Daily Rules, Proposed Rules, and Notices of the Federal Government
Section 11(a)(1) of the Home Owners' Loan Act (HOLA) (12 U.S.C. 1468(a)(1)) applies sections 23A and 23B of the FRA (12 U.S.C. 371c and 371c-1) to every savings association “in the same manner and to the same extent” as if the savings association were a member bank of the Federal Reserve System.
Section 23A of the FRA imposes three major limitations on a member bank's (and its subsidiaries') transactions with affiliates. First, section 23A limits the amount of “covered transactions” with any single affiliate to no more than 10 percent of the member bank's capital stock and surplus. Covered transactions with all affiliates are limited to no more than 20 percent of the member bank's capital stock and surplus. A covered transaction includes a loan or extension of credit to an affiliate, a purchase of or investment in securities issued by an affiliate, a purchase of assets from an affiliate, the acceptance of securities issued by an affiliate as collateral security for a loan or extension of credit to any person or company, and the issuance of a guarantee, acceptance, or letter of credit on behalf of an affiliate.
Second, section 23A requires that all covered transactions between a member bank and its affiliates be on terms and conditions that are consistent with safe and sound banking practices and prohibits a member bank from purchasing low-quality assets from an affiliate. Finally, section 23A requires that a member bank's extensions of credit to affiliates and guarantees on behalf of affiliates be appropriately secured by a statutorily defined amount of collateral.
Section 23B of the FRA protects member banks by requiring that transactions between the bank and its affiliates occur on market terms—on terms and under circumstances that are substantially the same, or at least as favorable to the bank, as those prevailing at the time for comparable transactions with unaffiliated companies. Section 23B applies to covered transactions under section 23A, as well as other transactions, such as the sale of securities or other assets to an affiliate and the payment of money or the furnishing of services to an affiliate. Section 23B also prohibits certain purchases and acquisitions of securities by a member bank or its subsidiary subject to certain conditions, and prohibits certain advertisements or agreements that state or suggest that the member bank is responsible for the obligations of its affiliates.
In addition to the section 23A and 23B restrictions, section 11(a)(1) of the HOLA imposes two prohibitions on savings associations. First, a savings association may not make a loan or other extension of credit to any affiliate unless that affiliate is engaged only in activities that a bank holding company may conduct. In addition, no savings association may purchase or invest in securities issued by an affiliate, other than with respect to shares of a subsidiary. Section 11(a)(4) of the HOLA authorizes OTS to impose such additional restrictions on any transaction between a savings association and any affiliate as it
In 1991, OTS issued comprehensive rules implementing section 11(a) of the HOLA.
The FRB has statutory authority to issue regulations to administer and carry out the purposes of sections 23A and 23B of the FRA.
The FRB's final rule does not by its terms apply to savings associations. However, because sections 23A and 23B apply to every savings association in the same manner and to the same extent as if the savings association were a member bank, OTS is revising its regulations on transactions with affiliates to reflect Regulation W. Today's interim final rule has three goals:
• To incorporate all applicable provisions and exceptions prescribed by the FRB in Regulation W;
• To provide guidance concerning the relationship between the additional prohibitions under section 11(a)(1) of the HOLA and Regulation W; and
• To set out the additional restrictions OTS imposes under section 11(a)(4) of the HOLA.
OTS is replacing its existing rules on transactions with affiliates at 12 CFR 563.41 and 563.42 (2002) with a new interim final rule, which will be codified at 12 CFR 563.41. The interim final rule cross references the substantive provisions contained in Regulation W; interprets Regulation W to the extent necessary to apply these restrictions to savings associations; incorporates the prohibitions in section 11(a)(1) of the HOLA; and imposes various additional restrictions on savings associations under section 11(a)(4) of the HOLA.
OTS considered, but is not adopting, an alternative presentation. Specifically, OTS reviewed whether its rule should restate, with appropriate revisions, all of Regulation W. While this alternative presentation would consolidate in one place all regulations under section 11(a) of the HOLA, OTS believes that this approach would be duplicative. Moreover, this approach would require OTS to revise its regulations every time that the FRB amends Regulation W. The approach in this interim final rule, on the other hand, will ensure that most amendments to Regulation W are automatically incorporated in OTS rules without further notice and comment rulemaking. OTS specifically seeks public comment on which approach is more suitable.
