Definition of “Predominantly Engaged in Financial Activities”, 21494-21505 [2012-8515]

Agencies

• FEDERAL RESERVE SYSTEM

[Federal Register Volume 77, Number 69 (Tuesday, April 10, 2012)]
[Proposed Rules]
[Pages 21494-21505]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2012-8515]


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FEDERAL RESERVE SYSTEM

12 CFR Part 225

[Regulation Y; Docket No. R-1405]
RIN 7100-AD64


Definition of ``Predominantly Engaged in Financial Activities''

AGENCY: Board of Governors of the Federal Reserve System (Board).

ACTION: Supplemental notice of proposed rulemaking and request for 
comment.

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SUMMARY: On February 11, 2011, the Board published a notice of proposed 
rulemaking (``February 2011 NPR'') that would amend Regulation Y to 
establish the criteria for determining whether a company is 
``predominantly engaged in financial activities'' and define the terms 
``significant nonbank financial company'' and ``significant bank 
holding company'' for purposes of Title I of the Dodd-Frank Wall Street 
Reform and Consumer Protection Act of 2010 (the ``Dodd-Frank Act'' or 
``Act''). Based on comments received, the Board believes that 
clarification is needed regarding the scope of activities that would be 
considered to be financial activities under that proposal. Accordingly, 
this notice supplements the February 2011 NPR amending specific 
portions of the regulation for clarity.

DATES: Comments should be received on or before May 25, 2012.

FOR FURTHER INFORMATION CONTACT: Laurie S. Schaffer, Associate General 
Counsel, (202) 452-2272, Paige E. Pidano, Senior Attorney, (202) 452-
2803 or Christine E. Graham, Senior Attorney, (202) 452-3005, Legal 
Division; Mark Van Der Weide, Senior Associate Director, (202) 452-
2263, Division of Banking Supervision and Regulation, Board of 
Governors of the Federal Reserve System, 20th Street and Constitution 
Avenue NW, Washington, DC 20551. Users of Telecommunication Device for 
Deaf (TDD) only, call (202) 263-4869.

SUPPLEMENTARY INFORMATION: 

I. Background

    This Notice of Proposed Rulemaking (``NPR'') amends the February 
2011 NPR and invites public comment on the definition of activities 
that are financial solely for purposes of determining whether a company 
qualifies as a nonbank financial company under Title I of the Dodd-
Frank Act.\1\
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    \1\ The NPR refers to these activities as ``activities that are 
financial in nature under Title I.''
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    The Dodd-Frank Act established the Council, which, among other 
authorities and duties, may require that a ``nonbank financial 
company'' become subject to supervision by the Board and prudential 
standards if the Council determines that the material financial 
distress of the company, or the nature, scope, size, scale, 
concentration, interconnectedness, or mix of the company's activities, 
could pose a threat to the financial stability of the United States.\2\ 
Nonbank financial companies that are designated by the Council under 
section 113 of the Dodd-Frank Act are referred to as ``nonbank 
financial companies supervised by the Board.'' \3\
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    \2\ See section 113 of the Dodd-Frank Act; 12 U.S.C. 5323.
    \3\ See id.
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    Title I of the Dodd-Frank Act defines a ``nonbank financial 
company'' to include both a U.S. nonbank financial company and a 
foreign nonbank financial company. The statute, in turn, defines a 
``U.S. nonbank financial company'' as a company (other than a bank 
holding company and certain other specified types of entities) that is 
(i) incorporated or organized under the laws of the United States or 
any State; and (ii) predominantly engaged in financial activities.\4\ A 
``foreign nonbank

[[Page 21495]]

financial company'' is defined as a company (other than a bank holding 
company or foreign bank or company that is, or is treated as, a bank 
holding company) that is (i) incorporated or organized outside the 
United States; and (ii) predominantly engaged in financial 
activities.\5\
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    \4\ See section 102(a)(4)(B) of the Dodd-Frank Act (emphasis 
added); 12 U.S.C. 5311(a)(4)(B) (emphasis added). Besides bank 
holding companies, the statute specifically provides that the term 
``U.S. nonbank financial company'' does not include (i) a Farm 
Credit System institution chartered and subject to the Farm Credit 
Act of 1971 (12 U.S.C. 2001 et seq.), (ii) a national securities 
exchange (or parent thereof), clearing agency (or parent thereof, 
unless the parent is a bank holding company), security-based swap 
execution facility, or security-based swap data repository that in 
each case is registered with the SEC, or (iii) a board of trade 
designated as a contract market (or parent thereof), or a 
derivatives clearing organization (or parent thereof, unless the 
parent is a bank holding company), swap execution facility or a swap 
data repository that in each case is registered with the CFTC.
    \5\ See section 102(a)(4)(A) of the Dodd-Frank Act (emphasis 
added); 12 U.S.C. 5311(a)(4)(A) (emphasis added). A foreign bank, or 
foreign company controlling a foreign bank, is treated as a bank 
holding company for purposes of the BHC Act if the foreign bank has 
a branch, agency, or commercial lending company subsidiary in the 
United States and does not control a U.S. bank.
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    For purposes of Title I of the Dodd-Frank Act, a company is 
considered to be ``predominantly engaged'' in financial activities if 
either

    (i) The annual gross revenues derived by the company and all of 
its subsidiaries from activities that are financial in nature (as 
defined in section 4(k) of the Bank Holding Company Act), and, if 
applicable, from the ownership or control of an insured depository 
institution, represents 85 percent or more of the consolidated 
annual gross revenues of the company; or
    (ii) The consolidated assets of the company and all of its 
subsidiaries related to activities that are financial in nature (as 
defined in section 4(k) of the Bank Holding Company Act), and, if 
applicable, related to the ownership or control of an insured 
depository institution, represents 85 percent or more of the 
consolidated assets of the company.\6\
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    \6\ See section 102(a)(6) of the Dodd-Frank Act; 12 U.S.C. 
5311(a)(6).

    The Dodd-Frank Act requires the Board to establish the requirements 
for determining whether a company is ``predominantly engaged in 
financial activities.'' \7\ In accordance with this requirement, the 
Board requested comment on the February 2011 NPR that, among other 
things, set forth the requirements for determining if a company is 
``predominantly engaged in financial activities'' under Title I of the 
Act.\8\ The public comment period on the proposed rule closed on March 
30, 2011.
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    \7\ Section 102(b) of the Dodd-Frank Act 12 U.S.C. 5311(b).
    \8\ 76 FR 7731 (February 11, 2011). The February 2011 NPR also 
proposed definitions of the terms ``significant nonbank financial 
company'' and ``significant bank holding company,'' as required by 
the Dodd-Frank Act. See sections 102(a)(7) and (b) of the Dodd-Frank 
Act; 12 U.S.C. 5311(a)(7) and (b).
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    In light of comments received on the February 2011 NPR, the Board 
is amending that NPR to clarify the activities that are financial for 
purposes of Title I.

II. Overview of Comments

    The Board received 23 comments on the February 2011 NPR. The 
comments received by the Board relating to the definition of activities 
that are financial for purposes of Title I raised questions as to 
whether the conduct of certain financial activities--in particular, 
investment activities--that did not comply with the conditions 
applicable to bank holding companies engaging in such activities should 
be considered to be financial activities for purposes of Title I. The 
Board intends to provide a complete discussion of the comments 
submitted in response to the February 2011 NPR after considering the 
comments received on this second proposal.
    The Board has considered the comments it received regarding the 
definition of activities that are financial in nature for purposes of 
Title I, as well as the language and legislative intent and history of 
the Dodd-Frank Act and the Bank Holding Company Act (``BHC Act''), as 
amended by the Gramm-Leach-Bliley Act (``GLB Act''). Based on these 
considerations, the Board is proposing to amend the February 2011 NPR 
to clarify that, consistent with the purpose of Title I any activity 
referenced in section 4(k) will be considered to be a financial 
activity without regard to conditions that were imposed on bank holding 
companies that do not define the activity itself.\9\ To provide 
clarity, the Board further is issuing as an appendix to the NPR a list 
of the activities that would be considered to be financial activities 
as of April 2, 2012, including conditions necessary to the definition 
of the activity as a financial activity, for purposes of determining 
whether a company is predominantly engaged in financial activities.
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    \9\ As noted below, conditions that do not define the activity 
itself include those conditions that were imposed to ensure that the 
activity is conducted in a safe and sound manner, to prevent a 
financial holding company from controlling a commercial firm, or to 
comply with another provision of law.
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    The Board is proposing this approach for several reasons. First, 
section 4(k) of the BHC Act and Regulation Y, which is incorporated by 
reference, contain broad lists of financial activities and impose 
conditions on bank holding companies conducting those activities. Many 
of these conditions were imposed so that a bank holding company, which, 
by definition, controls a bank, could engage in the activities without 
threatening the safety and soundness of its subsidiary depository 
institution and are distinct from the definition of the activity 
itself. Other conditions were required to comply with another provision 
of law, such as the Glass-Steagall Act.
    Defining financial activities for purposes of Title I to include 
all of the conditions imposed on the conduct of the activities by bank 
holding companies likely would enable some companies that are 
predominantly engaged in financial activities to avoid consideration 
for designation by the Council simply by choosing not to abide by 
conditions that were imposed by the Board on bank holding companies to 
ensure the safe and sound conduct of the activity or compliance with 
other legal restrictions unrelated to whether the activity is a 
financial activity. For example, some commenters suggested that a firm 
that organizes, sponsors, and manages an open-end investment company 
(including a mutual fund or money market mutual fund) should not be 
considered to be engaged in a financial activity if the firm owns or 
controls more than a given percentage of the fund because a financial 
holding company may not own or control more than that amount of the 
fund.
    This proposal is consistent with the purpose and legislative 
history of Title I, which demonstrate that Congress believed that the 
statutory definition of a ``nonbank financial company'' would make 
eligible for Council designation companies that were not bank holding 
companies but that engaged in a broad range of financial 
activities.\10\ A reading of Title I that limited the scope of 
companies considered to be

