Subordinated Debt Issued by a National Bank, 75417-75423 [2014-29615]

Agencies

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

[Federal Register Volume 79, Number 243 (Thursday, December 18, 2014)]
[Rules and Regulations]
[Pages 75417-75423]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2014-29615]



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Federal Register / Vol. 79, No. 243 / Thursday, December 18, 2014 / 
Rules and Regulations

[[Page 75417]]



DEPARTMENT OF THE TREASURY

Office of the Comptroller of the Currency

12 CFR Part 5

[Docket ID OCC-2014-0024]
RIN 1557-AD73


Subordinated Debt Issued by a National Bank

AGENCY: Office of the Comptroller of the Currency, Treasury.

ACTION: Interim final rule and request for comments.

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SUMMARY: The Office of the Comptroller of the Currency (OCC) is 
amending its interim final rule making Basel III conforming amendments 
related to cross-references, subordinated debt and limits based on 
regulatory capital. The interim final rule, published in the Federal 
Register on February 28, 2014, revised and clarified the OCC's rules 
governing subordinated debt issued by national banks and Federal 
savings associations to make those rules consistent with the 2013 
revised capital rules. The OCC is further clarifying the subordinated 
debt rules for national banks by moving certain provisions from 
national bank guidance to the rules and making other clarifying and 
technical amendments.

DATES: This interim final rule is effective January 1, 2015. Comments 
must be received by January 20, 2015.

ADDRESSES: Because paper mail in the Washington, DC area and at the OCC 
is subject to delay, commenters are encouraged to submit comments 
through the Federal eRulemaking Portal or email, if possible. Please 
use the title ``Subordinated Debt Issued by a National Bank'' to 
facilitate the organization and distribution of the comments. You may 
submit comments by any of the following methods:
     Federal eRulemaking Portal--``Regulations.gov'': Go to 
www.regulations.gov. Enter ``Docket ID OCC-2014-0024'' in the Search 
Box and click ``Search.'' Results can be filtered using the filtering 
tools on the left side of the screen. Click on ``Comment Now'' to 
submit public comments.
     Click on the ``Help'' tab on the Regulations.gov home page 
to get information on using Regulations.gov, including instructions for 
submitting public comments.
     Email: regs.comments@occ.treas.gov.
     Mail: Legislative and Regulatory Activities Division, 
Office of the Comptroller of the Currency, 400 7th Street SW., Suite 
3E-218, Mail Stop 9W-11, Washington, DC 20219.
     Hand Delivery/Courier: 400 7th Street SW., Suite 3E-218, 
Mail Stop 9W-11, Washington, DC 20219.
     Fax: (571) 465-4326.
    Instructions: You must include ``OCC'' as the agency name and 
``Docket ID OCC-2014-0024'' in your comment. In general, OCC will enter 
all comments received into the docket and publish them on the 
Regulations.gov Web site without change, including any business or 
personal information that you provide such as name and address 
information, email addresses, or phone numbers. Comments received, 
including attachments and other supporting materials, are part of the 
public record and subject to public disclosure. Do not enclose any 
information in your comment or supporting materials that you consider 
confidential or inappropriate for public disclosure.
    You may review comments and other related materials that pertain to 
this rulemaking action by any of the following methods:
     Viewing Comments Electronically: Go to 
www.regulations.gov. Enter ``Docket ID OCC-2014-0024'' in the Search 
box and click ``Search.'' Comments can be filtered by Agency using the 
filtering tools on the left side of the screen.
     Click on the ``Help'' tab on the Regulations.gov home page 
to get information on using Regulations.gov, including instructions for 
viewing public comments, viewing other supporting and related 
materials, and viewing the docket after the close of the comment 
period.
     Viewing Comments Personally: You may personally inspect 
and photocopy comments at the OCC, 400 7th Street SW., Washington, DC. 
For security reasons, the OCC requires that visitors make an 
appointment to inspect comments. You may do so by calling (202) 649-
6700. Upon arrival, visitors will be required to present valid 
government-issued photo identification and to submit to security 
screening in order to inspect and photocopy comments.
     Docket: You may also view or request available background 
documents and project summaries using the methods described above.

FOR FURTHER INFORMATION CONTACT: Jean Campbell, Senior Attorney, 
Legislative and Regulatory Activities Division, (202) 649-5490; and 
Patricia D. Goings, Senior Licensing Analyst, or Patricia Roberts, 
Senior Licensing Analyst, Licensing Division, (202) 649-6260.

SUPPLEMENTARY INFORMATION:

I. Background

    On October 11, 2013, the OCC published in the Federal Register the 
2013 revised capital rules,\1\ which listed, at 12 CFR 3.20(d), the 
criteria that an instrument must satisfy to be included in tier 2 
capital. The mandatory compliance date for the 2013 revised capital 
rules is January 1, 2014, for advanced approaches national banks and 
Federal savings associations,\2\ and

[[Page 75418]]