The interim final rule at § 563.41(a) sets out the scope of the new rule. Specifically, it states that § 563.41 implements section 11(a) of the HOLA, which applies sections 23A and 23B of the FRA to every savings association in the same manner and to the same extent as if the association were a member bank; prohibits certain types of transactions with affiliates; and authorizes OTS to impose additional restrictions on savings association transactions with affiliates.
The interim final rule implements only section 11(a) of the HOLA. It does not contain every statutory or regulatory restriction on transactions between savings associations and their affiliates. For example, the rule does not address additional restrictions on transactions with affiliates that OTS may require as prompt corrective action under section 38(f)(2)(B) of the Federal Deposit Insurance Act (FDIA). 12 U.S.C. 1831o(f)(2)(B).
The interim final rule at § 563.41(b) states that a savings association must comply with sections 23A and 23B of the FRA and Regulation W. To clarify Regulation W for savings associations, OTS has prepared a chart briefly explaining how specific sections of Regulation W apply and explaining why other sections do not apply to savings associations. These provisions are described below.
Regulation W by its terms applies only to member banks and defines this term as “any national bank, State bank, banking association, or trust company that is a member of the Federal Reserve System. For purposes of this definition, an operating subsidiary of a member bank is treated as part of the member bank.” 12 CFR 223.3(w). To ensure that Regulation W applies to savings associations and their subsidiaries in the same manner and to the same extent as member banks, the interim final rule at § 563.41(b)(11) states that the term “member bank” as used in Regulation W includes a savings association.
Like the existing rule, the interim final rule defines “savings association” to include federal and state-chartered savings associations and most thrift subsidiaries.
OTS has also revised the reference to “operating subsidiaries.”Under Regulation W, the definition of affiliate generally excludes any company that is a subsidiary of the member bank unless the subsidiary is: (1) A depository institution; (2) a financial subsidiary;
Under Regulation W, the term “affiliate” is defined to include parent companies (any company that controls the member bank); companies under common control with the member bank; companies under other types of common control; companies with interlocking directors or trustees; companies that are sponsored and advised on a contractual basis by the member bank, its subsidiary, or an affiliate; investment companies for which a member bank or any affiliate is an investment advisor; depository institution subsidiaries of a member bank; financial subsidiaries; companies held under merchant banking or insurance company investment authority; partnerships for which the member bank or an affiliate serves as general partner; subsidiaries of affiliates; and other companies that the FRB deems to be an affiliate of the member bank. 12 CFR 223.2(a). This definition specifically excludes certain companies, including most subsidiaries of member banks. 12 CFR 223.2(b). The interim final rule adopts the FRB definition of affiliate except as described below.
One of the fundamental concepts underlying the definition of affiliate is the concept of control. Regulation W states that control by a company or shareholder over another company means that:
• The company or shareholder, directly or indirectly, or acting through one or more other persons, owns, controls, or has the power to vote 25 percent or more of any class of voting securities or other similar voting interest of the other company.
• The company or shareholder controls in any manner the election of a majority of the directors, trustees, or general partners (or individuals exercising similar functions) of the other company.
• The Board determines, after notice and opportunity for hearing, that the company or shareholder, directly or indirectly, exercises a controlling influence over the management or policies of the other company. 12 CFR 223.3(g)(1).
Regulation W also includes specific provisions addressing ownership or control of shares as a fiduciary, shares by a subsidiary, convertible securities, and nonvoting equity securities.
When OTS promulgated its transactions with affiliates regulation in 1991, it exercised its authority under section 11(a)(4) of the HOLA to expand the definition of control. Specifically, existing § 563.41(b)(3) states that a company or shareholder has control over another company if the company or shareholder, directly or indirectly, or acting through one or more other persons owns, controls, or has the power to vote 25 percent or more of any class of voting securities of the other company or if the company or shareholder would be deemed to control another company under 12 CFR 574.4(a) or presumed to control the company under 12 CFR 574.4(b). As a related matter, OTS also applied its own concept of control to define a subsidiary of a savings association. Specifically, existing § 563.41(b)(4) defines subsidiary of a savings association as a company that is controlled by a savings association within the meaning of part 574.
This interim final rule at § 563.41(b)(6) continues to use the existing OTS definition of control.
