Section 3(d) of the Bank Holding Company Act forbids Board approval of a bank holding company’s application to acquire a bank outside of the state in which it conducts its principal banking operation unless the acquisition is specifically authorized by the laws of the state in which the sought-after bank is located. That section does not apply if no application for prior Board approval is necessary under section 3(a)(4) of the act, which exempts a subsidiary bank’s acquisitions of the assets of another bank from the requirement for prior Board approval. BD. RULING of Oct. 18, 1956.

The Board will not assert jurisdiction available to it over mergers between bank subsidiaries or a bank subsidiary and a nonsubsidiary bank if prior approval by another federal banking agency is necessary under the Bank Merger Act. STAFF OP. of Sept. 12, 1967, Aug. 29, 1977, Sept. 1, 1978, and Oct. 3, 1979.

When acting on a bank holding company’s application to acquire stock of a bank, the Board of Governors considers those factors set forth in section 3(c) of the Bank Holding Company Act. The Board will consider bank management’s opposition to the proposed acquisition only if it bears upon the specific standards provided by the act (i.e., managerial resources or future prospects of the bank and the bank holding company). STAFF OP. of Nov. 20, 1968.

Authority: BHCA § 3(c), 12 USC 1842(c).

It is proposed that an existing bank, with grandfathered branches in three states but with principal operations in one state, be merged into a newly created bank to assist the formation of a bank holding company. The principal operations of the bank will be conducted in the same state. Such a transaction is not prohibited by section 3(d) of the Bank Holding Company Act. STAFF OP. of Nov. 12, 1971.

A bank holding company, the majority of which is owned by one family, holds less than majority control of a bank. However, in a trust for the benefit of the family, the family owns enough additional shares of the bank to give the holding company majority control. The family-owned trusteed shares are deemed to be controlled by the holding company so that the holding company controls a majority of the bank’s shares. In this situation, acquisition of additional shares of bank does not require prior Board approval. STAFF OP. of May 23, 1972.

A company that became a bank holding company by virtue of the Bank Holding Company Act Amendments of 1970 owned less than majority control of a bank prior to 1970 but prior to the enactment of 1970 amendments had entered a legally binding contract in which the selling party agreed to vote shares as the bank holding company directed. Any dividends and salary payments by the bank to the selling party would reduce the purchase price of the bank shares. The bank holding company controlled the bank shares covered by the contract prior to 1970 and could purchase such shares after enactment of the 1970 amendments without prior Board approval, without violating the Bank Holding Company Act. STAFF OP. of April 22, 1974.

A family-owned bank holding company that controlled 68.3 percent of the shares of a bank transferred 24.97 percent of the shares of the bank to another company owned by its controlling family. Simultaneously, all the bank shares owned by both corporations were placed in a voting trust under a pledge agreement until a loan made to the first company was paid off, and the sole trustee of the voting trust was a family member and a director of both companies. The mergers of the two family-owned companies and the reacquisition by the first company of the 24.97 percent of bank shares transferred to the second company did not require prior Board approval pursuant to section 3(a)(B) of the Bank Holding Company Act, because the first company retained a beneficial interest in the transferred shares. Staff noted the overall legislative intent of the act to afford a more liberal treatment to family-owned corporations. STAFF OP. of Nov. 27, 1974.

The subsidiary bank of a bank holding company acquires more than 5 percent of the voting shares of another bank holding company in a fiduciary capacity, with sole discretionary authority to vote those shares. The bank holding company must apply to retain the shares acquired by its subsidiary bank in a fiduciary capacity. STAFF OP. of Nov. 25, 1975.

A bank holding company bank subsidiary made a loan to a party offering bank stock as collateral. Later, the bank required that the pledged stock be registered in the name of the nominee of the bank to prevent the borrower from transferring the shares. When the borrower subsequently defaulted, the two-year divestiture period for shares of a bank acquired in satisfaction of a debt previously contracted began on the date the bank acquired the shares through foreclosure, and not on the date the shares were registered in the name of the bank’s nominee. STAFF OP. of June 28, 1976.

Through a series of mergers by its subsidiary banks, a bank holding company located in one state proposes to relocate into another state that does not permit an out-of-state bank holding company to acquire shares or assets of a bank in that state. The relocation scheme would amount to an evasion of section 3(d) of the Bank Holding Company Act. The Board has not asserted jurisdiction under section 3(a) of that act over acquisition of control of banks by bank holding companies through mergers with existing bank subsidiaries; however, the relocation proposal would prompt a recommendation to the Board to reexamine this policy. STAFF OP. of March 28, 1977.

The top-tier bank holding company of a threetier conglomerate proposes to merge with its wholly owned bank holding company subsidiaries, which are the bottom two tiers of the conglomerate. The merger does not require prior Board approval. Since the top-tier bank holding company will engage directly in activities it previously engaged in indirectly, its “successor” status in relation to the bottom two tiers is irrelevant. Also, under this proposed merger, the bottom two tiers will cease to be bank holding companies. STAFF OP. of May 3, 1977.

An application must be filed for acquisitions of additional shares of any bank, both subsidiary and nonsubsidiary, in which the holding company owns less than a majority interest. STAFF OP. of July 18, 1977.

A bank holding company is required to divest shares of its less-than-majority-owned bank subsidiary and proposes to do so by having the bank redeem and retire enough shares that the holding company will then hold 80 percent of the bank’s shares, which will then be spun off to the holding company’s shareholders. The holding company must apply for the Board’s prior approval of this proposal and for a section 2(g)(3) determination on the effectiveness of the divestiture. STAFF OP. of Dec. 6, 1977.

Prior Board approval is not required for the conversion of a subsidiary bank of a bank holding company from a national charter to a state charter if the holding company already owns a majority of the bank’s voting shares or if no change in the holding company’s ownership or control of the bank’s shares will result either before or after the conversion. STAFF OP. July 12, 1978.

A bank acting as corporate trustee for five irrevocable trusts established for minor children, with sole discretionary authority to vote and exercise all rights and powers regarding stock in another bank, is a bank holding company that must obtain prior Board approval to act as trustee. Staff Op. of March 6, 1979.

A partnership that became a bank holding company by virtue of the Bank Holding Company Act Amendments of 1970 transferred its bank shares to its partners, two of whom were officers and directors of the bank. The partnership later transferred its remaining assets to a new corporation and dissolved, without obtaining a Board determination under section 2(g)(3) of the Bank Holding Company Act. No purpose would be served by a determination that the bank holding company, which no longer exists, does not control the bank; however, the bank holding company should have secured a control determination to eliminate the risk that its successor corporation may have acquired control of a bank without the Board’s prior approval, in violation of section 3(a)(1). STAFF OP. of Dec. 28, 1979.

A bank holding company seeks to increase its ownership of a subsidiary bank by merging it into a “phantom” national bank, subject to the approval of the Comptroller of the Currency. The question arises whether the bank holding company must obtain the Board’s prior approval, under section 3(a) of the Bank Holding Company Act, to acquire the phantom bank.

There are limits to the Board’s authority under the Bank Holding Company Act to entertain the complaints of minority shareholders regarding mergers subject to Board approval, particularly in view of Western Bancshares, Inc. v. Board of Governors, which held that the Board may not deny applications under the act solely because of an applicant’s failure to extend substantially equal purchase offers to minority shareholders. However, an applicant’s dealing with minority shareholders in a grossly unfair or unjust manner reflects adversely on management and may warrant denial of the application. STAFF OP. of March 20, 1981.

The Board is not required to consider untimely request for reconsideration of a Board action approving a bank holding company application if no evidence of extraordinary circumstances has been presented that might lead the Board to reconsider the case. Certain technical violations of securities laws do not constitute extraordinary circumstances. STAFF OP. of April 9, 1981.

