[Federal Register: April 24, 2008 (Volume 73, Number 80)] [Rules and Regulations] [Page 22215-22252] From the Federal Register Online via GPO Access [wais.access.gpo.gov] [DOCID:fr24ap08-6] [[Page 22215]] ----------------------------------------------------------------------- Part II Department of the Treasury ----------------------------------------------------------------------- Office of the Comptroller of the Currency ----------------------------------------------------------------------- 12 CFR Parts 1, 2, 3 et al. Regulatory Review Amendments; Final Rule [[Page 22216]] ----------------------------------------------------------------------- DEPARTMENT OF THE TREASURY Office of the Comptroller of the Currency 12 CFR Parts 1, 2, 3, 4, 5, 7, 9, 10, 11, 12, 16, 19, 21, 22, 23, 24, 26, 27, 28, 31, 32, 34, 37, and 40 [Docket ID OCC-2008-0004] RIN 1557-AC79 Regulatory Review Amendments AGENCY: Office of the Comptroller of the Currency, Treasury. ACTION: Final rule. ----------------------------------------------------------------------- SUMMARY: The Office of the Comptroller of the Currency (OCC) is revising its rules in order to reduce unnecessary regulatory burden, update certain rules, and make certain technical, clarifying, and conforming changes to its regulations. These revisions result from the OCC's most recent review of its regulations to ensure that they effectively advance our mission to promote the safety and soundness of the national banking system, ensure that national banks can compete efficiently in the financial services marketplace, and foster fairness and integrity in national banks' dealings with their customers, without imposing regulatory burden unnecessary to the achievement of those objectives. The revisions also further the purposes of the Economic Growth and Regulatory Paperwork Reduction Act of 1996, which, among other provisions, directs the OCC to identify and, if appropriate, eliminate regulations that are outdated, unnecessary, or unduly burdensome. DATES: This rule is effective on July 1, 2008. National banks, and foreign banks taking actions with respect to Federal branches and agencies, may elect to comply voluntarily with any applicable provision of the rule at any time prior to this effective date. FOR FURTHER INFORMATION CONTACT: Stuart E. Feldstein, Assistant Director, Legislative and Regulatory Activities, (202) 874-5090 or Heidi M. Thomas, Special Counsel, Legislative and Regulatory Activities, (202) 874-5090, Office of the Comptroller of the Currency, 250 E Street, SW., Washington, DC 20219. In addition, you may also contact the following OCC staff for further information regarding specific amendments: licensing/corporate applications-related amendments: Colleen Coughlin, Senior Licensing Analyst, Licensing Activities Division, (202) 874-4465, Jan Kalmus, NBE-Senior Licensing Analyst, Licensing Activities Division, 202-874-4608, and Yoo Jin Na, Licensing Analyst, Licensing Activities Division, 202-874-4604; electronic banking-related amendments: Aida Plaza Carter, Director, Bank Information Technology, (202) 874-4593, Office of the Comptroller of the Currency, 250 E Street, SW., Washington, DC 20219. SUPPLEMENTARY INFORMATION: Introduction and Summary of Proposed Rule On July 3, 2007, the OCC published a notice of proposed rulemaking \1\ to amend a variety of our regulations to reduce or eliminate unnecessary regulatory burden, incorporate prior OCC interpretive opinions, harmonize our rules with those issued by other Federal agencies, make technical and conforming amendments to improve clarity and consistency, and conform our rules with the statutory changes made by the Financial Services Regulatory Relief Act of 2006 (FSRRA) \2\ and section 8 of the 2004 District of Columbia Omnibus Authorization Act (DC Bank Act).\3\ --------------------------------------------------------------------------- \1\ 72 FR 36550. \2\ Public Law 109-351, 120 Stat. 1966 (Oct. 13, 2006). \3\ Public Law 108-386, 118 Stat. 2228 (2004). The DC Bank Act took effect on October 30, 2004. --------------------------------------------------------------------------- This rulemaking results from our most recent review of our regulations to identify opportunities to streamline our rules or regulatory processes. The rulemaking also furthers the purposes of section 2222 of the Economic Growth and Regulatory Paperwork Reduction Act of 1996 (EGRPRA),\4\ which directed the OCC and the other member agencies of the Federal Financial Institutions Examination Council to identify regulations that are outdated, unnecessary, or unduly burdensome, and to eliminate them if appropriate.\5\ --------------------------------------------------------------------------- \4\ See EGRPRA, Public Law 104-208, Sec. 2222, 110 Stat. 3009- 394, 3009-314-315 (Sept. 30, 1996), codified at 12 U.S.C. 3311. \5\ Pursuant to EGRPRA's regulatory review requirement, the OCC, together with the Board of Governors of the Federal Reserve System (Federal Reserve Board), the Federal Deposit Insurance Corporation (FDIC), and the Office of Thrift Supervision (OTS), published six notices seeking comment on ways to reduce unnecessary regulatory burden and has conducted outreach meetings with bankers and consumer groups. On November 1, 2007, the Federal Financial Institutions Examination Council, which includes these agencies and the National Credit Union Administration, published a Joint Report to Congress on this regulatory review process, as required by EGRPRA. 72 FR 62036 (Nov. 1, 2007). For additional information about the agencies' EGRPRA review, see http://www.EGRPRA.gov. --------------------------------------------------------------------------- The OCC received 8 comment letters in response to this proposal. Two of the commenters, a large bank and a bank trade association, expressed support for all, or almost all, of the proposed changes. Another commenter, also a bank trade association, commended the OCC for proposing ``modest changes'' and expressed its hope that the OCC would seek to make more significant regulatory improvements in the future. One commenter, an individual, opposed any lessening of regulatory supervision of national banks. Six of the 8 comment letters focused on specific provisions of the proposal--those relating to part 1, investment securities (Sec. 1.1), operating subsidiaries (Sec. 5.34(e)), financial guarantees (Sec. 7.1017), sales of nonconvertible debt (Sec. 16.6), and adjustable rate mortgages (Sec. 34.22). These comments, and the OCC's response to them, are discussed where relevant in the section-by-section description of the final rule. Commenters suggested changes to only a few of our proposed amendments and the OCC is adopting the remaining amendments in final form as proposed, with minor clarifying or technical changes to a few provisions, as noted in the section-by-section description. The most significant of the amendments made by this final rule include the following: Amendments to part 1, which pertains to investment securities, to provide the OCC with additional flexibility in administering part 1 as investment products evolve, codify existing precedent, and clarify applicable standards. Amendments to part 5, which governs national banks' corporate activities, to: [cir] Codify prior OCC interpretive opinions recognizing that national bank operating subsidiaries may take the form of limited partnerships; [cir] Update the standards the OCC uses to determine when an entity qualifies as an operating subsidiary; [cir] Clarify when a national bank may file an after-the-fact notice to establish or acquire an operating subsidiary and when the bank must file an application; and [cir] Expand the list of operating subsidiary activities eligible for after-the-fact notice. Amendments to part 5 to eliminate multiple, repetitive applications when a national bank opens an intermittent branch to provide branch banking services for one or more limited periods of time each year at a specified