Are cross marketing activities prohibited? In general. (i) Offer or market, directly or through any arrangement, any product or service of any company if more than 5 percent of the company's voting shares, assets or ownership interests are owned or controlled by the financial holding company pursuant to this subpart; or (ii) Allow any product or service of the depository institution, including any product or service of a subsidiary of the depository institution, to be offered or marketed, directly or through any arrangement, by or through any company described in paragraph (a)(1)(i) of this section. (2) How are certain subsidiaries treated? et seq.; et seq. et seq. (3) How do the cross marketing restrictions apply to private equity funds? (i) Portfolio companies held by a private equity fund that the financial holding company does not control; or (ii) The sale, offer or marketing of any interest in a private equity fund, whether or not controlled by the financial holding company. (b) When are companies held under section 4(k)(4)(H) affiliates under sections 23A and B? Rebuttable presumption of control. (2) Request to rebut presumption. (3) Presumptions that control does not exist. (i) No officer, director or employee of the financial holding company serves as a director, trustee, or general partner (or individual exercising similar functions) of the company; (ii) A person that is not affiliated or associated with the financial holding company owns or controls a greater percentage of the equity capital of the portfolio company than the amount owned or controlled by the financial holding company, and no more than one officer or employee of the holding company serves as a director or trustee (or individual exercising similar functions) of the company; or (iii) A person that is not affiliated or associated with the financial holding company owns or controls more than 50 percent of the voting shares of the portfolio company, and officers and employees of the holding company do not constitute a majority of the directors or trustees (or individuals exercising similar functions) of the company. (4) Convertible instruments. (5) Application of presumption to private equity funds. (6) Application of sections 23A and B to U.S. branches and agencies of foreign banks. (i) Any portfolio company that the foreign bank or affiliated company controls or is presumed to control under paragraph (b)(1) of this section; and (ii) Any company that the foreign bank or affiliated company controls or is presumed to control under paragraph (b)(1) of this section if the company is engaged in acquiring or controlling merchant banking investments and the proceeds of the covered transaction are used for the purpose of funding the company's merchant banking investment activities. § 225.177 Definitions. (a) What do references to a financial holding company include? (2) Except as otherwise expressly provided, the term “financial holding company” does not include a depository institution or subsidiary of a depository institution or any portfolio company controlled directly or indirectly by the financial holding company. (b) What do references to a depository institution include? (c) What is a portfolio company? (1) That is engaged in any activity not authorized for the financial holding company under section 4 of the Bank Holding Company Act (12 U.S.C. 1843); and (2) Any shares, assets or ownership interests of which are held, owned or controlled directly or indirectly by the financial holding company pursuant to this subpart, including through a private equity fund that the financial holding company controls. (d) Who are the executive officers of a company? (2) The term “executive officer” does not include— (i) Any person, including a person with an official title, who may exercise a certain measure of discretion in the performance of his duties, including the discretion to make decisions in the ordinary course of the company's business, but who does not participate in the determination of major policies of the company and whose decisions are limited by policy standards fixed by senior management of the company; or (ii) Any person who is excluded from participating (other than in the capacity of a director) in major policymaking functions of the company by resolution of the board of directors or by the bylaws of the company and who does not in fact participate in such policymaking functions. Subpart K—Proprietary Trading and Relationships With Hedge Funds and Private Equity Funds Source: 76 FR 8275, Feb. 14, 2011, unless otherwise noted. § 225.180 Definitions. For purposes of this subpart: (a) Banking entity (1) Any insured depository institution; (2) Any company that controls an insured depository institution; (3) Any company that is treated as a bank holding company for purposes of section 8 of the International Banking Act of 1978; and (4) Any affiliate or subsidiary of any of the foregoing entities. (b) Hedge fund private equity fund et seq. (c) Insured depository institution (1) All or substantially all of the deposits of such institution are in trust funds and are received in a bona fide fiduciary capacity; (2) No deposits of such institution which are insured by the Federal Deposit Insurance Corporation are offered or marketed by or through an affiliate of such institution; (3) Such institution does not accept demand deposits or deposits that the depositor may withdraw by check or similar means for payment to third parties or others or make commercial loans; and (4) Such institution does not— (i) Obtain payment or payment related services from any Federal Reserve bank, including any service referred to in section 11A of the Federal Reserve Act (12 U.S.C. 248a); or (ii) Exercise discount or borrowing privileges pursuant to section 19(b)(7) of the Federal Reserve Act (12 U.S.C. 416(b)(7)). (d) Nonbank financial company supervised by the Board (e) Board (f) Illiquid fund (1) As of May 1, 2010— (i) Was principally invested in illiquid assets; or (ii) Was invested in, and contractually committed to principally invest in, illiquid assets; and (2) Makes all investments pursuant to, and consistent with, an investment strategy to principally invest in illiquid assets. (g) Illiquid assets (1) Is not a liquid asset; (2) Because of statutory or regulatory restrictions applicable to the hedge fund, private equity fund or asset, cannot be offered, sold, or otherwise transferred by the hedge fund or private equity fund to a person that is unaffiliated with the relevant banking entity; or (3) Because of contractual restrictions applicable to the hedge fund, private equity fund or asset, cannot be offered, sold, or otherwise transferred by the hedge fund or private equity fund for a period of 3 years or more to a person that is unaffiliated with the relevant banking entity. (h) Liquid asset (1) Cash or cash equivalents; (2) An asset that is traded on a recognized, established exchange, trading facility or other market on which there exist independent, bona fide offers to buy and sell so that a price reasonably related to the last sales price or current bona fide competitive bid and offer quotations can be determined for the particular asset almost instantaneously; (3) An asset for which there are bona fide, competitive bid and offer quotations in a recognized inter-dealer quotation system or similar system or for which multiple dealers furnish bona fide, competitive bid and offer quotations to other brokers and dealers on request; (4) An asset the price of which is quoted routinely in a widely disseminated publication that is readily available to the general public or through an electronic service that provides indicative data from real-time financial networks; (5) An asset with an initial term of one year or less and the payments on which at maturity may be settled, closed-out, or paid in cash or one or more other liquid assets described in paragraphs (h)(1), (2), (3), or (4); and (6) Any other asset that the Board determines, based on all the facts and circumstances, is a liquid asset. (i) Principally invested (1) Is principally invested (i) Illiquid assets; or (ii) Risk-mitigating hedges entered into in connection with and related to individual or aggregated positions in, or holdings of, illiquid assets; (2) Is contractually committed to principally invest (3) Has an investment strategy to principally invest (i) Markets or holds itself out to investors as intending to principally invest in assets described in paragraph (i)(1) of this section; or (ii) Has a documented investment policy of principally investing in assets described in paragraph (i)(1) of this section. § 225.181 Conformance Period for Banking Entities Engaged in Prohibited Proprietary Trading or Private Fund Activities. (a) Conformance Period In general. (i) July 21, 2012; or (ii) Twelve months after the date on which final rules adopted under section 13(b)(2) of the Bank Holding Company Act (12 U.S.C. 1851(b)(2)) are published in the Federal Register. (2) New banking entities. (i) The conformance date determined in accordance with paragraph (a)(1) of this section; or (ii) Two years after the date on which the company becomes a banking entity or a subsidiary or affiliate of a banking entity. (3) Extended conformance period. (b) Illiquid funds Extended transition period. (i) The fund is an illiquid fund; and (ii) The acquisition or retention of such interest, or provision of additional capital, is necessary to fulfill a contractual obligation of the banking entity that was in effect on May 1, 2010. (2) Duration limited. (i) May not exceed 5 years beyond any conformance period granted under paragraph (a)(3) of this section; and (ii) Shall terminate automatically on the date during any such extension on which the banking entity is no longer under a contractual obligation described in paragraph (b)(1)(ii). (3) Contractual obligation. (i) A banking entity has a contractual obligation to take or retain an equity, partnership, or other ownership interest in an illiquid fund if the banking entity is prohibited from redeeming all of its equity, partnership, or other ownership interests in the fund, and from selling or otherwise transferring all such ownership interests to a person that is not an affiliate of the banking entity— (A) Under the terms of the banking entity's equity, partnership, or other ownership interest in the fund or the banking entity's other contractual arrangements with the fund or unaffiliated investors in the fund; or (B) If the banking entity is the sponsor of the fund, under the terms of a written representation made by the banking entity in the fund's offering materials distributed to potential investors; (ii) A banking entity has a contractual obligation to provide additional capital to an illiquid fund if the banking entity is required to provide additional capital to such fund— (A) Under the terms of its equity, partnership or other ownership interest in the fund or the banking entity's other contractual arrangements with the fund or unaffiliated investors in the fund; or (B) If the banking entity is the sponsor of the fund, under the terms of a written representation made by the banking entity in the fund's offering materials distributed to potential investors; and (iii) A banking entity shall be considered to have a contractual obligation for purposes of paragraph (b)(3)(i) or (ii) of this section only if— (A) The obligation may not be terminated by the banking entity or any of its subsidiaries or affiliates under the terms of its agreement with the fund; and (B) In the case of an obligation that may be terminated with the consent of other persons, the banking entity and its subsidiaries and affiliates have used their reasonable best efforts to obtain such consent and such consent has been denied. (c) Approval required to hold interests in excess of time limit. (1) Submit a request in writing to the Board at least 180 days prior to the expiration of the applicable time period; (2) Provide the reasons why the banking entity believes the extension should be granted, including information that addresses the factors in paragraph (d)(1) of this section; and (3) Provide a detailed explanation of the banking entity's plan for divesting or conforming the activity or investment(s). (d) Factors governing Board determinations Extension requests generally. (i) Whether the activity or investment— (A) Involves or results in material conflicts of interest between the banking entity and its clients, customers or counterparties; (B) Would result, directly or indirectly, in a material exposure by the banking entity to high-risk assets or high-risk trading strategies; (C) Would pose a threat to the safety and soundness of the banking entity; or (D) Would pose a threat to the financial stability of the United States; (ii) Market conditions; (iii) The nature of the activity or investment; (iv) The date that the banking entity's contractual obligation to make or retain an investment in the fund was incurred and when it expires; (v) The contractual terms governing the banking entity's interest in the fund; (vi) The degree of control held by the banking entity over investment decisions of the fund; (vii) The types of assets held by the fund, including whether any assets that were illiquid when first acquired by the fund have become liquid assets, such as, for example, because any statutory, regulatory, or contractual restrictions on the offer, sale, or transfer of such assets have expired; (viii) The date on which the fund is expected to wind up its activities and liquidate, or its investments may be redeemed or sold; (ix) The total exposure of the banking entity to the activity or investment and the risks that disposing of, or maintaining, the investment or activity may pose to the banking entity or the financial stability of the United States; (x) The cost to the banking entity of divesting or disposing of the activity or investment within the applicable period; (xi) Whether the divestiture or conformance of the activity or investment would involve or result in a material conflict of interest between the banking entity and unaffiliated clients, customers or counterparties to which it owes a duty; (xii) The banking entity's prior efforts to divest or conform the activity or investment(s), including, with respect to an illiquid fund, the extent to which the banking entity has made efforts to terminate or obtain a waiver of its contractual obligation to take or retain an equity, partnership, or other ownership interest in, or provide additional capital to, the illiquid fund; and (xiii) Any other factor that