[[Page 21496]]

``predominantly engaged in financial activities'' to only those 
companies that conduct such activities in compliance with the 
conditions applicable to bank holding companies would severely 
undermine the purpose of Title I and the authority granted by Congress 
to the Council to protect U.S. financial stability by taking certain 
actions to ensure such stability, such as the authority to subject to 
prudential standards financial firms that compete in financial markets 
and could threaten financial stability.\11\
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    \10\ See remarks by Senator Cardin at 156 Cong. Rec. S5873, July 
15, 2010, in which he indicates that mutual funds and their advisers 
would be eligible for designation by the Council (stating that 115 
of the Dodd-Frank Act would ``ensure that mutual funds and their 
advisers are not inadvertently subjected to unworkable standards in 
the unlikely event the Financial Stability Oversight Council 
designates [mutual funds] as systemically risky.''); See also 
remarks by Senator Kerry at 156 Cong. Rec. S5902-5903, July 15, 
2010, in which he indicates that although mutual funds and their 
advisers would be eligible for designation by the Council, 
regulation by the Board may not be appropriate for such companies 
because they do not pose a risk to United States financial stability 
(stating that ``there are large companies providing financial 
services that are in fact traditionally low-risk businesses, such as 
mutual funds and mutual fund advisers'' and that Congress did ``not 
envision nonbank financial companies that pose little risk to the 
stability of the financial system,'' such as ``mutual funds and 
mutual fund advisers,'' to be supervised by the Federal Reserve.'').
    \11\ Committee on Banking, Housing, and Urban Affairs Report, S. 
Rep. No. 111-176, April 15 2010, page 3, citing Testimony of Timothy 
Geithner, Secretary of the Treasury, to the Banking Committee, June 
18, 2009.
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    Second, section 167(a) of the Dodd-Frank Act supports the view that 
Congress intended that companies could be eligible for designation by 
the Council regardless of whether these companies complied with the 
non-definitional conditions applied to bank holding companies in the 
implementation of section 4(k).\12\ Section 167(a) provides that a 
nonbank financial company supervised by the Board ``* * * shall not be 
required to conform its activities to the requirements of section 4 of 
the BHC Act.'' \13\
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    \12\ See 12 U.S.C. 5367.
    \13\ Id.
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    This section demonstrates that Congress recognized that nonbank 
financial companies do not conduct their activities in compliance with 
the requirements applicable to bank holding companies. It would be 
illogical to conclude that a company would be eligible for Council 
designation only if it conducted its financial activities in 
conformance with the requirements imposed on bank holding companies' 
conduct of financial activities set forth in section 4(k), but would 
not be required to conform its financial activities to the conditions 
imposed on bank holding companies by section 4(k) after being 
designated by the Council for Board supervision.
    Third, the Council's anti-evasion authority appears to demonstrate 
Congress's intent to broadly define ``nonbank financial companies'' to 
capture firms predominantly engaged in the type of financial activities 
authorized by section 4(k). A nonbank company could slightly alter the 
manner in which it conducts a financial activity so that the activity 
does not comply with one of the non-definitional conditions that 
governs the conduct of the activity by a bank holding company to reduce 
the company's financial revenues and assets for purposes of the asset 
and revenue tests set forth in section 102(a)(6). The nonbank company 
could thereby avoid qualifying as a nonbank financial company and thus 
be ineligible for consideration by the Council for designation under 
section 113. Section 113(c) of the Dodd-Frank Act gives the Council the 
authority to subject the financial activities of any company to 
supervision by the Board if the Council determines, either on its own 
or pursuant to a recommendation by the Board, that: (i) The company is 
organized and operates in such a manner to evade application of Title I 
of the Dodd-Frank Act; and (ii) material financial distress related to, 
or the nature, scope, size, scale, concentration, interconnectedness, 
or mix of, the company's financial activities would pose a threat to 
the financial stability of the United States.\14\ Companies that are 
engaged in activities that are financial in nature, but that alter the 
manner in which they conduct those activities for purposes of evading 
designation by the Council under section 113 and supervision by the 
Board may be subject to designation by the Council under the special 
anti-evasion authority in section 113(c).
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    \14\ 12 U.S.C. 5323(c).
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III. Overview of Proposed Rule

Activities as Defined in Section 4(k)

    The proposal would revise section 225.301(d)(1) of the NPR to 
provide that any activity described in section 4(k) of the BHC Act will 
be considered financial in nature under Title I regardless of 
conformance with the conditions applicable to bank holding companies 
conducting such activity that do not define the financial activity 
itself.
    The proposed appendix would enumerate the activities that will be 
considered financial in nature as of April 2, 2012. These activities 
are identical to those in section 4(k) that are permissible for 
financial holding companies as of such date, but do not include the 
conditions imposed on the conduct of the activity by a bank holding 
company that do not describe the financial activity. These financial 
activities include those activities that were permitted by regulation 
or order as ``closely related to banking'' under the BHC Act, permitted 
as ``usual in connection with banking abroad,'' under the International 
Banking Act, and those that were authorized for financial holding 
companies by the GLB Act in 1999.
    In order to distinguish between conditions that are definitional 
from those that are imposed for other reasons, the Board considered its 
prior authorizations of permissible financial activities for bank 
holding companies. For instance, the Board reviewed its 1997 revisions 
to section 225.28 of Regulation Y that describes activities that are 
``closely related to banking,'' in which the Board removed several of 
the conditions imposed on bank holding companies conducting these 
activities. In this release, the Board distinguished between the 
activities that were ``necessary to establish the definition of the 
permitted activity'' and those that were imposed for other purposes, 
such as ``to prevent circumvention of another statute, such as the 
Glass-Steagall Act.'' \15\ The 1997 rulemaking is an example of the 
Board's use of its longstanding authority to define the parameters of 
permissible nonbanking activities for bank holding companies and impose 
conditions on the conduct of such activities by bank holding companies, 
and the Board's practice of distinguishing between the activities 
themselves and the conditions imposed on the conduct of those 
activities.
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    \15\ See 62 FR 9290, 9305 (February 28, 1997). The Board stated 
that the revisions made by the 1997 release were necessary to remove 
conditions that ``[were] outmoded, [were] superseded by Board order, 
or [did] not apply to insured depository institutions conducting 
those same activities,'' and the conditions it retained in section 
225.28 were ``necessary to establish the definition of the permitted 
activity or to prevent circumvention of another statute, such as the 
Glass-Steagall Act.'' The Board further noted that its ``removal of 
[such] restrictions from the regulation does not affect the Board's 
determination that'' these activities are ``so closely related to 
banking as to be a proper incident thereto'' and thus permissible 
for bank holding companies.
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    The GLB Act authorized certain financial activities and repealed 
many of the conditions imposed on bank holding companies under section 
225.28 for bank holding companies that qualify as financial holding 
companies. To the extent that an activity was originally authorized by 
the GLB Act, the Board has reviewed the legislative history of that Act 
to identify the conditions defining that activity. For instance, the 
legislative history related to Congress's authorization of 
``underwriting, merchant, and investment banking activities'' 
distinguishes between the activities themselves and certain conditions 
imposed on the conduct of these activities by a financial holding 
company that do not define the activities, such as the requirement that 
a financial holding company have a securities or insurance 
affiliate.\16\
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    \16\ See Conf. Rep. 106-434, 154 (November 2, 1999). (``The 
authorization of merchant banking activities as provided in new 
section 4(k)(4)(H) of the BHCA is designed to recognize the 
essential role that these activities play in modern finance and 
permits an FHC that has a securities affiliate or an affiliate of an 
insurance company engaged in underwriting life, accident and health, 
or property and casualty insurance, or providing and issuing 
annuities, to conduct such activities.'') (emphasis added).

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[[Page 21497]]

    Because section 4(k) references financial activities that were 
authorized by the Board under various authorities at different points 
in time, certain of these financial activities overlap with, or are 
wholly subsumed by, other financial activities permissible for 
financial holding companies. For purposes of the proposal, the Board 
has maintained the complete list of financial activities authorized 
under section 4(k), including the overlapping and redundant activities. 
Generally, the Board seeks comment on whether overlapping or redundant 
financial activities should be combined or removed, as appropriate, 
solely for purposes of determining whether a nonbank company is 
predominantly engaged in financial activities, in order to simplify the 
proposed appendix.
    It is possible that the Board may modify, interpret, or authorize 
activities under section 4(k) of the BHC Act in the future. Thus, the 
proposed revision to section 225.301(d)(1) would clarify that neither 
the rule nor the appendix would affect the authority of the Board under 
any other provision of law or regulation to modify these activities or 
to provide interpretations of section 4(k) in the future, which may 
affect those activities that are financial in nature under Title I.
    The following discussion describes the activities enumerated in the 
proposed appendix and identifies the conditions imposed by section 4(k) 
of the BHC Act and the Board's implementing regulations that are not 
reflected in the proposed appendix because they do not define the 
essential nature of the activity.