site during a specified recurring event, such as during a college registration period or a State fair. Amendments to part 7, which pertains to national banks' activities and operations, to provide national banks with greater flexibility to facilitate customers' financial transactions by [[Page 22217]] issuing financial guarantees, provided the financial guarantees are reasonably ascertainable in amount and consistent with applicable law. Amendments to part 7, to codify OCC electronic banking precedent and adapt the OCC's rules to certain current developments. Amendments to part 16, the OCC's securities offering disclosure rules, to eliminate unnecessary filing requirements and clarify the exemptions to the OCC's registration requirements for certain transactions. Amendments to part 34, which pertains to real estate lending and appraisals, to provide national banks with additional flexibility in selecting indices from which adjustments to interest rates in adjustable rate mortgages (ARMs) are derived. The final rule also includes certain technical and conforming amendments to our rules, including: Changes to part 4 (the OCC's organizational rules) and part 5 to reflect the OCC's most current organizational structure. Changes to conform the OCC's regulations--at parts 5, 23 (leasing), 31 (extensions of credit to insiders and transactions with affiliates), and 32 (lending limits)--to Regulation W issued by the Federal Reserve Board,\6\ which governs transactions between Federal Reserve member banks and their affiliates and implements sections 23A and 23B of the Federal Reserve Act.\7\ --------------------------------------------------------------------------- \6\ 12 CFR part 223. \7\ 12 U.S.C. 371c and 371c-1. --------------------------------------------------------------------------- Amendments to part 9 (fiduciary activities of national banks) and part 12 (Securities Exchange Act disclosure rules) to reflect changes in certain regulations adopted by the Securities and Exchange Commission (SEC). Amendments to part 31 to remove an obsolete interpretation relating to loans to third parties secured by both affiliate-issued securities and nonaffiliate collateral. Amendments to parts 1, 2, 3, 5, 10, 11, 16, 19, 21, 22, 26, 27, 28, and 40 to implement the DC Bank Act, which removed the OCC as the appropriate Federal banking agency for financial institutions established under the Code of Law for the District of Columbia (DC banks) and substituted the FDIC or the Federal Reserve Board, as appropriate to the bank's charter type.\8\ --------------------------------------------------------------------------- \8\ Under the DC Bank Act, the FDIC is the appropriate Federal banking agency for an insured bank chartered under District of Columbia law that is not a member of the Federal Reserve System, and the Federal Reserve Board is the appropriate Federal banking agency for a bank chartered under District of Columbia law that is a member of the Federal Reserve System, whether or not insured. Thus, while DC banks are no longer covered by these OCC regulations, they are subject to comparable regulatory regimes administered by the FDIC or the Federal Reserve Board. --------------------------------------------------------------------------- Amendments to conform our regulations to the changes made by the FSRRA, including: [cir] Amendments to part 5 that simplify a national bank's authority to pay a dividend and that remove the geographic limits with respect to bank service companies. [cir] Amendments to the OCC's Change in Bank Control Act (CBCA) regulation, Sec. 5.50, that: (1) Require a CBCA notice to include information on the future prospects of the national bank to be acquired, (2) permit the OCC to consider the future prospects of the bank as a basis to issue a notice of disapproval, and (3) permit the OCC to impose conditions on its action not to disapprove a CBCA notice. [cir] Amendments to part 7 that permit national banks to choose whether to provide for cumulative voting in the election of their directors. [cir] Amendments to part 19 that reflect changes to the OCC's enforcement authority with respect to institution-affiliated parties. [cir] Amendments to part 24 (community development investments) that implement section 305 of the FSRRA. Description of Comments Received and Final Rule Part 1--Investment Securities Part 1 of our regulations (12 CFR part 1) prescribes the standards under which a national bank may purchase, sell, deal in, underwrite, and hold securities, consistent with the National Bank Act (12 U.S.C. 24 (Seventh)) and safe and sound banking practices. This final rule clarifies the applicable standards by codifying existing precedent and provides the OCC with additional flexibility to administer part 1 as investment products evolve. Authority, Purpose, and Scope (Sec. 1.1) National banking law explicitly authorizes the OCC to determine the types of investment securities a national bank may purchase.\9\ Part 1 currently provides a general definition of the term ``investment security,'' describes several categories or types of permissible investment securities, and prescribes such limitations as apply to a national bank's investment in each type. To complement these specific categories, we proposed a new provision to recognize that the OCC also may determine, on a case-by-case basis, that a national bank may acquire an investment security that is not specifically listed in the regulation, provided the OCC determines that bank's investment is consistent with the character of investment securities permitted under section 24 (Seventh) and with safe and sound banking practices. We received no substantive comments on this provision and, accordingly, it is adopted essentially as proposed, with a minor revision clarifying that investments found by the OCC to be permissible under Section 1.1(d) constitute eligible investments under 12 U.S.C. 24. --------------------------------------------------------------------------- \9\ 12 U.S.C. 24 (Seventh). --------------------------------------------------------------------------- In making a determination under amended Sec. 1.1, the OCC will consider all relevant factors, including an evaluation of the risk characteristics of the particular instrument compared to those of investments that the OCC has previously authorized, as well as the bank's ability effectively to manage such risks. In approving such an investment, the OCC may impose such limits or conditions as are appropriate under the circumstances. In addition, this final rule removes the now-obsolete reference to DC banks from the scope of part 1 (Sec. 1.1(c)), thus eliminating the applicability of part 1 to DC banks. One commenter requested that the OCC continuously update the electronic version of our annual publication of permissible activities for national banks, ``Significant Legal, Licensing, and Community Development Precedents,'' \10\ to add precedents issued pursuant to Sec. 1.1, as well as other activities, more frequently than once a year. We note, however, that, in addition to this annual, cumulative summary of significant precedents, we also publish the full text of these precedents in Interpretations and Actions, consistent with the OCC's policy of providing public notice of significant legal opinions and other important precedents. Interpretations and Actions is published monthly and is available both in printed form and on the OCC's internet site at http://www.occ.treas.gov. We believe this method of publicizing our precedent adequately serves the purpose of providing prompt notice of our opinions and decisions to national banks and the public and, accordingly, are making no changes at this time to our schedule of updating our ``Significant Legal, [[Page 22218]] Licensing, and Community Development Precedents'' publication. --------------------------------------------------------------------------- \10\ Our most recent Significant Legal, Licensing, and Community