the Board believes appropriate. (2) Timing of Board review. (3) Consultation. (e) Authority to impose restrictions on activities or investments during any extension period In general. (2) Consultation. § 225.182 Conformance Period for Nonbank Financial Companies Supervised by the Board Engaged in Proprietary Trading or Private Fund Activities. (a) Divestiture requirement. (b) Extensions. (c) Approval required to hold interests in excess of time limit. (1) Submit a request in writing to the Board at least 180 days prior to the expiration of the applicable time period; (2) Provide the reasons why the nonbank financial company supervised by the Board believes the extension should be granted; and (3) Provide a detailed explanation of the company's plan for conforming the activity or investment(s) to any applicable requirements established under section 13(a)(2) or (f)(4) of the Bank Holding Company Act (12 U.S.C. 1851(a)(2) and (f)(4)). (d) Factors governing Board determinations In general. (2) Timing. (f) Authority to impose restrictions on activities or investments during any extension period. Subpart L—Conditions to Orders Source: 76 FR 8275, Feb. 14, 2011, unless otherwise noted. Conditions to Orders § 225.200 Conditions to Board's section 20 orders. (a) Introduction. (b) Conditions. (1) Capital. (ii) In the event that a bank or thrift affiliate of a section 20 subsidiary shall become less than well capitalized (as defined in section 38 of the Federal Deposit Insurance Act, 12 U.S.C. 1831o), and the bank holding company shall fail to restore it promptly to the well capitalized level, the Board may, in its discretion, reimpose the funding, credit extension and credit enhancement firewalls contained in its 1989 order allowing underwriting and dealing in bank-ineligible securities, 1 1 J.P. Morgan & Co., The Chase Manhattan Corp., Bankers Trust New York Corp., Citicorp, and Security Pacific Corp., (iii) A foreign bank that operates a branch or agency in the United States shall maintain strong capital on a fully consolidated basis at levels above the minimum levels required by the Basle Capital Accord. In the event that the Board determines that the foreign bank's capital has fallen below these levels and the foreign bank fails to restore its capital position promptly, the Board may, in its discretion, reimpose the funding, credit extension and credit enhancement firewalls contained in its 1990 order allowing foreign banks to underwrite and deal in bank-ineligible securities, 2 2 Canadian Imperial Bank of Commerce, The Royal Bank of Canada, Barclays PLC and Barclays Bank PLC, (2) Internal controls. 3 3 (ii) Each bank holding company or foreign bank shall ensure that an independent and thorough credit evaluation has been undertaken in connection with participation by a bank, thrift, or branch or agency in such transactions, and that adequate documentation of that evaluation is maintained for review by examiners of the appropriate federal banking agency and the Federal Reserve. (3) Interlocks restriction. (ii) Directors, officers or employees of a section 20 subsidiary shall not serve as a majority of the board of directors or the chief executive officer of an affiliated bank or thrift subsidiary or branch or agency, except that the manager of a branch or agency may act as a director of the underwriting subsidiary. (iii) For purposes of this standard, the manager of a branch or agency of a foreign bank generally will be considered to be the chief executive officer of the branch or agency. (4) Customer disclosure Disclosure to section 20 customers. 4 4 (ii) Disclosures accompanying investment advice. (5) Intra-day credit. (6) Restriction on funding purchases of securities during underwriting period. (i) The extension of credit is made pursuant to, and consistent with any conditions imposed in a preexisting line of credit that was not established in contemplation of the underwriting; or (ii) The extension of credit is made in connection with clearing transactions for the section 20 affiliate. (7) Reporting requirement. (ii) In the event that a section 20 subsidiary is required to furnish notice concerning its capitalization to the Securities and Exchange Commission pursuant to 17 CFR 240.17a-11, a copy of the notice shall be filed concurrently with the appropriate Federal Reserve Bank. (8) Foreign banks. [62 FR 45306, Aug. 27, 1997, as amended by Reg. Y, 63 FR 14804, Mar. 27, 1998] Subpart M—Minimum Requirements for Appraisal Management Companies Source: 80 FR 32681, June 9, 2015, unless otherwise noted. § 225.190 Authority, purpose, and scope. (a) Authority. (b) Purpose and scope. (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; (iii) Prescribes minimum standards for the performance of real estate appraisals in connection with Federal related transactions under the jurisdiction of the Board; (iv) Prescribes minimum requirements to be applied by participating States in the registration and supervision of AMCs; and (v) Prescribes minimum requirements to be applied by participating States to report certain information concerning AMCs registered with the States to a national registry of AMCs. (c) Rule of construction. 1 1 See, http://www.federalreserve.gov/newsevents/press/bcreg/20101202a.htm. § 225.191 Definitions. For purposes of this subpart: (a) Affiliate (b) AMC National Registry (c) Appraisal Foundation (d)(1) Appraisal management company (i) Provides appraisal management services to creditors or to secondary mortgage market participants, including affiliates; (ii) Provides such services in connection with valuing a consumer's principal dwelling as security for a consumer credit transaction or incorporating such transactions into securitizations; and (iii) Within a 12-month period, as defined in § 225.192(d), oversees an appraiser panel of more than 15 State-certified or State-licensed appraisers in a State or 25 or more State-certified or State-licensed appraisers in two or more States, as described in § 225.192; (2) An AMC does not include a department or division of an entity that provides appraisal management services only to that entity. (e) Appraisal management services (1) Recruiting, selecting, and retaining appraisers; (2) Contracting with State-certified or State-licensed appraisers to perform appraisal assignments; (3) Managing the process of having an appraisal performed, including providing administrative services such as receiving appraisal orders and appraisal reports, submitting completed appraisal reports to creditors and secondary market participants, collecting fees from creditors and secondary market participants for services provided, and paying appraisers for services performed; and (4) Reviewing and verifying the work of appraisers. (f) Appraiser panel (g) Consumer credit (h) Covered transaction (i) Creditor (1) A person who regularly extends consumer credit that is subject to a finance charge or is payable by written agreement in more than four installments (not including a down payment), and to whom the obligation is initially payable, either on the face of the note or contract, or by agreement when there is no note or contract. (2) A person regularly extends consumer credit if the person extended credit (other than credit subject to the requirements of 12 CFR 1026.32) more than 5 times for transactions secured by a dwelling in the preceding calendar year. If a person did not meet these numerical standards in the preceding calendar year, the numerical standards shall be applied to the current calendar year. A person regularly extends consumer credit if, in any 12-month period, the person originates more than one credit extension that is subject to the requirements of 12 CFR 1026.32 or one or more such credit extensions through a mortgage broker. (j) Dwelling (1) A residential structure that contains one to four units, whether or not that structure is attached to real property. The term includes an individual condominium unit, cooperative unit, mobile home, and trailer, if it is used as a residence. (2) A consumer can have only one “principal” dwelling at a time. Thus, a vacation or other second home would not be a principal dwelling. However, if a consumer buys or builds a new dwelling that will become the consumer's principal dwelling within a year or upon the completion of construction, the new dwelling is considered the principal dwelling for purposes of this section. (k) Federally regulated AMC (l) Federally related transaction regulations (m) Person (n) Secondary mortgage market participant (o) States (p) Uniform Standards of Professional Appraisal Practice § 225.192 Appraiser panel—annual size calculation. For purposes of determining whether, within a 12-month period, an AMC oversees an appraiser panel of more than 15 State-certified or State-licensed appraisers in a State or 25 or more State-certified or State-licensed appraisers in two or more States pursuant to § 225.191(d)(1)(iii)- (a) An appraiser is deemed part of the AMC's appraiser panel as of the earliest date on which the AMC: (1) Accepts the appraiser for the AMC's consideration for future appraisal assignments in covered transactions or for secondary mortgage market participants in connection with covered transactions; or (2) Engages the appraiser to perform one or more appraisals on behalf of a creditor for a covered transaction or secondary mortgage market participant in connection with a covered transaction. (b) An appraiser who is deemed part of the AMC's appraiser panel pursuant to paragraph (a) of this section is deemed to remain on the panel until the date on which the AMC: (1) Sends written notice to the appraiser removing the appraiser from the appraiser panel, with an explanation of its action; or (2) Receives written notice from the appraiser asking to be removed from the appraiser panel or notice of the death or incapacity of the appraiser. (c) If an appraiser is removed from an AMC's appraiser panel pursuant to paragraph (b) of this section, but the AMC subsequently accepts the appraiser for consideration for future assignments or engages the appraiser at any time during the twelve months after the AMC's removal, the removal will be deemed not to have occurred, and the appraiser will be deemed to have been part of the AMC's appraiser panel without interruption. (d) The period for purposes of counting appraisers on an AMC's appraiser panel may be the calendar year or a 12-month period established by law or rule of each State with which the AMC is required to register. § 225.193 Appraisal management company registration. Each State electing to register AMCs pursuant to paragraph (b)(1) of this section must: (a) Establish and maintain within the State appraiser certifying and licensing agency a licensing program that is subject to the limitations set forth in § 225.194 and with the legal authority and mechanisms to: (1) Review and approve or deny an AMC's application for initial registration; (2) Review and renew or review and deny an AMC's registration periodically; (3) Examine the books and records of an AMC operating in the State and require the AMC to submit reports, information, and documents; (4) Verify that the appraisers on the AMC's appraiser panel hold valid State certifications or licenses, as applicable; (5) Conduct investigations of AMCs to assess potential violations of applicable appraisal-related laws, regulations, or orders; (6) Discipline, suspend, terminate, or deny renewal of the registration of an AMC that violates applicable appraisal-related laws, regulations, or orders; and (7) Report an AMC's violation of applicable appraisal-related laws, regulations, or orders, as well as disciplinary and enforcement actions and other relevant information about an AMC's operations, to the Appraisal Subcommittee. (b) Impose requirements on AMCs that are not owned and controlled by an insured depository institution and not regulated by a Federal financial institutions regulatory agency to: (1) Register with and be subject to supervision by the State appraiser certifying and licensing agency; (2) Engage only State-certified or State-licensed appraisers for Federally related transactions in conformity with any Federally related transaction regulations; (3) Establish and comply with processes and controls reasonably designed to ensure that the AMC, in engaging an appraiser, selects an appraiser who is independent of the transaction and who has the requisite education, expertise, and experience necessary to competently complete the appraisal assignment for the particular market and property type; (4) Direct the appraiser to perform the assignment in accordance with USPAP; and (5) Establish and comply with processes and controls reasonably designed to ensure that the AMC conducts its appraisal management services in accordance with the requirements of section 129E(a)-(i) of the Truth in Lending Act, 15 U.S.C. 1639e(a)-(i), and regulations thereunder. § 225.194 Ownership limitations for State-registered appraisal management companies. (a) Appraiser certification or licensing of owners. (2) An AMC subject to State registration pursuant to § 225.193 is not barred by paragraph (a)(1) of this section from being registered by a State or included on the AMC National Registry if the license or certificate of the appraiser with an ownership interest was not revoked for a substantive cause and has been reinstated by the State or States in which the appraiser was licensed or certified. (b) Good moral character of owners. (1) Is determined by the State appraiser certifying and licensing agency not to have good moral character; or (2) Fails to submit to a background investigation carried out by the State appraiser certifying and licensing agency. § 225.195 Requirements for Federally regulated appraisal management companies. (a) Requirements in providing services. (b) Ownership limitations. (2) A Federally regulated AMC is not barred by this paragraph (b) from being included on the AMC National Registry if the license or certificate of the appraiser with an ownership interest was not revoked for a substantive cause and has been reinstated by the State or States in which the appraiser was licensed or certified. (c) Reporting information for the AMC National Registry. § 225.196 Information to be presented to the Appraisal Subcommittee by participating States. Each State electing to register AMCs for purposes of permitting AMCs to provide appraisal management services relating to covered transactions in the State must submit to the Appraisal Subcommittee the information required to be submitted by Appraisal Subcommittee regulations