Alternatives to the Use of External Credit Ratings in the Regulations of the OCC, 35253-35259 [2012-14169]

Agencies

• Office of the Comptroller of the Currency
• DEPARTMENT OF THE TREASURY

[Federal Register Volume 77, Number 114 (Wednesday, June 13, 2012)]
[Rules and Regulations]
[Pages 35253-35259]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2012-14169]


=======================================================================
-----------------------------------------------------------------------

DEPARTMENT OF THE TREASURY

Office of the Comptroller of the Currency

12 CFR Parts 1, 5, 16, 28, and 160

[Docket ID OCC-2012-0005]
RIN 1557-AD36


Alternatives to the Use of External Credit Ratings in the 
Regulations of the OCC

AGENCY: Office of the Comptroller of the Currency, Treasury (OCC).

ACTION: Final rule.

-----------------------------------------------------------------------

SUMMARY: Section 939A of the Dodd-Frank Wall Street Reform and Consumer 
Protection Act (Dodd-Frank Act) contains two directives to Federal 
agencies including the OCC. First, section 939A directs all Federal 
agencies to review, no later than one year after enactment, any 
regulation that requires the use of an assessment of creditworthiness 
of a security or money market instrument and any references to, or 
requirements in, such regulations regarding credit ratings. Second, the 
agencies are required to remove any references to, or requirements of 
reliance on, credit ratings and substitute such standard of 
creditworthiness as each agency determines is appropriate. The statute 
further provides that the agencies shall seek to establish, to the 
extent feasible, uniform standards of creditworthiness, taking into 
account the entities the agencies regulate and the purposes for which 
those entities would rely on such standards.
    On November 29, 2011, the OCC issued a notice of proposed 
rulemaking (NPRM), seeking comment on a proposal to revise its 
regulations pertaining to investment securities, securities offerings, 
and foreign bank capital equivalency deposits to replace references to 
credit ratings with alternative standards of creditworthiness.
    The OCC also proposed to amend its regulations pertaining to 
financial subsidiaries of national banks to better reflect the language 
of the underlying statute, as amended by section 939(d) of the Dodd-
Frank Act.
    Today, the OCC is finalizing those rules as proposed.

DATES: The final rule amending 12 CFR part 5 is effective on July 21, 
2012. The final rules amending 12 CFR parts 1, 16, 28, and 160 are 
effective on January 1, 2013.

FOR FURTHER INFORMATION CONTACT: Kerri Corn, Director for Market Risk, 
Credit and Market Risk Division, (202) 874-4660; Michael Drennan, 
Senior Advisor, Credit and Market Risk Division, (202) 874-4660; Carl 
Kaminski, Senior Attorney, or Kevin Korzeniewski, Attorney, Legislative 
and Regulatory Activities Division, (202) 874-5090; or Eugene H. 
Cantor, Counsel, Securities and Corporate Practices Division, (202) 
874-5210, Office of the Comptroller of the Currency, 250 E Street SW., 
Washington, DC 20219.

SUPPLEMENTARY INFORMATION: 

I. Background

    Section 939A of the Dodd-Frank Wall Street Reform and Consumer 
Protection Act \1\ (the Dodd-Frank Act) contains two directives to 
Federal agencies including the OCC. First, section 939A directs all 
Federal agencies to review, no later than one year after enactment, any 
regulation that requires the use of an assessment of creditworthiness 
of a security or money market instrument and any references to or 
requirements in such regulations regarding credit ratings. Second, the 
agencies are required to remove references to, or requirements of 
reliance on, credit ratings and substitute such standard of 
creditworthiness as each agency determines is appropriate. The statute 
further provides that the agencies shall seek to establish, to the 
extent feasible, uniform standards of creditworthiness, taking into 
account the entities the agencies regulate and the purposes for which 
those entities would rely on those standards.
---------------------------------------------------------------------------

    \1\ Public Law 111-203, Section 939A, 124 Stat. 1376, 1887 (July 
21, 2010).
---------------------------------------------------------------------------

    On November 29, 2011, the OCC issued a notice of proposed 
rulemaking (NPRM), seeking comment on a proposal to revise its 
regulations pertaining to investment securities, securities offerings, 
and foreign bank capital equivalency deposits to replace references to 
credit ratings with alternative standards of creditworthiness. The OCC 
also proposed to amend its regulations pertaining to financial 
subsidiaries of national banks to better reflect the language of the 
underlying statute, as amended by section 939(d) of the Dodd-Frank Act.
    The proposal generally pertained to rules that require national 
banks and Federal savings associations to determine whether a 
particular security or issuance qualifies, or does not qualify, for a 
specific treatment. For example, except for U.S. government securities 
and certain municipal securities, the OCC's investment securities 
regulations generally require a national bank or Federal savings 
association to determine whether or not a security is ``investment 
grade'' in order to determine whether purchasing the security is 
permissible.
    The OCC received 11 comments on the proposed rules from banks, bank 
trade groups, individuals, and bank service providers. The majority of 
the commenters generally supported the proposed rules and stated that 
they presented a workable alternative to the use of credit ratings. A 
few commenters raised specific issues, which are addressed in more 
detail below.
    After considering the comments and the issues raised, the OCC has 
decided to finalize the rules as proposed. In order to assist national 
banks and Federal savings associations in making these ``investment 
grade'' determinations, the OCC also is publishing a final guidance 
document today in this issue of the Federal Register.