Development Precedents document, dated June 2007, is available on our Web site at http://www.occ.gov/sigpre.pdf. --------------------------------------------------------------------------- Pooled Investments (Sec. 1.3(h)) Current Sec. 1.3(h) allows a national bank to purchase and sell shares in an investment company provided that the portfolio of the investment company is limited to investment securities authorized in part 1. However, as explained in the preamble to the proposed rule, markets increasingly are offering securitized, pooled investment vehicles that hold bank-permissible assets not limited to investment securities. For example, a bank may seek to purchase investment grade shares in an investment company where the underlying assets are loans. In that case, the bank's risk exposure may be comparable to its exposure when it purchases shares of identically rated and marketable pooled vehicles composed of part 1 investment securities. The proposal amended Sec. 1.3(h) to codify OCC precedents that permit a national bank to purchase shares in investment vehicles where the underlying assets are not limited to investment securities permissible under part 1, so long as the underlying assets otherwise are bank permissible.\11\ Specifically, the proposal deleted the phrase ``under this part'' both times it appears in Sec. 1.3(h) and revised the heading to read ``Pooled investments'' to clarify that banks have the authority to invest in entities holding pooled assets, provided that the underlying assets are those that a national bank may purchase and sell for its own account. The proposal also provided that pooled investments made pursuant to Sec. 1.3(h) must meet certain credit quality and marketability standards generally applicable to investment securities. We received no comments on this amendment and are adopting it in final form with the addition of the following clarifying language. --------------------------------------------------------------------------- \11\ See, e.g., Interpretive Letter No. 911 (June 4, 2001) (national bank may purchase interests in loan fund either pursuant to lending authority or as securities on the basis of reliable estimates of the issuer). --------------------------------------------------------------------------- Specifically, the final version of Sec. 1.3(h) includes an explicit reminder that pooled investments under this section must comply with Sec. 1.5 and conform with applicable published OCC precedent.\12\ Under, 12 CFR 1.5, when conducting investment activities described in Sec. 1.3, a national bank must adhere to safe and sound banking practices and the specific requirements of part 1. Thus, the bank must consider, as appropriate, the interest rate, credit, liquidity, price, foreign exchange, transaction, compliance, strategic, and reputation risks presented by a proposed activity; the particular activities undertaken by the bank must be appropriate for that bank; and the bank must conclude that the obligor can satisfy its obligations. --------------------------------------------------------------------------- \12\ See, e.g. OCC Interpretive Letters No. 779 (April 3, 1997) and 911 (June 4, 2001). See also OCC BC 181 (Rev), ``Purchases of Loans In Whole or In Part--Participations'' (Aug. 2, 1984), and ''Interagency Policy Statement on Investment Securities,'' 63 FR 20191 (April 23, 1998). --------------------------------------------------------------------------- Securities Held Based on Estimates of Obligor's Performance (Sec. 1.3(i)) Part 1 defines an investment security in terms of both asset quality and marketability.\13\ Section 1.2(f) further defines a ``marketable'' security as one that is: (1) Registered under the Securities Act of 1933 (Securities Act),\14\ (2) a municipal revenue bond exempt from registration under the Securities Act, (3) offered or sold pursuant to Securities and Exchange Commission (SEC) Rule 144A \15\ and rated investment grade or the credit equivalent, or (4) ``can be sold with reasonable promptness at a price that corresponds reasonably to its fair value.'' \16\ --------------------------------------------------------------------------- \13\ 12 CFR 1.2(e). \14\ 15 U.S.C. 77a, et. seq. \15\ 17 CFR 230.144A. \16\ 12 CFR 1.2(f). --------------------------------------------------------------------------- Section 1.3(i), in contrast, articulates different asset quality and marketability standards. That section permits a national bank to treat a debt security as an investment security ``if the bank concludes, on the basis of estimates that the bank reasonably believes are reliable, that the obligor will be able to satisfy its obligations under that security,'' and the bank believes that the security may be sold with reasonable promptness at a price that corresponds reasonably to its fair value.\17\ The standard of marketability in the ``reliable estimates'' provision differs from, and is more limited than, the marketability definition in Sec. 1.2(f) in that it does not contain all of the elements of the definition in Sec. 1.2(f). We proposed to harmonize these marketability standards by amending Sec. 1.3 to reflect the same standard as in Sec. 1.2. We received no comments on this proposal, and therefore adopt it as proposed. --------------------------------------------------------------------------- \17\ See 12 CFR 1.3(i)(1). --------------------------------------------------------------------------- Part 2--Sales of Credit Life Insurance Part 2 sets forth the principles and standards that apply to a national bank's provision of credit life insurance and the limitations that apply to the receipt of income from those sales by certain individuals and entities associated with the bank. This final rule removes DC banks from the definition of ``bank'' set forth in Sec. 2.2(a) to conform to the DC Bank Act. Part 3--Minimum Capital Ratios; Issuance of Directives Part 3 establishes the minimum capital ratios that apply to national banks, sets out in appendices the rules governing the computation of those ratios, and provides procedures for the issuance of individual minimum capital requirements and capital directives. The current rule provides that local currency claims on, or unconditionally guaranteed by, central governments that are not members of the Organization for Economic Development (OECD) receive a zero percent risk weight to the extent the bank has local currency liabilities in that country. To align the rule more closely with foreign exchange risk, we proposed to amend Appendix A to part 3 by removing the current restriction on the location of the offsetting liability, thus providing a zero percent risk weight to the extent the bank has liabilities in that currency. We received no comments on this amendment and are adopting the changes as proposed, with a conforming technical amendment. This final rule also removes DC banks from the definition of ``bank'' in Sec. 3.2(b). Pursuant to the DC Bank Act, DC banks now will be subject to the regulatory capital requirements prescribed either by the FDIC or the Federal Reserve Board, depending on whether the DC bank is a member of the Federal Reserve System. Part 4--Organization and Functions, Availability and Release of Information, Contracting Outreach Program, Post-Employment Restrictions for Senior Examiners The proposed rule updated Sec. 4.4 to reflect that the Large Bank Supervision Department supervises the largest national banks under the OCC's current organizational structure. It also amended Sec. 4.5 by updating OCC district office addresses and the geographical coverage of those offices resulting from the OCC's district office realignments. We received no comments on these changes and are adopting the changes as proposed, with additional updates to the geographical coverage of OCC district offices. Part 5--Rules, Policies, and Procedures for Corporate Activities Part 5 establishes rules, policies, and procedures for national banks' corporate activities