or guidance concerning AMCs that operate in the State. Subpart N—Computer-Security Incident Notification Source: 86 FR 66442, Nov. 23, 2021, unless otherwise noted. § 225.300 Authority, purpose, and scope. (a) Authority. et seq. (b) Purpose. (c) Scope. § 225.301 Definitions. (a) Except as modified in this subpart, or unless the context otherwise requires, the terms used in this subpart have the same meanings as set forth in 12 U.S.C. 1813. (b) For purposes of this subpart, the following definitions apply. (1) Banking organization (2) Bank service provider (3) Business line (4) Computer-security incident (5) Covered services (6) Designated financial market utility (7) Notification incident (i) Ability to carry out banking operations, activities, or processes, or deliver banking products and services to a material portion of its customer base, in the ordinary course of business; (ii) Business line(s), including associated operations, services, functions, and support, that upon failure would result in a material loss of revenue, profit, or franchise value; or (iii) Operations, including associated services, functions and support, as applicable, the failure or discontinuance of which would pose a threat to the financial stability of the United States. (8) Person § 225.302 Notification. A banking organization must notify the appropriate Board-designated point of contact about a notification incident through email, telephone, or other similar methods that the Board may prescribe. The Board must receive this notification from the banking organization as soon as possible and no later than 36 hours after the banking organization determines that a notification incident has occurred. § 225.303 Bank service provider notification. (a) A bank service provider is required to notify at least one bank-designated point of contact at each affected banking organization customer as soon as possible when the bank service provider determines that it has experienced a computer-security incident that has materially disrupted or degraded, or is reasonably likely to materially disrupt or degrade, covered services provided to such banking organization for four or more hours. (1) A bank-designated point of contact is an email address, phone number, or any other contact(s), previously provided to the bank service provider by the banking organization customer. (2) If the banking organization customer has not previously provided a bank-designated point of contact, such notification shall be made to the Chief Executive Officer and Chief Information Officer of the banking organization customer, or two individuals of comparable responsibilities, through any reasonable means. (b) The notification requirement in paragraph (a) of this section does not apply to any scheduled maintenance, testing, or software update previously communicated to a banking organization customer. Subpart O—Quality Control Standards for Automated Valuation Models Used for Mortgage Lending Purposes Source: 89 FR 64573, Aug. 7, 2024, unless otherwise noted. § 225.350 Authority, purpose and scope. (a) Authority. In general. et seq. et seq. et seq. et seq. (2) Nothing in this part shall be read to limit the authority of the Board to take action under provisions of law other than 12 U.S.C. 3354, including but not limited to action to address unsafe or unsound practices or conditions, or violations of law or regulation, under section 8 of the Federal Deposit Insurance Act, as amended (12 U.S.C. 1818). (b) Purpose and scope. (2) This subpart does not apply to the use of automated valuation models in: (i) Monitoring of the quality or performance of mortgages or mortgage-backed securities; (ii) Reviews of the quality of already completed determinations of the value of collateral; or (iii) The development of an appraisal by a certified or licensed appraiser. § 225.351 Definitions. As used in this subpart: Automated valuation model Control systems Covered securitization determination (1) Whether to waive an appraisal requirement for a mortgage origination in connection with its potential sale or transfer to a secondary market issuer; or (2) Structuring, preparing disclosures for, or marketing initial offerings of mortgage-backed securitizations. Credit decision Dwelling Mortgage Mortgage originator (1) Any person who, for direct or indirect compensation or gain, or in the expectation of direct or indirect compensation or gain— (i) Takes a mortgage application; (ii) Assists a consumer in obtaining or applying to obtain a mortgage; or (iii) Offers or negotiates terms of a mortgage; (2) Includes any person who represents to the public, through advertising or other means of communicating or providing information (including the use of business cards, stationery, brochures, signs, rate lists, or other promotional items), that such person can or will provide any of the services or perform any of the activities described in paragraph (1) of this definition; (3) Does not include any person who is— (i) Not otherwise described in paragraph (1) or (2) of this definition and who performs purely administrative or clerical tasks on behalf of a person who is described in any such paragraph; or (ii) A retailer of manufactured or modular homes or an employee of the retailer if the retailer or employee, as applicable— (A) Does not receive compensation or gain for engaging in activities described in paragraph (1) of this definition that is in excess of any compensation or gain received in a comparable cash transaction; (B) Discloses to the consumer— ( 1 ( 2 (C) Does not directly negotiate with the consumer or lender on loan terms (including rates, fees, and other costs); (4) Does not include a person or entity that only performs real estate brokerage activities and is licensed or registered in accordance with applicable State law, unless such person or entity is compensated by a lender, a mortgage broker, or other mortgage originator or by any agent of such lender, mortgage broker, or other mortgage originator; (5) Does not include a person that meets all of the following criteria: (i) The person provides seller financing for the sale of three or fewer properties in any 12-month period to purchasers of such properties, each of which is owned by the person and serves as security for the financing; (ii) The person has not constructed, or acted as a contractor for the construction of, a residence on the property in the ordinary course of business of the person; (iii) The person provides seller financing that meets the following requirements: (A) The financing is fully amortizing; (B) The financing is one that the person determines in good faith the consumer has a reasonable ability to repay; (C) The financing has a fixed rate or an adjustable rate that is adjustable after five or more years, subject to reasonable annual and lifetime limitations on interest rate increases. If the financing agreement has an adjustable rate, the rate is determined by the addition of a margin to an index rate and is subject to reasonable rate adjustment limitations. The index the adjustable rate is based on is a widely available index such as indices for U.S. Treasury securities or SOFR. (6) Does not include a natural person, estate, or trust that meets all of the following criteria: (i) The natural person, estate, or trust provides seller financing for the sale of only one property in any 12-month period to purchasers of such property, which is owned by the natural person, estate, or trust and serves as security for the financing; (ii) The natural person, estate, or trust has not constructed, or acted as a contractor for the construction of, a residence on the property in the ordinary course of business of the person; (iii) The natural person, estate, or trust provides seller financing that meets the following requirements: (A) The financing has a repayment schedule that does not result in negative amortization; (B) The financing has a fixed rate or an adjustable rate that is adjustable after five or more years, subject to reasonable annual and lifetime limitations on interest rate increases. If the financing agreement has an adjustable rate, the rate is determined by the addition of a margin to an index rate and is subject to reasonable rate adjustment limitations. The index the adjustable rate is based on is a widely available index such as indices for U.S. Treasury securities or SOFR. (7) Does not include a servicer or servicer employees, agents and contractors, including but not limited to those who offer or negotiate terms of a mortgage for purposes of renegotiating, modifying, replacing and subordinating principal of existing mortgages where borrowers are behind in their payments, in default or have a reasonable likelihood of being in default or falling behind. Person Secondary market issuer § 225.352 Quality control standards. Mortgage originators and secondary market issuers that engage in credit decisions or covered securitization determinations themselves, or through or in cooperation with a third-party or affiliate, must adopt and maintain policies, practices, procedures, and control systems to ensure that automated valuation models used in these transactions adhere to quality control standards designed to: (a) Ensure a high level of confidence in the estimates produced; (b) Protect against the manipulation of data; (c) Seek to avoid conflicts of interest; (d) Require random sample testing and reviews; and (e) Comply with applicable nondiscrimination laws. Appendix A to Part 225—Capital Adequacy Guidelines for Bank Holding Companies: Risk-Based Measure I. Overview 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 1 2 1 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 3 In addition, when certain organizations that engage in trading activities calculate their risk-based capital ratio under this appendix A, they must also refer to appendix E of this part, which incorporates capital charges for certain market risks into the risk-based capital ratio. When calculating their risk-based capital ratio under this appendix A, such organizations are required to refer to appendix E of this part for supplemental rules to determine qualifying and excess capital, calculate risk-weighted assets, calculate market risk equivalent assets, and calculate risk-based capital ratios adjusted for market risk. 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 any bank holding company with consolidated assets of $500 million or more. The risk-based guidelines also apply on a consolidated basis to any bank holding company with consolidated assets of less than $500 million if the holding company (i) is engaged in significant nonbanking activities either directly or through a nonbank subsidiary; (ii) conducts significant off-balance sheet activities (including securitization and asset management or administration) either directly or through a nonbank subsidiary; or (iii) has a material amount of debt or equity securities outstanding (other than trust preferred securities) that are registered with the Securities and Exchange Commission (SEC). The Federal Reserve may apply the risk-based guidelines at its discretion to any bank holding company, regardless of asset size, if such action is warranted for supervisory purposes. 4 4 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 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. The Federal Reserve may determine that the regulatory capital treatment for a banking organization's exposure or other relationship to an entity not consolidated on the banking organization's balance sheet is not commensurate with the actual risk relationship of the banking organization to the entity. In making this determination, the Federal Reserve may require the banking organization to treat the entity as if it were consolidated onto the balance sheet of the banking organization for risk-based capital purposes and calculate the appropriate risk-based capital ratios accordingly, all as specified by the Federal Reserve. II. Definition of Qualifying Capital for the Risk Based Capital Ratio (i) A banking organization's qualifying total capital consists of two types of capital components: “core capital elements” (tier 1 capital elements) and “supplementary capital elements” (tier 2 capital elements). These capital elements and the various limits, restrictions, and deductions to which they are subject, are discussed below. To qualify as an element of tier 1 or tier 2 capital, an instrument must be fully paid up and effectively unsecured. Accordingly, if a banking organization has purchased, or has directly or indirectly funded the purchase of, its own capital instrument, that instrument generally is disqualified from inclusion in regulatory capital. A qualifying tier 1 or tier 2 capital instrument must be subordinated to all senior indebtedness of the organization. If issued by a bank, it also must be subordinated to claims of depositors. In addition, the instrument must not contain or be covered by any covenants, terms, or restrictions that are inconsistent with safe and sound banking practices. (ii) On a case-by-case basis, the Federal Reserve may determine whether, and to what extent, any instrument that does not fit wholly within the terms of a capital element set forth below, or that does not have the characteristics or the ability to absorb losses commensurate with the capital treatment specified below, will qualify as an element of tier 1 or tier 2 capital. In making such a determination, the Federal Reserve will consider the similarity of the instrument to instruments explicitly addressed in the guidelines; the ability of the instrument to absorb losses, particularly while the organization operates as a going concern; the maturity and redemption features of the instrument; and other relevant terms and factors. (iii) The redemption of capital instruments before stated maturity could have a significant impact on an organization's overall capital structure. Consequently, an organization should consult with the Federal Reserve before redeeming any equity or other capital instrument included in tier 1 or tier 2 capital prior to stated maturity if such redemption could have a material effect on the level or composition of the organization's capital base. Such consultation generally would not be necessary when the instrument is to be redeemed with the proceeds of, or replaced by, a like amount of a capital instrument that is of equal or higher quality with regard to terms and maturity and the Federal Reserve considers the organization's capital position to be fully sufficient. A. The Definition and Components of