 Lending, exchanging, transferring, investing for others, or 
safeguarding money and securities

    The activities of lending, exchanging, transferring, investing for 
others, or safeguarding money and securities were authorized as 
permissible for financial holding companies by the GLB Act.\17\
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    \17\ 12 U.S.C. 1843(k)(4)(A).
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 Insurance activities

    A broad range of insurance activities, including insuring, 
guaranteeing, or indemnifying against loss, harm, damage, illness, 
disability, or death, or providing and issuing annuities, and acting as 
principal, agent, or broker for purposes of the foregoing, in any 
State, were authorized as permissible for financial holding companies 
by the GLB Act.\18\
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    \18\ 12 U.S.C. 1843(k)(4)(B).
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 Financial, investment, and economic advisory services

    The activities of providing investment, financial, or economic 
advisory services were authorized as permissible for financial holding 
companies by the GLB Act.\19\
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    \19\ 12 U.S.C. 1843(k)(4)(C).
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 Securitizing

    The activity of issuing or selling instruments representing 
interests in pools of assets was authorized as permissible for 
financial holding companies by the GLB Act.\20\ The GLB Act also 
imposed the condition that the assets being securitized must be 
permissible for a bank to hold directly. This condition appears to 
address both safety and soundness matters and restrictions imposed by 
other provisions of law unrelated to the financial nature of the 
activity, and is not reflected in the proposed appendix.
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    \20\ 12 U.S.C. 1843(k)(4)(D).
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 Underwriting, dealing, and market making

    The activities of underwriting, dealing in, and making a market in 
securities were authorized as permissible for financial holding 
companies by the GLB Act.\21\
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    \21\ 12 U.S.C. 1843(k)(4)(E).
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 Extending credit and servicing loans

    The activities of making, acquiring, brokering, or servicing loans 
or other extensions of credit (including factoring, issuing letters of 
credit and accepting drafts) for the company's account or for the 
account of others were authorized by the Board as activities that are 
closely related to banking and thus permissible for bank holding 
companies.\22\ The Board requests comment on whether these lending 
activities are included in the broad authorization of lending under 
section 4(k)(4)(A) and need not be separately reflected in the 
appendix.
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    \22\ 12 U.S.C. 1843(k)(4)(F); 12 CFR 225.28(b)(1).
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 Activities related to extending credit

    Activities usual in connection with making, acquiring, brokering, 
or servicing loans or other extensions of credit were determined to be 
permissible by the Board for bank holding companies as activities that 
are closely related to banking.\23\ These activities include performing 
appraisals of real estate and personal property (including securities), 
acting as an intermediary for commercial or industrial real estate 
financing, providing check guarantee services, providing collection 
agency services, providing credit bureau services, engaging in asset 
management, servicing, and collection activities, acquiring debt in 
default, and providing real estate settlement services.\24\ The 
proposed appendix reflects these activities without the conditions 
imposed on the conduct of these activities by a bank holding company 
that do not describe the financial activities themselves.
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    \23\ 12 U.S.C. 1843(k)(4)(F); 12 CFR 225.28(b)(2).
    \24\ Id.
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    For instance, under the Board's regulations, a bank holding company 
may not have an interest in, participate in managing or developing, or 
promote or sponsor the development of the property for which it is 
arranging commercial real estate equity financing. The proposed 
appendix does not reflect these conditions because they are not 
essential to the activity of arranging commercial real estate equity 
financing.\25\ Similarly, under the Board's regulations, bank holding 
companies conducting asset management activities may engage in these 
activities only if the company does not also engage in real property 
management or real estate brokerage. The proposed appendix does not 
reflect that condition because, for purposes of determining whether a 
company is predominantly engaged in financial activities, the 
restriction could be read to exclude any asset management activity from 
being treated as financial if the company also engaged in any real 
estate brokerage or property management activities. While neither real 
estate brokerage nor real estate management is a permissible financial 
activity for financial holding companies, nor are such activities 
considered to be financial for purposes of Title I, a company may 
engage in these activities and still be predominantly engaged in 
financial activities so long as these activities comprise no more than 
fifteen percent of the company's activities.
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    \25\ Neither real estate brokerage nor real estate management is 
an activity that is financial in nature. See 12 U.S.C. 1843 note; 
Public Law 111-8, sec. 624 (Mar. 11, 2009).
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    With respect to acquiring debt in default, under the Board's 
regulations, a bank holding company acquiring debt in default must 
divest impermissible assets securing debt in default within a certain 
time period, stand only in the position of a creditor and not purchase 
equity of obligors of debt in default, and not

[[Page 21498]]

acquire debt in default secured by shares of a bank or bank holding 
company. The proposed appendix does not reflect these conditions 
because they do not appear to be part of the essential nature of the 
activity of acquiring debt in default. The conditions requiring the 
bank holding company to divest impermissible assets and stand only in 
the position of a creditor and not purchase equity of obligors are 
intended to prevent the bank holding company from owning assets 
prohibited by the BHC Act or other provisions of law and are not 
related to the activity of acquiring debt in default. Similarly, the 
condition requiring that the debt not be secured by shares of a bank or 
bank holding company was imposed to prevent the bank holding company 
from circumventing the BHC Act's requirement that a bank holding 
company obtain approval from the Board before acquiring control of 
another bank or bank holding company.

 Leasing

    Leasing personal or real property, and acting as an agent, broker, 
or adviser for personal or real property was determined to be closely 
related to banking by the Board.\26\
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    \26\ 12 U.S.C. 1843(k)(4)(F); 12 CFR 225.28(b)(3).
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 Operating nonbank depository institutions

    The activities of owning, controlling, and operating nonbank 
depository institutions, including industrial banks, Morris Plan banks, 
industrial loan companies and thrifts, was determined to be closely 
related to banking by the Board.\27\ While the Board's regulations 
require that a target thrift be engaged only in deposit-taking 
activities and activities permissible for bank holding companies, the 
proposed appendix does not include these conditions because they are 
not essential elements of the activity of owning a nonbank depository 
institution.
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    \27\ 12 U.S.C. 1843(k)(4)(F); 12 CFR 225.28(b)(4).
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 Trust company functions

    The activities performed by a trust company were determined to be 
closely related to banking by the Board.\28\ The Board requests comment 
on whether trust company functions are incorporated in the broad 
authorization provided under section 4(k)(4)(A) to engage in lending, 
exchanging, transferring, investing for others, and safeguarding 
financial assets and need not be separately reflected in the appendix.
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    \28\ 12 U.S.C. 1843(k)(4)(F); 12 CFR 225.28(b)(5).
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 Financial and investment advisory activities

    The activities of acting as an investment or financial advisor to 
any person were determined to be closely related to banking by the 
Board.\29\ These activities have been defined to include, without 
limitation, serving as a registered investment adviser to a registered 
investment company, including sponsoring, organizing, and managing a 
closed-end investment company; furnishing general economic information 
and advice, general economic statistical forecasting services, and 
industry studies; providing advice in connection with mergers, 
acquisitions, divestitures, investments, joint ventures, leveraged 
buyouts, recapitalizations, capital structurings, financing 
transactions and similar transactions; and conducting financial 
feasibility studies; providing information, statistical forecasting, 
and advice with respect to any transaction in foreign exchange, swaps, 
and similar transactions, commodities, and any forward contract, 
option, future, option on a future, and similar instruments; providing 
educational courses and instructional materials to consumers on 
individual financial management matters; and providing tax-planning and 
tax-preparation services to any person.\30\ The Board requests comment 
on whether these financial and investment advisory activities are 
incorporated in the broad authorization provided by section 4(k)(4)(C) 
of the BHC Act to provide financial, investment, and economic advisory 
services and need not be separately reflected in the appendix.
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    \29\ 12 U.S.C. 1843(k)(4)(F); 12 CFR 225.28(b)(6).
    \30\ Id.
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 Agency transactional services

    Agency transactional services, including providing securities 
brokerage services, acting as a riskless principal, providing private 
placement services, and acting as a futures commission merchant, were 
determined to be closely related to banking by the Board.\31\ 
Conditions that were imposed on bank holding companies conducting these 
activities in order to prevent circumvention of the Glass-Steagall Act 
or for safety and soundness reasons are not reflected in the proposed 
appendix.
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    \31\ 12 U.S.C. 1843(k)(4)(F); 12 CFR 225.28(b)(7).
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    For instance, bank holding companies providing securities brokerage 
services under this authority are limited to buying and selling 
securities solely as agent for the account of customers and not 
conducting securities underwriting or dealing activities, those 
providing private placement services under this authority cannot 
purchase or repurchase for their own account the securities being 
placed or hold in inventory unsold portions of issues of those 
securities, and those acting as riskless principal under this authority 
are subject to conditions with respect to bank-ineligible securities. 
These conditions were intended to prevent a bank holding company from 
using securities brokerage or riskless principal authority to engage in 
activities that were impermissible under the Glass-Steagall Act.\32\
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    \32\ 62 FR 9290, 9308.
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    In order to act as a futures commission merchant, a bank holding 
company must conduct the activity through a separately incorporated 
subsidiary, the contract must be traded on an exchange, and the parent 
bank holding company cannot guarantee that subsidiary's liabilities. 
The proposed appendix does not reflect these conditions, as they were 
imposed for safety and soundness reasons to limit the bank holding 
company's exposure to contingent obligations under the loss sharing 
rules of exchange clearinghouses in order to preserve the holding 
company's ability to serve as a source of strength to its insured 
depository institutions.\33\
---------------------------------------------------------------------------

    \33\ Id. at 9309.
---------------------------------------------------------------------------

    In order to provide agent transactional services to customers on 
certain commodity derivatives transactions, the derivative must relate 
to a commodity that is traded on an exchange (regardless of whether the 
contract being traded is traded on an exchange). The proposed appendix 
does not reflect this limitation because it appears to have been 
imposed for safety and soundness reasons and does not describe the 
underlying activity of providing transactional services on commodity 
derivatives transactions. The Board requests comment on whether the 
agency transactional services discussed above are included in the broad 
authorization provided under section 4(k)(5) to engage in arranging, 
effecting, or facilitating financial transactions for the account of 
third parties and need not be separately reflected in the appendix.

