District Circular Letters

March 29, 2000

BANKING SUPERVISION AND REGULATION:
REGULATIONS H AND Y--
FINANCIAL HOLDING COMPANIES

To State Member Banks,
Bank Holding Companies, Edge Act Corporations,
U.S. Branches and Agencies of Foreign Banks, and
Others Concerned
in the Twelfth Federal Reserve District

Amendments to Procedures for Bank Holding Companies and Foreign Banks to Elect to Become Financial Holding Companies (R-1057)

The Federal Reserve Board has adopted amendments to its interim rule regarding procedures for bank holding companies and foreign banks to elect to be treated as financial holding companies. The interim rule was issued on January 19, 2000. The amendments are effective immediately.

The Board has changed the procedures for processing elections filed by foreign banks to allow the use of the 31-day notice procedure applicable to U.S. bank holding companies. The Board based its decision on its assessment of the comparability of the standards used in the first elections filed by foreign banks. Given this experience, the Board believes it can effectively perform its statutory responsibilities using a notice procedure. The Board also adopted several other amendments to the interim rule.

The Board will accept comments on these amendments until April 17, 2000.

Interim Rule with Request for Comment on Listing Financial Activities Permissible for Financial Holding Companies (R-1062)

The Federal Reserve Board has approved an interim rule, effective March 11, 2000, listing financial activities permissible for financial holding companies under the Gramm-Leach-Bliley Act.

The list also will help identify companies subject to the provisions of the act governing the privacy of customer information. The privacy provisions apply to a company doing a financial business regardless of whether the company is affiliated with a bank.

The interim rule, which amends Regulation Y (Bank Holding Companies), establishes procedures for financial holding companies to engage in the listed financial activities. It also establishes procedures by which a party may ask the Board to list additional activities as financial in nature or as incidental to or complementary to a financial activity.

Comment is requested on the interim rule by May 12, 2000. The Board will revise it as appropriate after reviewing the comments.

Interim Rule with Request for Comment Concerning Application of Section 20 Operating Standards to Financial Holding Companies (R-1063)

The Federal Reserve Board has approved an interim rule that would apply to financial holding companies authorized under the Gramm-Leach-Bliley Act that have securities affiliates, 2 of the 8 operating standards that currently apply to bank holding companies that control so-called section 20 affiliates.

These two prudential provisions (1) require that intra-day extensions of credit to a securities firm from an affiliated bank or thrift or U.S. branch or agency of a foreign bank be on market terms consistent with section 23B of the Federal Reserve Act, and (2) apply the limitations of sections 23A and 23B of the Federal Reserve Act to certain covered transactions between a U.S. branch or agency of a foreign bank and a U.S. securities affiliate.

All 8 of the operating standards, as well as the Board's current 25 percent revenue test, will continue to apply to bank holding companies that control section 20 subsidiaries pursuant to section 4(c)(8) of the Bank Holding Company Act.

This interim rule was effective March 11, 2000. The Board requests comment on the interim rule by May 12, 2000. The Board will revise the interim rule as appropriate after reviewing comments.

Interim Rule with Request for Comment on Permitting State Member Banks to Acquire Financial Subsidiaries (R-1064)

The Federal Reserve Board has approved an interim rule permitting qualifying state member banks to establish financial subsidiaries and thereby engage in activities that have been determined to be financial in nature or incidental to financial activities. The interim rule establishes a streamlined notice procedure for state member banks that wish to acquire control of or an interest in a financial subsidiary. The Board's rule parallels that adopted by the Comptroller of the Currency for financial subsidiaries of national banks.

The interim rule was effective March 11, 2000, the effective date of Title I of the Gramm-Leach-Bliley Act. Comments will be accepted on the interim rule until May 12, 2000. The Board will revise the interim rule as appropriate after reviewing the comments.

Interim Rule and Request for Comment on Merchant Banking Activities of Financial Holding Companies (R-1065)

The interim rule implements the merchant banking provisions of the Financial Modernization Act. It includes provisions on record keeping and reporting; risk management practices; holding periods for merchant banking investments; corporate separateness and limits on involvement in management; and limits on exposure of financial holding companies to merchant banking investments. The interim rule is effective immediately.

The Board is also seeking public comment on a proposed rule, developed in consultation with the Secretary of the Treasury, that would govern the regulatory capital treatment for equity investments in nonfinancial companies held by bank holding companies. The proposed rule would generally impose a 50 percent capital requirement on merchant banking investments and certain similar investments.

Comments will be accepted on the interim rule and the capital proposal until May 22, 2000. The interim rule and the capital proposal will be revised as appropriate after the comments are reviewed.

Proposed Rule with Request for Comment on Governing Regulatory Capital Treatment for Equity Investments in Nonfinancial Companies held by Bank Holding Companies (R-1067)

The Board solicits comment on a proposal that would govern the regulatory capital treatment of certain investments in nonfinancial companies by bank holding companies. This proposal would amend the Board's consolidated capital guidelines for bank holding companies to apply a 50 percent capital charge to all investments made, directly or indirectly, by a bank holding company in nonfinancial companies under the merchant banking authority of section 4(k)(4)(H) of the Bank Holding Company Act (BHC Act), in nonfinancial companies under the Board's Regulation K, under section 24 of the Federal Deposit Insurance Act, through small business investment companies (whether controlled by the bank holding company or by a subsidiary depository institution), or under sections 4(c)(6) or (7) of the BHC Act in less than 5 percent of the shares of a nonfinancial company.

Comments must be received on the capital proposal by May 22, 2000. The Board will revise the final rule as appropriate in response to comments received.

Copies

Copies of the Board's notice are available from our Corporate Services Department. To request copies to be sent via mail, please call (415) 974-2060. To request copies to be sent via fax, please call (415) 974-3333, and specify:

Board notices are also available via the Federal Reserve Bank of San Francisco's Internet site, at http://www.frbsf.org/banking/bsr/regletters/.

Additional Information

For additional information regarding these matters, please contact our Banking Supervision and Regulation Department, at (415) 974-3007.

FEDERAL RESERVE BANK OF SAN FRANCISCO