Qualifying Capital 1. Tier 1 capital. a. Core capital elements (tier 1 capital elements). i. Qualifying common stockholders' equity; ii. Qualifying noncumulative perpetual preferred stock, including related surplus, and senior perpetual preferred stock issued to the United States Department of the Treasury (Treasury) under the Troubled Asset Relief Program (TARP), established by the Emergency Economic Stabilization Act of 2008 (EESA), Division A of Public Law 110-343 (which for purposes of this appendix shall be considered qualifying noncumulative perpetual preferred stock), including related surplus; iii. Minority interest related to qualifying common or noncumulative perpetual preferred stock directly issued by a consolidated U.S. depository institution or foreign bank subsidiary (Class A minority interest); and iv. Restricted core capital elements. The aggregate of these items is limited within tier 1 capital as set forth in section II.A.1.b. of this appendix. These elements are defined to include: (1) Qualifying cumulative perpetual preferred stock (including related surplus); (2) Minority interest related to qualifying cumulative perpetual preferred stock directly issued by a consolidated U.S. depository institution or foreign bank subsidiary (Class B minority interest); (3) Minority interest related to qualifying common stockholders' equity or perpetual preferred stock issued by a consolidated subsidiary that is neither a U.S. depository institution nor a foreign bank (Class C minority interest); (4) Qualifying trust preferred securities; and (5) Subordinated debentures issued prior to October 4, 2010, to the Treasury under the TARP (TARP Subordinated Securities) established by the EESA by a bank holding company that has made a valid election to be taxed under Subchapter S of Chapter 1 of the U.S. Internal Revenue Code (S-Corp BHC) or by a bank holding company organized in mutual form (Mutual BHC). b. Limits on restricted core capital elements Limits. (2) In addition, the aggregate amount of restricted core capital elements (other than qualifying mandatory convertible preferred securities 5 6 5 6 (3) Amounts of restricted core capital elements in excess of this limit generally may be included in tier 2 capital. The excess amounts of restricted core capital elements that are in the form of Class C minority interest and qualifying trust preferred securities are subject to further limitation within tier 2 capital in accordance with section II.A.2.d.iv. of this appendix. A banking organization may attribute excess amounts of restricted core capital elements first to any qualifying cumulative perpetual preferred stock or to Class B minority interest, and second to qualifying trust preferred securities or to Class C minority interest, which are subject to a tier 2 sublimit. ii. Transition. (1) The quantitative limits for restricted core capital elements set forth in sections II.A.1.b.i. and II.A.2.d.iv. of this appendix become effective on March 31, 2011. Prior to that time, a banking organization with restricted core capital elements in amounts that cause it to exceed these limits must consult with the Federal Reserve on a plan for ensuring that the banking organization is not unduly relying on these elements in its capital base and, where appropriate, for reducing such reliance to ensure that the organization complies with these limits as of March 31, 2011. (2) Until March 31, 2011, the aggregate amount of qualifying cumulative perpetual preferred stock (including related surplus) and qualifying trust preferred securities that a banking organization may include in tier 1 capital is limited to 25 percent of the sum of the following core capital elements: qualifying common stockholders' equity, Qualifying noncumulative and cumulative perpetual preferred stock (including related surplus), qualifying minority interest in the equity accounts of consolidated subsidiaries, and qualifying trust preferred securities. Amounts of qualifying cumulative perpetual preferred stock (including related surplus) and qualifying trust preferred securities in excess of this limit may be included in tier 2 capital. (3) Until March 31, 2011, internationally active banking organizations generally are expected to limit the amount of qualifying cumulative perpetual preferred stock (including related surplus) and qualifying trust preferred securities included in tier 1 capital to 15 percent of the sum of core capital elements set forth in section II.A.1.b.ii.2. of this appendix. c. Definitions and requirements for core capital elements Qualifying common stockholders' equity. (1) Definition. (2) Restrictions on terms and features. (3) Reliance on voting common stockholders' equity. ii. Qualifying perpetual preferred stock. (1) Qualifying requirements. (2) Restrictions on terms and features. 7 8 7 8 (3) Noncumulative and cumulative features. iii. Qualifying minority interest. 9 10 9 10 iv. Qualifying trust preferred securities. (1) A banking organization that wishes to issue trust preferred securities and include them in tier 1 capital must first consult with the Federal Reserve. Trust preferred securities are defined as undated preferred securities issued by a trust or similar entity sponsored (but generally not consolidated) by a banking organization that is the sole common equity holder of the trust. Qualifying trust preferred securities must allow for dividends to be deferred for at least twenty consecutive quarters without an event of default, unless an event of default leading to acceleration permitted under section II.A.1.c.iv.(2) has occurred. The required notification period for such deferral must be reasonably short, no more than 15 business days prior to the payment date. Qualifying trust preferred securities are otherwise subject to the same restrictions on terms and features as qualifying perpetual preferred stock under section II.A.1.c.ii.(2) of this appendix. (2) The sole asset of the trust must be a junior subordinated note issued by the sponsoring banking organization that has a minimum maturity of thirty years, is subordinated with regard to both liquidation and priority of periodic payments to all senior and subordinated debt of the sponsoring banking organization (other than other junior subordinated notes underlying trust preferred securities). Otherwise the terms of a junior subordinated note must mirror those of the preferred securities issued by the trust. 11 12 11 12 (3) In the last five years before the maturity of the note, the outstanding amount of the associated trust preferred securities is excluded from tier 1 capital and included in tier 2 capital, where the trust preferred securities are subject to the amortization provisions and quantitative restrictions set forth in sections II.A.2.d.iii. and iv. of this appendix as if the trust preferred securities were limited-life preferred stock. 2. Supplementary capital elements (tier 2 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); (v) Unrealized holding gains on equity securities (subject to limitations discussed in section II.A.2.e. of this appendix). The maximum amount of tier 2 capital that may be included in an institution's qualifying total capital is limited to 100 percent of tier 1 capital (net of goodwill, other intangible assets, interest-only strips receivables and nonfinancial equity investments that are required to be deducted in accordance with section II. B. The elements of supplementary capital are discussed in greater detail below. a. Allowance for loan and lease losses. 13 13 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. 14 14 b. Perpetual preferred stock. 15 15 c. Hybrid capital instruments, perpetual debt, and mandatory convertible debt securities. (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 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 Five-year minimum maturity. ii. Other restrictions on subordinated debt. 16 16 (1) The subordinated debt must be unsecured. (2) The subordinated debt must clearly state on its face that it is not a deposit and is not insured by a Federal agency. (3) The subordinated debt must not have credit-sensitive features or other provisions that are inconsistent with safe and sound banking practice. (4) Subordinated debt issued by a subsidiary U.S. depository institution or foreign bank of a bank holding company must be subordinated in right of payment to the claims of all the institution's general creditors and depositors, and generally must not contain provisions permitting debt holders to accelerate payment of principal or interest upon the occurrence of any event other than receivership of the institution. Subordinated debt issued by a bank holding company or its subsidiaries that are neither U.S. depository institutions nor foreign banks must be subordinated to all senior indebtedness of the issuer; that is, the debt must be subordinated at a minimum to all borrowed money, similar obligations arising from off-balance sheet guarantees and direct credit substitutes, and obligations associated with derivative products such as interest rate and foreign exchange contracts, commodity contracts, and similar arrangements. Subordinated debt issued by a bank holding company or any of its subsidiaries that is not a U.S. depository institution or foreign bank must not contain provisions permitting debt holders to accelerate the payment of principal or interest upon the occurrence of any event other than the bankruptcy of the bank holding company or the receivership of a major subsidiary depository institution. Thus, a provision permitting acceleration in the event that any other affiliate of the bank holding company issuer enters into bankruptcy or receivership makes the instrument ineligible for inclusion in tier 2 capital. iii. Discounting in last five years. iv. Limits. e. Unrealized gains on equity securities and unrealized gains (losses) on other assets. f. Revaluation reserves. ii. 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 bank holding companies are encouraged to disclose their equivalent of premises (building) and security revaluation reserves. The Federal Reserve will consider any appreciation, as well as any depreciation, in specific asset values as additional considerations in assessing overall capital strength and financial condition. B. Deductions from Capital and Other Adjustments Certain assets are deducted from an organization's capital for the purpose of calculating the risk-based capital ratio. 17 17 (i)(a) Goodwill—deducted from the sum of core capital elements. (b) Certain identifiable intangible assets, that is, intangible assets other than goodwill—deducted from the sum of core capital elements in accordance with section II.B.1.b. of this appendix. (c) Certain credit-enhancing interest-only strips receivables—deducted from the sum of core capital elements in accordance with sections II.B.1.c. through e. of this appendix. (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. (iv) Deferred tax assets—portions are deducted from the sum of core capital elements in accordance with section II.B.4. of this appendix A. (v) Nonfinancial equity investments—portions are deducted from the sum of core capital elements in accordance with section II. B. 1. Goodwill and other intangible assets Goodwill. b. Other intangible assets. ii. The treatment of identifiable intangible assets set forth in this section generally will be used in the calculation of a bank holding company's capital ratios for supervisory and applications purposes. However, in making an overall assessment of a bank holding company's capital adequacy for applications purposes, the Board may, if it deems appropriate, take into account the quality and composition of an organization's capital, together with the quality and value of its tangible and intangible assets. c. Credit-enhancing interest-only strips receivables (I/Os) pro rata ii. Both purchased and retained credit-enhancing I/Os, on a non-tax adjusted basis, are included in the total amount that is used for purposes of determining whether a bank holding company exceeds the tier 1 limitation described below in this section. In determining whether an I/O or other types of spread assets serve as a credit enhancement, the Federal Reserve will look to the economic substance of the transaction. d. Fair value limitation. e. Tier 1 capital limitation. 18 18 ii. For purposes of calculating these limitations on mortgage servicing assets, nonmortgage servicing assets, purchased credit card relationships, and credit-enhancing I/Os, tier 1 capital is defined as the sum of core capital elements, net of goodwill, and net of all identifiable intangible assets other than mortgage servicing assets, nonmortgage servicing assets, and purchased credit card relationships, but prior to the deduction of any disallowed mortgage servicing assets, any disallowed nonmortgage servicing assets, any disallowed purchased credit card relationships, any disallowed credit-enhancing I/Os (both purchased and retained), any disallowed deferred tax assets, and any nonfinancial equity investments. iii. Bank holding companies may elect to deduct goodwill, disallowed mortgage servicing assets, disallowed nonmortgage servicing assets, and disallowed credit-enhancing I/Os (both purchased and retained) on a basis that is net of any associated deferred tax liability. Deferred tax liabilities netted in this manner cannot also be netted against deferred tax assets when determining the amount of deferred tax assets that are dependent upon future taxable income. f. Valuation. g. Growing organizations. 2. Investments in certain subsidiaries Unconsolidated banking or finance subsidiaries. 19 20 19 20 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. 21 21 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. 22 22 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. 23 23 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. 24 24 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 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. 