 Investment transactions as principal

    Engaging in investment transactions as principal, including 
underwriting and dealing in government obligations and money market 
instruments and investing and trading as principal in foreign exchange 
and derivatives, and buying and selling bullion, are activities that 
were determined to be closely

[[Page 21499]]

related to banking by the Board.\34\ Under the Board's regulations, 
bank holding companies engaged in underwriting and dealing in 
government obligations and money market instruments are subject to the 
same conditions imposed on member banks engaged in these activities. 
The proposed appendix does not reflect these conditions because they 
were intended to prevent circumvention of the Glass-Steagall Act. In 
addition, under the Board's regulations, bank holding companies engaged 
in derivatives transactions are subject to certain conditions, 
including that the derivative contract itself cannot be a bank-
ineligible security and either that the asset underlying the contract 
be a bank permissible asset or that the contract contain protections 
against physical settlement. The proposed appendix does not include 
these conditions imposed on derivatives activities because these 
conditions appear to have been imposed to prevent circumvention of the 
Glass-Steagall Act's limitations on underwriting and dealing activities 
and for safety and soundness reasons.
---------------------------------------------------------------------------

    \34\ 12 U.S.C. 1843(k)(4)(F); 12 CFR 225.28(b)(8).
---------------------------------------------------------------------------

    The Board requests comment on whether the activity of underwriting 
and dealing in government obligations and money market instruments is 
included in the broad authorization provided under section 4(k)(4)(E) 
to engage in underwriting, dealing in, or making a market in securities 
and need not be separately reflected in the appendix.

 Management Consulting and Counseling Activities

    Providing management consulting services on any matter to 
unaffiliated depository institutions and on any financial, economic, 
accounting, or audit matter to any other company was determined to be 
closely related to banking by the Board.\35\ Under the Board's 
regulations, bank holding companies engaged in management consulting 
activities may not own more than 5 percent of the client institution or 
have a management interlock. The proposed appendix does not reflect 
this condition because it was intended to ensure that a bank holding 
company does not exercise control over a client company through a 
management consulting contract and to prevent conflicts of 
interest.\36\ The Board requests comment on whether the activity of 
management consulting is subsumed by the broader authority to engage in 
management consulting services that was determined to be usual in 
connection with banking abroad and need not be separately reflected in 
the appendix.
---------------------------------------------------------------------------

    \35\ 12 U.S.C. 1843(k)(4)(F); 12 CFR 225.28(b)(9)(i).
    \36\ 62 FR 9290, 9312.
---------------------------------------------------------------------------

    Providing employee benefits consulting services was determined to 
be closely related to banking by the Board \37\ and is included in the 
proposed appendix. Providing career counseling services also was 
determined to be closely related to banking by the Board,\38\ subject 
to the conditions that the services are provided to a financial 
organization, to individuals who are seeking employment at a financial 
institution, or to individuals currently employed in or who are seeking 
positions in the finance, accounting, and audit departments of any 
company. These conditions appear to be essential to this activity's 
being considered financial and thus are included in the definition of 
the financial activity in the proposed appendix.
---------------------------------------------------------------------------

    \37\ 12 U.S.C. 1843(k)(4)(F); 12 CFR 225.28(b)(9)(ii).
    \38\ 12 U.S.C. 1843(k)(4)(F); 12 CFR 225.28(b)(9)(iii).
---------------------------------------------------------------------------

 Courier Services and Printing and Selling MICR-Encoded Items

    Providing courier services for certain instruments and audit and 
accounting media was determined to be closely related to banking by the 
Board.\39\ Printing and selling MICR-encoded items was determined to be 
closely related to banking by the Board.\40\ These activities are 
included in the proposed appendix.
---------------------------------------------------------------------------

    \39\ 12 U.S.C. 1843(k)(4)(F); 12 CFR 225.28(b)(10)(i).
    \40\ 12 U.S.C. 1843(k)(4)(F); 12 CFR 225.28(b)(10)(ii).
---------------------------------------------------------------------------

 Insurance Agency and Underwriting

    Activities related to the provision of credit insurance and 
insurance in small towns were determined to be closely related to 
banking by the Board.\41\ The Board requests comment on whether these 
insurance activities are included in the broad authorization of 
insurance activities provided under section 4(k)(4)(B) of the BHC Act 
and thus need not be separately reflected in the appendix.
---------------------------------------------------------------------------

    \41\ 12 U.S.C. 1843(k)(4)(F); 12 CFR 225.28(b)(11).
---------------------------------------------------------------------------

 Community Development Activities

    Making debt and equity investments in corporations or projects that 
are designed primarily to promote community welfare, and providing 
advisory and related services for such programs, was determined to be 
closely related to banking by the Board.\42\ This activity is included 
in the proposed appendix.
---------------------------------------------------------------------------

    \42\ 12 U.S.C. 1843(k)(4)(F); 12 CFR 225.28(b)(12).
---------------------------------------------------------------------------

 Money Orders, Savings Bonds, and Traveller's Checks

    The issuance and sale of money orders and traveller's checks, and 
the issuance of savings bonds, was determined to be closely related to 
banking by the Board and is included in the proposed appendix.\43\
---------------------------------------------------------------------------

    \43\ 12 U.S.C. 1843(k)(4)(F); 12 CFR 225.28(b)(13).
---------------------------------------------------------------------------

 Data Processing

    Providing data processing services and related activities with 
respect to financial, banking, or economic data was determined to be 
closely related to banking by the Board.\44\ Under the Board's 
regulations, a bank holding company's data processing activities must 
comply with the condition that the hardware provided in connection with 
these services is offered only in conjunction with software related to 
the processing, storage, and transmission of financial, banking, or 
economic data, and where the general purpose hardware does not 
constitute more than 30 percent of the cost of any packaged offering. 
The proposed appendix does not include these conditions because they do 
not define the activity of financial data processing.
---------------------------------------------------------------------------

    \44\ 12 U.S.C. 1843(k)(4)(F); 12 CFR 225.28(b)(14).
---------------------------------------------------------------------------

 Mutual Fund Advisory Services

    Providing administrative and other services to mutual funds was 
determined be closely related to banking by the Board \45\ and is 
included in the proposed appendix.
---------------------------------------------------------------------------

    \45\ 12 U.S.C. 1843(k)(4)(F); 12 CFR 225.86(a)(2)(i).
---------------------------------------------------------------------------

 Owning Shares of a Securities Exchange

    Owning shares of a securities exchange was determined to be closely 
related to banking by the Board \46\ and is included in the proposed 
appendix.
---------------------------------------------------------------------------

    \46\ 12 U.S.C. 1843(k)(4)(F); 12 CFR 225.86(a)(2)(ii).
---------------------------------------------------------------------------

 Certification Services

    Acting as a certification authority for digital signatures and 
authenticating the identity of persons conducting financial and 
nonfinancial transactions was determined to be closely related to 
banking by the Board \47\ and is included in the proposed appendix.
---------------------------------------------------------------------------

    \47\ 12 U.S.C. 1843(k)(4)(F); 12 CFR 225.86(a)(2)(iii).
---------------------------------------------------------------------------

 Providing Employment Histories

    Providing employment histories to third parties for use in making 
credit decisions and to depository institutions and their affiliates 
for use in the ordinary course of business was

[[Page 21500]]

determined to be closely related to banking by the Board \48\ and is 
included in the proposed appendix.
---------------------------------------------------------------------------

    \48\ 12 U.S.C. 1843(k)(4)(F); 12 CFR 225.86(a)(2)(iv).
---------------------------------------------------------------------------

 Check-Cashing and Wire-Transmission Services

    Providing check-cashing and wire-transmission services was 
determined to be closely related to banking by the Board \49\ and is 
included in the proposed appendix.
---------------------------------------------------------------------------

    \49\ 12 U.S.C. 1843(k)(4)(F); 12 CFR 225.86(a)(2)(v).
---------------------------------------------------------------------------

 Postage, Vehicle Registration, Public Transportation Services

    Providing notary-public services, selling postage stamps and 
postage-paid envelopes, providing vehicle registration services, and 
selling public-transportation tickets and tokens in connection with 
offering banking services was determined to be closely related to 
banking by the Board \50\ and is included in the proposed appendix.
---------------------------------------------------------------------------

    \50\ 12 U.S.C. 1843(k)(4)(F); 12 CFR 225.86(a)(2)(vi).
---------------------------------------------------------------------------