An applicant seeking Board approval to become a bank holding company objected to the Board’s repeated requests for additional information to supplement its application and challenged the relevancy of the information requested, claiming the requests had delayed processing of the application. Section 3 of the Bank Holding Company Act requires the Board to consider the financial and managerial resources and future prospects of the company or companies and banks concerned as well as the convenience and needs of the community to be served. The Board has consistently taken the position that when principals of an applicant are engaged in operating a chain of banking organizations (as they are in this case) it should, in addition to analyzing the bank holding company proposal before it, also consider the financial and managerial resources and future prospects of the total chain within the context of the Board’s multibank holding company standards. Therefore, requests for information regarding the chain operated by the applicant’s principals is relevant to the application. Requests for personal financial statements and cash-flow projections for principals who retain personal indebtedness in connection with this acquisition is relevant unless it can be shown that these principals have the financial resources to repay the debt incurred, because it is assumed that income generated by the bank and the applicant will be transferred to these principals for debt repayment. However, the fact that the principals have been able to service personal debt without an undue burden on the banks involved in connection with a prior proposal does not negate the need for this consideration, because each proposal must be determined by analysis of the particular circumstances involved. STAFF OP. of July 7, 1981.

Authority: BHCA § 3(a) and (c), 12 USC 1842(a) and (c); 12 CFR 225.3 and 262.3.

See also Board of Governors v. First Lincolnwood Corp., 439 U.S. 234 (1978); Mid-Nebraska Bancshares v. Board of Governors, 627 F.2d 266 (D.C. Cir. 1980).

The question has arisen whether an application is required, pursuant to section 3 of the Bank Holding Company Act, if one bank acquires substantially all the stock of a second bank and, shortly thereafter, merges with the second bank. The Board does not require an application under the Bank Holding Company Act for bank mergers subject to approval of a federal bank regulatory agency. In this case, the merger transaction is subject to approval under the Bank Merger Act. Therefore, the first bank is not required to file an application to become a bank holding company as long as its acquisition of the second bank’s shares and the merger occur virtually simultaneously. STAFF OP. of Nov. 3, 1981.

A bank acquired 65 percent of the voting shares of a bank holding company in satisfaction of a debt previously contracted. The bank voted the shares to elect a new board of directors. The new board voted to place the bank holding company in bankruptcy. The bank argued that it did not control the shares it had voted. Section 2(a) of the Bank Holding Company Act provides that a company has control over a bank or other company if it has power to vote 25 percent of any class of voting securities of the bank or company. Under section 2(a)(5)(D) of the Bank Holding Company Act, no company is a bank holding company by virtue of shares acquired through a debt previously contracted until two years after the date of acquisition. Upon application to the Board, this time may be extended up to three years in one-year intervals. The bank was advised to apply for an extension. STAFF OP. of Sept. 30, 1982.

A foreign bank holding company whose principal state of banking operations is New York currently owns more than 25 percent of the voting shares of a foreign bank that has a branch in New York. The foreign bank is interested in expanding its banking operations in the United States outside the state of New York. Because the foreign bank is a subsidiary of the holding company, it may not acquire more than 5 percent of the voting shares of any bank outside New York. Based on the voting structure of the foreign bank, the holding company’s voting power is significantly less than the percentage of voting shares held. The holding company proposes that it sell a sufficient amount of stock to reduce its voting power (but not its voting shares) to less than 25 percent. The foreign bank argues that Congress intended that a subsidiary relationship be determined by voting power. The bank was informed that section 2(a)(2)(A) of the Bank Holding Company Act provides that a company is deemed to have control over a second company if it owns or controls 25 percent or more of any voting securities of the second company. The holding company’s ownership of more than 25 percent of the voting shares of the foreign bank creates a conclusive presumption of control that precludes the bank from acquiring a bank outside New York State.

A corporation that manages a group of mutual funds (“investment advisory firm”) applied to the Comptroller of the Currency for a charter for a new national bank. In 1971, the Board ruled that a bank holding company’s management of a mutual fund would violate section 20 of the Glass-Steagall Act because (1) a mutual fund, which issues its own securities continuously, is engaged principally in the issuance of securities within the meaning of section 20; (2) the bank holding company managing the mutual fund would control such fund; and (3) as a result of such control, any member bank that is a subsidiary of the holding company would be an affiliate of the mutual fund in violation of section 20 (see Board interpretation 12 CFR 225.125(f) at 4-177). The investment advisory firm here established the mutual funds it manages, directs their operations, and exercises a pervasive and dominant influence over the funds and thus controls them for purposes of section 20. It is also clear that if the charter were granted, the national bank would be a member bank. This acquisition would be in direct contravention of section 20 as interpreted by the Board in its 1971 interpretation.

A bank holding company proposes to purchase 4.99 percent of voting common stock and 100 percent of a new issue of nonvoting preferred stock from another bank holding company. Detachable warrants to purchase an additional 20 percent of voting common stock would accompany the preferred stock. The warrants would be exercisable only if interstate banking becomes permissible, and would be transferable only in a widely dispersed public offering and subject to the right of first refusal by the selling holding company. The selling company agrees to limit the dividends paid on common stock to a certain percentage after a specified date; however, the selling company has the right to call the preferred stock investments to release itself from the covenant. The agreement places no restrictions on the selling company’s activities or ability to make acquisitions. The proposed investment is consistent with the Bank Holding Company Act, Regulation Y, and the Board’s policy statement on nonvoting equity investments (at 4-172.1). BD. RULING OF Dec. 16, 1982.

An out-of-state bank holding company (A) proposes to purchase shares of nonvoting preferred stock and warrants convertible into approximately 20 percent of the outstanding voting common stock of another bank holding company (B). In addition, A proposes to purchase shares of newly issued voting common stock that represents approximately 4.9 percent of B’s outstanding voting stock. The agreement provides that the warrants (1) may be exercised only after appropriate regulatory approval has been obtained and (2) are transferable only in a widely dispersed public offering except in certain limited circumstances. In these circumstances, which relate to a change in control of B, the warrants may be sold in a private placement to parties unrelated to A or each other, provided that no purchaser acquires, individually or in concert with others, more than 2 percent of the voting shares of B. In any event, B retains the right of first refusal before A may transfer the warrants. In addition, A and B have agreed to merge if interstate banking becomes permissible. B may unilaterally terminate the merger agreement at any time by redeeming the preferred stock held by A. In addition, B may determine to accept a third-party merger bid that is in excess of the final offer made by A, at which time the merger agreement would be terminated and A’s investment must be redeemed.

An out-of-state bank holding company (A) proposes to purchase 120,000 shares of nonvoting preferred stock and warrants convertible into approximately 2.3 million shares of common stock of another bank holding company (B). An individual investor has proposed to acquire 54 percent of the total outstanding voting shares of B as well as options and warrants for an additional 1.8 million voting common shares of B. The investor would control a clear majority of the voting shares of B, serve as chief executive officer of B, and have options and warrants sufficient to maintain control of B. A may exercise the warrants, however, only if interstate banking becomes permissible. Prior to interstate banking, A may transfer warrants convertible into no more than 24.9 percent of the voting shares of B. Should interstate banking become permissible, the total of all warrants exercised or transferred by A could never be more than the lesser of 49 percent or 1 percent less than the voting rights actually exercised by the controlling individual. Subject to a right of first refusal in B, A may transfer the warrants only in a widely dispersed public offering, in a private sale to independent and unrelated parties with no investor acquiring more than 2 percent of B, or in a method approved by the Board prior to the transfer.

An out-of-state bank holding company (A) proposes to acquire the shares of another bank holding company (B), if interstate banking becomes permissible, at a formal price with a floor of approximately 1.85 times the book value of B. Under the terms of the agreement B may terminate the merger agreement at any time by accepting an offer to merge with a third party, subject to a right of first refusal in A if it is legally permissible for A to effect a merger at the time the third-party offer is made; A may terminate the merger agreement if the financial condition of B changes or if a third party acquires or makes a bona fide tender to acquire control of 50 percent or more of the voting stock of B.

A bank holding company (BHC 1) proposes to acquire another bank holding company (BHC 2) and its subsidiary bank (Bank 2) through a merger of a bank owned by BHC 1 (Bank 1) into Bank 2. Simultaneously with this merger, BHC 1’s shares of Bank 1 will be cancelled and replaced with newly issued voting shares of Bank 2. At the same time, BHC 2’s shares of Bank 2 will be cancelled, thereby giving BHC 1 control of Bank 2 (which, at this point, has absorbed Bank 1 by merger). In addition, BHC 2 will merge into BHC 1. Shareholders of BHC 2 will receive stock of BHC 1 or cash for their shares.