25 25 4. Deferred-tax assets. i. The amount of these deferred-tax assets that the bank holding company is expected to realize within one year of the calendar quarter-end date, based on its projections of future taxable income for that year, 26 26 ii. 10 percent of tier 1 capital. b. The reported amount of deferred-tax assets, net of any valuation allowance for deferred-tax assets, in excess of the lesser of these two amounts is to be deducted from a banking organization's core capital elements in determining tier 1 capital. For purposes of calculating the 10 percent limitation, tier 1 capital is defined as the sum of core capital elements, net of goodwill and net of all identifiable intangible assets other than mortgage servicing assets, nonmortgage servicing assets, and purchased credit card relationships, but prior to the deduction of any disallowed mortgage servicing assets, any disallowed nonmortgage servicing assets, any disallowed purchased credit card relationships, any disallowed credit-enhancing I/Os, any disallowed deferred-tax assets, and any nonfinancial equity investments. There generally is no limit in tier 1 capital on the amount of deferred-tax assets that can be realized from taxes paid in prior carry-back years or from future reversals of existing taxable temporary differences. 5. Nonfinancial equity investments General. b. Scope of nonfinancial equity investments. et seq. 27 28 27 28 See c. Amount of deduction from core capital. Table 1—Deduction for Nonfinancial Equity Investments Aggregate adjusted carrying value of all nonfinancial equity investments held directly or indirectly by the bank holding company (as a percentage of the Tier 1 capital of the parent banking organization) 1 Deduction from Core Capital Elements (as a percentage of the adjusted carrying value of the investment) Less than 15 percent 8 percent. 15 percent to 24.99 percent 12 percent. 25 percent and above 25 percent. 1 ii. These deductions are applied on a marginal basis to the portions of the adjusted carrying value of nonfinancial equity investments that fall within the specified ranges of the parent holding company's Tier 1 capital. For example, if the adjusted carrying value of all nonfinancial equity investments held by a bank holding company equals 20 percent of the Tier 1 capital of the bank holding company, then the amount of the deduction would be 8 percent of the adjusted carrying value of all investments up to 15 percent of the company's Tier 1 capital, and 12 percent of the adjusted carrying value of all investments in excess of 15 percent of the company's Tier 1 capital. iii. The total adjusted carrying value of any nonfinancial equity investment that is subject to deduction under this paragraph is excluded from the bank holding company's risk-weighted assets for purposes of computing the denominator of the company's risk-based capital ratio. 29 29 iv. As noted in section I, this appendix establishes minimum e.g., d. SBIC investments. 30 30 i.e. ii. To the extent the adjusted carrying value of all nonfinancial equity investments that a bank holding company holds through one or more SBICs that are consolidated with the bank holding company or in one or more SBICs that are not consolidated with the bank holding company exceeds, in the aggregate, 15 percent of the aggregate Tier 1 capital of the company's subsidiary banks, the appropriate percentage of such amounts (as set forth in Table 1) must be deducted from the bank holding company's core capital elements. In addition, the aggregate adjusted carrying value of all e. Transition provisions. B. 31 32 not 31 B. 32 B. B. B. f. Adjusted carrying value. B. less 33 33 ii. As discussed above with respect to consolidated SBICs, some equity investments may be in companies that are consolidated for accounting purposes. For investments in a nonfinancial company that is consolidated for accounting purposes under generally accepted accounting principles, the parent banking organization's adjusted carrying value of the investment is determined under the equity method of accounting (net of any intangibles associated with the investment that are deducted from the consolidated bank holding company's core capital in accordance with section II.B.1 of this appendix). Even though the assets of the nonfinancial company are consolidated for accounting purposes, these assets (as well as the credit equivalent amounts of the company's off-balance sheet items) should be excluded from the banking organization's risk-weighted assets for regulatory capital purposes. g. Equity investments. B. B. Attachment II—Summary of Definition of Qualifying Capital for Bank Holding Companies* [Using the Year-End 1992 Standard] Components Minimum requirements CORE CAPITAL (Tier 1) Must equal or exceed 4% of weighted-risk assets. Common stockholders' equity No limit. Qualifying noncumulative perpetual preferred stock No limit; bank holding companies should avoid undue reliance on preferred stock in tier 1. Qualifying cumulative perpetual preferred stock Limited to 25% of the sum of common stock, qualifying perpetual stock, and minority interests. Minority interest in equity accounts of consolidated subsidiaries Organizations should avoid using minority interests to introduce elements not otherwise qualifying for tier 1 capital. Less: Goodwill, other intangible assets, credit-enhancing interest-only strips and nonfinancial equity investments required to be deducted from capital 1 SUPPLEMENTARY CAPITAL (Tier 2) Total of tier 2 is limited to 100% of tier 1. 2 Allowance for loan and lease losses Limited to 1.25% of weighted-risk assets. 2 Perpetual preferred stock No limit within tier 2. Hybrid capital instruments and equity contract notes No limit within tier 2. Subordinated debt and intermediate-term preferred stock (original weighted average maturity of 5 years or more) Subordinated debt and intermediate-term preferred stock are limited to 50% of tier 1 2 Revaluation reserves (equity and building) Not included; organizations encouraged to disclose; may be evaluated on a case-by-case basis for international comparisons; and taken into account in making an overall assessment of capital. DEDUCTIONS (from sum of tier 1 and tier 2) Investments in unconsolidated subsidiaries As a general rule, one-half of the aggregate investments will be deducted from tier 1 capital and one-half from tier 2 capital. 3 Reciprocal holdings of banking organizations' capital securities Other deductions (such as other subsidiaries or joint ventures) as determined by supervisory authority On a case-by-case basis or as a matter of policy after a formal rulemaking. TOTAL CAPITAL (tier 1 + tier 2− deductions) Must equal or exceed 8% of weighted-risk assets. 1 2 3 * See discussion in section II of the guidelines for a complete description of the requirements for, and the limitations on, the components of qualifying capital. III. Procedures for Computing Weighted Risk Assets and Off-Balance Sheet Items A. Procedures 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. 34 34 The Federal Reserve will, on a case-by-case basis, determine the appropriate risk weight for any asset or credit equivalent amount of an off-balance sheet item that does not fit wholly within the terms of one of the risk weight categories set forth below or that imposes risks on a bank holding company that are incommensurate with the risk weight otherwise specified below for the asset or off-balance sheet item. In addition, the Federal Reserve will, on a case-by-case basis, determine the appropriate credit conversion factor for any off-balance sheet item that does not fit wholly within the terms of one of the credit conversion factors set forth below or that imposes risks on a banking organization that are incommensurate with the credit conversion factors otherwise specified below for the off-balance sheet item. In making such a determination, the Federal Reserve will consider the similarity of the asset or off-balance sheet item to assets or off-balance sheet items explicitly treated in the guidelines, as well as other relevant factors. B. Collateral, Guarantees, and Other Considerations 1. Collateral. 35 35 With regard to collateralized claims that may be 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 such 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. 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. Recourse obligations, direct credit substitutes, residual interests, and asset- and mortgage-backed securities. a. Definitions Credit derivative ii. Credit-enhancing representations and warranties 1. 2. 3. iii. Direct credit substitute 1. 2. 3. 4. 5. 6. 7. 8. iv. Eligible ABCP liquidity facility v. Externally rated vi. Face amount vii. Financial asset viii. Financial standby letter of credit 1. 2. ix. Liquidity Facility x. Mortgage servicer cash advance 1. 2. xi. Nationally recognized statistical rating organization (NRSRO) xii. Recourse 1. 2. 3. 4. 5. 6. 7. 8. xiii. Residual interest xiv. Risk participation e.g. xv. Securitization xvi. Sponsor xvii. Structured finance program xviii. Traded position b. Credit equivalent amounts and risk weight of recourse obligations and direct credit substitutes. Credit equivalent amount. ii. Risk-weight factor. e.g., i.e., c. Externally-rated positions: credit-equivalent amounts and risk weights of recourse obligations, direct credit substitutes, residual interests, and asset- and mortgage-backed securities (including asset-backed commercial paper) Traded positions. Long-term rating category Examples Risk weight Highest or second highest investment grade AAA, AA 20 Third highest investment grade A 50 Lowest investment grade BBB 100 One category below investment grade BB 200 Short-term rating Examples Risk weight Highest investment grade A-1, P-1 20 Second highest investment grade A-2, P-2 50 Lowest investment grade A-3, P-3 100 ii. Non-traded positions. 1. 2. 3. 4. If the ratings are different, the lowest rating will determine the risk category to which the recourse obligation, direct credit substitute, or residual interest will be assigned. d. Senior positions not externally rated. e. Capital requirement for residual interests Capital requirement for credit-enhancing I/O strips. ii. Capital requirement for other residual interests. 1. 2. 1. f. Positions that are not rated by an NRSRO. Rating category Examples Risk weight Highest or second highest investment grade AAA, AA 100 Third highest investment grade A 100 Lowest investment grade BBB 100 One category below investment grade BB 200 i. Internal risk rating used for asset-backed programs. 1. 2. 3. 4. 5. 6. 7. 8. 9. ii. Program Ratings. iii. Computer Program. g. Limitations on risk-based capital requirements Low-level exposure. ii. Mortgage-related securities or participation certificates retained in a mortgage loan swap. iii. Related on-balance sheet assets. 4. Maturity. remaining remaining original original 5. Small Business Loans and Leases on Personal Property Transferred with Recourse. b. For purposes of this appendix A, a banking organization is qualifying if it meets the criteria for well capitalized or, by order of the Board, adequately capitalized, as those criteria are set forth in the Board's prompt corrective action regulation for state member banks (12 CFR 208.40). For purposes of determining whether an organization meets these criteria, its capital ratios must be calculated without regard to the capital treatment for transfers of small business obligations with recourse specified in section III.B.5.a. of this appendix A. The total outstanding amount of recourse retained by a qualifying banking organization on transfers of small business obligations receiving the preferential capital treatment cannot exceed 15 percent of the organization's total risk-based capital. By order, the Board may approve a higher limit. c. If a bank holding company ceases to be qualifying or exceeds the 15 percent capital limitation, the preferential capital treatment will continue to apply to any transfers of small business obligations with recourse that were consummated during the time that the organization was qualifying and did not exceed the capital limit. 6. Asset-backed commercial paper programs. b. If a bank holding company has multiple overlapping exposures (such as a program-wide credit enhancement and multiple pool-specific liquidity facilities) to an ABCP program that is not consolidated for risk-based capital purposes, the bank holding company is not required to hold duplicative risk-based capital under this appendix against the overlapping position. Instead, the bank holding company should apply to the overlapping position the applicable risk-based capital treatment that results in the highest capital charge. C. Risk Weights 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. 36 37 38 36 37 38 This category also includes claims collateralized by cash on deposit in the subsidiary lending institution or by securities issued or guaranteed by OECD central governments or U.S. government agencies for which a positive margin of collateral is maintained on a daily basis, fully taking into account any change in the banking organization's exposure to the obligor or counterparty under a claim in relation to the market value of the collateral held in support of that claim. This category also includes ABCP (i) purchased by a bank holding company on or after September 19, 2008, from an SEC-registered open-end investment company that holds itself out as a money market mutual fund under SEC Rule 2a-7 (17 CFR 270.2a-7) and (ii) pledged by the bank holding company to a Federal Reserve Bank to secure financing from the ABCP lending facility (AMLF) established by the Board on September 19, 2008. 2. Category 2: 20 percent. 39 40 41 42 39 40 See 41 See 42 b. 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 43 44 43 not explicitly 44 c. This category also includes the portions of claims (including repurchase transactions) collateralized by cash on deposit in the subsidiary lending institution or by securities issued or guaranteed by OECD central governments or U.S. government agencies that do not qualify for the zero percent risk-weight category; collateralized by securities issued or guaranteed by U.S. government-sponsored agencies; or collateralized by securities issued by multilateral lending institutions or regional development banks in which the U.S. government is a shareholder or contributing member. d. This category also includes claims 45 46 45 46 (1) Is a reverse repurchase/repurchase agreement or securities lending/borrowing transaction executed under standard industry documentation; (2) Is collateralized by debt or equity securities that are liquid and readily marketable; (3) Is marked-to-market daily; (4) Is subject to a daily margin maintenance requirement under the standard industry documentation; and (5) Can be liquidated, terminated, or accelerated immediately in bankruptcy or similar proceeding, and the security or collateral agreement will not be stayed or avoided, under applicable law of the relevant jurisdiction. 47 47 3. Category 3: 50 percent. 