and corporate structure. It also contains procedural requirements for [[Page 22219]] the filing of corporate applications, including the circumstances under which applications or notices are required, and the required content of the filing. A description of our amendments to part 5 is set forth below, with substantive amendments presented first, followed by technical or conforming amendments. Fiduciary Powers (Sec. 5.26) The OCC's current rule requires a national bank filing an application for approval to offer fiduciary services to provide an opinion of counsel that the proposed fiduciary activities do not violate applicable Federal or State law. However, an opinion of counsel is not required for expedited applications filed by ``eligible banks.'' \18\ Because our experience has been that an opinion of counsel often is not necessary to enable the OCC to conclude that the proposed fiduciary activities are permissible, we proposed to eliminate this requirement for all applications to exercise fiduciary activities, unless the OCC specifically requests an opinion. We received no comments on this amendment and adopt it as proposed. We note that the removal of this requirement does not relieve the bank of its responsibility to ensure that its fiduciary activities comport with applicable Federal and State law. --------------------------------------------------------------------------- \18\ An ``eligible bank'' is a national bank that is well capitalized, has a composite rating of 1 or 2 under the Uniform Financial Institutions Rating System, has a CRA rating of ``Outstanding'' or ``Satisfactory,'' and is not subject to a cease and desist order, consent order, formal written agreement, or prompt corrective action directive. 12 CFR 5.3(g). --------------------------------------------------------------------------- Establishment, Acquisition, and Relocation of a Branch--Intermittent Branches (Sec. 5.30) Section 5.30 describes the procedures and standards governing OCC review and approval of a national bank's application to establish a new branch or to relocate a branch. As the preamble to our proposed rule noted, it is unclear under the current regulation whether a bank must refile an application under Sec. 5.30 each year to operate branches on a recurring basis at the same location or event (such as an annual State fair or at a specific college campus during registration periods) even where all of the facts relevant to the branch application remain the same as those previously approved. As a result, some banks have filed for approval of such branches each time the bank seeks to operate the branch. To reduce the regulatory burden associated with these multiple filings, we proposed to eliminate subsequent applications for recurring, temporary branches that serve the same site at regular intervals. We received no comments on this amendment, and we adopt it as proposed. Specifically, the final rule adds to Sec. 5.30 the new term, ``intermittent branch,'' which is defined to mean a branch that provides branch banking services, where legally permissible under the national bank branching statute,\19\ for one or more limited periods of time each year at a specified site during a specified recurring event. Under this final rule, if the OCC grants a national bank approval to operate an intermittent branch, no further application or notice to the OCC is required. This amendment does not affect the legal requirements prescribing the conditions under which a national bank may establish or retain branches pursuant to the national bank branching statute at 12 U.S.C. 36. --------------------------------------------------------------------------- \19\ 12 U.S.C. 36. --------------------------------------------------------------------------- Operating Subsidiaries (Sec. 5.34) Section 5.34 of the OCC's rules authorizes national banks to establish or acquire operating subsidiaries as a means through which to exercise their powers to conduct the business of banking. The final rule makes several changes to Sec. 5.34 to update the standards for determining whether a subsidiary is controlled by the parent bank in light of changes in accounting standards, to clarify the type of entity that may qualify as an operating subsidiary, and to modify the standards under which transactions to establish or acquire operating subsidiaries qualify for after-the-fact notice procedures rather than the filing of an application. None of the proposed revisions alters the fundamental characteristics of an operating subsidiary, that is, that an operating subsidiary may conduct only bank-permissible activities and conducts those activities pursuant to the same ``authorization, terms and conditions'' as apply to the parent bank.\20\ --------------------------------------------------------------------------- \20\ 12 CFR 5.34(e). --------------------------------------------------------------------------- Qualifying standards. Under current Sec. 5.34(e)(2), an entity qualifies as an operating subsidiary only if the parent bank ``controls'' the subsidiary. The rule provides for two alternative means of establishing control. First, a national bank controls an operating subsidiary if the bank owns more than 50 percent of the voting interest (or similar type of controlling interest) in the subsidiary. Second, control may be established if the parent bank ``otherwise controls'' the operating subsidiary and no other party controls more than 50 percent of the voting interest (or similar type of controlling interest) in the subsidiary. The proposal would have revised this standard to provide that a national bank may invest in an operating subsidiary if it satisfies the following requirements: (1) The bank has the ability to control the management and operations of the subsidiary by owning more than 50 percent of the voting interest in the subsidiary, or otherwise; and (2) the operating subsidiary is consolidated with the bank under Generally Accepted Accounting Principles (GAAP). The OCC received two comments that addressed this issue. One commenter asserted that the proposal was too broad and that there are many structures that have legitimate business purposes where the bank controls a majority of the voting and operational rights but other passive or non-controlling investors have economic rights. Another commenter noted that the requirement to consolidate under GAAP would narrow the circumstances under which national banks may establish operating subsidiaries. The OCC continues to believe that these changes are appropriate to clarify that the requirement that a national bank control its operating subsidiary encompasses the bank's control of the business activities of the subsidiary to appropriately reflect the status of the operating subsidiary as a vehicle used by the bank to exercise its powers to engage in the business of banking, the operations of which are consolidated with those of the bank as an accounting matter. Therefore, the OCC has adopted the rule essentially as proposed, with a few revisions to resolve ambiguity in the proposed text. As noted above, the first element of the proposed rule required the bank to have the ability to control the management and operations of the subsidiary by owning more than 50 percent of the voting interest in the subsidiary, or otherwise. The proposal could have been read to mean that a 50 percent voting interest in the subsidiary, without more, would have satisfied that criterion. The final rule revises the proposal to make clear that the standard has three elements: (i) The parent bank has the ability to control the management and operations of the subsidiary; (ii) the bank owns and controls more than 50 percent of the voting (or similar type of controlling) interest of the operating subsidiary, or the parent bank otherwise controls the operating subsidiary and no other party controls more than 50 percent of the voting (or similar type of controlling) interest of the operating subsidiary; and (iii) the operating subsidiary is [[Page 22220]] consolidated with the bank under GAAP.