II. Description of the Final Rules

    For the purposes of its regulations at 12 CFR parts 1, 16, 28, and 
160, the OCC is amending the definition of ``investment grade'' to 
remove references to credit ratings and nationally recognized 
statistical rating

[[Page 35254]]

organizations (NRSROs).\2\ Where appropriate, the final rules replace 
the references to credit ratings with non-ratings based standards of 
creditworthiness.
---------------------------------------------------------------------------

    \2\ A nationally recognized statistical rating organization 
(NRSRO) is an entity registered with the U.S. Securities and 
Exchange Commission (SEC) as an NRSRO under section 15E of the 
Securities Exchange Act of 1934. See, 15 U.S.C. 78o-7, as 
implemented by 17 CFR 240.17g-1.
---------------------------------------------------------------------------

Parts 1, 16, and 160

    These final rules remove references to credit ratings provided by 
NRSROs and instead generally require national banks and Federal savings 
associations to make assessments of a security's creditworthiness, 
similar to the assessments currently required for the purchase of 
unrated securities.

National Bank Regulations

    Under the proposed amendments to parts 1 and 16, a security would 
be ``investment grade'' if the issuer of the security has an adequate 
capacity to meet financial commitments under the security for the 
projected life of the asset or exposure. To meet this new standard, 
national banks must determine that the risk of default by the obligor 
is low and the full and timely repayment of principal and interest is 
expected. In the case of a structured security (that is, a security 
that relies primarily on the cash flows and performance of underlying 
collateral for repayment, rather than the credit of the issuer), the 
determination that full and timely repayment of principal and interest 
is expected may be influenced more by the quality of the underlying 
collateral, the cash flow rules, and the structure of the security 
itself than by the condition of the entity that is technically the 
issuer.
    When determining whether a particular security is ``investment 
grade,'' the OCC expects national banks to consider a number of 
factors, to the extent appropriate. While external credit ratings and 
assessments remain valuable sources of information and provide national 
banks with a standardized credit risk indicator, if a national bank 
chooses to use credit ratings as part of its ``investment grade'' 
determination and due diligence, the bank should, consistent with 
existing rules and guidance, supplement the external ratings with a 
degree of due diligence processes and additional analyses that are 
appropriate for the bank's risk profile and for the size and complexity 
of the instrument. In other words, a security rated in the top four 
rating categories by an NRSRO is not automatically deemed to satisfy 
the revised ``investment grade'' standard.
    Importantly, the proposal did not include a requirement that a 
national bank consider external credit ratings to make an ``investment 
grade'' determination. Therefore, a national bank could rely on other 
sources of information, including its own internal systems and/or 
analytics provided by third parties, when conducting due diligence and 
determining whether a particular security is a permissible and 
appropriate investment.
    In comments on the proposed rule and guidance, banks and industry 
groups expressed concern about the amount of due diligence that the OCC 
would require a bank to conduct to determine whether an issuer has an 
adequate capacity to meet financial commitments under the security. 
Commenters were particularly concerned about the impact of due 
diligence requirements on smaller institutions. The OCC believes that 
the proposed ``investment grade'' standard and the due diligence 
required to meet it are consistent with those under prior ratings-based 
standards and existing due diligence requirements and guidance. Even 
under the prior ratings-based standards, national banks of all sizes 
should not rely solely on a credit rating to evaluate the credit risk 
of a security, and consistently have been advised through guidance and 
other supervisory materials to supplement any use of credit ratings 
with additional research on the credit risk of a particular security. 
Therefore, the OCC expects that most national banks already have such 
processes in place.
    After considering the comments received, the OCC has decided to 
finalize the definition of ``investment grade'' as proposed. Also, in 
today's Federal Register, the OCC is publishing final guidance to 
assist national banks in determining whether a security is ``investment 
grade'' and to further explain the OCC's expectations with regard to 
regulatory due diligence requirements,\3\ which remain unchanged. While 
the final guidance explains the OCC's expectations in more detail, the 
OCC's regulations require national banks to understand and evaluate the 
risks of purchasing investment securities. Fundamentally, national 
banks should not purchase securities for which they do not understand 
the relevant risks.
---------------------------------------------------------------------------

    \3\ See 12 CFR 1.5 (national banks) and 12 CFR 160.1(b) and 
160.40(c) (federal savings associations).
---------------------------------------------------------------------------

    One commenter stated that the definition of ``investment grade'' 
for structured securities should explicitly require a bank to consider 
the likely performance of the underlying collateral under stressed 
economic scenarios. In the proposed rule, the OCC noted that the 
National Credit Union Administration (NCUA) explicitly proposed to 
include a similar requirement for all investment securities in 
regulations applicable to Federal credit unions.\4\ Under the NCUA 
proposal, a Federal credit union must consider whether an obligor will 
continue to have the capacity to meet financial commitments, even under 
adverse economic conditions, when considering the creditworthiness of a 
security. In the November 29, 2011, proposal, the OCC requested comment 
on whether OCC regulations should include a similar requirement in the 
regulations applicable to national banks and Federal savings 
associations.
---------------------------------------------------------------------------