48 49 50 51 48 49 i.e., i.e., 50 51 (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, on 1- to 4-family residential or multifamily residential properties, each underlying mortgage meets the criteria described above in this section for eligibility for the 50 percent risk category at the time the pool is originated; (3) If the security is backed by privately-issued mortgage-backed securities, each underlying security qualifies for the 50 percent risk category; and (4) If the security is backed by a pool of multifamily residential mortgages, principal and interest payments on the security are not 30 days or more past due. 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 category. Also assigned to this category are revenue Credit equivalent amounts of derivative 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. b. 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. 52 53 52 53 c. 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. d. 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 those that may have been grandfathered into capital. D. Off-Balance Sheet Items The face amount of an off-balance sheet item is generally incorporated into risk-weighted assets in two steps. The face amount is first multiplied by a credit conversion factor, except for direct credit substitutes and recourse obligations as discussed in section III.D.1. of this appendix. The resultant credit equivalent amount is assigned to the appropriate risk category according to the obligor or, if relevant, the guarantor, the nature of any collateral, or external credit ratings. 54 54 1. Items with a 100 percent conversion factor. b. Sale and repurchase agreements and forward agreements. 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, 55 55 c. 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, or, if applicable, to any collateral delivered to the lending organization, or the independent custodian acting on the lending organization's behalf. Where a banking organization is acting as agent for a customer in a transaction involving the lending or sale of securities that is collateralized by cash delivered to the banking organization, the transaction is deemed to be collateralized by cash on deposit in a subsidiary depository institution for purposes of determining the appropriate risk-weight category, provided that any indemnification is limited to no more than the difference between the market value of the securities and the cash collateral received and any reinvestment risk associated with that cash collateral is borne by the customer. d. In the case of direct credit substitutes in which a risk participation 56 pro rata 57 pro rata 58 56 57 58 e. In the case of direct credit substitutes in which a risk participation has been acquired, the acquiring banking organization's percentage share of the direct credit substitute is multiplied by the full amount of the assets that are supported, in whole or in part, by the credit enhancement and converted to a credit equivalent amount at 100 percent. The credit equivalent amount of an acquisition of a risk participation in a direct credit substitute is assigned to the risk category appropriate to the account party obligor or, if relevant, the nature of the collateral or guarantees. f. In the case of direct credit substitutes that take the form of a syndication where each banking organization is 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 assets supported, in whole or in part, by the direct credit substitute in its risk-based capital calculation. 59 59 pro rata pro rata 2. Items with a 50 percent conversion factor. b. The unused portion of commitments with an original 60 60 c.i. 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, eligible ABCP liquidity facilities, 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 ii. Banking organizations that are subject to the market risk rules are required to convert the notional amount of eligible ABCP liquidity facilities, in form or in substance, with an original maturity of over one year that are carried in the trading account at 50 percent to determine the appropriate credit equivalent amount even though those facilities are structured or characterized as derivatives or other trading book assets. Liquidity facilities that support ABCP, in form or in substance, (including those positions to which the market risk rules may not be applied as set forth in section 2(a) of appendix E of this part) that are not eligible ABCP liquidity facilities are to be considered recourse obligations or direct credit substitutes, and assessed the appropriate risk-based capital treatment in accordance with section III.B.3. of this appendix. d. 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. e. 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. 4. Items with a 10 percent conversion factor. b. Banking organizations that are subject to the market risk rules are required to convert the notional amount of eligible ABCP liquidity facilities, in form or in substance, with an original maturity of one year or less that are carried in the trading account at 10 percent to determine the appropriate credit equivalent amount even though those facilities are structured or characterized as derivatives or other trading book assets. Liquidity facilities that support ABCP, in form or in substance, (including those positions to which the market risk rules may not be applied as set forth in section 2(a) of appendix E of this part) that are not eligible ABCP liquidity facilities are to be considered recourse obligations or direct credit substitutes and assessed the appropriate risk-based capital requirement in accordance with section III.B.3. of this appendix. 5. Items with a zero percent conversion factor. E. Derivative Contracts (Interest Rate, Exchange Rate, Commodity- (including precious metals) and Equity-Linked Contracts) 1. Scope. a. Interest Rate Contracts. These include single currency interest rate swaps, basis swaps, forward rate agreements, interest rate options purchased (including caps, collars, and floors purchased), and any other instrument linked to interest rates that gives rise to similar credit risks (including when-issued securities and forward forward deposits accepted). b. Exchange Rate Contracts. These include cross-currency interest rate swaps, forward foreign exchange contracts, currency options purchased, and any other instrument linked to exchange rates that gives rise to similar credit risks. c. Equity Derivative Contracts. These include equity-linked swaps, equity-linked options purchased, forward equity-linked contracts, and any other instrument linked to equities that gives rise to similar credit risks. d. Commodity (including precious metal) Derivative Contracts. These include commodity-linked swaps, commodity-linked options purchased, forward commodity-linked contracts, and any other instrument linked to commodities that gives rise to similar credit risks. e. Exceptions. Exchange rate contracts with an original maturity of fourteen or fewer calendar days and derivative contracts traded on exchanges that require daily receipt and payment of cash variation margin may be excluded from the risk-based ratio calculation. Gold contracts are accorded the same treatment as exchange rate contracts except that gold contracts with an original maturity of fourteen or fewer calendar days are included in the risk-based ratio calculation. Over-the-counter options purchased are included and treated in the same way as other derivative contracts. 2. Calculation of credit equivalent amounts. b. The current exposure is determined by the mark-to-market value of the contract. If the mark-to-market value is positive, then the current exposure is equal to that mark-to-market value. If the mark-to-market value is zero or negative, then the current exposure is zero. Mark-to-market values are measured in dollars, regardless of the currency or currencies specified in the contract and should reflect changes in underlying rates, prices, and indices, as well as counterparty credit quality. c. The potential future credit exposure of a contract, including a contract with a negative mark-to-market value, is estimated by multiplying the notional principal amount of the contract by a credit conversion factor. Banking organizations should use, subject to examiner review, the effective rather than the apparent or stated notional amount in this calculation. The credit conversion factors are: Conversion Factors [In percent] Remaining maturity Interest rate Exchange rate and gold Equity Commodity, excluding precious metals Precious metals, except gold One year or less 0.0 1.0 6.0 10.0 7.0 Over one to five years 0.5 5.0 8.0 12.0 7.0 Over five years 1.5 7.5 10.0 15.0 8.0 d. For a contract that is structured such that on specified dates any outstanding exposure is settled and the terms are reset so that the market value of the contract is zero, the remaining maturity is equal to the time until the next reset date. For an interest rate contract with a remaining maturity of more than one year that meets these criteria, the minimum conversion factor is 0.5 percent. e. For a contract with multiple exchanges of principal, the conversion factor is multiplied by the number of remaining payments in the contract. A derivative contract not included in the definitions of interest rate, exchange rate, equity, or commodity contracts as set forth in section III. E. f. No potential future exposure is calculated for a single currency interest rate swap in which payments are made based upon two floating rate indices (a so called floating/floating or basis swap); the credit exposure on such a contract is evaluated solely on the basis of the mark-to-market value. g. The Board notes that the conversion factors set forth above, which are based on observed volatilities of the particular types of instruments, are subject to review and modification in light of changing volatilities or market conditions. 3. Netting. i. The netting is accomplished under a written netting contract that creates a single legal obligation, covering all included individual contracts, with the effect that the banking organization would have a claim to receive, or obligation to pay, only the net amount of the sum of the positive and negative mark-to-market values on included individual contracts in the event that a counterparty, or a counterparty to whom the contract has been validly assigned, fails to perform due to any of the following events: default, insolvency, liquidation, or similar circumstances. ii. The banking organization obtains a written and reasoned legal opinion(s) representing that in the event of a legal challenge—including one resulting from default, insolvency, liquidation, or similar circumstances—the relevant court and administrative authorities would find the banking organization's exposure to be the net amount under: 1. 2. 3. iii. The banking organization establishes and maintains procedures to ensure that the legal characteristics of netting contracts are kept under review in the light of possible changes in relevant law. iv. The banking organization maintains in its files documentation adequate to support the netting of derivative contracts, including a copy of the bilateral netting contract and necessary legal opinions. b. A contract containing a walkaway clause is not eligible for netting for purposes of calculating the credit equivalent amount. 61 61 c. A banking organization netting individual contracts for the purpose of calculating credit equivalent amounts of derivative contracts represents that it has met the requirements of this appendix A and all the appropriate documents are in the banking organization's files and available for inspection by the Federal Reserve. The Federal Reserve may determine that a banking organization's files are inadequate or that a netting contract, or any of its underlying individual contracts, may not be legally enforceable under any one of the bodies of law described in section III. E. d. The credit equivalent amount of contracts that are subject to a qualifying bilateral netting contract is calculated by adding (i) the current exposure of the netting contract (net current exposure) and (ii) the sum of the estimates of potential future credit exposures on all individual contracts subject to the netting contract (gross potential future exposure) adjusted to reflect the effects of the netting contract. 62 62 e. The net current exposure is the sum of all positive and negative mark-to-market values of the individual contracts included in the netting contract. If the net sum of the mark-to-market values is positive, then the net current exposure is equal to that sum. If the net sum of the mark-to-market values is zero or negative, then the net current exposure is zero. The Federal Reserve may determine that a netting contract qualifies for risk-based capital netting treatment even though certain individual contracts included under the netting contract may not qualify. In such instances, the nonqualifying contracts should be treated as individual contracts that are not subject to the netting contract. f. Gross potential future exposure, or A gross E. g. The effects of the bilateral netting contract on the gross potential future exposure are recognized through the application of a formula that results in an adjusted add-on amount (A net A net gross gross h. The NGR may be calculated in accordance with either the counterparty-by-counterparty approach or the aggregate approach. i. Under the counterparty-by-counterparty approach, the NGR is the ratio of the net current exposure for a netting contract to the gross current exposure of the netting contract. The gross current exposure is the sum of the current exposures of all individual contracts subject to the netting contract calculated in accordance with section III. E. ii. Under the aggregate approach, the NGR is the ratio of the sum of all of the net current exposures for qualifying bilateral netting contracts to the sum of all of the gross current exposures for those netting contracts (each gross current exposure is calculated in the same manner as in section III. E. iii. A banking organization must use consistently either the counterparty-by-counterparty approach or the aggregate approach to calculate the NGR. Regardless of the approach used, the NGR should be applied individually to each qualifying bilateral netting contract to determine the adjusted add-on for that netting contract. i. In the event a netting contract covers contracts that are normally excluded from the risk-based ratio calculation—for example, exchange rate contracts with an original maturity of fourteen or fewer calendar days or instruments traded on exchanges that require daily payment and receipt of cash variation margin—an institution may elect to either include or exclude all mark-to-market values of such contracts when determining net current exposure, provided the method chosen is applied consistently. 