 Real Estate Title Abstracting

    Engaging in real estate title abstracting was determined to be 
closely related to banking by the Board \51\ and is included in the 
proposed appendix.
---------------------------------------------------------------------------

    \51\ 12 U.S.C. 1843(k)(4)(F); 12 CFR 225.86(a)(2)(vii).
---------------------------------------------------------------------------

 Management Consulting Services

    Providing management consulting services was determined to be usual 
in connection with the transaction of banking or other financial 
operations abroad.\52\ Under the Board's regulations, bank holding 
companies are prohibited from controlling the person to which the 
services are provided. The proposed appendix does not reflect this 
condition because it appears to have been intended to ensure that a 
bank holding company does not exercise control over a client company 
through a management consulting contract and to prevent conflicts of 
interest.
---------------------------------------------------------------------------

    \52\ 12 U.S.C. 1843(k)(4)(G); 12 CFR 225.86(b)(1).
---------------------------------------------------------------------------

 Travel Agency

    Operating a travel agency in connection with financial services was 
determined to be usual in connection with the transaction of banking or 
other financial operations abroad \53\ and is included in the proposed 
appendix.
---------------------------------------------------------------------------

    \53\ 12 U.S.C. 1843(k)(4)(G); 12 CFR 225.86(b)(2).
---------------------------------------------------------------------------

 Mutual Fund Activities

    Organizing, sponsoring, and managing a mutual fund was determined 
to be usual in connection with the transaction of banking or other 
financial operations abroad.\54\ Under the Board's regulations, bank 
holding companies are prohibited from exerting managerial control over 
the companies in which the fund invests and must reduce their ownership 
to less than 25 percent of the equity of the fund within one year of 
sponsoring the fund. The proposed appendix does not reflect these 
conditions because they were imposed to prevent circumvention of the 
investment restrictions in the BHC Act.
---------------------------------------------------------------------------

    \54\ 12 U.S.C. 1843(k)(4)(G); 12 CFR 225.86(b)(3).
---------------------------------------------------------------------------

 Merchant Banking

    Section 4(k)(4)(H) of the BHC Act authorizes financial holding 
companies to acquire ``shares, assets or ownership interests,'' 
including debt or equity securities, in a company engaged in any 
activity not authorized under section 4 ``as part of a bona fide 
underwriting or merchant or investment banking activity, including 
investment activities engaged in for the purpose of appreciation and 
ultimate resale or disposition of the investment,'' subject to the 
following conditions: (i) The shares may not be acquired or held by a 
depository institution; (ii) the shares must be acquired and held by a 
securities affiliate or an affiliate thereof, or in the case of a 
financial holding company that has an insurance company affiliate, the 
shares must be acquired and held by an affiliate that provides 
investment advice to an insurance company and is registered pursuant to 
the Investment Advisers Act of 1940, or an affiliate thereof, as part 
of a bona fide underwriting or merchant or investment banking activity, 
including investment activities engaged in for the purpose of 
appreciation and ultimate resale or disposition of the investment; 
(iii) the shares must be held for a period of time to enable the sale 
or disposition on a reasonable basis consistent with the financial 
viability of the company's underwriting, merchant, or investment 
banking activities; and (iv) during the period the shares are held, the 
bank holding company may not routinely manage or operate the company 
except as may be necessary to obtain a reasonable return on investment 
upon resale or disposition.\55\
---------------------------------------------------------------------------

    \55\ 12 U.S.C. 1843(k)(4)(H).
---------------------------------------------------------------------------

    The proposed appendix reflects those conditions that appear to 
define the essential nature of the activities of underwriting, 
merchant, or investment banking activities, and omits those that do 
not.
    First, the condition requiring that the shares be held for a period 
of time to enable their sale or disposition on a reasonable basis 
consistent with the financial viability of the company's underwriting, 
merchant, or investment banking activities appears to be an essential 
element of a bona fide underwriting, merchant, or investment banking 
activity. Thus, this condition is reflected in the proposed appendix. 
Companies engaging in bona fide underwriting, merchant, or investment 
banking activities do not invest in investee companies for the purpose 
of engaging in the activity in which the investee company is engaged, 
but instead invest with the intent to sell such instruments at some 
later point in time at which a profit is expected to be realized. The 
length of time that the shares are held will vary by investment.\56\
---------------------------------------------------------------------------

    \56\ The Board and the Secretary of the Treasury jointly 
implemented regulations interpreting the holding period for merchant 
banking investments by financial holding companies. This regulatory 
interpretation is separate from the activity of merchant banking set 
forth in section 4(k)(4)(H) of the BHC Act and would not apply for 
determining whether an activity is a financial activity for purposes 
of Title I. See 12 CFR 225.172 and 12 CFR 1500.3, respectively.
---------------------------------------------------------------------------

    For example, certain companies, such as private equity firms, that 
are engaged in bona fide underwriting, merchant, or investment banking 
activities typically invest in firms that the private equity firm 
believes will increase in value over time and can be resold at a 
profit. The holding period for an investment will vary based on the 
investee company, and in some cases the private equity firm may hold 
the shares for several years. A firm such as a hedge fund or a mutual 
fund invests in firms with the expectation to sell those instruments at 
a future date in order to realize profits consistent with its 
particular investment strategy. The holding period for an investment by 
a hedge fund or a mutual fund will depend on the length of time 
necessary to recognize gains consistent with the fund's investment 
strategy.
    The prohibition on routinely managing an investee company in which 
it has purchased shares, other than for purposes of recognizing a 
reasonable return, appears to be an essential element of bona fide 
underwriting, merchant, or investment banking activities. Thus, this 
prohibition is reflected in the proposed appendix. As previously 
discussed, companies engaging in these activities purchase shares of 
investee companies to recognize an ultimate profit, rather than to 
engage in the underlying activity in which the investee company engages 
as its primary business activity. Routinely managing the companies, 
other than for the goal of recognizing a reasonable return, would be 
inconsistent with the underlying nature of the activities. Therefore, 
in order for an activity to qualify as a bona fide

[[Page 21501]]

underwriting, merchant, or investment banking activity, a nonbank 
company must comply with this restriction.\57\
---------------------------------------------------------------------------

    \57\ The Board and the Secretary of the Treasury jointly 
implemented regulations interpreting the limitation on routine 
management and operation for merchant banking investments by 
financial holding companies. This regulatory interpretation is 
separate from the activity of merchant banking set forth in section 
4(k)(4)(H) of the BHC Act and would not apply for determining 
whether an activity is a financial activity for purposes of Title I. 
See 12 CFR 225.171 and 12 CFR 1500.2 et seq., respectively.
---------------------------------------------------------------------------

    By contrast, the condition requiring that shares acquired as part 
of a bona fide underwriting or merchant or investment banking activity 
not be acquired or held by a depository institution is not an essential 
element of such activities, and thus is not reflected in the proposed 
appendix. This restriction was imposed because banks are restricted 
from investing in certain types of companies by statute and 
regulation.\58\ Similarly, the condition in section 4(k) requiring a 
financial holding company engaging in underwriting or merchant or 
investment banking activities to either have (i) a securities 
affiliate, or (ii) in the case of a financial holding company that has 
an insurance company affiliate, an affiliate that provides investment 
advice to an insurance company and is registered pursuant to the 
Investment Advisers Act of 1940, does not appear to be an essential 
element of these activities because the condition does not require that 
the activity be conducted through the securities affiliate or 
investment adviser affiliate of the financial holding company. The 
condition was designed to ensure that only those financial holding 
companies with experience engaging in underwriting, merchant, or 
investment banking activities conducted such activities. The Board 
proposes to define the activities of underwriting, merchant, and 
investment banking to include only the conditions that appear to be 
essential elements of the activities themselves, as discussed 
above.\59\
---------------------------------------------------------------------------

    \58\ See, e.g., 12 U.S.C. 24, (Seventh); 12 U.S.C. 24, 
(Eleventh); 12 CFR 1.
    \59\ Similarly, the Council has indicated its belief that 
nonbank companies such as hedge funds, private equity firms, and 
mutual funds will be eligible for designation. The Council noted in 
its second notice of proposed rulemaking that it will consider 
whether to establish an additional set of metrics or thresholds 
tailored to evaluate hedge funds and private equity firms and their 
advisers for potential designation under section 113. See 76 FR 
64264, 64269 (October 18, 2011).
---------------------------------------------------------------------------

    In addition, the proposed appendix does not reflect the provision 
of section 4(k)(4)(H) that the investment be in company engaged in any 
activity not authorized under section 4 of the BHC Act because this 
provision does not affect the scope of activities that are financial 
activities for purposes of Title I. An investment in a company solely 
engaged in activities permissible under section 4 would otherwise be 
treated as a financial activity.
    Section 4(k)(4)(I) of the BHC Act similarly authorizes financial 
holding companies to acquire ``shares, assets or ownership interests,'' 
including debt or equity securities, of a company or other entity 
engaged in any activity not authorized by section 4(k) if (i) the 
shares, assets, or ownership interests are not acquired or held by a 
depository institution or a subsidiary of a depository institution; 
(ii) such shares, assets, or ownership interests are acquired and held 
by an insurance company that is predominantly engaged in underwriting 
life, accident and health, or property and casualty insurance (other 
than credit-related insurance) or providing and issuing annuities; 
(iii) such shares, assets, or ownership interests represent an 
investment made in the ordinary course of business of such insurance 
company in accordance with relevant State law governing such 
investments; and (iv) during the period such shares, assets, or 
ownership interests are held, the bank holding company does not 
routinely manage or operate such company except as may be necessary or 
required to obtain a reasonable return on investment.
    The condition requiring that shares, assets, or ownership interests 
not be acquired or held by a depository institution does not appear to 
be an essential element of the investment activities authorized by 
section 4(k)(4)(I), and thus is not reflected in the proposed appendix. 
This restriction was imposed because banks are restricted from 
investing in certain types of companies by statute and regulation.\60\ 
Each of the other conditions imposed on the conduct of the activity by 
a bank holding company appears to be an essential element of the 
activity of investing in connection with engaging in insurance 
activities. The Board proposes to define the investment activities 
authorized by section 4(k)(4)(I) to include only the conditions that 
appear to be essential elements of these activities, as discussed 
above.
---------------------------------------------------------------------------

