66339Federal Register / Vol. 63, No. 230 / Tuesday, December 1, 1998 / Proposed Rules
FEDERAL DEPOSIT INSURANCE
CORPORATION
12 CFR Parts 303, 337, and 362
RIN 3064–AC20
Activities of Insured State Banks and
Insured Savings Associations
AGENCY: Federal Deposit Insurance
Corporation (FDIC).
ACTION: Notice of proposed rulemaking.
SUMMARY: The FDIC is seeking public
comment on its proposal to amend its
rules and regulations governing
activities and investments of insured
state banks. The FDIC proposes to add
safety and soundness standards to
govern insured state nonmember banks
that engage in the public sale,
distribution or underwriting of stocks,
bonds, debentures, notes or other
securities through a subsidiary if those
activities are permissible for a national
bank subsidiary but are not permissible
for the national bank itself. In addition,
the FDIC proposes to require that
insured state nonmember banks file a
notice before commencing any activities
permissible for subsidiaries of a national
bank that are not permissible for the
parent national bank itself. The FDIC
also proposes to remove and reserve the
provisions addressing, ‘‘Securities
Activities of Subsidiaries of Insured
State Banks: Bank Transactions with
Affiliated Securities Companies.’’ The
proposed effect of these amendments
will be to require banks to notify the
FDIC prior to conducting securities or
other activities through subsidiaries that
are not permissible for the bank itself.
These amendments also will consolidate
all securities activities regulation.
DATES: Comments must be received by
February 1, 1999.
ADDRESSES: Send written comments to
Robert E. Feldman, Executive Secretary,
Attention: Comments/OES, Federal
Deposit Insurance Corporation, 550 17th
Street, N.W., Washington, D.C. 20429.
Comments may be hand delivered to the
guard station at the rear of the 17th
Street Building (located on F Street), on
business days between 7:00 a.m. and
5:00 p.m. (Fax number (202) 898–3838;
Internet Address: comments@fdic.gov).
Comments may be inspected and
photocopied in the FDIC Public
Information Center, Room 100, 801 17th
Street, N.W. Washington, D.C. 20429,
between 9:00 a.m. and 4:30 p.m. on
business days.
FOR FURTHER INFORMATION CONTACT:
Curtis Vaughn, Examination Specialist,
(202/898–6759), Division of
Supervision; Linda L. Stamp, Counsel,
(202/898–7310) or Jamey Basham,
Counsel, (202/898–7265), Legal
Division, FDIC, 550 17th Street, N.W.,
Washington, D.C. 20429.
SUPPLEMENTARY INFORMATION:
I. Background
Recently, the FDIC reassessed part
362 of its rules, ‘‘Activities and
Investments of Insured State Banks’’ (12
CFR part 362) and § 337.4 of its rules,
‘‘Securities Activities of Subsidiaries of
Insured State Banks: Bank Transactions
with Affiliated Securities Companies’’
(12 CFR 337.4). That reassessment
resulted in an amended part 362 that is
published as a final rule elsewhere in
this issue of the Federal Register.
Although, in connection with that
reassessment, FDIC proposed removing
§ 337.4, the FDIC decided to leave that
rule in place to retain the safety and
soundness standards governing
securities activities that are not subject
to section 24 of the Federal Deposit
Insurance Act (FDI Act) (12 U.S.C.
1831a) (discussed below) during a
further comment period on rules that
would govern those activities.
In this proposal, the FDIC seeks
comment on proposed safety and
soundness standards governing an
insured state nonmember bank
subsidiary engaging in the public sale,
distribution or underwriting of stocks,
bonds, debentures, notes or other
securities permissible for a subsidiary of
a national bank that are not permissible
for the parent national bank directly.
The proposal also requests comment on
a proposed requirement that a notice be
filed before an insured state nonmember
bank subsidiary engages in any other
activity permissible for a subsidiary of
a national bank that is not permissible
for the parent national bank directly.
Under the proposal, the FDIC would
remove and reserve § 337.4. The
proposal is described in more detail
below.
