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Gramm-Leach-Bliley Act: Questions and Answers
FHC
Declaration | Supervision
| Permissible Activities | Notices
Detailed below are questions and answers that staff members from the
Federal Reserve Bank of San Francisco have received since the enactment
of the legislation. Please consult your legal counsel before making decisions
related to the Gramm-Leach-Bliley Act.
FHC Declaration
Should a BHC become a FHC?
The decision to become a FHC depends upon the company's strategic business
plan, capital position and projections, management strength, risk management
systems, expected debt ratings, accounting and tax consequences, etc.
Becoming a FHC is ultimately the decision of senior management and the
board of directors.
While FHC status allows a BHC to engage in a wide variety of financial
and complimentary activities, failure to maintain FHC criteria could significantly
affect the BHC's strategic business plan, since restrictions could be
placed upon BHCs that have requested FHC status and fail to adequately
maintain FHC criteria. If the organization does not have immediate plans
to engage in financially related activities, the BHC may want to delay
submitting a declaration to become a FHC.
How does a domestic BHC or foreign bank apply to become a FHC?
Once senior management and the directorate have made the decision to
apply for FHC status, a domestic BHC must file a written declaration with
the appropriate Reserve Bank and forward a copy of their request to Federal
Reserve Board staff that contains the following information:
- a statement that the BHC elects to be a FHC;
- the name and head office address of the company and each depository
institutions controlled by the company;
- a certification that all depository institutions controlled by the
company are well-capitalized as of the date the company files its election;
the capital ratios for all relevant capital measures (as defined in
Section 38 of the Federal Deposit Insurance Act) as of the close of
the previous quarter for each depository institution controlled by the
company on the date the company files its election; and
- a certification that all depository institutions controlled by the
company are well-managed as of the date the company files its election.5
The declaration must be signed by an official or representative with
authority to bind the company.
Note: Although not required to be included within the declaration,
all insured depository institutions controlled by the BHC as of the date
of the filing must be rated satisfactory or better under the CRA for the
declaration to be effective.
Foreign banks that operate in the U.S. through branches, agencies, or
commercial lending companies must provide information on the capital adequacy
of the foreign bank itself in addition to the well-managed status of its
U.S. operations. The specific information required depends on whether
the home country supervisor has adopted capital standards of the Basel
Accord. Foreign banks should consult SR Letter 00-1 for additional guidance.
The FHC declaration should be sent to the following individuals:
Federal Reserve Bank of San Francisco
Patrick Weiss
Senior Manager, Applications & Enforcement
Banking Supervision and Regulation
Federal Reserve Bank of San Francisco
101 Market Street
San Francisco, CA 94105
Federal Reserve Board
Betsy Cross, Assistant Director
Division of Banking Supervision and Regulation
Board of Governors of the Federal Reserve System
20th and C Streets, NW
Washington, D.C. 20551
When does a FHC declaration become effective? A declaration
is deemed effective on the 31st day after the date the declaration was
received by the responsible Federal Reserve Bank unless notified by the
Reserve Bank. However, the Federal Reserve Board may affirmatively notify
a company that its declaration is effective prior to the 30-day expiration.
The Federal Reserve Board has 30 days from the receipt of the declaration
to notify a BHC that its request is ineffective. The Federal Reserve Board
may find the election to be ineffective if any of the depository institutions
controlled by the BHC are not well-capitalized, well-managed, or have
a less than satisfactory CRA rating.6
In the case of foreign banks, an election can also be found to be ineffective
if the Board does not have sufficient information to assess whether the
foreign banks meets the eligibility requirements.
How does the Act impact a BHC that does not elect to become a FHC?
Permissible non-banking activities for BHCs that do not elect to become
FHCs remain the same. BHCs will be limited to engaging in activities that
the Federal Reserve Board has determined to be closely related to banking
under Section 4(c)(8) of the BHC Act.7
Supervision
What are the consequences to a FHC if its depository institution
subsidiaries cease to meet capital or management requirements?
The Federal Reserve Board will notify the FHC in writing upon discovering
that not all depository institutions controlled by the company are well-capitalized
or well-managed. There may be occasions that a FHC is aware that one of
its subsidiaries has ceased to be well-capitalized or well-managed before
the Federal Reserve Board will have access to such data. In such instances,
FHCs are required to notify the Federal Reserve Board immediately of the
institutions involved and the areas of noncompliance.