A holding Company (A) has acquired shares of preferred stock of another holding company (B). The preferred shares are nonvoting and represent approximately 14.2 percent of the total shareholders’ equity of B.

A proposal involved the expansion by an existing bank holding company subsidiary bank through merger with another bank, followed immediately by a merger of the parent holding companies. No regulatory issue was raised under the Bank Holding Company Act, and the competitive effects of the proposal were evaluated under the Bank Merger Act. The staff did not require an application under section 3 of the Bank Holding Company Act after the applicant submitted sufficient information to determine the effect of the proposal on the financial and managerial resources of the holding company and whether the proposal presented other issues over which the Board has exclusive or primary jurisdiction. STAFF OP. of Sept. 25, 1985.

Board staff previously expressed its opinion that a proposal by two bank holding companies to execute an agreement to merge if interstate banking becomes permissible and to acquire warrants convertible into voting shares of one of the companies, without an accompanying equity investment, was consistent with the Bank Holding Company Act, the Board’s regulations, the Board’s policy statement on nonvoting equity investments by bank holding companies (12 CFR 225.143 at 4-172.1), or the Board’s decisions thereunder. One of the holding companies now requests the staff’s opinion regarding the addition of a nonvoting equity investment to the previous agreement.

The creation of an interim bank holding company (interim company) wholly owned by another bank holding company (A) to hold all of the voting shares of a bank holding company acquired by A through its merger with another bank holding company (B) is subject to the prior approval of the Board under sections 3(a)(1) and 4(c)(8) of the Bank Holding Company Act. In limited circumstances, however, the Board may determine that such an application is not required.

A question was raised about the permissibility of an investment in a leveraged corporate acquisition fund that is being organized and managed by a private merchant bank. A bank holding company proposes to purchase up to 24.9 percent of the total equity of the fund in the form of a nonvoting limited partnership interest. The bank holding company will have no voting rights, will not be an advisor to or have any role in the management of the fund, and will not be able to withdraw its investment from the fund.

Bank Holding Company A applied for the Board’s approval to acquire Bank Holding Company B under section 3(a) of the Bank Holding Company Act. Pursuant to the terms of the proposed agreements, A will purchase a 15-year subordinated capital note, amounting to approximately 26 percent of B’s total capital, with an option to acquire all of B’s outstanding stock, exercisable any time during the fourth or fifth year after the effective date of the option. B may cancel the option only upon A’s giving notice of their intent to exercise the option and only upon paying a substantial cancellation fee and accelerating the repayment of the capital note. The agreements between A and B place significant restrictions on the operations of B, including its ability to redeem stock, make investments or acquisitions, incur indebtedness, engage in a merger, or sell its bank subsidiary. In addition, B is required to designate representatives to confer with A regularly and frequently. In light of the option and other restrictions placed on B, A applied to acquire control of B within the meaning of the Bank Holding Company Act.

A parent bank holding company that controls 54.7 percent of a subsidiary bank holding company’s total voting power, including 96.6 percent of a separate class of voting securities of the subsidiary, proposed to sell shares of the subsidiary back to the subsidiary. After the sellback, the parent would control 48.9 percent of the subsidiary, including 95.8 percent of a separate class of voting securities of the subsidiary. In connection with the sellback, the parent would grant to the subsidiary an option to put the sold shares back to the parent at the subsidiary’s discretion.

See 4-363.

Use of trustees to acquire shares of nonbank companies for the benefit of shareholders of a bank holding company does not remove such transactions from the prohibition of section 4(a)(1) of the Bank Holding Company Act. BD. RULING of July 31, 1957 and Sept. 19, 1958.

A bank holding company and its subsidiary own shares of a company acquired before the enactment of the Bank Holding Company Act. A bank holding company’s proposal to exercise stock rights to acquire additional shares of the company in order to maintain its existing percentage of ownership of a company after the passage of the act was found to be an acquisition of additional ownership of shares requiring Board approval. BD. RULING of July 31, 1957 and Sept. 19, 1958.

A bank holding company may retain its indirect interest in two nonbanking organizations through its national bank subsidiary if the investments are permissible for the national bank subsidiary under section 24A of the Federal Reserve Act, because section 4(c)(5) of the Bank Holding Company Act exempts such “eligible” investments from the section 4 prohibitions. BD. RULING of Dec. 16, 1957.

Section 4(c)(5) authorizes retention of the shares of a wholly owned company engaged solely in furnishing fiduciary services of the type that a national bank may furnish from premises of the bank holding company’s subsidiary bank. STAFF OP. of June 30, 1969.

No provision of the Bank Holding Company Act pertaining to bank holding company interests in nonbanking organizations, nor any provisions of Regulation Y, specifically or by implication preempt, supplant, or override any North Carolina statutory provisions relating to requirements imposed by the state for the licensing of insurance agents. Regulation Y should be read as presuming compliance with all state statutory and regulatory requirements pertaining to a particular proposed activity. STAFF OP. of Oct. 5, 1971.

Formation of a company that would be a subsidiary of a labor union exempt from the prohibitions of section 4 of the Bank Holding Company Act and whose shares will be distributed to shareholders of the bank will not cause the labor union to lose its exemptions under section 4(c)(i) if the subsidiary will not be a bank holding company and will engage only in permissible nonbank activities. STAFF OP. of Jan. 6, 1972.

The exception in section 4(c)(1)(A) of the Bank Holding Company Act, which allows bank holding companies to own shares in a corporation involved in property management activities if the properties are wholly or substantially used by banking subsidiaries, does not extend to property used in the operations of nonbanking subsidiaries. STAFF OP. of Feb. 15, 1973.

Authority: BHCA § 4(c)(1)(A), 12 USC 1843(c)(1)(A).

A state-chartered bank proposes to acquire a mortgage company subsidiary engaged in arranging and servicing mortgages and sale-and-lease-back transactions for institutional investors. Such an acquisition is authorized by Regulation Y, which permits a state-chartered bank to acquire all the shares of a company that engages solely in activities in which the parent bank may engage, at locations at which the bank may engage in the activities. STAFF OP. of May 7, 1974.

State-chartered banking subsidiaries of bank holding companies may acquire all of the shares of a company that engages in activities in which the parent bank may engage, subject to the same limitations the parent bank would be subject to if it were engaged in the activity. The Board, however, has refrained from utilizing its authority to regulate the nonbanking activities of state-chartered banks that are bank holding company subsidiaries, because these activities are under the primary supervision of state banking authorities. STAFF OP. of July 3, 1974.

A bank holding company proposes to join other lenders in a partnership to operate, manage, and sell certain real property acquired in satisfaction of a debt previously contracted in good faith in order to realize their equity interest in the real property. The Board has no objection to the bank holding company entering the partnership provided that best efforts are made to see the real property sold at an early date, the bank holding company reports every six months to its Federal Reserve Bank concerning those efforts, and the bank holding company’s involvement in the partnership terminates within five years. BD. RULING of Sept. 9, 1974.

A bank holding company’s wholly owned subsidiary may create a subsidiary to hold title to, operate, and manage property received as a result of default on its loans, without Board approval, as long as the assets are liquidated within a reasonable amount of time—usually the time period applicable to such property acquired by banks in satisfaction of a debt previously contracted. If properties of this kind are held longer, they may constitute an impermissible nonbanking activity. STAFF OP. of Oct. 10, 1975.

A foreign banking organization, with a U.S. subsidiary bank, proposes to offer $20 million of its capital notes for sale to the public at its U.S. offices and agencies, but not at its bank subsidiary. The Board applies the spirit and purpose of the Glass-Steagall Act to the U.S. activities of all registered bank holding companies whether they are domestic or foreign companies. The foreign bank holding company’s proposal does not violate sections 20 and 32 of the Glass-Steagall Act in that sale of the capital notes would not cause the company to be primarily engaged or to engage principally in the issue, floatation, underwriting, public sale, or distribution of securities within the meaning of these sections. This opinion is based on the understanding that (1) the notes would be offered for sale only during a three-month period; (2) the notes will be subject to designated maturities and specific limitations on denomination and aggregate amounts; (3) there are no plans for renewal or substitute offerings; and (4) such offerings are not to be an integral part of the company’s operations. STAFF OP. of May 25, 1977.