Part 362 of the FDIC’s regulations
implements the provisions of section 24
of the FDI Act. Section 24 was added to
the FDI Act by the Federal Deposit
Insurance Corporation Improvement Act
of 1991 (FDICIA) (Pub. L. 102–242).
With certain exceptions, section 24
limits the direct equity investments of
state chartered insured banks to equity
investments of a type permissible for
national banks. In addition, with certain
exceptions, section 24 prohibits an
insured state bank from engaging as
principal in any type of activity that is
not permissible for a national bank
unless the bank meets applicable capital
requirements and the FDIC determines
that the activity will not pose a
significant risk to the appropriate
deposit insurance fund. Section 24 also
prohibits an insured state bank
subsidiary from engaging as principal in
any activity or making any equity
investment of a type that is not
permissible for a national bank
subsidiary unless the bank meets
applicable capital requirements and the
FDIC determines that the activity will
not pose a significant risk to the
appropriate deposit insurance fund.
Since section 24 was enacted, the
Office of the Comptroller of the
Currency (OCC) has confirmed—
through its rule governing operating
subsidiaries—that there may be
activities that are not permissible for a
national bank itself, but that are
permissible for national bank
subsidiaries. Effective December 31,
1996, the OCC amended its regulations
governing the acquisition and
establishment of operating subsidiaries
by national banks. 12 CFR part 5. These
regulations establish a process through
which a national bank may seek
approval to conduct activities in an
operating subsidiary that are part of or
incidental to the business of banking as
determined by the OCC pursuant to 12
U.S.C. 24 (Seventh) or other statutory
authority but that differ from the
activities that are permissible for the
national bank itself. The OCC always
requires an application from a bank
seeking to conduct a bank-
impermissible activity in an operating
subsidiary. If the activity proposed for
the operating subsidiary has not been
approved previously by the OCC, the
OCC will publish a notice of the
application in the Federal Register and
solicit comment. The OCC may also
follow this notice and comment
procedure if the activity is one that the
OCC has previously approved. 12 CFR
5.34(f).
The framework in the regulation sets
up a review process that has two,
equally important components. First,
the OCC reviews operating subsidiary
applications to determine whether the
proposed activities are legally
permissible for an operating subsidiary.
Second, the OCC evaluates the proposal
to determine whether it is consistent
with safe and sound banking practices
and OCC policy and does not endanger
the safety or soundness of the particular
parent national bank.
The operating subsidiary rule sets out
a number of conditions, or firewalls,
that the OCC will impose each time it
approves the conduct of an activity in
an operating subsidiary that the parent
FEDERAL DEPOSIT INSURANCE
CORPORATION
12 CFR Parts 303, 337, and 362
RIN 3064–AC20
Activities of Insured State Banks and
Insured Savings Associations
AGENCY: Federal Deposit Insurance
Corporation (FDIC).
ACTION: Notice of proposed rulemaking.
SUMMARY: The FDIC is seeking public
comment on its proposal to amend its
rules and regulations governing
activities and investments of insured
state banks. The FDIC proposes to add
safety and soundness standards to
govern insured state nonmember banks
that engage in the public sale,
distribution or underwriting of stocks,
bonds, debentures, notes or other
securities through a subsidiary if those
activities are permissible for a national
bank subsidiary but are not permissible
for the national bank itself. In addition,
the FDIC proposes to require that
insured state nonmember banks file a
notice before commencing any activities
permissible for subsidiaries of a national
bank that are not permissible for the
parent national bank itself. The FDIC
also proposes to remove and reserve the
provisions addressing, ‘‘Securities
Activities of Subsidiaries of Insured
State Banks: Bank Transactions with
Affiliated Securities Companies.’’ The
proposed effect of these amendments
will be to require banks to notify the
FDIC prior to conducting securities or
other activities through subsidiaries that
are not permissible for the bank itself.
These amendments also will consolidate
all securities activities regulation.
DATES: Comments must be received by
February 1, 1999.
ADDRESSES: Send written comments to
Robert E. Feldman, Executive Secretary,
Attention: Comments/OES, Federal
Deposit Insurance Corporation, 550 17th
Street, N.W., Washington, D.C. 20429.