    \4\ 76 FR 11164 (March 1, 2011).
---------------------------------------------------------------------------

    Under the OCC's prior ratings-based definition of ``investment 
grade,'' a security could be characterized as ``investment grade'' if 
it was rated in the top four ``investment grade'' ratings by two NRSROs 
(or one NRSRO if only one NRSRO had rated the particular security) or, 
if no NRSROs had rated the security, if the national bank or Federal 
savings association determined that the security was the credit 
equivalent of a security rated in the top four ``investment grade'' 
categories by an NRSRO. As a general matter, NRSROs consider potential 
adverse economic conditions when determining how to appropriately rate 
a security.\5\ Therefore, the ratings-based standard for determining 
whether a security is ``investment grade'' generally included the 
consideration of potential adverse economic conditions.
---------------------------------------------------------------------------

    \5\ For example, on its public Web site, Moody's Corporation 
includes the following statement in its description of its ratings 
methodology:
    In coming to a conclusion, rating committees routinely examine a 
variety of scenarios. Moody's ratings deliberately do not 
incorporate a single, internally consistent economic forecast. They 
aim rather to measure the issuer's ability to meet debt obligations 
against economic scenarios reasonably adverse to the issuer's 
specific circumstances.
    Available at, https://www.moodys.com/ratings-process/Ratings-Policy-Approach/002003.
---------------------------------------------------------------------------

    The OCC does not intend for the elimination of references to credit 
ratings, in accordance with the Dodd-Frank Act, to change substantively 
the standards national banks must follow when deciding whether a 
security is ``investment grade,'' nor does it change the requirement 
set forth at 12 CFR 1.5, that institutions adhere to safe and sound 
banking practices when dealing in, underwriting, and purchasing and 
selling investment securities, and consider, as appropriate, the risks 
associated with the particular activities

[[Page 35255]]

undertaken by the bank. As previously noted, national banks must 
perform due diligence necessary to establish (1) that the risk of 
default by the obligor is low, and (2) that full and timely repayment 
of principal and interest is expected. The depth of the due diligence 
should be a function of the security's credit quality, the complexity 
of the structure, and the size of the investment. The more complex a 
security's structure, the greater the expectations, even when the 
credit quality is perceived to be very high. To satisfy the 
``investment grade'' and safety and soundness standards, a national 
bank should ensure that it understands a security's structure and how 
the security may perform under adverse economic conditions. A national 
bank should be particularly diligent when purchasing a structured 
security.
    To the extent a national bank would be expected to consider adverse 
economic conditions under the current ``investment grade'' and safety 
and soundness standards, the OCC would expect the national bank to 
continue to consider adverse economic conditions, as appropriate, when 
conducting investment securities activities. Importantly, a national 
bank may not need to develop its own internal systems to measure 
potential adverse economic conditions to meet the revised standard. 
Instead, a national bank could consider projections provided by third 
parties, including those provided by NRSROs. Therefore, the OCC has 
determined that the ``investment grade'' standard does not need to be 
revised to address the commenter's concern. However, the OCC recognizes 
the need to clarify its expectations with regard to the level of due 
diligence necessary to meet the investment grade and safety and 
soundness standards. Therefore, the final guidance document, which is 
being published in today's Federal Register, provides further detail on 
the amount of due diligence the OCC expects national banks and Federal 
savings associations to undertake, including, as appropriate, the 
consideration of potential adverse economic conditions.

Federal Savings Association Regulations

    Under current law, savings associations generally are prohibited by 
statute from investing in corporate debt securities unless they are 
rated ``investment grade'' by an NRSRO.\6\ However, the Dodd-Frank Act 
provides that on July 21, 2012, this statutory requirement will be 
replaced by ``standards of creditworthiness established by the 
[FDIC].'' \7\ In this final rule, the OCC is adopting the rule as 
proposed to define the term ``investment grade,'' as it is used in Part 
160, to refer to 12 U.S.C. 1831e. Therefore, it will continue to 
reference the current ratings-based requirement until such time as that 
requirement is replaced by the FDIC.
---------------------------------------------------------------------------

    \6\ 12 U.S.C. 1831e(d)(1).
    \7\ Public Law 111-203, Section 939(a)(2) (July 21, 2010).
---------------------------------------------------------------------------