    \60\ See, e.g., 12 U.S.C. 24, (Seventh); 12 U.S.C. 24, 
(Eleventh), 12 CFR 1.
---------------------------------------------------------------------------

 Lending, Safeguarding, Exchanging, and Investing for Others 
With Respect to Financial Assets Other Than Money and Securities

    The GLB Act authorizes the activities of lending, exchanging, 
transferring, investing for others, or safeguarding financial assets 
other than money or securities; providing any device or other 
instrumentality for transferring money or other financial assets; and 
arranging, effecting, or facilitating financial transactions for the 
account of third parties for financial holding companies.\61\ The 
statute requires the Board to define these activities as financial in 
nature and the extent to which such activities are financial in nature 
or incidental thereto. The Board and the Secretary of the Treasury 
issued a joint interim rule authorizing such activities as permissible 
for financial holding companies.\62\ These activities are included in 
the proposed appendix.
---------------------------------------------------------------------------

    \61\ 12 U.S.C. 1843(k)(5).
    \62\ See 66 FR 257 (January 3, 2001).
---------------------------------------------------------------------------

Implications for Bank Holding Companies

    The Board is proposing to define the activities listed in the 
proposed appendix as financial solely for purposes of Title I of the 
Dodd-Frank Act. The proposed appendix is not intended to amend section 
4(k) of the BHC Act for purposes of defining those activities that are 
permissible for financial holding companies or the manner in which bank 
holding companies and financial holding companies are permitted to 
conduct those activities. The Board notes that it does not have the 
authority to unilaterally expand the list of permissible financial 
activities under section 4(k) as it applies to financial holding 
companies without first consulting with the Secretary of the 
Treasury.\63\ In making its determination, the Board also must take 
into account four factors: (1) The purposes of the GLB Act and BHC Act; 
(2) the changes or reasonably expected changes in the marketplace in 
which financial holding companies compete; (3) the changes or 
reasonably expected changes in technology for delivering financial 
services; and (4) whether the proposed activity is necessary or 
appropriate to allow a financial holding company to compete effectively 
with companies seeking to provide financial services in the United 
States, efficiently deliver financial information and services through 
technological means, and offer customers any available or emerging 
technological means for using financial services or for the document 
imaging of data.\64\ Additionally, Congress clearly did not intend to 
expand the list of permissible financial activities for bank holding 
companies in enacting the Dodd-Frank Act. In fact, Congress

[[Page 21502]]

demonstrated a clear intent to restrict the conduct of financial 
activities by bank holding companies and other companies affiliated 
with depository institutions, as evidenced by the new restrictions 
imposed by section 619 of the Act (the ``Volcker Rule'') on certain 
financial activities, such as securities underwriting and dealing, 
conducted by bank holding companies and other depository institution 
affiliates.\65\
---------------------------------------------------------------------------

    \63\ 12 U.S.C. 1843(k)(2).
    \64\ 12 U.S.C. 1843(k)(3).
    \65\ See 12 U.S.C. 1851.
---------------------------------------------------------------------------

IV. Administrative Law Matters

A. Paperwork Reduction Act

    In accordance with the Paperwork Reduction Act of 1995 (44 U.S.C. 
chapter 3506; 5 CFR 1320 Appendix A.1), the Board reviewed this NPR 
under the authority delegated to the Board by the Office of Management 
and Budget (``OMB'').
    As noted in the Supplementary Information, the Board published the 
February 2011 NPR to amend the sections of Regulation Y that establish 
the criteria for determining whether a company is ``predominantly 
engaged in financial activities'' and define the terms ``significant 
nonbank financial company'' and ``significant bank holding company'' 
for purposes of Title I of the Dodd-Frank Act. The comment period for 
the February 2011 NPR closed on March 30, 2011; the Board received 23 
comment letters. Based on comments received, the Board believes that 
clarification is needed regarding the scope of activities that would be 
considered to be financial activities under that proposal.
    Although this NPR supplements the February 2011 NPR by amending 
specific portions of the regulation for clarity, it does not affect the 
collections of information that are proposed by the February 2011 NPR 
that are found in 12 CFR 225.301(f). This NPR proposes no new 
collections nor makes any revisions to the collections that were 
proposed under the February 2011 NPR.
    The Board may not conduct or sponsor, and an organization is not 
required to respond to, this information collection unless it displays 
a currently valid OMB control number. The OMB control number will be 
assigned once the rulemaking has been finalized.

B. Regulatory Flexibility Act

    In accordance with Section 3(a) of the Regulatory Flexibility Act, 
5 U.S.C. 601 et seq. (``RFA''), the Board is publishing an initial 
regulatory flexibility analysis with this rulemaking. The RFA requires 
an agency either to provide an initial regulatory flexibility analysis 
with a proposed rule for which a general notice of proposed rulemaking 
is required or to certify that the proposed rule will not have a 
significant economic impact on a substantial number of small entities.
    As noted in the Supplementary Information, the Board published the 
February 2011 NPR to amend the sections of Regulation Y that establish 
the criteria for determining whether a company is ``predominantly 
engaged in financial activities'' and define the terms ``significant 
nonbank financial company'' and ``significant bank holding company'' 
for purposes of Title I of the Dodd-Frank Act. The comment period for 
the February 2011 NPR closed on March 30, 2011; the Board received 23 
comment letters. Based on comments received, the Board believes that 
clarification is needed regarding the scope of activities that would be 
considered to be financial activities under that proposal. Although 
this NPR supplements the February 2011 NPR by amending specific 
portions of that proposal for clarity, it does not affect the Board's 
initial regulatory flexibility analysis with respect to the February 
2011 NPR. A final regulatory flexibility analysis will be conducted 
after consideration of comments received during the public comment 
period.

List of Subjects in 12 CFR Part 225

    Administrative practice and procedure, Banks, banking, Holding 
companies, Reporting and recordkeeping requirements, Securities.

Authority and Issuance

    For the reasons stated in the preamble, the Board proposes to 
further amend Regulation Y, 12 CFR part 225, as proposed to be amended 
at 76 FR 7731 (February 11, 2011), as follows:

PART 225--BANK HOLDING COMPANIES AND CHANGE IN BANK CONTROL 
(REGULATION Y)

    1. The authority citation for part 225 is revised to read as 
follows:

    Authority: 12 U.S.C. 1844(b), 3106 and 3108, 1817(j)(13), 
1818(b)), 1831i, 1972, Pub. L. 98-181, title IX, and 5311(a)(6) and 
(b).

    2. In Sec.  225.301 which was proposed to be added on February 11, 
2011 at 76 FR 7731, is further amended by revising paragraph (d)(1) as 
follows:


Sec.  225.301  Nonbank companies ``predominantly engaged'' in financial 
activities.

* * * * *
    (d) Activities that are financial in nature.
    (1) In general. Any activity described in section 4(k) of the BHC 
Act, regardless of conformance with the conditions applicable to 
financial holding companies conducting such activity that do not define 
the financial activity, shall be considered financial in nature for 
purposes of this section. These activities as of April 2, 2012 are set 
forth in the appendix. Nothing in this part limits the authority of the 
Board under any other provision of law or regulation to modify the 
activities it has determined to be financial in nature or to provide 
interpretations of section 4(k) of the BHC Act.
* * * * *
    3. Add Appendix A to Subpart N to read as follows:

Appendix A to Subpart N--Financial Activities for Purposes of Title I

    (1) Lending, exchanging, transferring, investing for others, or 
safeguarding money and securities.
    (2) Insuring, guaranteeing, or indemnifying against loss, harm, 
damage, illness, disability, or death, or providing and issuing 
annuities, and acting as principal, agent, or broker for purposes of 
the foregoing, in any state.
    (3) Providing financial, investment, or economic advisory 
services, including advising an investment company (as defined in 
section 3 of the Investment Company Act of 1940).
    (4) Issuing or selling instruments representing interests in 
pools of assets.
    (5) Underwriting, dealing in, or making a market in securities.
    (6) Extending credit and servicing loans. Making, acquiring, 
brokering, or servicing loans or other extensions of credit 
(including factoring, issuing letters of credit and accepting 
drafts) for the company's account or for the account of others.
    (7) Activities related to extending credit. Any activity usual 
in connection with making, acquiring, brokering or servicing loans 
or other extensions of credit, including the following activities:
    (i) Real estate and personal property appraising. Performing 
appraisals of real estate and tangible and intangible personal 
property, including securities.
    (ii) Arranging commercial real estate equity financing. Acting 
as intermediary for the financing of commercial or industrial 
income-producing real estate by arranging for the transfer of the 
title, control, and risk of such a real estate project to one or 
more investors.
    (iii) Check-guaranty services. Authorizing a subscribing 
merchant to accept personal checks tendered by the merchant's 
customers in payment for goods and services, and purchasing from the 
merchant validly authorized checks that are subsequently dishonored.
    (iv) Collection agency services. Collecting overdue accounts 
receivable, either retail or commercial.
    (v) Credit bureau services. Maintaining information related to 
the credit history of consumers and providing the information to a 
credit grantor who is considering a