January 1, 2015, for non-advanced approaches national banks and Federal 
savings associations.
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    \1\ See 78 FR 62018 (Oct. 11, 2013). Among other things, this 
rule adopted the Basel III Capital Framework and revised Prompt 
Corrective Action requirements for national banks and Federal 
savings associations.
    \2\ The Basel III Capital Framework, at 12 CFR 3.100(b)(1), 
defines an advanced approaches national bank or Federal savings 
association to mean a national bank or Federal savings association 
that:
    1. Has consolidated total assets, as reported on its most recent 
year-end Consolidated Reports of Condition and Income (Call Report) 
equal to $250 billion or more;
    2. Has consolidated total on-balance sheet foreign exposure on 
its most recent year-end Call Report equal to $10 billion or more 
(where total on-balance sheet foreign exposure equals total cross-
border claims less claims with a head office or guarantor located in 
another country plus redistributed guaranteed amounts to the country 
of head office or guarantor plus local country claims on local 
residents plus revaluation gains on foreign exchange and derivative 
products, calculated in accordance with the Federal Financial 
Institutions Examination Council (FFIEC) 009 Country Exposure 
Report);
    3. Is a subsidiary of a depository institution that uses the 
advanced approaches pursuant to subpart E of 12 CFR part 3 (OCC), 12 
CFR part 217 (Board of Governors of the Federal Reserve System) 
(Board), or 12 CFR part 325 (Federal Deposit Insurance Corporation) 
(FDIC) to calculate its total risk-weighted assets;
    4. Is a subsidiary of a bank holding company or savings and loan 
holding company that uses the advanced approaches pursuant to 12 CFR 
part 217 to calculate its total risk-weighted assets; or
    5. Elects to use subpart E of 12 CFR part 3 to calculate its 
total risk-weighted assets.
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    On February 28, 2014, the OCC published an interim final rule 
(February 2014 interim final rule) \3\ amending the OCC's rules to be 
consistent with the 2013 revised capital rules. The February 2014 
interim final rule revised and clarified the OCC's rules, at 12 CFR 
5.47 and 163.81,\4\ governing subordinated debt issued by national 
banks and Federal savings associations, respectively, to make the 
subordinated debt rules consistent with the Basel III criteria. In 
order to accommodate the different compliance dates for advanced 
approaches national banks and Federal savings associations and non-
advanced approaches national banks and Federal savings associations, 
the February 2014 interim final rule created two sets of provisions: 
the first set of provisions that contained the pre-Basel III version of 
the subordinated debt rules (with minimal changes), and the second set 
of provisions that contained the new Basel III-conforming subordinated 
debt rules.
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    \3\ See 79 FR 11300 (Feb. 28, 2014).
    \4\ The OCC recently proposed to move 12 CFR 163.81 to 12 CFR 
5.56. See 79 FR 33260 (June 10, 2014).
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    The second set of provisions incorporated substantive changes 
necessary to be consistent with the Basel III Capital Framework for 
subordinated debt. With respect to tier 2 capital instruments, those 
changes include: (i) Requiring all national banks and Federal savings 
associations to obtain prior OCC approval to prepay subordinated debt; 
(ii) prohibiting the holder of subordinated debt from having a 
contractual right to accelerate principal or interest on the 
instrument, except in the event of a receivership, insolvency, 
liquidation, or other similar proceeding; and (iii) prohibiting the 
exercise of a call option in the first five years following issuance, 
except in certain very limited circumstances.
    As described in the preamble to the February 2014 interim final 
rule, this structure was intended to be temporary. The next section of 
this Supplementary Information describes in detail the changes the OCC 
is making in this interim final rule to further clarify the 
subordinated debt rules applicable to national banks under Sec.  5.47.
    Because of differences in the respective rules and guidance 
applicable to national banks and Federal savings associations, changes 
to 12 CFR 163.81 are not being made at this time. In the future, the 
OCC will consider integrating its rules regarding the issuance of 
subordinated debt for national banks and Federal savings associations.

II. Changes to Sec.  5.47 Applicable to National Banks

A. Structural Changes

    Beginning January 1, 2015, the first set of provisions at 
paragraphs (b) through (i) will no longer be necessary because they 
provide the old criteria and procedures for issuance and prepayment of 
subordinated debt that are not consistent with the Basel III Capital 
Framework. Accordingly, the OCC is deleting the first set of provisions 
and renumbering the second set of provisions. In addition, the OCC is 
making technical amendments throughout Sec.  5.47 to remove all 
references to timing differences for advanced approaches national banks 
and non-advanced approaches national banks.