Comments may be hand delivered to the
guard station at the rear of the 17th
Street Building (located on F Street), on
business days between 7:00 a.m. and
5:00 p.m. (Fax number (202) 898–3838;
Internet Address: comments@fdic.gov).
Comments may be inspected and
photocopied in the FDIC Public
Information Center, Room 100, 801 17th
Street, N.W. Washington, D.C. 20429,
between 9:00 a.m. and 4:30 p.m. on
business days.
FOR FURTHER INFORMATION CONTACT:
Curtis Vaughn, Examination Specialist,
(202/898–6759), Division of
Supervision; Linda L. Stamp, Counsel,
(202/898–7310) or Jamey Basham,
Counsel, (202/898–7265), Legal
Division, FDIC, 550 17th Street, N.W.,
Washington, D.C. 20429.
SUPPLEMENTARY INFORMATION:
I. Background
Recently, the FDIC reassessed part
362 of its rules, ‘‘Activities and
Investments of Insured State Banks’’ (12
CFR part 362) and § 337.4 of its rules,
‘‘Securities Activities of Subsidiaries of
Insured State Banks: Bank Transactions
with Affiliated Securities Companies’’
(12 CFR 337.4). That reassessment
resulted in an amended part 362 that is
published as a final rule elsewhere in
this issue of the Federal Register.
Although, in connection with that
reassessment, FDIC proposed removing
§ 337.4, the FDIC decided to leave that
rule in place to retain the safety and
soundness standards governing
securities activities that are not subject
to section 24 of the Federal Deposit
Insurance Act (FDI Act) (12 U.S.C.
1831a) (discussed below) during a
further comment period on rules that
would govern those activities.
In this proposal, the FDIC seeks
comment on proposed safety and
soundness standards governing an
insured state nonmember bank
subsidiary engaging in the public sale,
distribution or underwriting of stocks,
bonds, debentures, notes or other
securities permissible for a subsidiary of
a national bank that are not permissible
for the parent national bank directly.
The proposal also requests comment on
a proposed requirement that a notice be
filed before an insured state nonmember
bank subsidiary engages in any other
activity permissible for a subsidiary of
a national bank that is not permissible
for the parent national bank directly.
Under the proposal, the FDIC would
remove and reserve § 337.4. The
proposal is described in more detail
below.
Part 362 of the FDIC’s regulations
implements the provisions of section 24
of the FDI Act. Section 24 was added to
the FDI Act by the Federal Deposit
Insurance Corporation Improvement Act
of 1991 (FDICIA) (Pub. L. 102–242).
With certain exceptions, section 24
limits the direct equity investments of
state chartered insured banks to equity
investments of a type permissible for
national banks. In addition, with certain
exceptions, section 24 prohibits an
insured state bank from engaging as
principal in any type of activity that is
not permissible for a national bank
unless the bank meets applicable capital
requirements and the FDIC determines
that the activity will not pose a
significant risk to the appropriate
deposit insurance fund. Section 24 also
prohibits an insured state bank
subsidiary from engaging as principal in
any activity or making any equity
investment of a type that is not
permissible for a national bank
subsidiary unless the bank meets
applicable capital requirements and the
FDIC determines that the activity will
not pose a significant risk to the
appropriate deposit insurance fund.
Since section 24 was enacted, the
Office of the Comptroller of the
Currency (OCC) has confirmed—
through its rule governing operating
subsidiaries—that there may be
activities that are not permissible for a
national bank itself, but that are
permissible for national bank
subsidiaries. Effective December 31,
1996, the OCC amended its regulations
governing the acquisition and
establishment of operating subsidiaries
by national banks. 12 CFR part 5. These
regulations establish a process through
which a national bank may seek
approval to conduct activities in an
operating subsidiary that are part of or
incidental to the business of banking as
determined by the OCC pursuant to 12
U.S.C. 24 (Seventh) or other statutory
authority but that differ from the
activities that are permissible for the
national bank itself. The OCC always
requires an application from a bank
seeking to conduct a bank-
impermissible activity in an operating
subsidiary. If the activity proposed for
the operating subsidiary has not been
approved previously by the OCC, the
OCC will publish a notice of the
application in the Federal Register and
solicit comment. The OCC may also
follow this notice and comment
procedure if the activity is one that the
OCC has previously approved. 12 CFR
5.34(f).