4. Risk Weights. 63 63 B. 5. Avoidance of double counting. E. b. Examples of the calculation of credit equivalent amounts for contracts covered under this section III. E. IV. Minimum Supervisory Ratios and Standards The interim and final supervisory standards set forth below specify minimum 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. A. Minimum Risk-Based Ratio After Transition Period As reflected in Attachment VI, by year-end 1992, all bank holding companies 64 64 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). B. Transition Arrangements The transition period for implementing the risk-based capital standard ends on December 31, 1992. 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. Attachment I—Sample Calculation of Risk-Based Capital Ratio for Bank Holding Companies Example of a banking organization with $6,000 in total capital and the following assets and off-balance sheet items: Balance Sheet Assets: Cash $5,000 U.S. Treasuries 20,000 Balances at domestic banks 5,000 Loans secured by first liens on 1-4 family residential properties 5,000 Loans to private corporations 65,000 Total Balance Sheet Assets $100,000 Off-Balance Sheet Items: Standby letters of credit (“SLCs”) backing general obligation debt issues of U.S. municipalities (“GOs”) $10,000 Long-term legally binding commitments to private corporations 20,000 Total Off/Balance Sheet Items $30,000 This bank holding company's total capital to total To compute the bank holding company's weighted risk assets: 1. Compute the credit equivalent amount of each off-balance sheet (“OBS”) item. OBS item Face value Conversion factor Credit equivalent amount SLCS backing municipal GOs $10,000 × 1.00 = $10,000 Long-term commitments to private corporations $20,000 × 0.50 = $10,000 2. Multiply each balance sheet asset and the credit equivalent amount of each OBS item by the appropriate risk weight. 0% Category: Cash 5,000 U.S. Treasuries 20,000 25,000 × 0 = 0 20% Category: Balances at domestic banks 5,000 Credit equivalent amounts of SLCs backing GOs of U.S. municipalities 10,000 15,000 × .20 = $3,000 50% Category: Loans secured by first liens on 1-4 family residential properties 5,000 × .50 = $2,500 100% Category: Loans to private corporations 65,000 Credit equivalent amounts of long-term commitments to private corporations 10,000 $75,000 × 1.00 = 75,000 Total Risk-weighted Assets 80,500 This bank holding company's ratio of total capital to weighted risk assets (risk-based capital ratio) would be: ($6,000/$80,500) = 7.45% C. Optional Transition Provisions Related to the Implementation of Consolidation Requirements under FAS 167 This section IV.C. provides optional transition provisions for a banking organization that is required for financial and regulatory reporting purposes, as a result of its implementation of Statement of Financial Accounting Standards No. 167, Amendments to FASB Interpretation No. 46(R) 1. Exclusion Period a. Exclusion of risk-weighted assets for the first and second quarters. i. Subject to the limitations in section IV.C.3, assets held by a VIE, provided that the following conditions are met: ( 1 ( 2 ( 3 ( 4 1 3 ii. Subject to the limitations in section IV.C.3, assets held by a VIE that is a consolidated ABCP program, provided that the following conditions are met: ( 1 ( 2 ( 3 1 2 b. Risk-weighted assets during exclusion period. c. Inclusion of allowance for loan and lease losses in tier 2 capital for the first and second quarters. 2. Phase-In Period a. Exclusion amount. exclusion amount b. Risk-weighted assets for the third and fourth quarters. c. Inclusion of ALLL in tier 2 capital for the third and fourth quarters. 3. Implicit recourse limitation. [Reg. Y, 54 FR 4209, Jan. 27, 1989] Editorial Note: For Federal Register www.govinfo.gov. Appendix B to Part 225 [Reserved] Appendix C to Part 225—Small Bank Holding Company and Savings and Loan Holding Company Policy Statement Policy Statement on Assessment of Financial and Managerial Factors In acting on applications filed under the Bank Holding Company Act, 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. When bank holding companies incur debt and rely upon the earnings of their subsidiary banks as the means of repaying such debt, a question arises as to the probable effect upon the financial condition of the holding company and its subsidiary bank or banks. The Board believes that a high level of debt at the parent holding company impairs the ability of a bank holding company to provide financial assistance to its subsidiary bank(s) and, in some cases, the servicing requirements on such debt may be a significant drain on the resources of the bank(s). For these reasons, the Board has not favored the use of acquisition debt in the formation of bank holding companies or in the acquisition of additional banks. Nevertheless, the Board has recognized that the transfer of ownership of small banks often requires the use of acquisition debt. The Board, therefore, has permitted the formation and expansion of small bank holding companies with debt levels higher than would be permitted for larger holding companies. Approval of these applications has been given on the condition that small bank holding companies demonstrate the ability to service acquisition debt without straining the capital of their subsidiary banks and, further, that such companies restore their ability to serve as a source of strength for their subsidiary banks within a relatively short period of time. In the interest of continuing its policy of facilitating the transfer of ownership in banks without compromising bank safety and soundness, the Board has, as described below, adopted the following procedures and standards for the formation and expansion of small bank holding companies subject to this policy statement. 1. Applicability of Policy Statement This policy statement applies only to bank holding companies with pro forma 1 1 While this policy statement primarily applies to the formation of small bank holding companies, it also applies to existing small bank holding companies that wish to acquire an additional bank or company and to transactions involving changes in control, stock redemptions, or other shareholder transactions. 2 2 2. Ongoing Requirements The following guidelines must be followed on an ongoing basis for all organizations operating under this policy statement. A. Reduction in parent company leverage: Small bank holding companies are to reduce their parent company debt consistent with the requirement that all debt be retired within 25 years of being incurred. The Board also expects that these bank holding companies reach a debt to equity ratio of .30:1 or less within 12 years of the incurrence of the debt. 3 3 debt, Subordinated debt associated with trust preferred securities generally would be treated as debt for purposes of paragraphs 2.C., 3.A., 4.A.i., and 4.B.i. of this policy statement. A bank holding company, however, may exclude from debt an amount of subordinated debt associated with trust preferred securities up to 25 percent of the holding company's equity (as defined below) less goodwill on the parent company's balance sheet in determining compliance with the requirements of such paragraphs of the policy statement. In addition, a bank holding company subject to this policy statement that has not issued subordinated debt associated with a new issuance of trust preferred securities after December 31, 2005, may exclude from debt any subordinated debt associated with trust preferred securities until December 31, 2010. Bank holding companies subject to this policy statement also may exclude from debt until December 31, 2010, any subordinated debt associated with refinanced issuances of trust preferred securities originally issued on or prior to December 31, 2005, provided that the refinancing does not increase the bank holding company's outstanding amount of subordinated debt. Subordinated debt associated with trust preferred securities will not be included as debt in determining compliance with any other requirements of this policy statement. In addition, notwithstanding any other provision of this policy statement and for purposes of compliance with paragraphs 2.C., 3.A., 4.A.i, and 4.B.i. of this policy statement, both a bank holding company that is organized in mutual form and a bank holding company that has made a valid election to be taxed under Subchapter S of Chapter 1 of the U.S. Internal Revenue Code may exclude from debt subordinated debentures issued to the United States Department of the Treasury under (i) the Troubled Asset Relief Program established by the Emergency Economic Stabilization Act of 2008, Division A of Public Law 110-343, 122 Stat. 3765 (2008), and (ii) the Small Business Lending Fund established by the Small Business Jobs Act of 2010, title IV of Public Law 111-240, 124 Stat. 2504 (2010). The term equity, Ordinarily the Board does not view redeemable preferred stock as a substitute for common stock in a small bank holding company. Nevertheless, to a limited degree and under certain circumstances, the Board will consider redeemable preferred stock as equity in the capital accounts of the holding company if the following conditions are met: (1) The preferred stock is redeemable only at the option of the issuer; and (2) the debt to equity ratio of the holding company would be at or remain below .30:1 following the redemption or retirement of any preferred stock. Preferred stock that is convertible into common stock of the holding company may be treated as equity. B. Capital adequacy: Each insured depository subsidiary of a small bank holding company is expected to be well-capitalized. Any institution that is not well-capitalized is expected to become well-capitalized within a brief period of time. C. Dividend restrictions: A small bank holding company whose debt to equity ratio is greater than 1.0:1 is not expected to pay corporate dividends until such time as it reduces its debt to equity ratio to 1.0:1 or less and otherwise meets the criteria set forth in §§ 225.14(c)(1)(ii), 225.14(c)(2), and 225.14(c)(7) of Regulation Y. 4 4 Small bank holding companies formed before the effective date of this policy statement may switch to a plan that adheres to the intent of this statement provided they comply with the requirements set forth above. 3. Core Requirements for All Applicants In assessing applications or notices by organizations subject to this policy statement, the Board will continue to take into account a full range of financial and other information about the applicant, and its current and proposed subsidiaries, including the recent trend and stability of earnings, past and prospective growth, asset quality, the ability to meet debt servicing requirements without placing an undue strain on the resources of the bank(s), and the record and competency of management. In addition, the Board will require applicants to meet the following requirements: A. Minimum down payment: The amount of acquisition debt should not exceed 75 percent of the purchase price of the bank(s) or company to be acquired. When the owner(s) of the holding company incurs debt to finance the purchase of the bank(s) or company, such debt will be considered acquisition debt even though it does not represent an obligation of the bank holding company, unless the owner(s) can demonstrate that such debt can be serviced without reliance on the resources of the bank(s) or bank holding company. B. Ability to reduce parent company leverage: The bank holding company must clearly be able to reduce its debt to equity ratio and comply with its loan agreement(s) as set forth in paragraph 2A above. Failure to meet the criteria in this section would normally result in denial of an application. 4. Additional Application Requirements for Expedited/Waived Processing A. Expedited notices under §§ 225.14 and 225.23 of Regulation Y: A small bank holding company proposal will be eligible for the expedited processing procedures set forth in §§ 225.14 and 225.23 of Regulation Y if the bank holding company is in compliance with the ongoing requirements of this policy statement, the bank holding company meets the core requirements for all applicants noted above, and the following requirements are met: i. The parent bank holding company has a pro forma ii. The bank holding company meets all of the criteria for expedited action set forth in §§ 225.14 or 225.23 of Regulation Y. B. Waiver of stock redemption filing: A small bank holding company will be eligible for the stock redemption filing exception for well-capitalized bank holding companies contained in § 225.4(b)(6) if the following requirements are met: i. The parent bank holding company has a pro forma d ii. The bank holding company is in compliance with the ongoing requirements of this policy statement and meets the requirements of §§ 225.14(c)(1)(ii), 225.14(c)(2), and 225.14(c)(7) of Regulation Y. [Reg. Y, 62 FR 9343, Feb. 28, 1997, as amended at 71 FR 9902, Feb. 28, 2006; 74 FR 26081, June 1, 2009; 80 FR 20158, Apr. 15, 2015; 83 FR 44199, Aug. 30, 2018] Appendixes D-E to Part 225 [Reserved] Appendix F to Part 225—Interagency Guidelines Establishing Information Security Standards Table of Contents I. Introduction A. Scope B. Preservation of Existing Authority C. Definitions II. Standards for Safeguarding Customer Information A. Information Security Program B. Objectives III. Development and Implementation of Customer Information Security Program A. Involve the Board of Directors B. Assess Risk C. Manage and Control Risk D. Oversee Service Provider Arrangements E. Adjust the Program F. Report to the Board G. Implement the Standards I. Introduction These Interagency Guidelines Establishing Information Security Standards (Guidelines) set forth standards pursuant to sections 501 and 505 of the Gramm-Leach-Bliley Act (15 U.S.C. 6801 and 6805). These Guidelines address standards for developing and implementing administrative, technical, and physical safeguards to protect the security, confidentiality, and integrity of customer information. A. Scope. B. Preservation of Existing Authority. C. Definitions. 2. For purposes of the Guidelines, the following definitions apply: a. Board of directors, b. Customer c. Customer information d. Customer information systems e. Service provider f. Subsidiary II. Standards for Safeguarding Customer Information A. Information Security Program. B. Objectives. 