\21\ These changes help to ensure that in all circumstances a parent bank must have true operating control over an entity for it to be an operating subsidiary. --------------------------------------------------------------------------- \21\ The OCC will address on a case-by-case basis the appropriate treatment of a national bank's investment in a subsidiary in which the bank satisfies (i) and (ii), but not (iii) because the subsidiary is not consolidated with the bank under GAAP. --------------------------------------------------------------------------- Two commenters also suggested grandfathering operating subsidiaries that were established prior to these changes. These commenters noted that to do otherwise could disrupt existing arrangements and impose administrative burdens on banks to restructure their subsidiaries to comply with the new rule. The final rule adds a grandfathering provision responsive to these concerns. The provision makes clear that, unless otherwise notified by the OCC with respect to a particular operating subsidiary, an operating subsidiary a national bank lawfully acquired or established and operated as an operating subsidiary before the publication date of this rule will not be treated as in violation of Sec. 5.34 as revised, provided that the bank and the operating subsidiary are, and continue to be, in compliance with the standards and requirements applicable when the bank established or acquired the operating subsidiary. This grandfathering applies only to operating subsidiaries in existence and conducting authorized activities on April 24, 2008. Form of operating subsidiary. Current Sec. 5.34(e)(2) permits national banks to conduct activities through operating subsidiaries organized in a variety of forms, including as a corporation or limited liability company. In recent years, national banks have sought to hold limited partnerships as operating subsidiaries as States have amended their limited liability company and limited partnership laws to provide more structural flexibility. The OCC has recognized this and previously permitted a limited partnership to qualify as an operating subsidiary where the parent bank exercised ``all economic and management control over the activities'' of the partnership.\22\ Therefore, the proposal clarified that a bank may invest in an operating subsidiary organized as a limited partnership, provided it satisfies the other requirements of Sec. 5.34. --------------------------------------------------------------------------- \22\ See Corporate Decision No. 2004-16 (Sept. 10, 2004). --------------------------------------------------------------------------- We did not receive any comments on that provision and are adopting the change as proposed. After-the-fact notice procedures. Current Sec. 5.34(e)(5) provides that a well capitalized and well managed national bank may establish or acquire an operating subsidiary, or conduct a new activity in an existing operating subsidiary, by providing the OCC written notice within 10 days after doing so if the activity to be conducted in the subsidiary is specified in the rule as eligible for notice processing. The proposal would have permitted a bank to use the after-the-fact notice procedures if the financial statements of the bank and subsidiary were consolidated under GAAP, and the bank had the ability to control the management and operations of the subsidiary by holding: (i) More than 50% of the voting interests in the subsidiary; or (ii) voting interests sufficient to select the number of directors needed to control the subsidiary's board and to select and terminate senior management. The final rule slightly revises the criteria for after-the-fact notices to permit the bank to use that procedure when the bank and proposed subsidiary meet (1) all the requirements for a notice that do not pertain to control, (2) the financial statements of the bank and subsidiary are consolidated under GAAP, and (3) the bank has the ability to control the management and operations of the subsidiary by holding: (i) More than 50% of the voting interests in the subsidiary; and (ii) voting interests sufficient to select the number of directors needed to control the subsidiary's board and to select and terminate senior management. These control arrangements are the most suitable for the after-the-fact notice procedures because the OCC generally is familiar with these structural arrangements and they do not ordinarily present unusual control or safety and soundness concerns. Other arrangements will be reviewed under the full application process. The proposal also contained an additional standard for a national bank seeking to hold a limited partnership as an operating subsidiary through an after-the-fact notice. Under that additional standard, the proposed limited partnership operating subsidiary would qualify for the after-the-fact notice procedure only in the limited circumstance where the bank controls, directly or indirectly, all of the ownership interests in the limited partnership (and the other requirements of Sec. 5.34 are satisfied). We explained that this approach would allow the OCC to review more complex arrangements through the application process. We received two comments that addressed the after-the-fact notice procedure for limited partnerships. These commenters expressed concern that limiting after-the-fact notice in this manner would inappropriately require an application process in situations that do not present heightened complexity or risk. We agree with the commenters that the after-the-fact notice process could be modestly expanded without presenting new operational risks or policy considerations. Accordingly, we have revised the standard for investments in limited partnership operating subsidiaries to qualify for after-the-fact notice. Under the final rule, the after-the-fact notice eligibility standards for limited partnerships are similar to those for corporate entities, except that, in the case of a limited partnership, the bank or its operating subsidiary must be the sole general partner of the limited partnership and, under the partnership agreement, the limited partners must have no authority to bind the partnership by virtue solely of their status as limited partners. This will allow banks to use the less burdensome after-the-fact notice procedures while still ensuring that transactions that raise issues of potential liability for general partners are subject to the higher scrutiny available under the application process. In addition, the final rule adds the following to the list of activities eligible for after-the-fact notice: Providing data processing, and data transmission services, facilities (including equipment, technology, and personnel), data bases, advice and access to such services, facilities, data bases and advice, for the parent bank and for others, pursuant to 12 CFR 7.5006, to the extent permitted by published OCC precedent. Currently, only data processing activity provided to the bank itself or its affiliates qualifies for after-the-fact notice treatment under Sec. 5.34(e)(5)(v)(H). Providing bill presentment, billing, collection, and claims-processing services.\23\ --------------------------------------------------------------------------- \23\ See OCC Interpretive Letter No. 712 (Feb. 29, 1996). --------------------------------------------------------------------------- Providing safekeeping for personal information or valuable confidential trade or business information, such as encryption keys, to the extent permitted by published OCC precedent.\24\ --------------------------------------------------------------------------- \24\ See 12 CFR 7.5002(a)(4). --------------------------------------------------------------------------- Payroll processing.