The framework in the regulation sets
up a review process that has two,
equally important components. First,
the OCC reviews operating subsidiary
applications to determine whether the
proposed activities are legally
permissible for an operating subsidiary.
Second, the OCC evaluates the proposal
to determine whether it is consistent
with safe and sound banking practices
and OCC policy and does not endanger
the safety or soundness of the particular
parent national bank.
The operating subsidiary rule sets out
a number of conditions, or firewalls,
that the OCC will impose each time it
approves the conduct of an activity in
an operating subsidiary that the parent
66340 Federal Register / Vol. 63, No. 230 / Tuesday, December 1, 1998 / Proposed Rules
1 Under these conditions, the § 5.34(f) operating
subsidiary generally must: be physically separate
from the parent; hold itself out as a separate and
distinct entity; use a different name; have adequate
capital; maintain separate accounting and corporate
records; have independent policies and procedures
designed to inform customers of the independence
of the subsidiary; negotiate contracts with the
parent at arm’s length; hold separate board
meetings; have at least one-third of the members of
the board who are not directors of the bank who
have relevant expertise; and have internal controls
to manage financial and operational risks.
Moreover, if the operating subsidiary will be
conducting activities as principal, additional safety
and soundness conditions are imposed, including
that the bank’s equity investment in the subsidiary
must be deducted from the bank’s capital and
assets, and the assets and liabilities of the
subsidiary may not be consolidated with those of
the bank. In addition, the OCC will apply sections
23A and 23B of the Federal Reserve Act (12 U.S.C.
371c and 371c–1) to transactions between the
parent bank and its operating subsidiary.
2 Zions applied to the OCC pursuant to 12 CFR
5.34(f) to commence a new activity in an existing
operating subsidiary. The subsidiary would
underwrite, deal in, and invest in securities of
states and their political subdivisions. These
securities include the following: (1) Obligations
presently defined by the OCC as general obligations
of states and political subdivisions (General
Obligation Securities); and (2) other obligations of
states and their political subdivisions that do not
qualify under the OCC’s current definitions as
general obligations (Revenue Bonds). The OCC
determined that the activity was permissible for an
operating subsidiary under the authority of 12
U.S.C. 24 (Seventh) that allows a national bank to
own operating subsidiaries that conduct activities
that are incidental to the business of banking. In
this case, the OCC determined that the activity of
underwriting revenue bonds is incidental to
banking by finding that underwriting revenue
bonds is the functional equivalent or a logical
outgrowth of activities that are currently conducted
by national banks. However, the OCC reiterated that
section 20 of the Glass-Steagall Act prohibits the
affiliation of member banks with firms that
principally engage in underwriting bank-ineligible
securities. As a result, the OCC imposed a 25
percent revenue limitation on the Zions’ subsidiary
to conform to the limitation for section 20
subsidiaries set by Board of Governors of the
Federal Reserve System. The OCC imposed the
conditions set forth in § 5.34(f), including corporate
separateness requirements and the applications of
sections 23A and 23B of the Federal Reserve Act to
transactions between the bank and its subsidiary. In
addition, the OCC imposed other conditions
tailored to the Zions’ application. For example, it
required disclosures to customers, including use of
the Interagency Statement on Retail Sales of
Nondeposit Investment Products (Interagency
Statement), and limited opinions on the bonds by
bank directors, officers and employees.
3 Section 362.4 of the final regulation establishes
rules by which subsidiaries of insured state banks
may conduct certain securities activities which are
not permissible for a national bank subsidiary.
Section 362.8(b) established similar rules for
securities affiliates of insured state nonmember
bank subsidiaries of so-called ‘‘nonbank bank
holding companies.’’ As is specified in § 337.4(i),
the activities of such subsidiaries and affiliates are
controlled by part 362, not § 337.4.