A state-chartered bank (“bank”) organized a holding compay (“Company A”) to acquire a de novo bank and later created a limited partnership to build, own, and manage a building for the de novo bank. (The bank’s interest in the limited partnership is permissible under state law.) It then assigned its interest in the limited partnership to a wholly owned subsidiary. Because of passage of the 1970 Amendments to the Bank Holding Company Act, the bank and Company A became bank holding companies. Thereafter, the bank merged with Company A, with the surviving bank holding company controlling both the bank and the bank premise company.

A bank holding company organized a nonbank subsidiary to assist it in the sale of its debt securities. The nonbank subsidiary’s activities consist solely of placing advertisements, discussing terms of the debt securities with customers, and reviewing and transmitting purchase contracts for the debt securities to the bank holding company.

Unless the Board initiates control proceedings, section 4(c)(2) of the Bank Holding Company Act, requiring disposition of shares acquired in satisfaction of debts previously contracted, would be inapplicable to the acquisition, by a bank holding company’s banking subsidiary, of warrants that are immediately convertible into voting shares of a mortgage and realty company. Section 4(c)(2) would apply to the unconverted warrants if the Board issued a final determination of control relating to the warrants. STAFF OP. of Jan. 11, 1978.

Bank holding companies may invest in small business investment companies under section 4(c)(5) of the Bank Holding Company Act to the extent allowed by the 1976 amendment to the Small Business Investment Act, which permits national banks to own 100 percent of the voting stock of a small business investment company rather than to the extent allowed by the Board’s 1968 interpretation (at 4-175), which prohibited ownership or control of 50 percent or more of the voting stock. STAFF OP. of June 27, 1978.

A bank holding company may own an investment company subsidiary, pursuant to section 4(c)(7) of the Bank Holding Company Act, if the subsidiary makes certain equity investments in other corporations and those investments do not exceed 5 percent of the voting shares in each corporation. The bank holding company may hold the investment indirectly through the subsidiary pursuant to section 4(c)(6). For the purpose of computing the percentage of outstanding voting shares held by the bank holding company and subsidiary pursuant to sections 4(c)(6) and 4(c)(7), the bank holding company and subsidiary need not aggregate with the investment shares any shares of the companies invested in that were acquired by the bank holding company’s subsidiary banks in satisfaction of debts previously contracted, pursuant to section 4(c)(2), nor any shares held in a fiduciary capacity under section 4(c)(4). STAFF OP. of Sept. 20, 1978.

Authority: BHCA § 4(c)(2), (4), (6), and (7), 12 USC 1843(c)(2), (4), (6), and (7).

Acquisition of a one-third interest in a partnership engaged in providing investment advice is not permissible under section 4(c)(5), which exempts investments in companies in which national banks may invest, because (1) a one-third interest in such a company is not a permissible investment for a national bank under the Comptroller’s regulations requiring 80 percent ownership of subsidiaries engaged in approved activities and (2) the partnership shares are not the kind of securities explicitly eligible by federal statute for investment by a national bank. Therefore, a bank holding company must apply to retain these shares under section 4(c)(8). STAFF OP. of Sept. 22, 1978.

The establishment by a bank holding company of a nonbank subsidiary to issue commercial paper and purchase loans from an affiliated member bank within the limits set by the Board does not violate section 20 of the Glass-Steagall Act. STAFF OP. of Dec. 15, 1978.

The authority of national banks to invest in bank service corporations is not derived from the Bank Holding Company Act but from the Bank Service Corporation Act. Such investments are permissible for national banks that are holding company subsidiaries. STAFF OP. of Aug. 2, 1979.

Under the Glass-Steagall Act and section 4(c)(7) of the Bank Holding Company Act, it is lawful for a bank holding company and its affiliate to elect a majority of the directors of a publicly held closed-end investment company, registered under the Investment Company Act of 1940, in which the bank holding company owns an equity interest. STAFF OP. of Oct. 4, 1979.

A bank holding company’s subsidiary bank and an unaffiliated bank own shares in a corporation engaged in operating an electronic fund transfer network for the banks. The corporation provides EFT services to the banks through automated teller machines (ATMs) and electronic computers. The bank holding company proposes to acquire shares of the corporation. A corporation offering EFT services to banks is a “bank service corporation” within the meaning of section 1 of the Bank Service Corporation Act. Therefore, the corporation’s shares could be purchased by a national bank and also by a bank holding company under section 4(c)(5) of the Bank Holding Company Act.

A question has arisen about the characteristics of notes that bank holding companies may offer for sale to the public without obtaining prior Board approval through the application process. The Board has stated that prior approval is not required for a bank holding company’s sale of notes that have an initial maturity of 14 days, after which the notes may be redeemed on demand. Such notes may not be sold or redeemed at or through any banking offices of subsidiaries of the bank holding company. Proceeds of the notes should not automatically or by prearrangement be deposited in the investor’s checking account at a bank, and purchases and redemptions should not function through a checking account. A bank holding company should not offer notes that have any third-party payment capabilities without the Board’s prior approval. STAFF OP. of March 20, 1982.

Authority: BHCA § 4(a)(2), 12 USC 1843(a)(2).

See also Orbanco Financial Services Corporation, 1982 Fed. Res. Bull. 198.

A bank holding company proposes to issue demand notes as a means of funding its subsidiaries’ consumer finance activities. The demand noted would bear a market rate of interest and would be available in denominations of $2,000 to $5,000. Subsequent purchases could be made in amounts of $500 or more. The holding company would advertise the notes for sale to the general public. Sales of and information about the notes could be obtained only through registered representatives of the holding company at offices located in one city. The holding company’s consumer finance subsidiaries would not sell the demand notes. Purchasers of the notes would receive a nonnegotiable “custodial receipt” as evidence of ownership of the note. A negotiable note certificate would be sent only upon request. The notes would be redeemable in part at any time, provided that at least $2,000 in principal remains outstanding, or in full. To redeem a note, a note holder would be required to deliver the custodial receipt to the sales offices. Those offices would advise the paying agent in another city of the amount to be paid. The requested redemption would be sent by mail to the note holder by the paying agent. The notes could not be redeemed at any offices of the holding company’s subsidiaries.

The purchase or acquisition, either direct or indirect, of 1.0 percent of the class B nonvoting stock of a reinsurance company by various bank holding companies or their nonbanking subsidiaries does not require prior Board approval. Moreover, the limitations of section 4(c)(6) do not apply, since that section applies only to the acquisition or purchase of voting shares of a company by a bank holding company. STAFF OP. of April 29, 1982.

A bank holding company requested an opinion on the permissibility of its subsidiary’s receiving limited overriding royalty interests in oil, gas, and other hydrocarbon leasehold interests as partial compensation for investment advisory services in connection with those properties. The bank holding company would not acquire more than 5 percent interest in any project. The subsidiary would place the assigned royalties in a compensation plan for assignment to certain professional employees. Neither the subsidiary nor any affiliate would acquire, hold, locate, sponsor, develop, organize, or manage any other energy property investment or in any other manner control the investment. The subsidiary would hold interest in energy properties only if the interest had not yet been reassigned to an employee, or if an employee terminates service with the subsidiary and is required to reassign his or her energy properties to the subsidiary. The bank holding company’s proposal is consistent with section 4(c)(6) of the Bank Holding Company Act, which exempts passive investments of 5 percent or less from the prohibitions of section 4 of the Bank Holding Company Act. STAFF OP. of May 3, 1983.

A bank holding company proposes to acquire 4.9 percent of the voting stock and 100 percent of the class B floating-market-rate nonvoting preferred stock of an insurance holding company (the company) that would own all of the voting stock of several newly formed insurance companies, each of which would underwrite life insurance, as well as annuities in various states. The bank holding company agreed that its holdings in the company would, under all circumstances, remain below 25 percent of the total shareholders’ equity.