\25\ --------------------------------------------------------------------------- \25\ See Conditional Approval No. 384 (April 25, 2000) and Corporate Decision No. 2002-2 (Jan. 9, 2002). --------------------------------------------------------------------------- [[Page 22221]] Branch management services.\26\ --------------------------------------------------------------------------- \26\ See Conditional Approval No. 612 (Dec. 21, 2003). --------------------------------------------------------------------------- Merchant processing except when the activity involves the use of third parties to solicit or underwrite merchants.\27\ --------------------------------------------------------------------------- \27\ See Conditional Approvals Nos. 582 (March 12, 2003) and 583 (March 12, 2003). --------------------------------------------------------------------------- Administrative tasks involved in benefits administration.\28\ --------------------------------------------------------------------------- \28\ See Corporate Decision No. 98-13 (Feb. 9, 1998). --------------------------------------------------------------------------- The OCC has previously found these activities to be permissible for a national bank and generally to pose low safety and soundness risks. We did not receive any comments on these additional activities eligible for after-the-fact notice and are adopting the above changes as proposed. We have determined, however, not to add to this list those activities approved for a non-controlling investment by a national bank or its operating subsidiary pursuant to 12 CFR 5.36(e)(2) because the circumstances of such non-controlling investment activities could be such that they should be evaluated on a case-by-case basis when proposed to be conducted by an operating subsidiary controlled by a national bank. Application procedures. Current Sec. 5.34(e)(5)(i) sets forth the rules for when a national bank must file an operating subsidiary application. The final rule modifies these provisions to make them consistent with the changes to the qualifying subsidiary and after-the- fact notice provisions of Sec. 5.34 discussed previously. In particular, the final rule requires the bank to describe in full detail structural arrangements where control is based on a factor other than bank ownership of more than 50 percent of the voting interest of the subsidiary and the ability to control the management and operations of the subsidiary by holding voting interests sufficient to select the number of directors needed to control the subsidiary's board and to select and terminate senior management. The final rule also requires, in the case of an application to establish a limited partnership as an operating subsidiary, that a bank provide a statement explaining why it is not eligible for the after-the-fact notice procedures. Finally, the final rule makes conforming changes to Sec. 5.34(e)(5)(vi), which sets forth the circumstances under which an application or notice is waived, to reflect the changes discussed above. Bank Service Companies (Sec. 5.35) Section 602 of the FSRRA amended the Bank Service Company Act \29\ to repeal the geographic limits that prohibited a bank service company from performing services for persons other than depository institutions in any State except the State where its shareholders and members are located. Section 602 retains the requirements that the services and the location at which these services are provided must be otherwise permissible for all depository institution shareholders or members and that Federal Reserve Board approval be obtained before a bank service company engages in activities that are only authorized under the Bank Holding Company Act. Section 602 also permits savings associations to invest in bank service companies under the same rules that apply to banks. --------------------------------------------------------------------------- \29\ 12 U.S.C. 1861 et seq. --------------------------------------------------------------------------- The proposal amended 12 CFR 5.35 to reflect this change in the statutory geographic restrictions on the operations of bank service companies. It also changed ``insured bank'' to ``insured institution'' throughout the section, where relevant, to reflect the fact that savings associations now may invest in bank service companies. We received no comments on these amendments and adopt them as proposed. Other Equity Investments (Sec. 5.36) Section 5.36(e) provides an expedited process for OCC review of a non-controlling investment by a national bank. Under this section, a national bank may make, directly or through an operating subsidiary, certain non-controlling investments in entities by filing an after-the- fact written notice in which the bank certifies, among other things, that it is well capitalized and well managed and will account for its investment under the equity or cost method of accounting.\30\ This section currently does not, however, provide a procedure for a national bank to follow when it cannot provide the certifications needed for after-the-fact notice. Our proposal revised the accounting requirements needed for after-the-fact notice, added an application procedure where a bank or the proposed non-controlling investment do not qualify for the after-the-fact procedure, and made two changes to expedite non- controlling investments involving assets acquired through foreclosure or otherwise in good faith to compromise a doubtful claim or in the ordinary course of collecting a debt previously contracted (DPC assets). We received no comments on any of these amendments to Sec. 5.36 and adopt them as proposed, with some minor technical changes in terminology for clarification purposes and a revision to a clarifying amendment to Sec. 5.36(b). --------------------------------------------------------------------------- \30\ Under the equity method, the carrying value of the bank's investment is originally recorded at cost but subsequently adjusted periodically to reflect the bank's proportionate share of the entity's earnings and losses and decreased by the amount of any cash dividends or similar distributions received from the entity. --------------------------------------------------------------------------- Representations concerning accounting treatment. Current Sec. 5.36(e)(5) requires a national bank to certify in its notice that it will account for its non-controlling investment under the equity or cost method of accounting. The OCC had adopted this requirement because an investment accounted for in this manner was not previously considered under then current GAAP standards to be controlled by the parent bank and, accordingly, the parent bank did not consolidate the investment on its books. Thus, the unconsolidated entity could be considered a non-controlling investment and not an operating subsidiary. However, as we have noted, under FIN 46R this assumption is no longer valid in all cases and an investment previously accounted for using the equity or cost method today may in some instances result in consolidation of the investment with the bank, depending on which party holds the majority of risks or rewards. As in the proposal, the final rule addresses this issue by removing the requirement that a bank certify in its notice that it will account for its non-controlling investment under the equity or cost method of accounting. The final rule also accordingly removes the requirement in current Sec. 5.36(e)(7) that a bank certify that its loss exposure related to the non-controlling investment is limited as an accounting matter. The final rule retains the requirement in paragraph (e)(7) that the bank certify that as a legal matter its loss exposure is limited and that it does not have open-ended liability for the obligations of the enterprise. Application procedure. Current Sec. 5.36(e) permits use of the after-the-fact notice procedure only when the bank can make the representations and certifications required by that section.