B. Requirements Applicable to Subordinated Debt

1. Guidelines for Subordinated Debt
    Following publication of the February 2014 interim final rule, the 
OCC undertook a review of its guidance for subordinated debt issued by 
a national bank to make it consistent with the Basel III Capital 
Framework and the amendments to Sec.  5.47. As a result of that review, 
the OCC has decided that most of the practices and disclosures 
described in Appendix A of the Subordinated Debt booklet of the 
Licensing Manual (current Guidelines) should be moved to Sec.  5.47 to 
locate applicable requirements in one place. The changes to Sec.  5.47 
are described in Section II.B.2. of this Supplementary Information.
    We note that, with a few exceptions described in Section II.B.2. of 
this Supplementary Information, the changes do not increase burden for 
institutions issuing subordinated debt. Typically, subordinated debt 
notes issued by national banks were consistent with the practices and 
disclosures described in the current Guidelines for a number of 
practical reasons, including making the review process quicker and more 
efficient and avoiding unnecessary burden and effort by the national 
bank by using sample language provided in the current Guidelines. The 
new requirements in this interim final rule are: (1) A new disclosure 
related to the OCC's authority under 12 CFR 3.11 to limit 
distributions, including interest payments on any tier 2 capital 
instrument if the national bank has full discretion to permanently or 
temporarily suspend such payments without triggering an event of 
default; and (2) an expanded prohibition on covenants or provisions 
that unreasonably restrict a national bank's ability to raise 
additional capital through the issuance of additional subordinated debt 
or other regulatory capital instruments.
    Prior to the effective date of this interim final rule, the OCC 
plans to issue revised Guidelines for Subordinated Debt Issued by 
National Banks (revised Guidelines) and a revised sample note that are 
consistent with the 2013 revised capital rules and the amendments to 
Sec.  5.47 made by the February 2014 interim final rule.
2. Description of Changes to Sec.  5.47
    The pre-Basel III rules were ambiguous regarding what, if any, 
requirements apply to subordinated debt that is not included in tier 2 
capital. Accordingly, the February 2014 interim final rule clarified 
that certain basic requirements apply to all subordinated debt by 
adding the substantive requirements in Sec.  3.701(f)(1) to the 
subordinated debt rule. The pre-Basel III rules generally did not 
require eligible national banks to obtain prior approval to prepay 
subordinated debt. However, the Basel III Capital Framework requires 
prior approval to prepay subordinated debt included in tier 2 capital. 
Therefore, the February 2014 interim final rule required that all 
national banks, not just eligible national banks, obtain prior approval 
to prepay such subordinated debt. In addition, the Basel III Capital 
Framework imposes additional requirements on a prepayment in the form 
of a call option, and the February 2014 interim final rule added those 
requirements to the subordinated debt rules.
    The OCC is amending the name of paragraph (a) by deleting ``and 
applicability'' from the title of paragraph (a); adding additional 
statutory cites in paragraph (a)(1); and deleting paragraph (a)(2), 
which provides different compliance dates for an advanced approaches 
national bank and a non-advanced approaches national bank.
    The OCC is redesignating current paragraph (j), ``Scope,'' as new 
paragraph (b). New paragraph (b) is amended to clarify that, in 
addition to setting forth procedures for the OCC's review and approval 
of subordinated

[[Page 75419]]

debt, Sec.  5.47 also sets forth requirements that are applicable to 
all subordinated debt issued by a national bank. The OCC believes this 
change more accurately reflects the content of Sec.  5.47 and alerts a 
national bank that certain requirements apply to all subordinated debt, 
even if the national bank is not required to file an application to 
issue or prepay subordinated debt or a notice to include the 
subordinated debt in regulatory capital.
    The OCC is redesignating current paragraph (k), ``Definitions,'' as 
new paragraph (c) and adding two new definitions. The new definitions 
are ``payment on subordinated debt'' and ``original maturity.'' The OCC 
is adding these definitions to clarify the meaning of those terms as 
they are used in Sec.  5.47. ``Payment on subordinated debt'' is 
defined to mean principal and interest, and premium, if any, and 
``original maturity'' is defined to mean the stated maturity of the 
subordinated debt note. While the definition of ``payment on 
subordinated debt'' is new, the substance of this definition reflects 
the prior understanding of payment as reflected in the language of the 
disclosures in the current Guidelines. The new definition of ``original 
maturity'' further clarifies that if a subordinated debt note does not 
have a stated maturity, the original maturity would be the earliest 
possible date the subordinated debt note may be redeemed, repurchased, 
prepaid, terminated, or otherwise retired by the national bank pursuant 
to the terms of such note. This definition of ``original maturity'' is 
consistent with existing OCC precedent.
    The OCC is redesignating current paragraph (l) as new paragraph 
(d); renaming new paragraph (d) ``Requirements for issuance of 
subordinated debt''; adding a heading to new paragraph (d)(1), 
``Minimum terms''; and redesignating current paragraph (l)(1)(viii) as 
new paragraph (d)(3)(iii). The OCC also is revising paragraph (d)(1); 