4 According to the information provided in the
application, the Zions’ subsidiary appears to meet
the 5-year operation test that § 337.4 would apply
to a state nonmember bank subsidiary. Section
337.4 has no procedure for a bank to file an
application to be relieved of the five year operation
requirement; however, there is a waiver application
procedure in § 337.10. Any such application would
be granted at the discretion of the FDIC’s Board of
Directors.
bank could not do directly.1 In addition,
the rule contemplates the imposition of
other bank-specific conditions tailored
to the facts and circumstances presented
by the individual application. To date,
the OCC has received and published
notice of three applications to conduct
activities, through an operating
subsidiary, which would not be
permissible for a national bank. Two
applications were filed by NationsBank,
National Association, (Charlotte, North
Carolina) to engage in limited real estate
development activities in connection
with bank premises and to provide real
estate lease financing through operating
subsidiaries of the bank. The FDIC, in
its final rule published elsewhere in
today’s Federal Register, dealt with
state nonmember banks which seek to
engage in real estate activities
permissible for a national bank only
through a subsidiary (subpart B of the
amended part 362).
Another application was filed by
Zions First National Bank, (Salt Lake
City, Utah) (Zions) to conduct
municipal revenue bond underwriting
activities on April 8, 1997. The OCC
published notice and requested
comment in the Federal Register on
April 18, 1997. 62 FR 19171. On
December 11, 1997, the OCC announced
its approval of the Zions’ application
allowing an operating subsidiary of a
national bank to engage in the activities
of underwriting, dealing in, and
investing in state and municipal
revenue bonds, subject to certain safety
and soundness requirements.2
This OCC approval means that the
requirement under section 24 and
subpart A of part 362, that an insured
state nonmember bank apply to the
FDIC for consent to engage in this
activity through a subsidiary, no longer
applies. However, the FDIC did not
remove § 337.4 as proposed, but instead
left § 337.4 in place to require that an
insured state nonmember bank file a
notice and comply with the FDIC’s
safety and soundness requirements to
engage in the distribution or
underwriting of stocks, bonds,
debentures, notes or other securities
through a subsidiary.3
Section 337.4 of the FDIC’s
regulations governs securities activities
of subsidiaries of insured state
nonmember banks as well as
transactions between insured state
nonmember banks and their securities
subsidiaries and affiliates. The
regulation was adopted in 1984 (49 FR
46723) and is designed to promote the
safety and soundness of insured state
nonmember banks that have
subsidiaries which engage in securities
activities that are impermissible for
banks directly, under section 16 of the
Banking Act of 1933 (12 U.S.C. 24
(Seventh)), commonly known as the
Glass-Steagall Act. Section 337.4
requires that these subsidiaries qualify
as bona fide subsidiaries; establishes
transaction restrictions between a bank
and its subsidiaries or other affiliates
that engage in securities activities that
are prohibited for banks under section
16; requires that an insured state
nonmember bank give prior notice to
the FDIC before establishing or
acquiring any securities subsidiary;
requires that disclosures be provided to
securities customers in certain
instances; and requires that a bank’s
investment in a securities subsidiary
engaging in activities that are
impermissible for a bank under section
16 be deducted from the bank’s capital.
Under the current version of § 337.4,
a subsidiary of a state nonmember bank
that wanted to underwrite, deal in, and
invest in municipal revenue bonds
(securities of states and their political
subdivisions that do not qualify under
the OCC’s current definition of general
obligation bonds) would have to file a
notice under § 337.4 and meet its
requirements. To underwrite, deal in, or
invest in municipal revenue bonds, the
bank and its subsidiary would be
required to:
1. File a notice at least 60 days prior
to the consummation of the operation of
the subsidiary;
2. Meet the ‘‘bona fide subsidiary’’
requirements as set forth in definition in
§ 337.4;
3. Deduct the capital invested in
subsidiary from bank’s total capital;
4. Underwrite only debt securities of
investment grade, unless the subsidiary
has been in continuous operation for the
five year period preceding the notice.4
The applicability of § 337.4 is not
impacted by the OCC’s approval of the
Zions application. The application of
§ 337.4 is independent of and was
adopted prior to section 24 of the FDI
Act and part 362. Section 337.4 is
invoked based on the securities
activities of the bank subsidiary and was
adopted pursuant to an analysis of the
Glass-Steagall Act undertaken in the
early 1980s. In short, the regulation lists
securities underwriting and distribution
as an activity that will not pose a
significant risk to the fund if conducted
through a majority-owned subsidiary
that operates in accordance with
§ 337.4. Now, in this rulemaking
proceeding, the FDIC proposes to
remove and reserve § 337.4 and address
1 Under these conditions, the § 5.34(f) operating
subsidiary generally must: be physically separate
from the parent; hold itself out as a separate and
distinct entity; use a different name; have adequate
capital; maintain separate accounting and corporate
records; have independent policies and procedures
designed to inform customers of the independence
of the subsidiary; negotiate contracts with the
parent at arm’s length; hold separate board
meetings; have at least one-third of the members of
the board who are not directors of the bank who
have relevant expertise; and have internal controls
to manage financial and operational risks.