\31\ [[Page 22222]] The rule provides no procedure for a national bank to follow when it cannot provide all of the required representations and certifications. The final rule revises Sec. 5.36 to establish an application procedure that a national bank may use to seek approval for non-controlling investments that do not qualify for after-the-fact notice either because the proposed activity does not qualify under the standards set forth in the rule (as described in Sec. 5.36(e)(2)), or because the bank is not well capitalized or well managed (as described in Sec. 5.36(e)(3)). The final rule does not require a national bank to file either an application or notice under this section if the investment is authorized by a separate provision of OCC regulations, such as 12 CFR part 1 (investment securities) or part 24 (community development). In these cases, a national bank would follow the procedures required by these provisions. --------------------------------------------------------------------------- \31\ Section 5.36(e) currently requires that a written after- the-fact notice contain the following eight elements, set out in numbered paragraphs, as follows: (1) A description of the proposed investment; (2) identification of the regulatory provision or prior precedent that has authorized an activity that is substantively the same as the proposed activity; (3) certification that the bank is well capitalized and well managed; (4) a statement of how the bank can control the activities of the enterprise in which it is investing or ensure its ability to withdraw its investment; (5) the accounting certification described in the preamble text (which this final rule removes); (6) a description of how the investment relates to the bank's business; (7) certification that the bank's loss exposure is limited as a legal and accounting matter (the final rule removes this accounting certification); and (8) certification that the enterprise in which the bank is investing agrees to be subject to OCC examination and supervision, subject to limits provided elsewhere in Federal law. --------------------------------------------------------------------------- The final rule specifically requires the application to provide the other representations and certifications required in paragraph (e) for after-the-fact notices as well as the representation required by (e)(2) (pertaining to the OCC's prior determination that the investment is permissible) or the certification required by (e)(3) (pertaining to the bank's capital level and rating for management), as appropriate. A bank may not make a non-controlling investment in an entity if the bank cannot provide the representations or certifications that the rule requires, other than those in paragraphs (e)(2) or (e)(3). In addition, if the bank is unable to make the representation described in paragraph (e)(2), the bank's application must explain why the activity is a permissible activity for a national bank and why the bank should be permitted to hold a non-controlling investment in an enterprise engaged in that activity. This application requirement would fill the gap in the current rule for investments where a national bank cannot meet all of the after-the- fact notice requirements. The use of an application procedure provides certainty to the applicant and also permits the OCC to ensure that all non-controlling investments comport with applicable legal standards and appropriate supervisory requirements. The proposal made two conforming changes to the scope of Sec. 5.36(b) to conform to these changes. We have revised one of these changes in the final rule. This change would have removed the last sentence of Sec. 5.36(b), which currently provides that other investments authorized under Sec. 5.36 may be reviewed on a case-by- case basis. After further review, we have decided to maintain this sentence with minor technical revisions, as the scope section covers all equity investments not governed by other OCC regulations, not solely non-controlling investments. DPC assets. As in the proposal, the final rule makes two changes to expedite non-controlling investments involving assets acquired through foreclosure or otherwise in good faith to compromise a doubtful claim or in the ordinary course of collecting a debt previously contracted (DPC assets). Under the current rule, a national bank making a non- controlling investment in an entity that holds or manages DPC assets for the bank must meet all of the requirements in Sec. 5.36, including the required certifications. However, under Sec. 5.34, a national bank investing in an operating subsidiary engaged in the same activity need only file a written notice within 10 days after acquiring or establishing the subsidiary or commencing the activity. These procedural differences can be disruptive in workouts involving a jointly-held entity to resolve loans with multiple lenders where each lender will hold minority interests in the joint venture. The final rule harmonizes these provisions by providing that a national bank making a non-controlling investment in an entity that holds or manages DPC assets for the bank need only file a simplified written notice with the appropriate district office \32\ no later than 10 days after making the non-controlling investment. The notice must contain a complete description of the bank's investment in the enterprise and the activities conducted, a description of how the bank plans to divest the non-controlling investment or the DPC assets within the statutory time frames, and a representation and undertaking that the bank will conduct the activities in accordance with OCC policies contained in guidance issued by the OCC regarding the activities. --------------------------------------------------------------------------- \32\ Part 5 defines ``appropriate district office'' as the Licensing Department for all national bank subsidiaries of those holding companies assigned to the Washington, DC, licensing unit; the appropriate OCC district office for all national bank subsidiaries of certain holding companies assigned to a district office licensing unit; the OCC's district office where the national bank's supervisory office is located for all other banks; or the licensing unit in the Northeastern District Office for Federal branches and agencies of foreign banks. 12 CFR 5.3. --------------------------------------------------------------------------- The final rule also amends Sec. 5.36 to clarify that an application or notice is not required when a national bank acquires DPC assets. This change conforms this section with Sec. 5.34, which provides that a subsidiary in which the bank has acquired, in good faith, shares through foreclosure on collateral, by way of compromise of a doubtful claim, or to avoid a loss in connection with a debt previously contracted is not an operating subsidiary for purposes of Sec. 5.34 and, therefore, no application or notice is required. Changes in Permanent Capital (Sec. 5.46) The final rule streamlines the application process for a national bank seeking OCC approval of a change in its permanent capital. The OCC did not receive any comments on this change and we are adopting it as proposed. The OCC's rules at Sec. 5.46(i)(1) and (2) currently require a national bank to submit an application and obtain prior approval for a change in permanent capital. Under the expedited review procedures in Sec. 5.46(i)(2), the application of an eligible bank is deemed approved within 30 days of receipt, unless the OCC notifies the applicant otherwise. The final rule amends Sec. 5.46(i)(2) to change the expedited review period from 30 days to 15 days. The final rule also simplifies the certification process for a national bank that increases its permanent capital. Section 5.46 currently requires a national bank that increases permanent capital to submit a letter of notification to the OCC in order to receive a certification of the increase as required by 12 U.S.C. 57.