    A few commenters were concerned that the statutory provision 
requiring the FDIC to create an alternative for ratings under 12 U.S.C. 
1831e could lead to different alternatives to the use of ratings for 
corporate debt securities. The OCC has consulted with and intends to 
continue to consult with the FDIC on the development of the alternative 
creditworthiness standard under 12 U.S.C. 1831e to ensure consistency 
to the extent possible.
    At 12 CFR 160.42, Federal savings associations are subject to 
certain limitations with regard to purchases of state and local 
government obligations. Previously, Federal savings associations could 
hold state or municipal revenue bonds that have ratings in one of the 
four highest ``investment grade'' rating categories from one issuer up 
to a limit of 10 percent of total capital without prior OCC approval. 
Under the revised rules, this provision would apply to state or 
municipal revenue bonds if the issuer has an adequate capacity to meet 
financial commitments under the security for the projected life of the 
asset or exposure. An issuer has an adequate capacity to meet financial 
commitments if the risk of default by the obligor is low and the full 
and timely repayment of principal and interest is expected.
    The OCC considered the comments discussed above regarding changes 
to the definition of ``investment grade'' for national bank 
regulations. For the same reasons, the OCC believes that Federal 
savings associations already should be conducting due diligence on 
these securities and that the new ``investment grade'' standard is 
appropriate. Therefore, the OCC adopts the revisions to Sec.  160.42 as 
proposed. In addition, Federal savings associations should look to the 
final guidance document, issued today in the Federal Register, to 
provide more information about how to meet the ``investment grade'' 
standard in Sec.  160.42.

Safety and Soundness Regulations

    In addition to regulatory provisions that generally limit national 
banks and Federal savings associations to purchasing securities that 
are of ``investment grade,'' OCC regulations require that national 
banks and Federal savings associations conduct their investment 
activities in a manner that is consistent with safe and sound 
practices.\8\ Specifically, national banks and Federal savings 
associations must consider the interest rate, credit, liquidity, price 
and other risks presented by investments, and the investments must be 
appropriate for the particular institution.\9\ In addition to 
determining whether a security is of ``investment grade,'' national 
banks and Federal savings associations with substantial securities 
portfolios, in particular, must have and maintain robust risk 
management frameworks to ensure that an investment in a particular 
security appropriately fits within its goals and that the institution 
will remain in compliance with all relevant concentration limits. The 
final rules do not amend those provisions.\10\
---------------------------------------------------------------------------

    \8\ 12 CFR 1.5; 12 CFR 160.1(b), 160.40(c).
    \9\ 12 CFR 1.5(a); 12 CFR 160.1(b), 160.40(c).
    \10\ 76 FR 11164 (March 1, 2011).
---------------------------------------------------------------------------

Part 28--Foreign Banking Institutions

    The OCC's capital equivalency deposit regulation at 12 CFR 28.15 
previously allowed for the use of certificates of deposit or bankers' 
acceptances as part of the deposit if the issuer is rated ``investment 
grade'' by an internationally recognized rating organization. This 
final rule removes the requirement referencing credit ratings provided 
by ratings organizations. Instead, the issuer of the certificate of 
deposit or banker's acceptance must have ``an adequate capacity to meet 
financial commitments for the projected life of the asset or 
exposure.'' The OCC received no comments on this revision, and adopts 
it as proposed.

Effective Date

    The OCC did not propose a specific effective date in the proposed 
rule. Two bank industry commenters were concerned that banks and 
savings associations would have insufficient time to develop processes 
for making ``investment grade'' determinations on new securities 
purchased before the effective date of this final rule. In addition, 
these commenters were concerned about the burden of analyzing 
securities institutions had purchased before the effective date of this 
final rule. These commenters suggested that the OCC adopt a one-year 
delayed effective date and allow for grandfathering of securities held 
by the institution before the effective date of this rule.
    The OCC recognizes that it may take time for some national banks 
and

[[Page 35256]]

Federal savings associations to develop the systems and processes 
necessary to make ``investment grade'' determinations under the new 
standard. Therefore, the OCC is allowing institutions until January 1, 
2013, to come into compliance with this rule.
    The OCC also understands that national banks and Federal savings 
associations own a significant amount of securities that were purchased 
with heavy reliance on credit ratings. Some of these securities, 
particularly structured securities, have maturity dates that could 
extend to 30 years. Therefore, the OCC does not believe that 
grandfathering would be appropriate, as institutions would be able to 
hold a grandfathered security for decades without performing additional 
``investment grade'' analysis. National banks and Federal savings 
associations will still have until the proposed effective date of 
January 1, 2013, to evaluate their existing holdings and ensure that 
they meet the revised standard.

Part 5--Financial Subsidiaries

    Finally, the OCC is adopting as proposed a technical change to 12 
CFR 5.39, which pertains to financial subsidiaries of national banks, 
to conform with section 939(d) of the Dodd-Frank Act, which amends the 
criteria applicable to national banks seeking to control or hold an 
interest in a financial subsidiary.
    Currently, pursuant to 12 U.S.C. 24a(a)(3), a national bank that is 
one of the 50 largest insured banks may control or hold an interest in 
a financial subsidiary if, among other criteria, the bank has at least 
one issue of outstanding eligible debt rated in one of the top three 
``investment grade'' rating categories by an NRSRO.\11\ A national bank 
that is one of the second 50 largest insured banks may either satisfy 
this requirement or it may satisfy such other criteria as the Secretary 
of the Treasury and the Federal Reserve Board may establish jointly by 
regulation. The Secretary of the Treasury and the Federal Reserve Board 
established an alternative creditworthiness requirement under this 
provision of the National Bank Act; however, the alternative 
requirement also is based on NRSRO credit ratings. Pursuant to Treasury 
Department regulations, a national bank that is within the second 50 
largest insured banks may invest in a financial subsidiary if it has a 
``current long-term issuer credit rating from at least one NRSRO that 
is within the three highest ``investment grade'' rating categories used 
by the organization.'' \12\ No statutory creditworthiness requirement 
applies under current law to national banks that are not among the 
largest 100 insured banks.
---------------------------------------------------------------------------