redesignating paragraph (d)(2) as new paragraph (e); and adding new 
paragraphs (d)(2) and (d)(3), as described in greater detail below.
    In addition, in redesignated paragraph (d)(1)(iv) the OCC is 
clarifying the meaning of the term ``unsecured'' by providing that a 
subordinated debt note must not include the establishment of any 
legally enforceable fund for payment of the subordinated debt note 
through: (i) a sinking fund; or (ii) a compensating balance or other 
funds or assets subject to a legal right of offset, as defined by 
applicable state law. This concept of a sinking fund or compensating 
balance is being moved to paragraph (d)(1)(iv) from the current 
Guidelines. The OCC is concerned with any type of arrangement that 
acts, in economic substance, to create a secured arrangement between 
the note holder and the issuing national bank. The OCC has concluded 
that a sinking fund or similar arrangement that sets aside assets of a 
national bank constitutes a de facto secured arrangement or interest 
for the benefit of the subordinated note holder because, in the event 
of insolvency, the proceeds from the sale of the assets securing the 
loan would function like collateral and would be applied to the 
obligations of the holder of the subordinated debt note, which would 
place the note holder senior in right of payment to other creditors. 
Compensating balances, while rare, also have the potential to place the 
note holder in a de facto secured position. The concern is that, under 
state law, a correspondent bank may have a right of offset against the 
compensating balance for any amount due on the note. Therefore, the OCC 
is prohibiting such an arrangement with respect to the issuance of 
subordinated debt where a legally enforceable right of offset exists 
because it constitutes a secured arrangement for the benefit of the 
note holder.
    The OCC is adding new paragraph (d)(2), ``Corporate authority.'' 
New paragraph (d)(2) prohibits the inclusion of any provision or 
covenant in a subordinated debt note that unduly restricts or otherwise 
limits the authority of a national bank or interferes with the OCC's 
supervision of the national bank. The OCC is moving five examples of 
provisions or covenants to new paragraph (d)(2) from the current 
Guidelines. Although these provisions are being added as new provisions 
to the regulations, as described in Section II.B.1. of this 
Supplementary Information, national banks currently comply with the 
substance of these provisions. New paragraph (d)(2)(i) prohibits a 
covenant or provision in which the national bank agrees to maintain a 
certain minimum amount in its capital accounts, or minimum assets, 
liquidity, loan ratios or other similar metrics. Pursuant to 12 U.S.C. 
1818 and 3907, the OCC seeks to prohibit unsafe or unsound banking 
practices and promote maintenance of a national bank's capital, 
particularly when a national bank is experiencing financial 
difficulties. While a statement affirming the national bank's current 
condition would be acceptable, a covenant that would require a national 
bank to maintain on an ongoing basis a specified minimum amount in its 
capital accounts, or minimum capital assets, liquidity, loan ratios or 
other similar metrics, potentially would subject the national bank to 
acceleration at the very point in time when the national bank should 
seek to maintain its capital. The OCC believes this would constitute an 
unsafe or unsound banking practice and therefore is prohibiting such a 
covenant.
    New paragraph (d)(2)(ii) prohibits a covenant or provision that 
unduly restricts a national bank's ability to raise additional capital 
through the issuance of additional subordinated debt or other 
regulatory capital instruments. The OCC believes that it would 
constitute an unsafe or unsound banking practice if a national bank 
agreed to such a covenant. The OCC notes that this provision mirrors 
similar restrictions in the 2013 revised capital rules for additional 
tier 1 capital and the wording in the current Guidelines has been 
expanded to cover the issuance of all regulatory capital instruments, 
including additional subordinated debt. An example of a prohibited 
covenant, which is provided in the current Guidelines, would be one 
that requires any subordinated debt issued by the national bank in the 
future to be junior in right of payment to the current issuance. The 
OCC believes this requirement reflects a fundamental supervisory policy 
that is equally applicable to all capital instruments, not just tier 1 
instruments, and that the underlying concern that such a covenant in a 
subordinated debt note would unreasonably restrict a national bank's 
ability to raise capital in the future is equally applicable to 
subordinated debt.
    New paragraph (d)(2)(iii) prohibits a covenant or provision that 
provides for default and acceleration of the subordinated debt as the 
result of a change in control, if such change in control results from 
the OCC's exercise of its statutory authority to require a national 
bank to sell stock in that national bank, enter into a merger or 
consolidation, or be acquired by a bank holding company. In a situation 
where a national bank is considered ``significantly undercapitalized'' 
as defined under applicable law, or in certain circumstances where it 
is considered ``undercapitalized,'' the OCC has broad statutory 
authority to require a national bank to sell stock in the national 
bank, enter into a merger or consolidation, or be acquired by a bank 
holding company. In such a case, the OCC does not allow a change in 
control resulting from such OCC action to constitute a default. 
Therefore, the OCC is adding this prohibition. The OCC believes that, 
in practice, such a clause