Regulation W defines affiliate to include a financial subsidiary of a member bank. 12 CFR 223.2(a)(8). A financial subsidiary is defined as any subsidiary of a member bank that “engages, directly or indirectly, in any activity that national banks are not permitted to engage in directly or that is conducted on terms and conditions that differ from those that govern the conduct of such activity by national banks.” The definition excludes a subsidiary that “a national bank is specifically authorized to own or control by the express terms of a Federal statute * * *.”
Approximately 100 thrifts have investments in subsidiaries called service corporations that engage in activities in which a national bank may not engage directly. Regulation W did not address whether these thrift subsidiaries would be considered to be financial subsidiaries. For the reasons stated below, OTS concludes that savings association subsidiaries are not financial subsidiaries under the definition in Regulation W.
OTS believes that service corporations would fall within the exception to the definition of financial subsidiary. As noted above, Regulation W states that a financial subsidiary does not include a subsidiary that a national bank is specifically authorized by the express terms of a Federal statute to own or control. This exception is based on the definition of a financial subsidiary of a national bank at 12 U.S.C. 24a, which also expressly provides that bank service companies are not financial
OTS also believes that the statutory scheme underlying GLBA strongly indicates that Congress did not contemplate that a savings association would own or control a financial subsidiary as that term is defined in section 23A of the FRA. Section 121 of GLBA added the new provisions addressing financial subsidiaries. In addition to the changes to section 23A(e) of the FRA, section 121 added extensive provisions governing financial subsidiaries of national banks
The text of section 23A(e) of FRA provides further evidence thatCongress did not intend to include thrift subsidiaries as financial subsidiaries. Section 23A(e)(1) defined financial subsidiary as any company that is “a subsidiary of a bank that would be a financial subsidiary of a national bank under [12 U.S.C. 24a].” Congress could have used the phrase “a subsidiary of an insured depository institution that would be a financial subsidiary of a national bank.”
OTS notes that a contrary interpretation would also fail to recognize that Congress specifically and comprehensively addressed the regulation of savings associations and their subsidiaries in the Financial Institutions Reform, Recovery, and Enforcement Act of 1989(FIRREA).
Finally, OTS believes that its interpretation is consistent with the purposes of sections 23A and 23B of the FRA. These two provisions were designed to limit the risks to an institution (and the Federal deposit insurance funds) from transactions between the institution and its affiliates, and to limit the ability of an institution to transfer to its affiliates the subsidy arising from the institution's access to the Federal safety net.
Accordingly, the interim final rule at § 563.41(b) states that the Regulation W references to financial subsidiaries do not apply to savings associations and their subsidiaries. These references include 12 CFR 223.2(a)(8) and (b)(1)(ii) (affiliate includes a financial subsidiary); 12 CFR 223.3(p) (definition of financial subsidiary); and 12 CFR 223.32 (rules that apply to a financial subsidiary of a member bank).
Under Regulation W, subsidiaries of a member bank are generally not affiliates unless the subsidiary is: (1) A depository institution; (2) a financial subsidiary; (3) directly controlled by one or more affiliates (other than depository institution affiliates) of the member bank, by a shareholder that controls the member bank, or by a group of shareholders that together control the member bank;(4) an employee stock option plan (ESOP), trust, or similar organization that exists for the benefit of shareholders, partners, members, or employees of the member bank or its affiliates, or (5) determined by the FRB
Except for references to financial subsidiaries, the OTS interim final rule follows Regulation W. This will modify OTS's current treatment of thrift subsidiaries. In one respect, the interim final rule will add to the definition of affiliate a subsidiary that is an ESOP, trust, or similar organization that exists for the benefit of shareholders, partners, members, or employees of the member bank or its affiliates.
In another respect, the interim rule will delete from the OTS definition of affiliate “any company that would be an affiliate under [12 CFR 563.41(b)(1) (2002)] but for the fact that it is a subsidiary of a savings association.”
Section 223.2(a)(12) states that “affiliate” includes any company that the FRB or the appropriate federal banking agency determines by regulation or order to have a relationship with the member bank or any subsidiary or affiliate of the bank such that covered transactions by the bank with that company may be affected by the relationship to the detriment of the bank or its subsidiary.