Within 45 days after receiving a notice of noncompliance, the FHC must
execute an agreement with the Federal Reserve Board to comply with applicable
capital and management requirements. The agreement must include the following
items:
- explain the actions that the company will take to correct each deficiency;
- provide a schedule detailing when each action will be taken;
- provide any other information required by the Federal Reserve Board;
and
- be acceptable to the Federal Reserve Board.
Once notice is received, the FHC may not commence any new activities
or acquire a company engaged in 4(k) Activities without prior approval
from the Federal Reserve Board. If the deficiencies are not corrected
within 180 days of receipt of the notice, the FHC may be ordered to divest
of control of any depository institution subsidiary, or alternatively,
at its election, the FHC may cease engaging in activities other than activities
permissible under 4(c)(8) of the BHC Act.8
What are the consequences to a FHC if its depository institution
subsidiaries fail to maintain a satisfactory or better CRA rating?
Similar to a failure to meet the well capitalized and well managed maintenance
requirements, prohibitions are placed upon an FHC if any of its depository
institution subsidiaries fail to maintain a satisfactory or better CRA
rating. Although the Federal Reserve Board will notify the FHC if any
of its depository institutions cease to meet capital or management requirements,
notice of noncompliance for depository institutions failing to maintain
a satisfactory or better CRA rating is different. It is understood that
the FHC is deemed to have received notice of noncompliance once the appropriate
Federal banking agency has forwarded the examination report to the insured
depository institution or the controlling FHC that the institution has
received a less than satisfactory CRA rating.
Once a FHC is deemed to have received notice, the following prohibitions
are in effect. The FHC may not (i) commence any additional 4(k) Activities
or (ii) directly or indirectly acquire control of a company engaged in
any 4(k) Activities.9
Permissible Activities
Does the Act authorize FHCs to engage in commercial activities?
The Act does not generally authorize FHCs to engage in commercial activities.
However, the Act authorizes FHCs to engage in activities with commercial
characteristics, such as complementary activities, merchant banking, and
a limited amount of commercial activity by nonbanking companies that become
FHCs.10
In accordance with the Act, what activities may a financial subsidiary
of a national bank engage in?
A national bank may own or control a subsidiary that engages, as principal
or agent, in activities that are not permissible for national banks to
engage in directly. National banks may apply with the OCC to engage in
such activities through a Ïfinancial subsidiary.Ó A financial subsidiary
of a national bank may engage in all 4(k) Activities except insurance
underwriting, providing or issuing annuities, real estate investment and
development, and merchant banking.11
Can state member banks engage in activities authorized for financial
subsidiaries?
A state member bank may own or control a subsidiary that engages in activities
as principal that would be permissible for a national bank to conduct
through a financial subsidiary; if they comply with the conditions and
limitations applicable to national banks.12
What is the divestiture period for impermissible commercial holdings
of a non-banking company that becomes a FHC?
When a non-banking company predominately engaged in financial activities
becomes a FHC, the organization has up to 10 years to divest its impermissible
commercial holdings. However, the FHC may apply to the Federal Reserve
Board to receive approval for the possibility of a 5-year extension.13
Notices
What notice to the Federal Reserve System is required for a FHC to
engage in financial in nature activities?
A FHC that proposes to engage in an activity, or acquires control or
shares of a company engaged in any 4(k) Activities is required to provide
written notice to the appropriate Federal Reserve Bank within 30 calendar
days after the commencement of the activities or after the acquisition.
The notice should describe the activity or identify the name of the company
acquired and describe its activities. The manner in which the information
should be submitted is explained in the Board's March 10 interim rule.
How does a FHC request that the Board determine that an activity
is financial in nature or incidental to a financial activity?
The FHC should submit a request to the Board that identifies the activity
and explains in detail why it should be considered financial in nature.
The Board will consult with the Secretary of the Treasury and will endeavor
to make a decision on the request within 60 days following the consultative
process.
What approval by the Federal Reserve System is required for a FHC
to engage in complementary activities?
A FHC may engage in any nonfinancial activity that the Federal Reserve
Board determines is complementary to the financial activity and does not
pose a substantial risk to the safety and soundness of depository institutions
or the financial system. Notice is required 60 days prior to engaging
in complementary activities.14
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