1. Ensure the security and confidentiality of customer information; 2. Protect against any anticipated threats or hazards to the security or integrity of such information; and 3. Protect against unauthorized access to or use of such information that could result in substantial harm or inconvenience to any customer. III. Development and Implementation of Information Security Program A. Involve the Board of Directors. 1. Approve the bank holding company's written information security program; and 2. Oversee the development, implementation, and maintenance of the bank holding company's information security program, including assigning specific responsibility for its implementation and reviewing reports from management. B. Assess Risk. 1. Identify reasonably foreseeable internal and external threats that could result in unauthorized disclosure, misuse, alteration, or destruction of customer information or customer information systems. 2. Assess the likelihood and potential damage of these threats, taking into consideration the sensitivity of customer information. 3. Assess the sufficiency of policies, procedures, customer information systems, and other arrangements in place to control risks. C. Manage and Control Risk. 1. Design its information security program to control the identified risks, commensurate with the sensitivity of the information as well as the complexity and scope of the bank holding company's activities. Each bank holding company must consider whether the following security measures are appropriate for the bank holding company and, if so, adopt those measures the bank holding company concludes are appropriate: a. Access controls on customer information systems, including controls to authenticate and permit access only to authorized individuals and controls to prevent employees from providing customer information to unauthorized individuals who may seek to obtain this information through fraudulent means. b. Access restrictions at physical locations containing customer information, such as buildings, computer facilities, and records storage facilities to permit access only to authorized individuals; c. Encryption of electronic customer information, including while in transit or in storage on networks or systems to which unauthorized individuals may have access; d. Procedures designed to ensure that customer information system modifications are consistent with the bank holding company's information security program; e. Dual control procedures, segregation of duties, and employee background checks for employees with responsibilities for or access to customer information; f. Monitoring systems and procedures to detect actual and attempted attacks on or intrusions into customer information systems; g. Response programs that specify actions to be taken when the bank holding company suspects or detects that unauthorized individuals have gained access to customer information systems, including appropriate reports to regulatory and law enforcement agencies; and h. Measures to protect against destruction, loss, or damage of customer information due to potential environmental hazards, such as fire and water damage or technological failures. 2. Train staff to implement the bank holding company's information security program. 3. Regularly test the key controls, systems and procedures of the information security program. The frequency and nature of such tests should be determined by the bank holding company's risk assessment. Tests should be conducted or reviewed by independent third parties or staff independent of those that develop or maintain the security programs. D. Oversee Service Provider Arrangements. 1. Exercise appropriate due diligence in selecting its service providers; 2. Require its service providers by contract to implement appropriate measures designed to meet the objectives of these Guidelines; and 3. Where indicated by the bank holding company's risk assessment, monitor its service providers to confirm that they have satisfied their obligations as required by paragraph D.2. As part of this monitoring, a bank holding company should review audits, summaries of test results, or other equivalent evaluations of its service providers. E. Adjust the Program. F. Report to the Board. G. Implement the Standards. 1. Effective date. 2. Two-year grandfathering of agreements with service providers. Supplement A to Appendix F to Part 225—Interagency Guidance on Response Programs for Unauthorized Access to Customer Information and Customer Notice I. Background This Guidance 1 2 1 2 A. Interagency Security Guidelines Section 501(b) of the GLBA required the Agencies to establish appropriate standards for financial institutions subject to their jurisdiction that include administrative, technical, and physical safeguards, to protect the security and confidentiality of customer information. Accordingly, the Agencies issued Security Guidelines requiring every financial institution to have an information security program designed to: 1. Ensure the security and confidentiality of customer information; 2. Protect against any anticipated threats or hazards to the security or integrity of such information; and 3. Protect against unauthorized access to or use of such information that could result in substantial harm or inconvenience to any customer. B. Risk Assessment and Controls 1. The Security Guidelines direct every financial institution to assess the following risks, among others, when developing its information security program: a. Reasonably foreseeable internal and external threats that could result in unauthorized disclosure, misuse, alteration, or destruction of customer information or customer information systems; b. The likelihood and potential damage of threats, taking into consideration the sensitivity of customer information; and c. The sufficiency of policies, procedures, customer information systems, and other arrangements in place to control risks. 3 3 See 2. Following the assessment of these risks, the Security Guidelines require a financial institution to design a program to address the identified risks. The particular security measures an institution should adopt will depend upon the risks presented by the complexity and scope of its business. At a minimum, the financial institution is required to consider the specific security measures enumerated in the Security Guidelines, 4 4 See a. Access controls on customer information systems, including controls to authenticate and permit access only to authorized individuals and controls to prevent employees from providing customer information to unauthorized individuals who may seek to obtain this information through fraudulent means; b. Background checks for employees with responsibilities for access to customer information; and c. Response programs that specify actions to be taken when the financial institution suspects or detects that unauthorized individuals have gained access to customer information systems, including appropriate reports to regulatory and law enforcement agencies. 5 5 See C. Service Providers The Security Guidelines direct every financial institution to require its service providers by contract to implement appropriate measures designed to protect against unauthorized access to or use of customer information that could result in substantial harm or inconvenience to any customer. 6 6 See II. Response Program Millions of Americans, throughout the country, have been victims of identity theft. 7 8 9 10 7 See Identity Theft Survey Report, http://www.ftc.gov/os/2003/09/synovatereport.pdf. 8 9 customer information systems See 10 See http://www.ffiec.gov/ffiecinfobase/html_pages/infosec_book_frame.htm. In addition, each institution should be able to address incidents of unauthorized access to customer information in customer information systems maintained by its domestic and foreign service providers. Therefore, consistent with the obligations in the Guidelines that relate to these arrangements, and with existing guidance on this topic issued by the Agencies, 11 11 See A. Components of a Response Program 1. At a minimum, an institution's response program should contain procedures for the following: a. Assessing the nature and scope of an incident, and identifying what customer information systems and types of customer information have been accessed or misused; b. Notifying its primary Federal regulator as soon as possible when the institution becomes aware of an incident involving unauthorized access to or use of sensitive c. Consistent with the Agencies' Suspicious Activity Report (“SAR”) regulations, 12 12 See See See also http://www.ots.treas.gov/BSA d. Taking appropriate steps to contain and control the incident to prevent further unauthorized access to or use of customer information, for example, by monitoring, freezing, or closing affected accounts, while preserving records and other evidence; 13 13 See e. Notifying customers when warranted. 2. Where an incident of unauthorized access to customer information involves customer information systems maintained by an institution's service providers, it is the responsibility of the financial institution to notify the institution's customers and regulator. However, an institution may authorize or contract with its service provider to notify the institution's customers or regulator on its behalf. III. Customer Notice Financial institutions have an affirmative duty to protect their customers' information against unauthorized access or use. Notifying customers of a security incident involving the unauthorized access or use of the customer's information in accordance with the standard set forth below is a key part of that duty. Timely notification of customers is important to manage an institution's reputation risk. Effective notice also may reduce an institution's legal risk, assist in maintaining good customer relations, and enable the institution's customers to take steps to protect themselves against the consequences of identity theft. When customer notification is warranted, an institution may not forgo notifying its customers of an incident because the institution believes that it may be potentially embarrassed or inconvenienced by doing so. A. Standard for Providing Notice When a financial institution becomes aware of an incident of unauthorized access to sensitive customer information, the institution should conduct a reasonable investigation to promptly determine the likelihood that the information has been or will be misused. If the institution determines that misuse of its information about a customer has occurred or is reasonably possible, it should notify the affected customer as soon as possible. Customer notice may be delayed if an appropriate law enforcement agency determines that notification will interfere with a criminal investigation and provides the institution with a written request for the delay. However, the institution should notify its customers as soon as notification will no longer interfere with the investigation. 1. Sensitive Customer Information Under the Guidelines, an institution must protect against unauthorized access to or use of customer information that could result in substantial harm or inconvenience to any customer. Substantial harm or inconvenience is most likely to result from improper access to sensitive customer information sensitive customer information Sensitive customer information 2. Affected Customers If a financial institution, based upon its investigation, can determine from its logs or other data precisely which customers' information has been improperly accessed, it may limit notification to those customers with regard to whom the institution determines that misuse of their information has occurred or is reasonably possible. However, there may be situations where the institution determines that a group of files has been accessed improperly, but is unable to identify which specific customers' information has been accessed. If the circumstances of the unauthorized access lead the institution to determine that misuse of the information is reasonably possible, it should notify all customers in the group. B. Content of Customer Notice 1. Customer notice should be given in a clear and conspicuous manner. The notice should describe the incident in general terms and the type of customer information that was the subject of unauthorized access or use. It also should generally describe what the institution has done to protect the customers' information from further unauthorized access. In addition, it should include a telephone number that customers can call for further information and assistance. 14 14 a. A recommendation that the customer review account statements and immediately report any suspicious activity to the institution; b. A description of fraud alerts and an explanation of how the customer may place a fraud alert in the customer's consumer reports to put the customer's creditors on notice that the customer may be a victim of fraud; c. A recommendation that the customer periodically obtain credit reports from each nationwide credit reporting agency and have information relating to fraudulent transactions deleted; d. An explanation of how the customer may obtain a credit report free of charge; and e. Information about the availability of the FTC's online guidance regarding steps a consumer can take to protect against identity theft. The notice should encourage the customer to report any incidents of identity theft to the FTC, and should provide the FTC's Web site address and toll-free telephone number that customers may use to obtain the identity theft guidance and report suspected incidents of identity theft. 15 15 http://www.consumer.gov/idtheft 2. The Agencies encourage financial institutions to notify the nationwide consumer reporting agencies prior to sending notices to a large number of customers that include contact information for the reporting agencies. C. Delivery of Customer Notice Customer notice should be delivered in any manner designed to ensure that a customer can reasonably be expected to receive it. For example, the institution may choose to contact all customers affected by telephone or by mail, or by electronic mail for those customers for whom it has a valid e-mail address and who have agreed to receive communications electronically. [66 FR 8636, Feb. 1, 2001, as amended at 70 FR 15751, 15753, Mar. 29, 2005; 71 FR 5780, Feb. 3, 2006; 79 FR 37167, July 1, 2014] Appendix G to Part 225 [Reserved]

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