[[Page 75420]]

is unnecessary because when the OCC directs the merger or acquisition 
of the national bank, the OCC requires the purchaser of a national bank 
to assume the obligation on the subordinated debt note, which provides 
adequate protection to the note holder.
    New paragraph (d)(2)(iv) prohibits a covenant or provision that 
requires the prior approval of a purchaser or holder of the 
subordinated debt note in the case of a voluntary merger by a national 
bank where the resulting institution assumes the due and punctual 
performance of all conditions of the subordinated debt note and 
agreement and is not in default of the various covenants of the 
subordinated debt. The OCC is moving this provision from the current 
Guidelines to paragraph (d)(2)(iv) with one simplifying change; the 
rule does not require the resulting institution to be a commercial 
bank. The OCC believes that the amended language sufficiently protects 
the note holder by permitting a default clause if a voluntary merger 
does not satisfy these conditions, while at the same time not 
interfering with a national bank's ability to exercise its business 
judgment and manage the national bank in a manner that avoids unsafe or 
unsound banking practices.
    Paragraph (d)(2)(v) prohibits a covenant or provision that provides 
for default and acceleration of the subordinated debt as the result of 
a default by a subsidiary of the national bank (including a limited 
liability company), unless there is a separate agreement between the 
subsidiary and the purchaser of the national bank's subordinated debt 
note; and such separate agreement has been reviewed and approved by the 
OCC. While the OCC acknowledges that in some instances default by a 
subsidiary may signal financial difficulties of the parent national 
bank, the OCC believes it would be an unsafe or unsound banking 
practice if a technical or otherwise minor default by a subsidiary of 
the national bank could trigger the default of a national bank's 
subordinated debt note resulting in acceleration. Therefore, the rule 
allows such a default to occur only if there is a separate agreement 
between the subsidiary and the purchaser and the separate agreement has 
been reviewed and approved by the OCC.
    The OCC is adding new paragraph (d)(3), ``Disclosure 
requirements.'' New paragraph (d)(3)(i) provides two disclosures that 
the OCC has determined are sufficiently important to require that they 
must appear clearly on the face of a subordinated debt note in all 
capital letters using the exact language in paragraph (d)(3)(i). These 
disclosures, which are being moved to new paragraph (d)(3)(i) from the 
current Guidelines, state that the obligation is not a deposit and is 
not insured by the Federal Deposit Insurance Corporation (FDIC), and 
that the obligation is subordinated to claims of depositors and general 
creditors, is unsecured, and is ineligible as collateral for a loan by 
the issuing national bank.
    New paragraph (d)(3)(ii) lists three types of disclosures that a 
national bank is required to make in the subordinated debt note. The 
OCC has determined that these disclosures contain important information 
that must be disclosed to a potential purchaser of the subordinated 
debt note. However, rather than providing specific language for these 
disclosures, paragraph (d)(3)(ii) allows national banks discretion in 
how they word the disclosures, provided the disclosures are made 
clearly and accurately. Two of these disclosures are being moved to 
paragraph (d)(3)(ii) from the current Guidelines, and the third one is 
a new disclosure.
    The first such disclosure, at paragraph (d)(3)(ii)(A), relates to 
the order and level of subordination. In addition to being subordinated 
to the claims of depositors, this disclosure provides that, at a 
minimum, the subordinated debt note is subordinate and junior in its 
right of payment to the obligations of all creditors, including both 
secured and unsecured or general creditors, except those specifically 
designated as ranking on a parity with, or subordinated to, the 
subordinated debt note. The second disclosure, at paragraph 
(d)(3)(ii)(B), is a general description of the OCC's regulatory 
authority with respect to a national bank in danger of insolvency that 
includes: (1) in the case of insolvency, that the FDIC, acting as 
receiver, has authority to transfer a national bank's obligation under 
the subordinated debt note and to supersede or void any default, 
acceleration, or subordination that may have occurred; (2) in the case 
of a national bank that is ``undercapitalized'' as defined by 
applicable law and fails to satisfactorily implement a required capital 
restoration plan, that the national bank may be subject to the 
additional restrictions and requirements applicable to a 
``significantly undercapitalized'' institution, including being 
required to sell shares in the national bank, being acquired by a 
depository institution holding company, or being merged or consolidated 
with another depository institution, and this authority supersedes and 
voids any defaults that may have occurred; and (3) in the case of a 
national bank that is ``critically undercapitalized,'' as defined by 
applicable law, that the national bank is prohibited from making 
principal or interest payments on the subordinated debt note without 
prior regulatory approval.
    The third such disclosure, at paragraph (d)(3)(ii)(C), is a new 
disclosure that is not in the current Guidelines. It describes the 
OCC's authority under 12 CFR 3.11 to limit distributions, including 
interest payments on any tier 2 capital instrument if the national bank 
has full discretion to permanently or temporarily suspend such payments 
without triggering an event of default. The OCC believes that this 
disclosure is necessary to make clear to subordinated debt note holders 
the circumstances in which certain payments or other distributions 
related to the subordinated debt note could be limited and is 
particularly important in light of the potential new limitations under 
the Basel III Capital Framework.
    Current paragraph (l)(1)(viii) requires that subordinated debt must 
comply with the Securities Offering Disclosure Rules in 12 CFR part 16, 
and the OCC is retaining that requirement as redesignated paragraph 
(d)(3)(iii). The rules in Part 16 establish registration statement and 
prospectus requirements for the offer or sale of securities issued by a 
national bank, subject to exemptions.
    The OCC notes that national banks also must comply with all 
applicable laws and regulations, such as the federal and state 
securities laws.
    The OCC is redesignating current paragraph (l)(2), ``Additional 
requirements to qualify as tier 2 capital,'' as new paragraph (e). In 
addition, the OCC is adding a reminder that 12 CFR 3.20(d)(1)(xi) 
requires an advanced approaches national bank to make a specific 
disclosure that holders of the instrument may be fully subordinated to 
interests held by the U.S. government in the event that the national 
bank enters into a receivership, insolvency, liquidation, or similar 
proceeding. The OCC also is deleting the requirement relating to 
applicable OCC guidance for subordinated debt, which will no longer be 
necessary because those practices and disclosures deemed to be most 
important by the OCC are being added to Sec.  5.47.
    The OCC is redesignating current paragraph (m) as new paragraph (f) 
and renaming new paragraph (f) ``Process and procedures.'' The OCC also 
is redesignating current paragraphs (n), (o), and (p) as new paragraphs 
(g), (h), and (i).

[[Page 75421]]

III. Request for Comments

    The OCC requests comment on all aspects of this interim final rule.

IV. Regulatory Analysis

A. Administrative Procedure Act

    Pursuant to the Administrative Procedure Act (APA),\5\ at 5 U.S.C. 
553(b)(B), notice and comment are not required prior to the issuance of 
a final rule if an agency, for good cause, finds that ``notice and 
public procedure thereon are impracticable, unnecessary, or contrary to 
the public interest.'' The OCC finds that it is impracticable to seek 
prior notice and comment for the following reasons. Subordinated debt 
plays an important role in the capital and liquidity management of 
national banks. The February 2014 interim final rule revised and 
clarified the OCC's rules governing subordinated debt issued by 
national banks to make those rules consistent with the 2013 revised 
capital rules. This interim final rule makes important clarifications 
to those subordinated debt rules by moving certain provisions from the 
current Guidelines to the rules and making other clarifying and 
technical amendments. This interim final rule is necessary because the 
2013 revised capital rules will become applicable to non-advanced 
approaches national banks beginning January 1, 2015. Accordingly, the 
OCC finds good cause to issue this interim final rule.
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    \5\ See 5 U.S.C. 553(b) and (d).
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    The APA also requires that a substantive rule must be published not 
less than 30 days before its effective date, unless, among other 
things, the agency determines for good cause that the rule should 
become effective before such time. For the reasons described above, the 
OCC finds good cause to dispense with the delayed effective date 
otherwise required.\6\
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    \6\ See id. at 553(d).
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B. Regulatory Flexibility Act