[[Page 21503]]

borrower's application for credit or who has extended credit to the 
borrower.
    (vi) Asset management, servicing, and collection activities. 
Engaging under contract with a third party in asset management, 
servicing, and collection \1\ of assets of a type that an insured 
depository institution may originate and own.
---------------------------------------------------------------------------

    \1\ Asset management services include acting as agent in the 
liquidation or sale of loans and collateral for loans, including 
real estate and other assets acquired through foreclosure or in 
satisfaction of debts previously contracted.
---------------------------------------------------------------------------

    (vii) Acquiring debt in default. Acquiring debt that is in 
default at the time of acquisition.
    (viii) Real estate settlement servicing. Providing real estate 
settlement services.\2\
---------------------------------------------------------------------------

    \2\ For purposes of this section, real estate settlement 
services do not include providing title insurance as principal, 
agent, or broker.
---------------------------------------------------------------------------

    (8) Leasing personal or real property. Leasing personal or real 
property or acting as agent, broker, or adviser in leasing such 
property if:
    (i) The lease is on a nonoperating basis; \3\
---------------------------------------------------------------------------

    \3\ The requirement that the lease be on a nonoperating basis 
means that the company may not, directly or indirectly, engage in 
operating, servicing, maintaining, or repairing leased property 
during the lease term. For purposes of the leasing of automobiles, 
the requirement that the lease be on a nonoperating basis means that 
the company may not, directly or indirectly: (1) Provide servicing, 
repair, or maintenance of the leased vehicle during the lease term; 
(2) purchase parts and accessories in bulk or for an individual 
vehicle after the lessee has taken delivery of the vehicle; (3) 
provide the loan of an automobile during servicing of the leased 
vehicle; (4) purchase insurance for the lessee; or (5) provide for 
the renewal of the vehicle's license merely as a service to the 
lessee where the lessee could renew the license without 
authorization from the lessor. The company may arrange for a third 
party to provide these services or products.
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    (ii) The initial term of the lease is at least 90 days; and
    (iii) In the case of leases involving real property:
    (A) At the inception of the initial lease, the effect of the 
transaction will yield a return that will compensate the lessor for 
not less than the lessor's full investment in the property plus the 
estimated total cost of financing the property over the term of the 
lease from rental payments, estimated tax benefits, and the 
estimated residual value of the property at the expiration of the 
initial lease; and
    (B) The estimated residual value of property for purposes of 
paragraph (b)(3)(iii)(A) of this section shall not exceed 25 percent 
of the acquisition cost of the property to the lessor.
    (9) Operating nonbank depository institutions.
    (i) Industrial banking. Owning, controlling, or operating an 
industrial bank, Morris Plan bank, or industrial loan company that 
is not a bank for purposes of the BHC Act.
    (ii) Operating savings associations. Owning, controlling, or 
operating a savings association.
    (10) Trust company functions. Performing functions or activities 
that may be performed by a trust company (including activities of a 
fiduciary, agency, or custodial nature), in the manner authorized by 
federal or state law that is not a bank for purposes of section 2(c) 
of the Bank Holding Company Act.
    (11) Financial and investment advisory activities. Acting as 
investment or financial advisor to any person, including (without, 
in any way, limiting the foregoing):
    (i) Serving as investment adviser (as defined in section 
2(a)(20) of the Investment Company Act of 1940, 15 U.S.C. 80a-
2(a)(20)), to an investment company registered under that act, 
including sponsoring, organizing, and managing a closed-end 
investment company;
    (ii) Furnishing general economic information and advice, general 
economic statistical forecasting services, and industry studies;
    (iii) Providing advice in connection with mergers, acquisitions, 
divestitures, investments, joint ventures, leveraged buyouts, 
recapitalizations, capital structurings, financing transactions and 
similar transactions, and conducting financial feasibility studies; 
\4\
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    \4\ Feasibility studies do not include assisting management with 
the planning or marketing for a given project or providing general 
operational or management advice.
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    (iv) Providing information, statistical forecasting, and advice 
with respect to any transaction in foreign exchange, swaps, and 
similar transactions, commodities, and any forward contract, option, 
future, option on a future, and similar instruments;
    (v) Providing educational courses, and instructional materials 
to consumers on individual financial management matters; and
    (vi) Providing tax-planning and tax-preparation services to any 
person.
    (12) Agency transactional services for customer investments.
    (i) Securities brokerage. Providing securities brokerage 
services (including securities clearing and/or securities execution 
services on an exchange), whether alone or in combination with 
investment advisory services, and incidental activities (including 
related securities credit activities and custodial services).
    (ii) Riskless principal transactions. Buying and selling in the 
secondary market all types of securities on the order of customers 
as a ``riskless principal'' to the extent of engaging in a 
transaction in which the company, after receiving an order to buy 
(or sell) a security from a customer, purchases (or sells) the 
security for its own account to offset a contemporaneous sale to (or 
purchase from) the customer.
    (iii) Private placement services. Acting as agent for the 
private placement of securities in accordance with the requirements 
of the Securities Act of 1933 (1933 Act) and the rules of the 
Securities and Exchange Commission.
    (iv) Futures commission merchant. Acting as a futures commission 
merchant (FCM) for unaffiliated persons in the execution, clearance, 
or execution and clearance of any futures contract and option on a 
futures contract.
    (v) Other transactional services. Providing to customers as 
agent transactional services with respect to swaps and similar 
transactions, any transaction described in paragraph (b)(8) of this 
section, any transaction that is permissible for a state member 
bank, and any other transaction involving a forward contract, 
option, futures, option on a futures or similar contract (whether 
traded on an exchange or not).
    (13) Investment transactions as principal.
    (i) Underwriting and dealing in government obligations and money 
market instruments. Underwriting and dealing in obligations of the 
United States, general obligations of states and their political 
subdivisions, and other obligations that state member banks of the 
Federal Reserve System may be authorized to underwrite and deal in 
under 12 U.S.C. 24 and 335, including banker's acceptances and 
certificates of deposit.
    (ii) Investing and trading activities. Engaging as principal in:
    (A) Foreign exchange;
    (B) Forward contracts, options, futures, options on futures, 
swaps, and similar contracts, whether traded on exchanges or not, 
based on any rate, price, financial asset (including gold, silver, 
platinum, palladium, copper, or any other metal), nonfinancial 
asset, or group of assets.
    (C) Forward contracts, options, futures, options on futures, 
swaps, and similar contracts, whether traded on exchanges or not, 
based on an index of a rate, a price, or the value of any financial 
asset, nonfinancial asset, or group of assets.
    (ii) Buying and selling bullion, and related activities. Buying, 
selling and storing bars, rounds, bullion, and coins of gold, 
silver, platinum, palladium, copper, and any other metal for the 
company's own account and the account of others, and providing 
incidental services such as arranging for storage, safe custody, 
assaying, and shipment.
    (14) Management consulting and counseling activities
    (i) Management consulting. (A) Providing management consulting 
advice: \5\
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    \5\ In performing this activity, companies are not authorized to 
perform tasks or operations or provide services to client 
institutions either on a daily or continuing basis, except as 
necessary to instruct the client institution on how to perform such 
services for itself. See also the Board's interpretation of bank 
management consulting advice (12 CFR 225.131).
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    (1) On any matter to unaffiliated depository institutions, 
including commercial banks, savings and loan associations, savings 
banks, credit unions, industrial banks, Morris Plan banks, 
cooperative banks, industrial loan companies, trust companies, and 
branches or agencies of foreign banks;
    (2) On any financial, economic, accounting, or audit matter to 
any other company.
    (ii) Employee benefits consulting services. Providing consulting 
services to employee benefit, compensation and insurance plans, 
including designing plans, assisting in the implementation of plans, 
providing administrative services to plans, and developing employee 
communication programs for plans.
    (iii) Career counseling services. Providing career counseling 
services to:

[[Page 21504]]