The interim final rule addresses OTS authority to make case-by-case determinations at § 563.41(b)(3). OTS has reworded the safety and soundness standard to more accurately reflect section 11(a)(4) of the HOLA and has deleted the list of supervisory factors as unnecessary. OTS, however, will continue to consider these and other factors when it makes its determination under the safety and soundness standard.
Regulation W's definition of the phrase “capital stock and surplus” uses capital terms such as Tier 1 and Tier 2 capital. By contrast, the existing OTS definition of the phrase “capital stock and surplus” cross-references the definition of unimpaired capital and unimpaired surplus under OTS's loans-to-one-borrower rule, which uses thrift-specific capital terms such as core and supplementary capital. To ensure that thrifts will be able to apply this definition, the interim rule continues to use the current OTS definition. For similar reasons, all citations to the Call Report will refer to the Thrift Financial Report.
OTS does not regulate U.S. branches or agencies of foreign banks. Accordingly, § 563.41(b) of the interim final rule states that 12 CFR 223.61, which addresses these entities, does not apply.
Section 11(a) of the HOLA imposes two prohibitions on savings associations in addition to those found in sections 23A and 23B of the FRA, and authorizes OTS to impose additional restrictions on a savings association's transactions with affiliates. Paragraph (c) of the interim final rule addresses these additional provisions.
The interim final rule applies Regulation W definitions to the additional section 11 prohibitions and restrictions, except as described in the chart at § 563.41(b) of the interim rule.
Section 11(a)(1)(A) of the HOLA states that “no loan or other extension of credit may be made to any affiliate unless that affiliate is engaged only in activities described at section 10(c)(2)(F)(i) of [the HOLA].” Section 10(c)(2)(F)(i) of the HOLA refers to activities “which the [FRB], by regulation, has determined to be permissible for bank holding companies under [12 U.S.C. 1843(c)], unless the Director, by regulation, prohibits or limits any such activities for savings and loan holding companies.”
For the purposes of this prohibition, the current rule states that a loan or other extension of credit includes a purchase of assets from an affiliate that is subject to the affiliate's agreement to repurchase. As a result, the existing rule
Section 11 of the HOLA does not define “loan or other extension of credit,” and does not compel a legal conclusion that purchases of assets that are subject to an affiliate's agreement to repurchase are, or are not, prohibited by statute. When it originally promulgated this provision, OTS noted that section 11(a)(1)(A) focused on prohibiting transactions with non-banking affiliates that transfer credit and other risks to the savings association. Because a purchase of assets that is subject to an agreement to repurchase generally bears many of the economic characteristics of a loan or extension of credit to such an affiliate,
In addition to the rules on purchases of assets that are subject to an agreement to repurchase, OTS has issued a number of interpretations regarding the loan prohibition. These interpretations are contained in various documents including preambles to proposed and final rules, opinion letters, and other guidance. For example, OTS has considered whether a savings association is barred from extending credit to an affiliate that directly engages only in activities permissible for a bank holding company, but owns subsidiaries engaged in activities not permissible for bank holding companies, such as real estate development. OTS determined that, in the case of affiliates that are not savings associations, such activities are imputed to each parent affiliate in a vertical ownership chain up to, but not including, a controlling holding company in the corporate structure. Activities are not, however, attributed downward to subsidiaries of an affiliate.
OTS has also considered whether a third party attribution rule applies to the loan prohibition. Sections 23A(a)(2) and 23B(a)(3) of the FRA require a member bank (and thus savings associations) to treat any transaction with any person as a transaction with an affiliate to the extent that the proceeds are used for the benefit of, or transferred to, an affiliate. Regulation W includes this third party attribution rule at 12 CFR 223.16 and 223.52(b). By contrast, section 11(a)(1)(A) of the HOLA does not include a third party attribution rule, and OTS has declined to infer such a rule for the purposes of section 11. As a result, OTS's existing rules implementing section 11(a)(1)(A) do not prohibit a loan or extension of credit to a non-affiliate where the proceeds are used for the benefit of, or transferred to, an affiliate that engages in non-bank holding company activities.
Section 11(a)(1)(B) provides that “no savings association may enter into any transaction described in section 23A(b)(7)(B) of [theFRA] with any affiliate other than with respect to shares of a subsidiary.” Section 23A(b)(7)(B) of the FRA describes “a purchase of or investment in securities issued by [an] affiliate.”