The Board reviews the facts and circumstances of each case within the context of these questions and considers, in addition, the existence and number of other substantial investors and the size of the investment in relation to the holding company’s capital. The number and size of a bank holding company’s nonvoting equity investments in relation to its total and primary capital and overall financial condition may raise concern even though an individual investment does not. All bank holding companies contemplating nonvoting investments in nonbanking companies should solicit the Board’s views on each investment.

Two asset-management subsidiaries of a qualifying foreign banking organization proposed to serve as trustee for foreign-based investment trusts that would invest in U.S. real estate. As part of this asset-management activity, the two subsidiaries would take title to U.S. real estate on behalf of the investment trusts and for the benefit of the investors in the trusts. The law of the foreign jurisdiction requires the two subsidiaries to obtain a banking license to serve as trustee for the investment trusts, and the two subsidiaries are subject to supervision and regulation by the bank supervisory authority in the foreign jurisdiction. Under the arrangement, the two subsidiaries are subject to fiduciary duties that closely resemble those of a trustee in the United States. Moreover, under the law of the foreign jurisdiction, the investment trusts would not be legal entities separate from the two subsidiaries. In addition, the foreign banking organization committed that neither it nor its subsidiaries or employee benefit plans would own any beneficial interests in the investment trusts.

A commercial bank subsidiary of a bank holding company owned by a Rhode Island mutual savings bank proposes to acquire only the assets and liabilities of its parent mutual savings bank. Prior Board approval is not necessary under section 4(c)(8) of the Bank Holding Company Act since the commercial bank will continue to engage only in commercial banking as permitted under section 4(a)(2) of the act and will not acquire the license or charter of the mutual savings bank, assume any additional activities permitted savings banks in Rhode Island, take advantage of lower reserve requirements allowed by Rhode Island law to a mutual savings bank, or expand the scope or nature of its activities in any way. Staff took note of the unique relationship enjoyed by Rhode Island mutual savings banks and commercial banks, which may even operate from the same office and advertise as one bank. This relationship has been recognized by the Board in its orders allowing some Rhode Island thrift institutions to become bank holding companies while maintaining their thrift institution activities. STAFF OP. of Aug. 29, 1973.

A bank holding company may shift an activity or subsidiary authorized under section 4(c)(8) of the Bank Holding Company Act to a subsidiary bank without filing an application with the Board. After the transfer, the parent company may rely upon section 4(c)(5) as authority for its indirect holding of shares in the subsidiary, and the restrictions and benefits of section 4(c)(8) would not longer apply. STAFF OP. of July 8, 1977.

Authority: BHCA § 4(c)(5) and (8), 12 USC 1843(c)(5) and (8); 12 CFR 225.4(a) and 225.123(c).

A bank holding company engaged in the grandfathered activity of selling commercial paper commenced, without prior Board approval, the activity of buying silver in transactions in which the seller had the right to repurchase the silver. The company contended that the silver transactions are essentially a financing transaction within the scope of the company’s grandfathered activity. Although the Board had previously found buying and selling gold and silver to be closely related to banking, the finding does not make that activity essentially the equivalent of a financing transaction. Moreover, even if such activity is the equivalent of a financing transaction, it is not within the scope of the activity of selling commercial paper in that purchase of silver under a repurchase agreement can be considered the functional equivalent of a loan (with the silver as collateral), while the seller of commercial paper is more appropriately characterized as a borrower. STAFF OP. of Sept. 20, 1977.

The Board has determined that when a bank holding company and its nonbank subsidiaries offer demand thrift notes involving the acceptance by a nonbank financial organization of non-FDIC-insured funds in small amounts from consumers with access on demand, such activities raise issues concerning competitive balance and monetary policy that should be considered in the context of an application filed under section 4(c)(8) of the Bank Holding Company Act. BD. RULING of July 1, 1981.

A bank holding company proposes a commercial-paper sweep arrangement whereby its subsidiary bank would automatically invest amounts of $25,000 or more from a customer’s checking account in the bank holding company’s commercial paper at the close of each business day. The commercial paper would have a maturity of one day. Proceeds of the commercial paper would be invested in large-denomination certificates of deposit or loan participations of the subsidiary bank. A minimum balance, based on the customer’s checking activity, would have to be maintained in the checking account in order to qualify it for the investment service. Only amounts of $25,000 or more in excess of the minimum balance would be invested. The plan is aimed at the bank’s commercial and affluent individual customers, and the bank holding company would not advertise the service to the general public.

A company has applied to offer career counseling services to unaffiliated parties through its wholly owned subsidiary. The subsidiary currently provides career counseling services for the company and its affiliates, and the company proposes to expand these services to unaffiliated companies and individuals in a wide array of industries nationwide. The Board has not previously determined that providing career counseling services to unaffiliated parties is closely related to banking under section 4(c)(8) of the Bank Holding Company Act and permissible for bank holding companies.

See 1994 Fed. Res. Bull. 51 for the full text of this order.

A bank holding company that is a large lessor of aircraft employs a staff to sell the aircraft at the conclusion of the lease term or when aircraft are acquired by virtue of a borrower’s default, as permitted by sections 225.22(a) and 225.25(b)(5)(vii) of Regulation Y. The number of aircraft to be sold varies considerably over time. The company inquires whether the occasional sale of aircraft for third parties in order to recover some of the expense of maintaining its aircraft brokerage staff would be incidental to its leasing activities. Activities that are incidental to activities closely related to banking are permitted under section 225.21(a)(2) of Regulation Y. The courts also have recognized the authority of bank holding companies to engage in incidental activities reasonably necessary to the carrying on of closely related activities.^*

[The staff opinion previously at 4-318.3, dealing with discount brokerage, has been redesignated 4-655.1.]

Training seminars conducted by a bank holding company on a fee basis through a joint venture would be within the scope of activities related to extending credit under section 225.28(b)(2) of Regulation Y. The training seminars would be provided to officers and employees of banks and consumer lending institutions and would cover the business and legal aspects of consumer lending, such as loan-customer solicitation, loan processing and documentation, credit insurance products, loan servicing, and specialty lending. STAFF OP. of Sept. 3, 1998.

Providing certain flood zone-determination services is within the scope of permissible activities related to extending credit under section 225.28(b)(2) of Regulation Y. Permissible services include determining whether particular parcels of real estate are in designated flood zones, preparing standard FEMA flood zone-determination forms, and communicating flood zone determinations to customers. STAFF OP. of July 9, 2002.

Title abstracting activities for U.S.-registered aircraft conducted by a bank holding company would be within the scope of title abstracting activities authorized by the Board in The First National Company, 81 Federal Reserve Bulletin 805, 806 (1995). Title abstracting services are limited to performing a title search of aircraft records and reporting factual information concerning the ownership history of the relevant aircraft and the existence of liens or encumbrances affecting title to the aircraft. The title abstracting services would be provided to affiliated and unaffiliated lenders and other parties in connection with aircraft financing and sales transactions and would not include providing insurance against title defects or providing a guarantee or certification with respect to aircraft title. STAFF OP. of Oct. 7, 2002.

An electronic equipment manufacturing company proposes indirectly to acquire a bank through a subsidiary. Shares held by a subsidiary are considered to be indirectly owned by the parent company under section 2(g)(1) of the Bank Holding Company Act. Therefore, if the subsidiary became a bank holding company, the parent electronic equipment manufacturing company would also become a bank holding company and would be subject to the provisions of section 4 of the act. In particular, the electronic equipment manufacturing company would be required to divest, within two years of the date it became a bank holding company, all nonbanking activities not specifically authorized by the act or by Board order or regulation. It is staff’s opinion that the Board’s discretion under section 4(c)(8) of the act is not so broad as to permit a determination that electronic equipment manufacturing is closely related to banking. STAFF OP. of July 1, 1971.

“Equity funding” is defined as the financing of sales of mutual fund shares and life insurance policies as a package. Based upon the policies of sections 20, 21, and 32 of the Glass-Steagall Act, which are incorporated into the Bank Holding Company Act, the Board determined that the activity of equity funding is not one that is considered to be closely related to banking under section 4(c)(8) of the Bank Holding Company Act. BD. RULING of Nov. 9, 1971.