    The Regulatory Flexibility Act (RFA) \7\ generally requires an 
agency that is issuing a proposed rule to prepare and make available 
for public comment an initial regulatory flexibility analysis that 
describes the impact of the proposed rule on small entities. The RFA 
does not apply to a rulemaking where a general notice of proposed 
rulemaking is not required.\8\ For the reasons described above, the OCC 
has determined, for good cause, that it is unnecessary to publish a 
notice of proposed rulemaking for this interim final rule. Accordingly, 
the RFA's requirements relating to an initial and final regulatory 
flexibility analysis do not apply.
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    \7\ See id. at 601 et seq.
    \8\ See id. at 603 and 604.
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C. Unfunded Mandates Reform Act

    Section 202 of the Unfunded Mandates Reform Act of 1995, 2 U.S.C. 
1532, requires that an agency prepare a budgetary impact statement 
before promulgating any rule likely to result in 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, as 
adjusted for inflation, in any one year. The Unfunded Mandates Reform 
Act only applies when an agency issues a general notice of proposed 
rulemaking. Because the OCC is not publishing a notice of proposed 
rulemaking, this final rule is not subject to section 202 of the 
Unfunded Mandates Reform Act.

D. Paperwork Reduction Act

    Under the Paperwork Reduction Act (PRA) (44 U.S.C. 3501-3520), the 
OCC may not conduct or sponsor, and a person is not required to respond 
to, an information collection unless the information collection 
displays a valid Office of Management and Budget (OMB) control number. 
The majority of the information collection requirements contained in 
this interim final rule have previously been approved under OMB Control 
Nos. 1557-0014 and 1557-0320. The amendments published today do not 
modify the approved collections but add a disclosure requirement that 
needs OMB approval. Section 5.47(d)(3)(ii)(C) requires in the 
subordinated debt note, a description of the OCC's authority under 12 
CFR 3.11 to limit distributions, including interest payments on any 
tier 2 capital instrument if the national bank has full discretion to 
permanently or temporarily suspend such payments without triggering an 
event of default. The OCC has submitted its collection under OMB 
Control No. 1557-0320 to OMB for revision to seek approval for this 
requirement.
    Estimated Number of Respondents: 42.
    Estimated Number of Responses per Respondent: 1.
    Estimated Burden Hours per Response: 0.50 hours.
    Total Estimated Burden: 21 hours.
    Comments are invited on:
    (a) Whether the collection of information is necessary for the 
proper performance of the functions of the OCC, including whether the 
information shall have practical utility;
    (b) The accuracy of the OCC's estimate of the burden of the 
collection of information;
    (c) Ways to enhance the quality, utility, and clarity of the 
information to be collected;
    (d) Ways to minimize the burden of the collection on respondents, 
including through the use of automated collection techniques or other 
forms of information technology; and
    (e) Estimates of capital or start-up costs and costs of operation, 
maintenance, and purchase of services to provide information.

List of Subjects in 12 CFR Part 5

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

Authority and Issuance

    For the reasons set forth in the preamble, the OCC amends 12 CFR 
Chapter I, part 5, as set forth below.

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

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

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

0
2. Revise Sec.  5.47 to read as follows:


Sec.  5.47  Subordinated debt issued by a national bank.

    (a) Authority. 12 U.S.C. 93a, 1831o, and 3907.
    (b) Scope. This section sets forth the requirements applicable to 
all subordinated debt notes issued by national banks and the procedures 
for OCC review and approval of a national bank's application to issue 
or prepay subordinated debt and a notice to include subordinated debt 
in tier 2 capital.
    (c) Definitions. The following definitions apply to this section:
    Capital plan means a plan describing the means and schedule by 
which a national bank will attain specified capital levels or ratios, 
including a capital restoration plan filed with the OCC under 12 U.S.C. 
1831o and 12 CFR 6.5.
    Original maturity means the stated maturity of the subordinated 
debt note. If the subordinated debt note does not have a stated 
maturity, then original maturity means the earliest possible date the 
subordinated debt note may be redeemed, repurchased, prepaid, 
terminated, or otherwise retired by the national bank pursuant to the 
terms of the subordinated debt note.
    Payment on subordinated debt means principal and interest, and 
premium, if any.

[[Page 75422]]