    \11\ 12 U.S.C. 24a(a)(3)(A)(i).
    \12\ 12 U.S.C. 24a(a)(3)(A)(ii). See, 12 CFR 1501.3.
---------------------------------------------------------------------------

    Section 939(d) of the Dodd-Frank Act amends the creditworthiness 
requirements applicable to the 100 largest insured banks by removing 
the reference to NRSRO ratings and by eliminating any distinction 
between the first 50 largest insured banks and the second 50 such 
institutions. Effective on July 21, 2012, a national bank that is one 
of the 100 largest insured banks may control a financial subsidiary, 
directly or indirectly, or hold an interest in a financial subsidiary 
if the bank has not fewer than one issue of outstanding debt that meets 
such standards of creditworthiness or other criteria as the Secretary 
of the Treasury and the Federal Reserve Board may jointly establish. As 
is the case under current law, this statutory creditworthiness 
requirement does not apply to an insured depository institution that is 
not among the largest 100 insured depository institutions. Therefore, 
the Dodd-Frank revision will not affect the ability of such an 
institution to control or hold an interest in a financial 
subsidiary.\13\
---------------------------------------------------------------------------

    \13\ The reference to creditworthiness standards issued jointly 
by the Treasury Department and the Federal Reserve Board with 
respect to the 100 largest insured banks appears in a paragraph--
paragraph (3)--that is cross-referenced by section 24a(a)(2)(E), 
which lists all of the requirements necessary for a national bank to 
have a financial subsidiary. This (a)(2)(E) list of requirements was 
amended by Dodd-Frank so that it continues to cross-reference 
paragraph (3), but now also refers to standards of creditworthiness 
established by the OCC as a criterion for having a financial 
subsidiary. Under one reading, (a)(2)(E) could be construed to 
impose new creditworthiness requirements for having a financial 
subsidiary on national banks that are not among the 100 largest 
insured banks and to permit banks that are among the 100 largest 
insured banks to choose between any creditworthiness standards that 
the OCC might issue and those issued jointly by the Treasury and the 
Board. Neither result squares with the cross-reference in the text 
to the requirement for the Treasury and the Board to issue 
creditworthiness standards for the 100 largest insured banks. 
Moreover, this reading is not sensible given that the statutory 
purpose is to eliminate references to credit rating agency ratings 
in statute and regulation, not to alter the requirements for all 
national banks to hold financial subsidiaries. The better reading is 
that national banks that are among the 100 largest insured banks 
must meet such standards of creditworthiness as the Treasury and the 
Board jointly establish and that the OCC is not required to impose 
new requirements on national banks that are not in that category.
---------------------------------------------------------------------------

    The Secretary of the Treasury and Federal Reserve Board have not 
yet established alternative non-ratings-based creditworthiness 
requirements applicable to the 100 largest insured banks under this 
revised provision of the National Bank Act. Until specific 
creditworthiness standards are established under 12 U.S.C. 24a, as 
modified by the Dodd-Frank Act, no specific creditworthiness 
requirements will be required of national banks applying to control or 
hold an interest in a financial subsidiary. Importantly, however, the 
requirements at 12 CFR 5.39(g)(1) and (2) still apply. These provisions 
provide that a national bank may control or hold an interest in a 
financial subsidiary only if it and each depository institution 
affiliate is well-capitalized and well-managed, and the aggregate 
consolidated total assets of all financial subsidiaries of the national 
bank do not exceed the lesser of 45 percent of the consolidated total 
assets of the parent bank or $50 billion (or such greater amount as is 
determined according to an indexing mechanism jointly established by 
regulation by the Secretary of the Treasury and the Board of Governors 
of the Federal Reserve System).
    In the NPRM and technical supplement,\14\ the OCC proposed to 
revise 12 CFR 5.39 to be consistent with the Dodd-Frank Act revisions 
to 12 U.S.C. 24a described above. The OCC received no comments on the 
proposed revision, and therefore adopts it as proposed in the NPRM and 
technical amendment supplement.
---------------------------------------------------------------------------

    \14\ 76 FR 76905 (December 9, 2011).
---------------------------------------------------------------------------

III. Implementation Guidance

    Together with this final rule, the OCC is publishing guidance for 
national bank and Federal savings association investment activities. 
This guidance is designed as an aid to institutions, particularly 
community banks and thrifts, regarding the factors they should consider 
in their due diligence with respect to securities of different degrees 
of complexity. The guidance reflects the OCC's expectations for 
national banks and Federal savings associations as they review their 
systems and consider any changes necessary to comply with the 
provisions for assessing credit risk in this final rule. The guidance 
describes factors institutions should consider with respect to certain 
types of investment securities to assess creditworthiness and to 
continue conducting their activities in a safe and sound manner.
    As noted above, OCC regulations require that national banks and 
Federal savings associations conduct their investment activities in a 
manner that is consistent with safe and sound practices. Neither the 
final rules, nor the final guidance, change this requirement. The OCC 
expects national banks and Federal savings associations to continue

[[Page 35257]]

to follow safe and sound practices in their investment activities.