\33\ Under the final rule, a national bank seeking to increase permanent capital continues to be required to send a notice to the OCC, but the bank will no longer receive a paper certification from the OCC. The OCC will deem the transaction approved and certified by operation of law seven days after our receipt of the bank's notice. The OCC intends to update the notification and certification procedures for increases in permanent capital in the Capital and Dividends Booklet of the Comptroller's Licensing [[Page 22223]] Manual and on E-Corp (the OCC's electronic filing system) to reflect this final rule. --------------------------------------------------------------------------- \33\ Section 57 provides that increases to permanent capital are not effective until the bank provides notice to the OCC and the OCC certifies the amount of the increase and approves it. The precise terms of the bank's notification and the OCC's approval vary slightly depending on whether the increase to permanent capital occurs through the declaration of a stock dividend or otherwise. See 12 U.S.C. 57. --------------------------------------------------------------------------- Change in Bank Control (Sec. 5.50) Section 5.50 sets forth the OCC's procedures for change in bank control transactions. Under this rule, any person seeking to acquire control of a national bank, i.e., acquire the power, directly or indirectly, to direct the management or policies or to vote 25 percent or more of any class of voting securities of a national bank, must provide 60 days prior written notice of the proposed acquisition to the OCC, with certain exceptions. Currently, the OCC has the burden of proof in establishing that a group of persons are acting in concert and will control, as a group, the bank after the acquisition of shares. When a member of a family acquires stock in a national bank in which other family members own or control substantial interests, the OCC frequently will review potential control issues by requesting additional documentation from, and making additional inquiries of, the family members. These additional steps can delay the notice process and increase the burden associated with the transaction for these individuals. We proposed to amend Sec. 5.50(f)(2) to establish a rebuttable presumption that immediate family members are acting in concert when acquiring shares of a bank. The proposal also amended Sec. 5.50(d) to define immediate family as a person's spouse, father, mother, stepfather, stepmother, brother, sister, stepbrother, stepsister, children, stepchildren, grandparent, grandchildren, father-in-law, mother-in-law, brother-in-law, sister-in-law, son-in-law, daughter-in- law, and the spouse of any of the foregoing. We did not receive any comments on these amendments and adopt them unchanged in the final rule. As noted in the preamble to the proposed rule, establishing a clear, but rebuttable, presumption provides notice to prospective investors of their filing obligations and reduces delays in processing the notice associated with repeat requests for information. In addition, this amendment conforms our regulations to the procedures regarding control by family members in these transactions set forth in OTS and Federal Reserve Board regulations. We intend to amend the Comptroller's Licensing Manual to address the process by which an applicant can rebut this presumption.\34\ --------------------------------------------------------------------------- \34\ See 12 CFR 574.4 (OTS) and 12 CFR 225.41(b)(3) and 225.41(d) (Federal Reserve Board). --------------------------------------------------------------------------- The proposed rule also made two amendments to Sec. 5.50 to implement provisions of the FSRRA. We received no comments on these amendments and adopt them as proposed. First, section 705 of the FSRRA amended the CBCA to allow the OCC and the other Federal banking agencies to extend the time period for considering a CBCA notice so that the agency may consider the acquiring party's business plans and the future prospects of the institution and use that information in determining whether to disapprove the notice. The final rule amends Sec. 5.50(f) of our regulations to implement this amendment by providing that the CBCA notice must include information on the future prospects of the institution and that the OCC may consider the future prospects of the institution as a basis to issue a notice of disapproval. Second, sections 702 and 716 of the FSRRA amended the Federal Deposit Insurance Act (FDI Act) to provide that the OCC and the other Federal banking agencies may enforce under 12 U.S.C. 1818 the terms of: (1) Conditions imposed in writing by the agency on a depository institution, including a national bank, or an institution-affiliated party in connection with an application, notice, or other request, and (2) written agreements between the agency and the institution or the institution-affiliated party. The amendment also clarifies that a condition imposed by a banking agency in connection with the nondisapproval of a notice, e.g., a notice under the CBCA, can be enforced under the FDI Act. Accordingly, the final rule amends Sec. 5.50(f) to provide that the OCC may impose conditions on its nondisapproval of a CBCA notice to assure satisfaction of the relevant statutory criteria for nondisapproval of the notice. Technical and Conforming Amendments to Part 5 The proposed rule made the following conforming and technical changes to part 5. None of the commenters addressed these changes and we adopt them in the final rule as proposed. Definition of national bank (Sec. 5.3(j)). This amendment removes the reference to DC banks from the definition of ``national bank'' found in Sec. 5.3(j). As a result, DC banks are no longer subject to the OCC's rules, policies, and procedures for corporate activities and transactions, including the OCC's filing requirements. Filing required (Sec. 5.4). The final rule replaces the terms ``Licensing Manager'' with ``Director for District Licensing'' and replaces ``Bank Organization and Structure'' with the term ``Licensing Department.'' This reflects the OCC's current organizational structure. Decisions (Sec. 5.13). Section 5.13 sets forth the procedures for OCC decisions on corporate filings. Paragraph (c) of Sec. 5.13 requires a filing with the OCC to contain all required information. The OCC may require additional information if necessary to evaluate the application, and may deem a filing abandoned if the information required or requested is not furnished within the time period specified by the OCC. The OCC also may return an application that it deems materially deficient when filed. The final rule amends Sec. 5.13(c) to define ``materially deficient'' to mean filings that lack sufficient information for the OCC to make a determination under the applicable statutory or regulatory criteria. Examples of material deficiencies that could cause the OCC to return a filing include failure to provide answers to all questions or failure to provide required financial information. Paragraph (f) of this section provides that an applicant may appeal an OCC decision to the Deputy Comptroller for Licensing or to the OCC Ombudsman. In some cases, however, the Deputy Comptroller for Licensing is the deciding official for OCC licensing decisions or has personal and substantial involvement in the decision-making process. Accordingly, we are amending this paragraph to provide that an appeal may be referred instead to the Chief Counsel when the Deputy Comptroller for Licensing was the deciding official of the matter appealed or was involved personally and substantially in the matter. In addition, the final rule replaces the title ``Deputy Comptroller for Bank Organization and Structure'' with the title ``Deputy Comptroller for Licensing'' to reflect the OCC's current organizational structure. Organizing a bank (Sec. 5.20). Section 5.20 sets forth the procedures and requirements governing OCC review and approval of an application to establish a national bank. Paragraph (i)(5) of th