Section 563.41(c)(2) of the interim final rule restates this restriction.
Currently §§ 563.41(e) and 563.42(e) require a savings association to make and retain records that reflect in reasonable detail all transactions between a savings association (and its subsidiaries) and affiliates, and transactions with an unaffiliated party that are attributed to an affiliate under the third party attribution rule. The current rule also includes minimum recordkeeping requirements at § 563.41(e)(1)(i) through (vii). OTS imposed these recordkeeping requirements under its authority at section 11(a)(4) of the HOLA, which permits OTS to impose additional restrictions to protect the safety and soundness of savings associations. The interim final rule retains these requirements at § 563.41(c)(3).
Under the existing rules, OTS may require certain savings associations to notify it at least 30 days before the savings association or its subsidiary conducts a transaction with an affiliate. These associations include a savings association that commenced
OTS restates these requirements with minor revisions at paragraph (c)(4) of the interim final rule. OTS has clarified that “troubled condition” is defined at 12 CFR 563.555. OTS has also deleted specific references to problem institutions, institutions that have a composite rating of 4 or 5 under CAMELS, and institutions that are subject to a cease and desist order. These institutions will either fall within the definition of troubled condition, or one of the other listed categories.
Section 722 of the GLBA
(1) Have we organized the material to suit your needs? If not, how could the material be better organized?
(2) Do we clearly state the requirements in the rule? If not, how could the rule be more clearly stated?
(3) Does the rule contain technical language or jargon that is not clear? If so, what language requires clarification?
(4) Would a different format (grouping and order of sections, use of headings, paragraphing) make the rule easier to understand? If so, what changes to the format would make the rule easier to understand?
Section 553 of the Administrative Procedure Act (APA) permits an agency to issue a rule without prior notice and public comment if the agency, for good cause, finds that notice and comment is impractical, unnecessary, or contrary to the public interest, and explains its finding when it publishes the final rule. 5 U.S.C. 553(b)(B).
Among the purposes of this interim final rule are updating existing OTS rules to reflect FRB's newly issued Regulation W, interpreting Regulation W to the extent necessary to apply it to savings associations, providing guidance concerning the relationship between the prohibitions imposed by section 11(a)(1) of the HOLA andRegulation W, and clearly setting out additional restrictions imposed by OTS under section 11(a)(4) of the HOLA. OTS's existing regulations at 12 CFR 563.41 and 563.42 contain provisions that conflict with final Regulation W and do not reflect updated interpretations contained in Regulation W. As a result, the continued retention of these rules following the effective date of Regulation W is likely to cause undue confusion concerning applicable restrictions on transactions with affiliates. OTS has already received numerous inquiries on these matters. Having an interim final rule in place will help to minimize this confusion and ensure a smoother transition for savings associations as OTS implementsRegulation W. OTS therefore believes that prior notice and public comment on this interim final rule is impractical, unnecessary, and contrary to the public interest.
The FRB made Regulation W effective April 1, 2003. Accordingly, transactions entered into on or after April 1, 2003, will be immediately subject to Regulation W. Transactions entered into after the date of publication of Regulation W in the
The FRB included a limited transition rule for transactions consummated on or before the publication date of Regulation W. Under this transition rule, if such a transaction would become subject to section 23A or 23B (or the treatment of the transaction would change) solely as a result of Regulation W, the transaction will not become subject to Regulation W until July 1, 2003. A transaction is subject to section 23A or 23B solely as a result of Regulation W, if the transaction is subject to section 23A or 23B under Regulation W, but was not subject to section 23A or 23B under the terms of the statute or any written interpretation of the statute by the FRB or its staff dated before publication of Regulation W. Similarly, a transaction's treatment under section 23A or section 23B changes solely as a result of Regulation W if the treatment of the transaction under RegulationW differs from the treatment of the transaction under the terms of sections 23A and 23B or any written interpretation of the statute by the FRB or its staff dated before publication of Regulation W.
There are two exceptions to the FRB transition rule. First, a transaction that otherwise qualifies for the transition period will immediately become subject to Regulation W if it is renewed, extended, or materially altered on or after April 1, 2003. Second, a purchase of assets that was consummated on or before the publication of Regulation W and that qualifies for the transaction rule, is not subject to the new requirements in Regulation W.