A bank holding company proposes to form a subsidiary that would sell limited partnerships interests in real estate syndication in which it would have the role of general partner and in which it would organize, structure, place, manage, and supervise the syndications. Such real estate syndication is not closely related to banking. Also, such activities go beyond the functions performed by an advisory company to a real estate investment trust, which are permitted by Regulation Y. Moreover, such activities are not in keeping with the policies of sections 20 and 32 of the Glass-Steagall Act, which have been incorporated into section 4(c)(8) of the Bank Holding Company Act. BD. RULING of April 4, 1972.

Authority: Glass-Steagall Act §§ 20 and 32, 12 USC 377 and 78; BHCA § 4(c)(8), 12 USC 1843(c)(8); 12 CFR 225.4(a)(5) and 225.126.

See also Investment Company Institute v. Camp, 401 U.S. 617 (1971).

The selling of auto club memberships is not a permissible activity for bank holding companies and their subsidiaries, since the Board has not found that activity to be closely related to banking. Also, while the Board has authorized the activity of acting as agent or broker for credit-related insurance, such activity does not encompass the type of insurance services offered by an auto club. Also, the types of insurance offered by the auto club are not related to extension of credit and do not serve to protect the lender from damage to the collateral securing loans. Many of the services offered by an auto club are not insurance related. Therefore, the sale of auto club memberships and accompanying insurance do not fall within the boundaries of permitted sales of credit-related insurance. STAFF OP. of May 31, 1974 and June 8, 1978.

A bank holding company subsidiary proposes to provide a credit card service for check-cashing purposes at a supermarket. The subsidiary would purchase any checks cashed with the credit card. This activity is not encompassed by the permissible activity of extending credit. Also, while this activity may be closely related to banking, the Board has not made a determination on this issue. BD. RULING of Aug. 5, 1974.

The preparation of tax returns has not been determined by the Board to be closely related to banking and consequently is an impermissible activity for bank holding companies. Whether a state-chartered bank may engage in this activity, however, is a matter of state law. STAFF OP. of Aug. 20, 1974.

The Board has determined that providing property management services is not closely related to banking or managing or controlling banks and therefore is an impermissible activity for bank holding companies and their subsidiaries. However, bank holding companies may provide such services for properties held in a fiduciary capacity, properties owned by the bank holding company or its subsidiaries for conducting its own bank or bank-related operations, or properties acquired by the bank holding company or its subsidiaries as a result of a default on a loan (dpc).

A bank holding company proposes either to include automatically or, for an additional premium, to extend credit-related insurance coverage to a debtor’s spouse. If the spouse is not obligated to repay the credit extended by the holding company system, the proposed insurance is not closely related to banking, because it is not related to the extension of credit. It is also not incidental to a permissible activity, because coverage of the spouse is not necessary to conduct the activity. STAFF OP. of Dec. 8, 1978.

In 1979, the Board approved a bank holding company’s acquisition of the check-authorization subsidiary pursuant to Section 225.4(b)(2) of Regulation Y. The subsidiary acquires and compiles in its computer banks certain negative financial information on individuals and, on the basis of that information, determines whether or not it should authorize subscribing merchants’ acceptance of personal checks tendered by customers in payment for goods and services. The subsidiary will purchase a validly authorized check for the subscribing merchant if the presented check is subsequently dishonored.

A bank holding company proposes to establish a plan that would permit holders of the credit card offered by a consumer finance subsidiary of the bank holding company to place funds in an account for future use. A minimum balance of $25 would be required to open an account under the plan, and additional contributions could be made in any amount. Funds placed in the plan would earn interest at a rate to be determined by the consumer finance subsidiary, depending on market conditions. The plan would allow a cardholder to direct that plan funds be transferred in whole or in part to reduce the cardholder’s current balance due on the card. The cardholder also could have funds returned upon written request or on demand at any of the consumer finance subsidiary’s offices, some of which would be equipped with electronic terminals providing access to plan accounts.

A group of bank holding companies proposes to establish a mutual insurance company to provide directors’ and officers’ responsibility coverage and bankers’ blanket bond coverage for the participating holding companies and their subsidiaries. The group would form a not-for-profit mutual insurance company that would be chartered in Bermuda. The insurance company would have at least 20 participating bank holding companies at all times, and no individual bank holding company would control 5 percent or more of the mutual insurance company. Membership in the mutual association would be open to any bank holding company that meets the company’s underwriting standards. Each participating bank holding company would have one vote regarding the direction of the company’s affairs. The company would be managed by an unrelated management company. The company would not provide any insurance other than directors’ and officers’ insurance and blanket bond coverage and would not insure any entity, directly or through reinsurance, other than a participating bank holding company and its subsidiaries.

A private (that is, unincorporated) bank is a bank, for purposes of the Bank Holding Company Act. Consequently, ownership of a one-half interest in such a bank constitutes ownership of 25 percent or more of the voting shares of the bank. BD. RULINGS of Nov. 2, 1966 and Aug. 18, 1967.

A subsidiary of a corporation organized under section 25(a) of the Federal Reserve Act is exempt from the definition of “bank” under section 2(c) of the Bank Holding Company Act provided the subsidiary’s activities are restricted to those permitted by the Edge corporation. STAFF OP. of March 3, 1970.

Authority: FRA § 25(a), 12 USC 611-631; BHCA §2(c), 12 USC 1841(c).

The term “commercial loan” includes all loans to a company or individual, secured or unsecured, other than a loan the proceeds of which are used to acquire property or services used by the borrower for her or his own personal, family, or household purposes, or for charitable purposes. BD. RULING of July 1, 1971.

An industrial bank that seeks to terminate its status as a bank by ceasing to engage in the making of commercial loans must neither channel deposits to any affiliated institution that does make commercial loans nor supply or maintain the availability of funds (except through dividends) to any affiliate that makes commercial loans. These restrictions are given broad application and apply to any and all funds from whatever source derived. STAFF OP. of July 29, 1971.

A branch licensed by state banking authorities for a foreign bank is not a “bank” for purposes of the Bank Holding Company Act, since such a branch has no corporate identity separate from the foreign bank’s. STAFF OP. of March 3, 1972.

Making occasional commercial loans as an accommodation to its trust customers is not sufficient to convey bank status to a trust company. An entity that is principally engaged in the trust business is not deemed to be engaged in the business of making commercial loans under the Bank Holding Company Act if it makes occasional commercial loans for the accommodation of trust customers only, and all loans total less than 2 percent of assets. BD. RULING of May 18, 1972.

A trust company that makes commercial loans is not considered a bank for the purposes of the Bank Holding Company Act so long as the bank does not also accept demand deposits. STAFF OP. of Sept. 25, 1974.

A company that restricts its activities to those permissible for a nonbanking trust company subsidiary of a bank holding company would not be a “bank” as defined by the Bank Holding Company Act. Under section 225.4(a)(4)(iii) of Regulation Y, a trust company may engage in the making of broker call loans as long as those loans are made as “passive investments” for the temporary investment of idle funds. The trust company may also give advance credit to a selling broker on a draft on the buyer’s bank, because the advance credit does not constitute a “commercial loan” within the meaning of the act. STAFF OP. of Jan. 26, 1976.

A national bank that has executed an agreement with the Comptroller of the Currency that it will only engage in providing trust services and that is barred from receiving deposits (other than trust funds) and making commercial loans is not a “bank” as defined by the Bank Holding Company Act. STAFF OP. of March 4, 1976.

The term “commercial loans” does not encompass consumer loans, generally, but would, however, include the purchase of retail installment contracts covering consumer purchases. An industrial bank that is affiliated with entities that do make commercial loans must not channel demand deposit funds to any of its commercial lending affiliates nor share common offices with any such affiliates. STAFF OP. of May 13, 1976.

The Bank Holding Company Act defines a “bank” as an institution that both accepts demand deposits and engages in the business of making commercial loans. A trust company proposes to offer its customers personal banking services, including personal unsecured lines of credit. The trust company will not be a bank as long as the loans are of a personal nature, are limited in most cases to a maximum amount of $5,000, and are not used for any commercial obligations of the borrower. STAFF OP. of May 19, 1978.