Moreover, if the operating subsidiary will be
conducting activities as principal, additional safety
and soundness conditions are imposed, including
that the bank’s equity investment in the subsidiary
must be deducted from the bank’s capital and
assets, and the assets and liabilities of the
subsidiary may not be consolidated with those of
the bank. In addition, the OCC will apply sections
23A and 23B of the Federal Reserve Act (12 U.S.C.
371c and 371c–1) to transactions between the
parent bank and its operating subsidiary.
2 Zions applied to the OCC pursuant to 12 CFR
5.34(f) to commence a new activity in an existing
operating subsidiary. The subsidiary would
underwrite, deal in, and invest in securities of
states and their political subdivisions. These
securities include the following: (1) Obligations
presently defined by the OCC as general obligations
of states and political subdivisions (General
Obligation Securities); and (2) other obligations of
states and their political subdivisions that do not
qualify under the OCC’s current definitions as
general obligations (Revenue Bonds). The OCC
determined that the activity was permissible for an
operating subsidiary under the authority of 12
U.S.C. 24 (Seventh) that allows a national bank to
own operating subsidiaries that conduct activities
that are incidental to the business of banking. In
this case, the OCC determined that the activity of
underwriting revenue bonds is incidental to
banking by finding that underwriting revenue
bonds is the functional equivalent or a logical
outgrowth of activities that are currently conducted
by national banks. However, the OCC reiterated that
section 20 of the Glass-Steagall Act prohibits the
affiliation of member banks with firms that
principally engage in underwriting bank-ineligible
securities. As a result, the OCC imposed a 25
percent revenue limitation on the Zions’ subsidiary
to conform to the limitation for section 20
subsidiaries set by Board of Governors of the
Federal Reserve System. The OCC imposed the
conditions set forth in § 5.34(f), including corporate
separateness requirements and the applications of
sections 23A and 23B of the Federal Reserve Act to
transactions between the bank and its subsidiary. In
addition, the OCC imposed other conditions
tailored to the Zions’ application. For example, it
required disclosures to customers, including use of
the Interagency Statement on Retail Sales of
Nondeposit Investment Products (Interagency
Statement), and limited opinions on the bonds by
bank directors, officers and employees.
3 Section 362.4 of the final regulation establishes
rules by which subsidiaries of insured state banks
may conduct certain securities activities which are
not permissible for a national bank subsidiary.
Section 362.8(b) established similar rules for
securities affiliates of insured state nonmember
bank subsidiaries of so-called ‘‘nonbank bank
holding companies.’’ As is specified in § 337.4(i),
the activities of such subsidiaries and affiliates are
controlled by part 362, not § 337.4.
4 According to the information provided in the
application, the Zions’ subsidiary appears to meet
the 5-year operation test that § 337.4 would apply
to a state nonmember bank subsidiary. Section
337.4 has no procedure for a bank to file an
application to be relieved of the five year operation
requirement; however, there is a waiver application
procedure in § 337.10. Any such application would
be granted at the discretion of the FDIC’s Board of
Directors.
bank could not do directly.1 In addition,
the rule contemplates the imposition of
other bank-specific conditions tailored
to the facts and circumstances presented
by the individual application. To date,
the OCC has received and published
notice of three applications to conduct
activities, through an operating
subsidiary, which would not be
permissible for a national bank. Two
applications were filed by NationsBank,
National Association, (Charlotte, North
Carolina) to engage in limited real estate
development activities in connection
with bank premises and to provide real
estate lease financing through operating
subsidiaries of the bank. The FDIC, in
its final rule published elsewhere in
today’s Federal Register, dealt with
state nonmember banks which seek to
engage in real estate activities
permissible for a national bank only
through a subsidiary (subpart B of the
amended part 362).