    Tier 2 capital has the same meaning as set forth in 12 CFR 3.20(d).
    (d) Requirements for issuance of subordinated debt. A national bank 
issuing subordinated debt must satisfy the requirements of this 
paragraph (d).
    (1) Minimum terms. The terms of any subordinated debt note issued 
by a national bank must:
    (i) Have a minimum original maturity of at least five years;
    (ii) Not be a deposit and not insured by the Federal Deposit 
Insurance Corporation (FDIC);
    (iii) Be subordinated to the claims of depositors;
    (iv) Be unsecured, which would include prohibiting the 
establishment of any legally enforceable fund earmarked for payment of 
the subordinated debt note through:
    (A) A sinking fund; or
    (B) A compensating balance or any other funds or assets subject to 
a legal right of offset, as defined by applicable state law;
    (v) Be ineligible as collateral for a loan by the issuing national 
bank;
    (vi) Provide that once any scheduled payments of principal begin, 
all scheduled payments shall be made at least annually and the amount 
repaid in each year shall be no less than in the prior year; and
    (vii) Provide that, where applicable, no payment (including payment 
pursuant to an acceleration clause, redemption prior to maturity, 
repurchase, or exercising a call option) shall be made without prior 
OCC approval.
    (2) Corporate authority. A subordinated debt note must not include 
any provision or covenant that unduly restricts or otherwise acts to 
unduly limit the authority of a national bank or interferes with the 
OCC's supervision of the national bank. Specifically, this would 
include a provision or covenant that:
    (i) Maintains a certain minimum amount in its capital accounts or 
other metric, such as minimum capital assets, liquidity, or loan 
ratios;
    (ii) Unreasonably restricts a national bank's ability to raise 
additional capital through the issuance of additional subordinated debt 
or other regulatory capital instruments;
    (iii) Provides for default and acceleration of the subordinated 
debt as the result of a change in control, if such change in control 
results from the OCC's exercise of its statutory authority to require a 
national bank to sell stock in that national bank, enter into a merger 
or consolidation, or be acquired by a bank holding company;
    (iv) Requires the prior approval of a purchaser or holder of the 
subordinated debt note in the case of a voluntary merger by a national 
bank where the resulting institution:
    (A) Assumes the due and punctual performance of all conditions of 
the subordinated debt note and agreement; and
    (B) Is not in default of the various covenants of the subordinated 
debt; and
    (v) Provides for default and acceleration of the subordinated debt 
as the result of a default by a subsidiary (including a limited 
liability company) of the national bank, unless:
    (A) There is a separate agreement between the subsidiary and the 
purchaser of the national bank's subordinated debt note; and
    (B) Such agreement has been reviewed and approved by the OCC.
    (3) Disclosure requirements. (i) A national bank must disclose 
clearly on the face of any subordinated debt note the following 
language in all capital letters:
    (A) THIS OBLIGATION IS NOT A DEPOSIT AND IS NOT INSURED BY THE 
FEDERAL DEPOSIT INSURANCE CORPORATION; and
    (B) THIS OBLIGATION IS SUBORDINATED TO CLAIMS OF DEPOSITORS AND 
GENERAL CREDITORS, IS UNSECURED, AND IS INELIGIBLE AS COLLATERAL FOR A 
LOAN BY [INSERT NAME OF ISSUING NATIONAL BANK].
    (ii) A national bank must disclose clearly and accurately in the 
subordinated debt note:
    (A) The order and level of subordination, and in addition to being 
subordinated to the claims of depositors, provide that, at a minimum, 
the subordinated debt note is subordinate and junior in its right of 
payment to the obligations of all creditors, including both secured and 
unsecured or general creditors, except those specifically designated as 
ranking on a parity with, or subordinated to, the subordinated debt 
note;
    (B) A general description of the OCC's regulatory authority with 
respect to a national bank in danger of insolvency that includes:
    (1) With respect to insolvency, that the FDIC, acting as receiver, 
has authority to transfer a national bank's obligation under the 
subordinated debt note and to supersede or void any default, 
acceleration, or subordination that may have occurred;
    (2) If a national bank that is ``undercapitalized'' as defined by 
applicable law fails to satisfactorily implement a required capital 
restoration plan, the national bank may be subject to all the 
additional restrictions and requirements applicable to a 
``significantly undercapitalized'' institution, as defined by 
applicable law, including being required to sell shares in the national 
bank, being acquired by a depository institution holding company, or 
being merged or consolidated with another depository institution, and 
this authority supersedes and voids any defaults that may have 
occurred; and
    (3) If a national bank is ``critically undercapitalized,'' as 
defined by applicable law, the national bank is prohibited from making 
principal or interest payments on the subordinated debt note without 
prior regulatory approval; and
    (C) A description of the OCC's authority under 12 CFR 3.11 to limit 
distributions, including interest payments on any tier 2 capital 
instrument if the national bank has full discretion to permanently or 
temporarily suspend such payments without triggering an event of 
default.
    (iii) A national bank must comply with the Securities Offering 
Disclosure Rules in 12 CFR part 16.
    (e) Additional requirements to qualify as tier 2 capital. In order 
to qualify as tier 2 capital, a national bank's subordinated debt must 
meet the requirements in 12 CFR 3.20(d), including, for an advanced 
approaches national bank, the disclosure requirement in 12 CFR 
3.20(d)(1)(xi).
    (f) Process and procedures--(1) Issuance of subordinated debt--(i) 
Approval--(A) Eligible bank. An eligible bank is required to receive 
prior approval from the OCC to issue any subordinated debt, in 
accordance with paragraph (g)(1)(i) of this section, if:
    (1) The national bank will not continue to be an eligible bank 
after the transaction;
    (2) The OCC has previously notified the national bank that prior 
approval is required; or
    (3) Prior approval is required by law.
    (B) National bank not an eligible bank. A national bank that is not 
an eligible bank must receive prior OCC approval to issue any 
subordinated debt, in accordance with paragraph (g)(1)(i) of this 
section.
    (ii) Notice to include subordinated debt in tier 2 capital. All 
national banks must notify the OCC, in accordance with paragraph (h) of 
this section, within ten days after issuing subordinated debt that is 
to be counted as tier 2 capital. Where a national bank's application to 
issue subordinated debt has been deemed to be approved, in accordance 
with paragraph (g)(2)(i) of this section, the national bank must notify 
the OCC, pursuant to paragraph (h) of this section, after issuance of 
the