A national bank that accepts demand deposits but does not engage in the business of making commercial loans is not a “bank” within the meaning of section 2(c) of the Bank Holding Company Act.¹ Therefore, a corporation is not required to obtain the Board’s prior approval before acquiring such a bank. Because a bank holding company is defined under the act as any company that controls a “bank,” a corporation would have to obtain the Board’s prior approval to become a bank holding company before acquiring a national bank that is a “bank” under the act.

The Board would not regard a Minnesota savings bank as a “bank” under the Bank Holding Company Act if two conditions are satisfied:

A bank in liquidation is not a bank for purposes of the Bank Holding Company Act. Because the bank in question had been closed by a court order, and had not accepted deposits nor made loans since that time, it was not a bank for purposes of the act.

Under section 4(a) of the Bank Holding Company Act, the Board ordered a bank holding company to terminate its status as a bank holding company by divesting its subsidiary bank or by divesting its impermissible nonbanking activities. The Board rejected the holding company’s proposal to direct its subsidiary to notify all demand deposit customers that the subsidiary reserved the right to require 14 days’ advance notice of withdrawal from their accounts. The holding company argued that this reservation converted its subsidiary from a bank to a nonbank under the Bank Holding Company Act because it would no longer be accepting demand deposits. Following the holding company’s insistence that its proposal would meet the divestiture requirements, the Board imposed a civil money penalty and ordered the holding company to cease and desist from its violation of the Bank Holding Company Act.

A firm engaged in managing and controlling mutual funds (“securities firm”) filed a notice of change in bank control with the FDIC regarding its proposed acquisition of an insured nonmember bank. By its express terms, the Change in Bank Control Act is not applicable to a transaction that requires the Board’s prior approval under section 3(a)(1) of the Bank Holding Company Act, and the proposed acquisition would require the Board’s approval under the Bank Holding Company Act. Section 2(c) of the Bank Holding Company Act defines the term “bank” as any institution that both accepts demand deposits and engages in the business of making commercial loans. The securities firm contends that the Bank Holding Company Act is not applicable because the bank to be acquired will divest its commercial loan portfolio before the acquisition, thereby converting the bank to a nonbank.

A bank holding company sought clarification of the status of its trust company subsidiary as a result of the enactment of the Competitive Equality Banking Act of 1987 (CEBA). Prior to the enactment of CEBA, the subsidiary was not a “bank” as then defined in section 2(c) of the Bank Holding Company Act (BHC Act) but instead functioned as a trust company, a nonbank subsidiary authorized to conduct business under section 4(c)(8) of the BHC Act and section 225.25(b)(3) of Regulation Y.

A company acquiring more than 10 percent of the outstanding voting shares of a bank holding company or a member bank without giving the Board prior notice may be in violation of Regulation Y and the Change in Bank Control Act. Any person (or corporation) who acquires ownership, control, or the power to vote 10 percent or more of a class of voting securities of a member bank or a bank holding company must give the Board prior notice of the proposed acquisition if (1) the bank or holding company has issued any class of securities subject to registration under section 12 of the Securities Exchange Act of 1934 or (2) immediately after the transaction no other person will own a greater proportion of that class of voting securities. If, under the circumstances, the Board finds that no regulatory or supervisory purpose would be served by taking any enforcement action, however, it may then decide to forego such action, particularly if the offender has acted promptly to reduce its share interest to less than 10 percent. STAFF OP. of Feb. 12, 1981.

Eight members of the A and B family (A/B family) and the C family (consisting of two family trusts and a family partnership) seek to acquire 13 percent of the voting shares of a bank holding company. The A/B family will purchase 11 percent of the holding company’s stock, while the C family will purchase about 2 percent. The question has arisen whether the A/B family and the C family must file a change-in-control notice with the appropriate Reserve Bank.

A nonbanking corporation (Corporation A) proposes to make a tender offer for all the shares of another nonbanking corporation (Corporation B). Through a wholly owned nonbanking subsidiary, Corporation B owns 14 percent of the voting shares of a one-bank holding company. Corporation A does not intend to acquire directly any shares of the one-bank holding company or its subsidiary bank. Neither Corporation B nor its wholly owned nonbanking subsidiary is registered with the Board as a bank holding company. The question has arisen whether Corporation A is required to file a change in control notice with the Board pursuant to the Change in Bank Control Act.

When the Board decides not to disapprove a notice of change in bank control in reliance on commitments made by the party filing the notice, compliance with these commitments may be enforced through the following mechanisms: (1) under the civil money penalty provisions of the Change in Bank Control Act; (2) through the institution of a control proceeding under the Bank Holding Company Act that could result in the Board’s prescribing a divestiture plan to be followed by the violators; or (3) by the Board’s cease-and-desist authority under section 8(b)(1) of the Federal Deposit Insurance Act as either a bank holding company or as “other persons participating in the conduct of the affairs” of a bank. STAFF OP. of Oct. 7, 1982.

A person (holder) acquired convertible nonvoting preferred stock of a bank holding company representing 18 percent of the voting share of the company. This acquisition made the holder the largest single shareholder of the company.

A nonbanking corporation (“corporation”) and the investors advised by the corporation filed a notice pursuant to the Change in Bank Control Act (CIBC Act) regarding a proposed investment in shares of a bank holding company (Company A). This investment has been proposed in connection with Company A’s acquisition from the FDIC of three bridge banks formed from banks that had been subsidiaries of a second bank holding company (Company B). The corporation proposes to call on invesment commitments made by a number of investors it advises, and to invite several other investors who typically invest with the corporation to purchase approximately $283 million of nonvoting convertible preferred stock and warrants of Company A. The investment would be made through two investment partnerships (partnerships) in which the corporation is the sole general partner. The partnerships will have a total of approximately 70 unrelated limited partners.

Because, in staff’s opinion, the activity of administering funds under the Comprehensive Employment and Training Act may promote community welfare, a subsidiary designed primarily to participate in such a payment system may be a corporation “designed primarily to promote community welfare” for purposes of Regulation Y and is therefore permissible as an activity closely related to banking. STAFF OP. of Nov. 26, 1974.

Authority: BHCA § 4(c)(8), 12 USC 1843(c)(8); 12 CFR 225.4(a)(7) and 225.127.

A subsidiary of a bank holding company received from a Federal Reserve Bank, under delegated authority, authorization to construct low- and moderate-income housing units under several federal housing programs. After the termination of one of the programs, the subsidiary continued to engage in these activities.

A community development corporation asked whether, under section 4 of the Bank Holding Company Act, a bank holding company must obtain the Board’s permission before investing in a nonprofit community development corporation aimed at economic revitalization of a certain area. The corporation was informed that the purely contributory and relatively passive nature of the bank holding company participation proposed demonstrated that no “activity” or “investment” requiring prior Board approval was involved. STAFF OP. of Jan. 27, 1983.

A bank holding company proposes to engage in community development activities pursuant to section 225.25(b) (6) of the Board’s Regulation Y through a corporation (Corporation A), a newly chartered business and industrial development corporation (BIDCO) licensed under Michigan law. Michigan BIDCOs are state-regulated private corporations established to promote economic development through the provision of moderate-risk growth capital and management assistance to small businesses.

An investing group consisting of individuals and organizations, although acting in concert for the acquisition of operating control of a company, lacks the structural characteristics required to be considered an association, or similar organization under the Bank Holding Company Act. BD. RULING of Aug. 19, 1966.

The ownership or control of 25 percent or more of the voting shares of a bank by an individual does not by itself bring an individual within coverage of the Bank Holding Company Act, since the definition of “company” does not include an individual. STAFF OP. of Oct. 6, 1971.

A religious association purchased more than 25 percent of the shares of a newly formed bank for the purpose of resale to association members and the general community within one year. The association is not a bank holding company, despite its control of more than 25 percent of the voting stock of a bank, because the shares are owned in connection with an underwriting and will be held only long enough to permit their sale on a reasonable basis. This determination was based on the understanding that the association will sell its shareholdings within one year and will not vote those shares while they are in its possession. BD. RULING of Aug. 15, 1974.