IV. Regulatory Analyses

A. Paperwork Reduction Act

    This final rule amends several regulations for which the OCC 
currently has approved collections of information under the Paperwork 
Reduction Act (44 U.S.C. 3501-3520) (OMB Control Nos. 1557-0014; 1557-
0190; 1557-0120; 1557-0205). The amendments in this final rule do not 
introduce any new collections of information into the rules, nor do 
they amend the rules in a way that substantively modifies the 
collections of information that Office of Management and Budget (OMB) 
has previously approved. Therefore, no additional OMB Paperwork 
Reduction Act approval is required at this time.

B. Regulatory Flexibility Act Analysis

    Pursuant to section 605(b) of the Regulatory Flexibility Act,\15\ 
(RFA), the regulatory flexibility analysis otherwise required under 
section 604 of the RFA is not required if an agency certifies that the 
rule will not have a significant economic impact on a substantial 
number of small entities (defined for purposes of the RFA to include 
banks with assets less than or equal to $175 million) and publishes its 
certification and a short, explanatory statement in the Federal 
Register along with its rule.
---------------------------------------------------------------------------

    \15\ 5 U.S.C. 605(b).
---------------------------------------------------------------------------

    This final rule would affect all 599 small national banks and all 
284 small federally chartered savings associations.\16\ However, 
because banks have long been expected to maintain a risk management 
process to ensure that credit risk is effectively identified, measured, 
monitored, and controlled, most if not all of the institutions affected 
by the rule already engage in appropriate risk management activity. 
Although the rule will affect a substantial number of small banks and 
federally chartered savings associations, it will not have a 
significant effect on a substantial number of those institutions. 
Therefore, the OCC certifies that the rule would not have a significant 
impact on a substantial number of small entities.
---------------------------------------------------------------------------

    \16\ All totals are as of March 31, 2012.
---------------------------------------------------------------------------

C. Unfunded Mandates Reform Act

    Section 202 of the Unfunded Mandates Reform Act of 1995, Public Law 
104-4 (UMRA) requires that an agency prepare a budgetary impact 
statement before promulgating a rule that includes a Federal mandate 
that may result in the expenditure by state, local, and tribal 
governments, in the aggregate, or by the private sector of $100 million 
or more (adjusted annually for inflation) in any one year. If a 
budgetary impact statement is required, section 205 of the UMRA also 
requires an agency to identify and consider a reasonable number of 
regulatory alternatives before promulgating a rule.
    The OCC has determined that its final rule would not result in 
expenditures by state, local, and tribal governments, or by the private 
sector, of $100 million or more. Accordingly, the OCC has not 
specifically addressed the regulatory alternatives considered.

List of Subjects

12 CFR Part 1

    Banks, Banking, National banks, Reporting and recordkeeping 
requirements, Securities.

12 CFR Part 5

    Administrative practice and procedure, National banks, Reporting 
and recordkeeping requirements, Securities.

12 CFR Part 16

    National banks, Reporting and recordkeeping requirements, 
Securities.

12 CFR Part 28

    Foreign banking, National banks, Reporting and recordkeeping 
requirements.

12 CFR Part 160

    Banks, Banking, Consumer protection, Investments, manufactured 
homes, Mortgages, Reporting and recordkeeping requirements, Savings 
associations, Securities, Surety bonds.

Authority and Issuance

    For the reasons stated in the preamble, the Office of the 
Comptroller of the Currency is amending parts 1, 5, 16, 28, and 160 of 
chapter I of Title 12, Code of Federal Regulations as follows:

PART 1--INVESTMENT SECURITIES

0
1. The authority citation for part 1 continues to read as follows:

    Authority: 12 U.S.C. 1, et. seq., 12 U.S.C. 24 (Seventh), and 12 
U.S.C. 93a.

0
2. In Sec.  1.2, revise paragraphs (d) through (f), remove and reserve 
paragraph (h), and revise paragraphs (m) and (n), to read as follows:


Sec.  1.2  Definitions.