To relieve regulatory burden, the FRB also permits member banks to apply specified provisions before Regulation W's effective date. Member banks may apply the following rules beginning on the date of publication of Regulation W: (1) Section 223.16(c)(4) (general purpose credit card exemption); (2) § 223.24(a), (b), and (c)(valuation principles applicable to extensions of credit secured by affiliate securities); (3) § 223.31(d) (exemption for step transactions involving the acquisition of an affiliate that becomes a non-affiliate subsidiary after the acquisition); (4) § 223.41(d) (exemption for internal corporate reorganization transactions); and (5) § 223.42(c), (f), (g), (i), (j), and (k)(exemptions for transactions secured by cash or U.S. government securities, purchases of certain marketable securities, purchases of municipal securities, asset purchases by a newly formed institution, transactions approved under the Bank Merger Act, and purchases of extensions of credit from an affiliate).
In today's interim final rule, OTS has established the same effective date, will apply identical transition rules, and will permit savings associations to apply the specified sections of Regulation W before the effective date of the rule. OTS, however, requests comment on whether the appropriate dates for these periods should be based on the date of publication of this interim rule, rather than the date of publication of Regulation W.
The Director of OTS has determined that this rule does not constitute a “significant regulatory action” for the purposes of Executive Order 12866.
An initial regulatory flexibility analysis under the Regulatory
Flexibility Act (RFA) is required when an agency must publish a general notice of proposed rulemaking. 5 U.S.C. 603. As noted above, OTS has determined that it is not necessary to publish a notice of proposed rulemaking for this interim final rule. Accordingly, the RFA does not require an initial regulatory flexibility analysis.
Nonetheless, OTS has considered the likely impacts of this rule on small businesses and believes that the rule
The Unfunded Mandates Reform Act of 1995, Public Law 104-4 (Unfunded Mandates Act) applies only when an agency is required to issue a general notice of proposed rulemaking or a final rule for which a general notice of proposed rulemaking was published. 2 U.S.C. 1532. As noted above, OTS has determined that a notice of proposed rulemaking is not required. Accordingly, OTS has concluded that the Unfunded Mandates Act does not require an analysis of this interim final rule.
Moreover, OTS has determined that the interim final rule will not result in expenditures by state, local, or tribal governments or by the private sector of $100 million or more. OTS has had comprehensive regulations implementing section 11 of the HOLA since 1991. Today's interim final rule merely updates these provisions to incorporate Regulation W, interprets Regulation W to the extent necessary to apply the FRB rule to savings associations, interprets Regulation W to the extent necessary to apply the FRB rule to savings associations, clarifies the relationship between section 11(a)(1) of the HOLA and Regulation W, and sets out the additional restrictions imposed under section 11(a)(4) of the HOLA. In light of existing §§ 563.41, OTS does not believe that the interim final rule will significantly increase the applicable burdens for savings associations and will not result in increased expenditures by these institutions. Accordingly, OTS has not prepared a budgetary impact statement or specifically addressed the regulatory alternatives considered.
The information collection requirements in the existing OTS rules at 12 CFR 563.41(e) and 563.42(e) were previously approved under OMB control number 1550-0078. The interim final rule incorporates these requirements at § 563.41(c)(3) and (4), and does not make any substantive changes that affect the overall burden of compliance.
Reporting and recordkeeping requirements.
Reporting and recordkeeping requirements, Savings associations, Subsidiaries.
Accounting, Reporting and recordkeeping requirements, Savings associations.
Accounting, Advertising, Crime, Currency, Investments, Reporting and recordkeeping requirements, Savings associations, Securities, Surety bonds.
44 U.S.C. 3501
12 U.S.C. 1462, 1462a, 1463, 1464, 1828.
12 U.S.C. 1463.
12 U.S.C. 375b, 1462, 1462a, 1463, 1464, 1467a, 1468, 1817, 1820, 1828, 1831o, 3806; 42 U.S.C. 4106.
(2) For the purposes of this section, “savings association” defined at section 3 of the Federal Deposit Insurance Act (12 U.S.C.1813), and also includes any savings bank or any cooperative bank that is a savings association under 12 U.S.C. 1467a(l). A non-affiliate subsidiary of a savings association as described in paragraph (b)(12) of this section is treated as part of the savings association.