Another application was filed by
Zions First National Bank, (Salt Lake
City, Utah) (Zions) to conduct
municipal revenue bond underwriting
activities on April 8, 1997. The OCC
published notice and requested
comment in the Federal Register on
April 18, 1997. 62 FR 19171. On
December 11, 1997, the OCC announced
its approval of the Zions’ application
allowing an operating subsidiary of a
national bank to engage in the activities
of underwriting, dealing in, and
investing in state and municipal
revenue bonds, subject to certain safety
and soundness requirements.2
This OCC approval means that the
requirement under section 24 and
subpart A of part 362, that an insured
state nonmember bank apply to the
FDIC for consent to engage in this
activity through a subsidiary, no longer
applies. However, the FDIC did not
remove § 337.4 as proposed, but instead
left § 337.4 in place to require that an
insured state nonmember bank file a
notice and comply with the FDIC’s
safety and soundness requirements to
engage in the distribution or
underwriting of stocks, bonds,
debentures, notes or other securities
through a subsidiary.3
Section 337.4 of the FDIC’s
regulations governs securities activities
of subsidiaries of insured state
nonmember banks as well as
transactions between insured state
nonmember banks and their securities
subsidiaries and affiliates. The
regulation was adopted in 1984 (49 FR
46723) and is designed to promote the
safety and soundness of insured state
nonmember banks that have
subsidiaries which engage in securities
activities that are impermissible for
banks directly, under section 16 of the
Banking Act of 1933 (12 U.S.C. 24
(Seventh)), commonly known as the
Glass-Steagall Act. Section 337.4
requires that these subsidiaries qualify
as bona fide subsidiaries; establishes
transaction restrictions between a bank
and its subsidiaries or other affiliates
that engage in securities activities that
are prohibited for banks under section
16; requires that an insured state
nonmember bank give prior notice to
the FDIC before establishing or
acquiring any securities subsidiary;
requires that disclosures be provided to
securities customers in certain
instances; and requires that a bank’s
investment in a securities subsidiary
engaging in activities that are
impermissible for a bank under section
16 be deducted from the bank’s capital.
Under the current version of § 337.4,
a subsidiary of a state nonmember bank
that wanted to underwrite, deal in, and
invest in municipal revenue bonds
(securities of states and their political
subdivisions that do not qualify under
the OCC’s current definition of general
obligation bonds) would have to file a
notice under § 337.4 and meet its
requirements. To underwrite, deal in, or
invest in municipal revenue bonds, the
bank and its subsidiary would be
required to:
1. File a notice at least 60 days prior
to the consummation of the operation of
the subsidiary;
2. Meet the ‘‘bona fide subsidiary’’
requirements as set forth in definition in
§ 337.4;
3. Deduct the capital invested in
subsidiary from bank’s total capital;
4. Underwrite only debt securities of
investment grade, unless the subsidiary
has been in continuous operation for the
five year period preceding the notice.4
The applicability of § 337.4 is not
impacted by the OCC’s approval of the
Zions application. The application of
§ 337.4 is independent of and was
adopted prior to section 24 of the FDI
Act and part 362. Section 337.4 is
invoked based on the securities
activities of the bank subsidiary and was
adopted pursuant to an analysis of the
Glass-Steagall Act undertaken in the
early 1980s. In short, the regulation lists
securities underwriting and distribution
as an activity that will not pose a
significant risk to the fund if conducted
through a majority-owned subsidiary
that operates in accordance with
§ 337.4. Now, in this rulemaking
proceeding, the FDIC proposes to
remove and reserve § 337.4 and address