* * * * *
    (d) Investment grade means the issuer of a security has an adequate 
capacity to meet financial commitments under the security for the 
projected life of the asset or exposure. An issuer has an adequate 
capacity to meet financial commitments if the risk of default by the 
obligor is low and the full and timely repayment of principal and 
interest is expected.
    (e) Investment security means a marketable debt obligation that is 
investment grade and not predominately speculative in nature.
    (f) Marketable means that the security:
    (1) Is registered under the Securities Act of 1933, 15 U.S.C. 77a 
et seq.;
    (2) Is a municipal revenue bond exempt from registration under the 
Securities Act of 1933, 15 U.S.C. 77c(a)(2);
    (3) Is offered and sold pursuant to Securities and Exchange 
Commission Rule 144A, 17 CFR 230.144A, and investment grade; or
    (4) Can be sold with reasonable promptness at a price that 
corresponds reasonably to its fair value.
* * * * *
    (h) [Reserved]
* * * * *
    (m) Type IV security means:
    (1) A small business-related security as defined in section 
3(a)(53)(A) of the Securities Exchange Act of 1934, 15 U.S.C. 
78c(a)(53)(A), that is fully secured by interests in a pool of loans to 
numerous obligors.
    (2) A commercial mortgage-related security that is offered or sold 
pursuant to section 4(5) of the Securities Act of 1933, 15 U.S.C. 
77d(5), that is investment grade, or a commercial mortgage-related 
security as described in section 3(a)(41) of the Securities Exchange 
Act of 1934, 15 U.S.C. 78c(a)(41), that represents ownership of a 
promissory note or certificate of interest or participation that is 
directly secured by a first lien on one or more parcels of real estate 
upon which one or more commercial structures are located and that is 
fully secured by interests in a pool of loans to numerous obligors.
    (3) A residential mortgage-related security that is offered and 
sold pursuant to section 4(5) of the Securities Act of 1933, 15 U.S.C. 
77d(5), that is investment grade, or a residential mortgage-related 
security as described in section 3(a)(41) of the Securities Exchange 
Act of 1934, 15 U.S.C. 78c(a)(41)) that does not otherwise qualify as a 
Type I security.
    (n) Type V security means a security that is:
    (1) Investment grade;
    (2) Marketable;
    (3) Not a Type IV security; and
    (4) Fully secured by interests in a pool of loans to numerous 
obligors and in which a national bank could invest directly.

0
3. In Sec.  1.3, revise paragraphs (e) and (h) to read as follows:

[[Page 35258]]

Sec.  1.3  Limitations on dealing in, underwriting, and purchase and 
sale of securities.

* * * * *
    (e) Type IV securities. A national bank may purchase and sell Type 
IV securities for its own account. The amount of the Type IV securities 
that a bank may purchase and sell is not limited to a specified 
percentage of the bank's capital and surplus.
* * * * *
    (h) Pooled investments--(1) General. A national bank may purchase 
and sell for its own account investment company shares provided that:
    (i) The portfolio of the investment company consists exclusively of 
assets that the national bank may purchase and sell for its own 
account; and
    (ii) The bank's holdings of investment company shares do not exceed 
the limitations in Sec.  1.4(e).
    (2) Other issuers. The OCC may determine that a national bank may 
invest in an entity that is exempt from registration as an investment 
company under section 3(c)(1) of the Investment Company Act of 1940, 
provided that the portfolio of the entity consists exclusively of 
assets that a national bank may purchase and sell for its own account.
    (3) Investments made under this paragraph (h) must comply with 
Sec.  1.5 of this part, conform with applicable published OCC 
precedent, and must be:
    (i) Marketable and investment grade, or
    (ii) Satisfy the requirements of Sec.  1.3(i).
* * * * *

PART 5--RULES, POLICIES, AND PROCEDURES FOR CORPORATE ACTIVITIES

0
4. The authority citation for part 5 continues to read as follows:

    Authority:  12 U.S.C. 1, et. seq., 12 U.S.C. 93a, 215a-2, 215a-
3, 481, and section 5136A of the Revised Statutes (12 U.S.C. 24a).


0
5. In Sec.  5.39, revise paragraph (g)(3), add paragraph (g)(4), and 
revise paragraph (j)(2) to read as follows:


Sec.  5.39  Financial subsidiaries.

* * * * *
    (g) * * *
    (3) If the national bank is one of the 100 largest insured banks, 
determined on the basis of the bank's consolidated total assets at the 
end of the calendar year, the bank has not fewer than one issue of 
outstanding debt that meets such standards of creditworthiness or other 
criteria as the Secretary of the Treasury and the Federal Reserve Board 
may jointly establish pursuant to Section 5136A of title LXII of the 
Revised Statutes (12 U.S.C. 24a).
    (4) Paragraph (g)(3) of this section does not apply if the 
financial subsidiary is engaged solely in activities in an agency 
capacity.
* * * * *
    (j) * * *
    (2) Eligible debt requirement. A national bank that does not 
continue to meet the qualification requirement set forth in paragraph 
(g)(3) of this section, applicable where the bank's financial 
subsidiary is engaged in activities other than solely in an agency 
capacity, may not directly or through a subsidiary, purchase or acquire 
any additional equity capital of any such financial subsidiary until 
the bank meets the requirement in paragraph (g)(3) of this section. For 
purposes of this paragraph (j)(2), the term ``equity capital'' 
includes, in addition to any equity investment, any debt instrument 
issued by the financial subsidiary if the instrument qualifies as 
capital of the subsidiary under Federal or state law, regulation, or 
interpretation applicable to the subsidiary.
* * * * *

PART 16--SECURITIES OFFERING DISCLOSURE RULES

0
6. The authority citation for part 16 continues to read as follows:

    Authority:  12 U.S.C. 1, et. seq., 12 U.S.C. 93a.


0
7. In Sec.  16.2, revise paragraph (g) to read as follows:


Sec.  16.2  Definitions.