    (A) A financial organization \6\ and individuals currently 
employed by, or recently displaced from, a financial organization;
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    \6\ Financial organization refers to insured depository 
institution holding companies and their subsidiaries, other than 
nonbanking affiliates of diversified savings and loan holding 
companies that engage in activities not permissible under section 
4(c)(8) of the Bank Holding Company Act (12 U.S.C. 1842(c)(8)).
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    (B) Individuals who are seeking employment at a financial 
organization; and
    (C) Individuals who are currently employed in or who seek 
positions in the finance, accounting, and audit departments of any 
company.
    (15) Support services.
    (i) Courier services. Providing courier services for:
    (A) Checks, commercial papers, documents, and written 
instruments (excluding currency or bearer-type negotiable 
instruments) that are exchanged among banks and financial 
institutions; and
    (B) Audit and accounting media of a banking or financial nature 
and other business records and documents used in processing such 
media.\7\
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    \7\ See also the Board's interpretation on courier activities 
(12 CFR 225.129), which sets forth conditions for company entry into 
the activity.
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    (ii) Printing and selling MICR-encoded items. Printing and 
selling checks and related documents, including corporate image 
checks, cash tickets, voucher checks, deposit slips, savings 
withdrawal packages, and other forms that require Magnetic Ink 
Character Recognition (MICR) encoding.
    (16) Insurance agency and underwriting.
    (i) Credit insurance. Acting as principal, agent, or broker for 
insurance (including home mortgage redemption insurance) that is:
    (A) Directly related to an extension of credit by the company or 
any of its subsidiaries; and
    (B) Limited to ensuring the repayment of the outstanding balance 
due on the extension of credit \8\ in the event of the death, 
disability, or involuntary unemployment of the debtor.
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    \8\ Extension of credit includes direct loans to borrowers, 
loans purchased from other lenders, and leases of real or personal 
property so long as the leases are nonoperating and full-payout 
leases that meet the requirements of paragraph (b)(3) of this 
section.
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    (ii) Finance company subsidiary. Acting as agent or broker for 
insurance directly related to an extension of credit by a finance 
company \9\ that is a subsidiary of a company, if:
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    \9\ Finance company includes all non-deposit-taking financial 
institutions that engage in a significant degree of consumer lending 
(excluding lending secured by first mortgages) and all financial 
institutions specifically defined by individual states as finance 
companies and that engage in a significant degree of consumer 
lending.
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    (A) The insurance is limited to ensuring repayment of the 
outstanding balance on such extension of credit in the event of loss 
or damage to any property used as collateral for the extension of 
credit; and
    (B) The extension of credit is not more than $10,000, or $25,000 
if it is to finance the purchase of a residential manufactured home 
\10\ and the credit is secured by the home; and
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    \10\ These limitations increase at the end of each calendar 
year, beginning with 1982, by the percentage increase in the 
Consumer Price Index for Urban Wage Earners and Clerical Workers 
published by the Bureau of Labor Statistics.
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    (C) The applicant commits to notify borrowers in writing that:
    (1) They are not required to purchase such insurance from the 
applicant;
    (2) Such insurance does not insure any interest of the borrower 
in the collateral; and
    (3) The applicant will accept more comprehensive property 
insurance in place of such single-interest insurance.
    (iii) Insurance in small towns. Engaging in any insurance agency 
activity in a place where the company or a subsidiary has a lending 
office and that:
    (A) Has a population not exceeding 5,000 (as shown in the 
preceding decennial census); or
    (B) Has inadequate insurance agency facilities, as determined by 
the Board, after notice and opportunity for hearing.
    (iv) Insurance-agency activities conducted on May 1, 1982. 
Engaging in any specific insurance-agency activity \11\ if the 
company, or subsidiary conducting the specific activity, conducted 
such activity on May 1, 1982, or received Board approval to conduct 
such activity on or before May 1, 1982.\12\ A company or subsidiary 
engaging in a specific insurance agency activity under this clause 
may:
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    \11\ Nothing contained in this provision shall preclude a 
company subsidiary that is authorized to engage in a specific 
insurance-agency activity under this clause from continuing to 
engage in the particular activity after merger with an affiliate, if 
the merger is for legitimate business purposes and prior notice has 
been provided to the Board.
    \12\ For the purposes of this paragraph, activities engaged in 
on May 1, 1982, include activities carried on subsequently as the 
result of an application to engage in such activities pending before 
the Board on May 1, 1982, and approved subsequently by the Board or 
as the result of the acquisition by such company pursuant to a 
binding written contract entered into on or before May 1, 1982, of 
another company engaged in such activities at the time of the 
acquisition.
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    (A) Engage in such specific insurance agency activity only at 
locations:
    (1) In the state in which the company has its principal place of 
business (as defined in 12 U.S.C. 1842(d));
    (2) In any state or states immediately adjacent to such state; 
and
    (3) In any state in which the specific insurance-agency activity 
was conducted (or was approved to be conducted) by such company or 
subsidiary thereof or by any other subsidiary of such company on May 
1, 1982; and
    (B) Provide other insurance coverages that may become available 
after May 1, 1982, so long as those coverages insure against the 
types of risks as (or are otherwise functionally equivalent to) 
coverages sold or approved to be sold on May 1, 1982, by the company 
or subsidiary.
    (v) Supervision of retail insurance agents. Supervising on 
behalf of insurance underwriters the activities of retail insurance 
agents who sell:
    (A) Fidelity insurance and property and casualty insurance on 
the real and personal property used in the operations of the company 
or its subsidiaries; and
    (B) Group insurance that protects the employees of the company 
or its subsidiaries.
    (vi) Small companies. Engaging in any insurance-agency activity 
if the company has total consolidated assets of $50 million or less. 
A company performing insurance-agency activities under this 
paragraph may not engage in the sale of life insurance or annuities 
except as provided in paragraphs (b)(11)(i) and (iii) of this 
appendix, and it may not continue to engage in insurance-agency 
activities pursuant to this provision more than 90 days after the 
end of the quarterly reporting period in which total assets of the 
holding company and its subsidiaries exceed $50 million.
    (vii) Insurance-agency activities conducted before 1971. 
Engaging in any insurance-agency activity performed at any location 
in the United States directly or indirectly by a company that was 
engaged in insurance-agency activities prior to January 1, 1971, as 
a consequence of approval by the Board prior to January 1, 1971.
    (17) Community development activities.
    (i) Financing and investment activities. Making equity and debt 
investments in corporations or projects designed primarily to 
promote community welfare, such as the economic rehabilitation and 
development of low-income areas by providing housing, services, or 
jobs for residents.
    (ii) Advisory activities. Providing advisory and related 
services for programs designed primarily to promote community 
welfare.
    (18) Money orders, savings bonds, and traveler's checks. The 
issuance and sale at retail of money orders and similar consumer-
type payment instruments; the sale of U.S. savings bonds; and the 
issuance and sale of traveler's checks.
    (19) Data processing. Providing data processing, data storage 
and data transmission services, facilities (including data 
processing, data storage and data transmission hardware, software, 
documentation, or operating personnel), databases, advice, and 
access to such services, facilities, or databases by any 
technological means, if the data to be processed, stored or 
furnished are financial, banking or economic.
    (20) Providing administrative and other services to mutual 
funds.
    (21) Owning shares of a securities exchange.
    (22) Acting as a certification authority for digital signatures 
and authenticating the identity of persons conducting financial and 
nonfinancial transactions.
    (23) Providing employment histories to third parties for use in 
making credit decisions and to depository institutions and their 
affiliates for use in the ordinary course of business.
    (24) Check cashing and wire transmission services.
    (25) In connection with offering banking services, providing 
notary public services, selling postage stamps and postage-paid 
envelopes, providing vehicle registration services, and selling 
public transportation tickets and tokens.

[[Page 21505]]

    (26) Real estate title abstracting.
    (27) Providing management consulting services, including to any 
person with respect to nonfinancial matters, so long as the 
management consulting services are advisory.
    (28) Operating a travel agency in connection with financial 
services.
    (29) Organizing, sponsoring, and managing a mutual fund.
    (30) Directly, or indirectly acquiring or controlling, whether 
as principal, on behalf of 1 or more entities, or otherwise, shares, 
assets, or ownership interests (including debt or equity securities, 
partnership interests, trust certificates, or other instruments 
representing ownership) of a company or other entity, whether or not 
constituting control of such company or entity, if:
    (i) Such shares, assets, or ownership interests are acquired and 
held as part of a bona fide underwriting or merchant or investment 
banking activity, including investment activities engaged in for the 
purpose of appreciation and ultimate resale or disposition of the 
investment;
    (ii) Such shares, assets, or ownership interests are held for a 
period of time to enable the sale or disposition thereof on a 
reasonable basis consistent with the financial viability of the 
activities described in paragraph (30)(i) of this appendix; and
    (iii) During the period such shares, assets, or ownership 
interests are held, the company does not routinely manage or operate 
such company or entity except as may be necessary or required to 
obtain a reasonable return on investment upon resale or disposition.
    (31) Directly or indirectly acquiring or controlling, whether as 
principal, on behalf of 1 or more entities, or otherwise, shares, 
assets, or ownership interests (including debt or equity securities, 
partnership interests, trust certificates or other instruments 
representing ownership) of a company or other entity, whether or not 
constituting control of such company or entity if--
    (i) Such shares, assets, or ownership interests are acquired and 
held by an insurance company that is predominantly engaged in 
underwriting life, accident and health, or property and casualty 
insurance (other than credit-related insurance) or providing and 
issuing annuities;
    (ii) Such shares, assets, or ownership interests represent an 
investment made in the ordinary course of business of such insurance 
company in accordance with relevant State law governing such 
investments; and
    (iii) During the period such shares, assets, or ownership 
interests are held, the company does not routinely manage or operate 
such company except as may be necessary or required to obtain a 
reasonable return on investment.
    (32) Lending, exchanging, transferring, investing for others, or 
safeguarding financial assets other than money or securities.
    (33) Providing any device or other instrumentality for 
transferring money or other financial assets.
    (34) Arranging, effecting, or facilitating financial 
transactions for the account of third parties.

    By order of the Board of Governors of the Federal Reserve 
System, April 2, 2012.
Robert deV. Frierson,
Deputy Secretary of the Board.
[FR Doc. 2012-8515 Filed 4-9-12; 8:45 am]
BILLING CODE 6210-01-P