[[Page 75423]]

subordinated debt. A national bank may not include subordinated debt as 
tier 2 capital unless the national bank has filed the notice with the 
OCC and received notification from the OCC that the subordinated debt 
issued by the national bank qualifies as tier 2 capital.
    (2) Prepayment of subordinated debt--(i) Subordinated debt not 
included in tier 2 capital--(A) Eligible bank. An eligible bank is 
required to receive prior approval from the OCC to prepay any 
subordinated debt that is not included in tier 2 capital (including 
acceleration, repurchase, redemption prior to maturity, and exercising 
a call option), in accordance with paragraph (g)(1)(ii) of this 
section, only if:
    (1) The national bank will not be an eligible bank after the 
transaction;
    (2) The OCC has previously notified the national bank that prior 
approval is required;
    (3) Prior approval is required by law; or
    (4) The amount of the proposed prepayment is equal to or greater 
than one percent of the national bank's total capital, as defined in 12 
CFR 3.2.
    (B) National bank not an eligible bank. A national bank that is not 
an eligible bank must receive prior OCC approval to prepay any 
subordinated debt that is not included in tier 2 capital (including 
acceleration, repurchase, redemption prior to maturity, and exercising 
a call option), in accordance with paragraph (g)(1)(ii) of this 
section.
    (ii) Subordinated debt included in tier 2 capital--(A) General. 
Notwithstanding paragraph (f)(2)(i)(B) of this section, all national 
banks must receive prior OCC approval to prepay subordinated debt 
included in tier 2 capital, in accordance with paragraph (g)(1)(ii)(A) 
of this section.
    (B) Call option. Notwithstanding this paragraph (f)(2)(ii)(A) of 
this section, a national bank must receive prior OCC approval to prepay 
subordinated debt included in tier 2 capital, in accordance with 
paragraph (g)(2)(ii)(B) of this section, when the prepayment is a 
result of exercising a call option.
    (g) Prior approval procedure--(1) Application--(i) Issuance of 
subordinated debt. A national bank required to obtain OCC approval 
before issuing subordinated debt shall submit an application to the 
appropriate OCC licensing office. The application must include:
    (A) A description of the terms and amount of the proposed issuance;
    (B) A statement of whether the national bank is subject to a 
capital plan or required to file a capital plan with the OCC and, if 
so, how the proposed change conforms to the capital plan;
    (C) A copy of the proposed subordinated note format and note 
agreement; and
    (D) A statement that the subordinated debt issue complies with all 
applicable laws and regulations.
    (ii) Prepayment of subordinated debt--(A) General. A national bank 
required to obtain OCC approval before prepaying subordinated debt, 
pursuant to paragraph (f)(2) of this section, shall submit an 
application to the appropriate OCC licensing office. The application 
must include:
    (1) A description of the terms and amount of the proposed 
prepayment;
    (2) A statement of whether the national bank is subject to a 
capital plan or required to file a capital plan with the OCC and, if 
so, how the proposed change conforms to the capital plan; and
    (3) A copy of the subordinated debt instrument the national bank is 
proposing to prepay.
    (B) Call option. (1) Before prepaying subordinated debt if the 
prepayment is in the form of a call option, a national bank is required 
to obtain OCC approval, pursuant to paragraph (g)(2)(ii) of this 
section, by submitting an application to the appropriate OCC licensing 
office.
    (2) In addition to the information required in this paragraph 
(g)(1)(ii)(A) of this section, the application must include:
    (i) A statement explaining why the national bank believes that 
following the proposed prepayment the national bank would continue to 
hold an amount of capital commensurate with its risk; or
    (ii) A description of the replacement capital instrument that meets 
the criteria for tier 1 or tier 2 capital under 12 CFR 3.20, including 
the amount of such instrument, and the time frame for issuance.
    (iii) Additional information. The OCC reserves the right to request 
additional relevant information, as appropriate.
    (2) Approval--(i) General. The application is deemed approved by 
the OCC as of the 30th day after the filing is received by the OCC, 
unless the OCC notifies the national bank prior to that date that the 
filing presents a significant supervisory, or compliance concern, or 
raises a significant legal or policy issue.
    (ii) Call option. Notwithstanding this paragraph (g)(2)(i) of this 
section, if the application for prior approval is for prepayment in the 
form of a call option, the national bank must receive affirmative 
approval from the OCC to exercise the call option. If the OCC requires 
the national bank to replace the subordinated debt, the national bank 
must receive affirmative approval that the replacement capital 
instrument meets the criteria for tier 1 or tier 2 capital under 12 CFR 
3.20 and must issue the replacement instrument prior to exercising the 
call option, or immediately thereafter.\2\
---------------------------------------------------------------------------

    \2\ A national bank may replace tier 2 capital instruments 
concurrent with the redemption of existing tier 2 capital 
instruments.
---------------------------------------------------------------------------

    (iii) Tier 2 capital. Following notification to the OCC pursuant to 
paragraph (f)(1)(ii) of this section that the national bank has issued 
the subordinated debt, the OCC will notify the national bank whether 
the subordinated debt qualifies as tier 2 capital.
    (iv) Expiration of approval. Approval expires if a national bank 
does not complete the sale of the subordinated debt within one year of 
approval.
    (h) Notice procedure for inclusion in tier 2 capital. (1) All 
national banks shall notify the appropriate OCC licensing office in 
writing within ten days after issuing subordinated debt that it intends 
to include as tier 2 capital. A national bank may not include such 
subordinated debt in tier 2 capital unless the national bank has 
received notification from the OCC that the subordinated debt qualifies 
as tier 2 capital.
    (2) The notice must include:
    (i) The terms of the issuance;
    (ii) The amount and date of receipt of funds;
    (iii) A copy of the final subordinated note format and note 
agreement; and
    (iv) A statement that the issuance complies with all applicable 
laws and regulations.
    (i) Exceptions to rules of general applicability. Sections 5.8, 
5.10, and 5.11 do not apply to transactions governed by this section.

    Dated: December 10, 2014.
Thomas J. Curry,
Comptroller of the Currency.
[FR Doc. 2014-29615 Filed 12-17-14; 8:45 am]
BILLING CODE 4810-33-P