* * * * *
    (g) Investment grade means the issuer of a security has an adequate 
capacity to meet financial commitments under the security for the 
projected life of the asset or exposure. An issuer has an adequate 
capacity to meet financial commitments if the risk of default by the 
obligor is low and the full and timely repayment of principal and 
interest is expected.
* * * * *

0
8. In Sec.  16.6, revise paragraph (a)(4) to read as follows:


Sec.  16.6  Sales of nonconvertible debt.

    (a) * * *
    (4) The debt is investment grade.
* * * * *

PART 28--INTERNATIONAL BANKING ACTIVITIES

0
9. The authority citation for part 28 continues to read as follows:

    Authority:  12 U.S.C. 1 et seq., 24 (Seventh), 93a, 161, 602, 
1818, 3101 et seq., and 3901 et seq.


0
10. In Sec.  28.15, revise paragraph (a)(1)(iii) to read as follows:


Sec.  28.15  Capital equivalency deposits.

    (a) * * * (1) * * *
    (iii) Certificates of deposit, payable in the United States, and 
banker's acceptances, provided that, in either case, the issuer has an 
adequate capacity to meet financial commitments for the projected life 
of the asset or exposure. An issuer has an adequate capacity to meet 
financial commitments if the risk of default by the obligor is low and 
the full and timely repayment of principal and interest is expected
* * * * *

PART 160--LENDING AND INVESTMENT

0
11. The authority citation for part 160 continues to read as follows:

    Authority:  12 U.S.C. 1462, 1462a, 1463, 1464, 1467a, 1701j-3, 
1828, 3803, 3806, 5412(b)(2)(B); 42 U.S.C. 4106.


0
12. In Sec.  160.3, add the definition of Investment grade in 
alphabetical order to read as follows:


Sec.  160.3  Definitions.

* * * * *
    Investment grade means a security that meets the creditworthiness 
standards described in 12 U.S.C. 1831e.
* * * * *

0
13. In Sec.  160.40, revise paragraphs (a)(1)(i), (a)(1)(ii), and 
(a)(2)(ii) as follows:


Sec.  160.40  Commercial paper and corporate debt securities.

* * * * *
    (a) * * * (1) * * *
    (i) Investment grade as of the date of purchase; or
    (ii) Guaranteed by a company having outstanding paper that meets 
the standard set forth in paragraph (a)(1)(i) of this section.
    (2) * * *
    (ii) Investment grade.
* * * * *

0
14. In Sec.  160.42, revise paragraphs (a) and (d) to read as follows:


Sec.  160.42  State and local government obligations.

    (a) Pursuant to HOLA section 5(c)(1)(H), a Federal savings 
association may invest in obligations issued by any state, territory, 
possession, or political subdivision thereof (``governmental entity''), 
subject to appropriate underwriting and the following conditions:

[[Page 35259]]



------------------------------------------------------------------------
                                       Aggregate          Per-issuer
                                      limitation          limitation
------------------------------------------------------------------------
 (1) General obligations........  None..............  None.
 (2) Other obligations of a       None..............  10% of the
 governmental entity (e.g.,                            institution's
 revenue bonds) if the issuer                          total capital.
 has an adequate capacity to
 meet financial commitments
 under the security for the
 projected life of the asset or
 exposure. An issuer has an
 adequate capacity to meet
 financial commitments if the
 risk of default by the obligor
 is low and the full and timely
 repayment of principal and
 interest is expected.
 (3) Obligations of a             As approved by the  10% of the
 governmental entity that do not   OCC.                institution's
 qualify under any other                               total capital.
 paragraph but are approved by
 the OCC.
------------------------------------------------------------------------

* * * * *
    (d) For all securities, the institution must consider, as 
appropriate, the interest rate, credit, liquidity, price, transaction, 
and other risks associated with the investment activity and determine 
that such investment is appropriate for the institution. The 
institution must also determine that the obligor has adequate resources 
and willingness to provide for all required payments on its obligations 
in a timely manner.

0
15. In Sec.  160.93, revise paragraph (d)(5) introductory text and 
paragraph (d)(5)(i) to read as follows:


Sec.  160.93  Lending limitations.

* * * * *
    (d) * * *
    (5) Notwithstanding the limit set forth in paragraphs (c)(1) and 
(c)(2) of this section, a savings association may invest up to 10 
percent of unimpaired capital and unimpaired surplus in the obligations 
of one issuer evidenced by:
    (i) Commercial paper or corporate debt securities that are, as of 
the date of purchase, investment grade.
* * * * *

0
16. In Sec.  160.121, revise paragraphs (b)(1) and (2) to read as 
follows:


Sec.  160.121  Investments in state housing corporations.

* * * * *
    (b) * * *
    (1) The obligations are investment grade; or
    (2) The obligations are approved by the OCC. The aggregate 
outstanding direct investment in obligations under paragraph (b) of 
this section shall not exceed the amount of the Federal savings 
association's total capital.
* * * * *

    Dated: June 4, 2012.
Thomas J. Curry,
Comptroller of the Currency.
[FR Doc. 2012-14169 Filed 6-12-12; 8:45 am]
BILLING CODE 4810-33-P