A family formed an association to create a company and has wholly owned that company since the company’s establishment. A member of that family, representing himself as an agent of the company, purchased 84 percent of the outstanding voting shares of a bank for the company prior to June 30, 1968. The articles of incorporation were drawn up and signed by June 30, 1968 but not formally filed until July 3, 1968.

A shareholder agreement requires each shareholder to provide financial support in addition to the initial share subscription, imposes certain restrictions on transferability of shares, and provides for designation of directors on other than a strict voting share basis. The Board determined that, standing alone, such an agreement would support a determination that a company exists under the Bank Holding Company Act. However, the fact that the agreement serves legitimate supervisory and regulatory purposes (that is, to ensure that the relevant bank will have financially agreeable commitments to protect its ability to meet its financial obligations) and is not intended to create a distinct entity, permits the Board to determine that a company does not exist. BD. RULING of Jan. 26, 1976.

Three individuals own combined shareholdings of 25 percent or more in each of three banks, and each of the three shareholders serves as an executive officer and/or director of all three banks. Unless a formalized or structured relationship through an agreement of some kind between the individuals, the individuals do not constitute an association and are not a “company” within the meaning of section 2(b) of the Bank Holding Company Act. BD. RULING of Sept. 13, 1977.

A partnership holds shares of a bank, but the partners in the trust are the minor children of a single family. Trustees manage the assets of the partnership, which serves as a vehicle to provide for the education of the children and is intended to last only until the end of their minority. The partnership appears, in substance, to be a short-term trust exempt from the Bank Holding Company Act’s definition of “company.” STAFF OP. of Jan. 9, 1978.

The question has arisen whether an Indian tribe is a company for the purposes of the Bank Holding Company Act, which excludes from the definition of “company” any corporation the majority of the shares of which are owned by the United States or by any state. It appears that in many respects the tribe’s powers and functions resemble state governments’ and represent a unique aggregation possessing attributes of sovereignty over both its numbers and its territory. Because of its status under federal law, the tribe is more closely analogous to a state than to any other entities enumerated and defined in the act as a “company.” Thus, the tribe should not be regarded as a “company”; therefore, would not be a bank holding company. STAFF OP. of June 9, 1978 and July 10, 1981.

Authority: BHCA § 2(b), 12 USC 1841(b).

See also United States v. Mazurie, 419 U.S. 544 (1975).

A bank holding company proposes to divest itself of all assets, including its subsidiary bank, transfer its assets to a liquidating trust with a limited existence of 10 years. The liquidating trust is not a company, and prior Board approval of the transaction is not necessary. Because the bank holding company will dissolve after transfer of assets to trust, the rebuttable presumptions of control in section 2(g) of the Bank Holding Company Act are not applicable. However, the proposed trustee, which is a bank, and its parent bank holding company would constitute bank holding companies of the divested bank and would have to apply for prior Board approval to act as trustee for the liquidating trust. STAFF OP. of Nov. 7, 1978.

A group of six registered bank holding companies, acting with a single purpose with common ownership and under common control, participating in a tender offer, is a de facto company under the Bank Holding Company Act. Moreover, the company is a bank holding company, because its constituent elements own banks and therefore could not purchase 5 percent or more of the shares of a bank located in another state. BD. RULING of Nov. 17, 1978.

A group composed of six individuals owns common investments, including two banks and other nonbanking investments held for the members of the group under a nominee agreement. The group is a company for purposes of the Bank Holding Company Act.

Two bank holding companies, which are both majority-owned by a single family, propose to each acquire 4.99 percent of the voting shares of a third corporation, which proposes to become a bank holding company. Members of the controlling shareholder family propose to purchase directly 25 percent of the third corporation. Staff concluded that there is sufficient evidence to support the opinion that the two bank holding companies together are associated in the acquisition of the third corporation and, therefore, constitute a “company” within the meaning of section 2(b) of the Bank Holding Company Act. The two bank holding companies must gain the prior approval of the Board before making this stock acquisition. STAFF OP. of March 24, 1981.

Authority: BHCA §§ 2(b) and 3(a)(1) and (3), 12 USC 1841(b) and 1842(a)(1) and (3).

See also WISCOB, 1979 Fed. Res. Bull. 778; Commerce Bank Corporation, 1980 Fed. Res. Bull. 506.

Section 2(b) of the Bank Holding Company Act defines “company” as any corporation, partnership, business trust, association, or similar organization or other trust unless by its terms it must terminate within the period set by the statute. Section 3 of the act requires any company that proposes to take action that would make it a bank holding company to obtain prior Board approval for that action. A one-bank holding company controls 85 percent of the voting shares of a bank and is in turn controlled by a limited partnership. The question was raised whether an employee stock ownership plan (ESOP) of the holding company must file an application with the Board pursuant to section 3 before acquiring more than 25 percent of the holding company. The trustees of the ESOP are senior officers of the holding company and the bank, and the individuals who control the limited partnership are all currently registered bank holding companies subject to the Board’s supervision and regulation.

Three bank holding companies each propose to acquire 5 percent of the voting shares of a proposed bank holding company. The sole business of each of the three holding companies is ownership of their respective subsidiary banks. None of these three holding companies owns shares in the other.

When more than 25 percent of the voting shares in a bank are held by trustees for the members of a union, the shares are deemed to be held for the union. Therefore, the union is a bank holding company and is required to register as such. BD. RULING of April 30, 1959.

Company A controls 86.89 percent of the voting shares of Company B; Company B controls 42.1 percent of the voting shares of Company C; Company C controls 71.77 percent of the voting shares of Company D; and Company D controls 88 percent of the voting shares of Bank E. Company A controls Companies B, C, and D and Bank E by virtue of its control of more than 25 percent of the voting shares of Company B and each of Company B’s, C’s, and D’s control of more than 25 percent of the voting shares of the next-lowest subsidiary. Shares held by a directly or indirectly controlled subsidiary are attributed to the parent corporation. Therefore, because of Company A’s indirect control of Company D, Company D’s direct control of 88 percent of Bank E is attributed to Company A. Company A is therefore a bank holding company. BD. RULING of Sept. 16, 1959.

Shares of a bank that are held in the name of an individual solely to enable that individual to qualify as a director of a subsidiary bank and that the individual and the bank holding company acknowledge are owned by the bank holding company are deemed to be controlled by the bank holding company. Consequently, these shares are included in determining whether a bank holding company holds a majority of shares in a bank and can thus acquire additional shares of the bank without prior Board approval under section 3(a) (B) of the Bank Holding Company Act. STAFF OP. of Jan. 26, 1961.

A company is found to own or control more than 25 percent of the voting stock of a bank indirectly both through the company’s ownership of shares of a second company, which holds 65 percent of the voting stock of the bank, and through a wholly owned subsidiary’s ownership of 33⅓ percent of the voting stock of that bank. The parent company is deemed to control the bank by either line, because control by a subsidiary is attributed to its parent. STAFF OP. of Nov. 13, 1968 and Aug. 14, 1967.

A proposed reorganization of stockholdings involving four banks and a newly organized holding company would give the holding company 25 percent or more of the shares of Bank A, the largest of the four banks, and 24.9 percent of the shares of each of the three other banks. Trustees of trusts for the benefit of the shareholders of Bank A would own 20 percent of the shares of the bank holding company and 24.9 percent of the shares of each of the other three banks, all in trust for the stockholders of Bank A.

A bank is the sole remaining trustee of a trust containing shares of another bank. The beneficiaries have sole discretion to appoint new trustees but are not inclined to do so, and the bank cannot delegate its voting power to anyone but a co-trustee appointed by the beneficiaries.

The Bank Holding Company Act is concerned with control of a bank by a company rather than by individuals. As a general rule, when a company controls less than 25 percent of the shares of a bank but individuals controlling the company own more than 25 percent of the shares of the bank in their individual capacities, the bank is considered to be controlled by the individuals rather than the companies. When two or more companies that are controlled by a common group of individuals collectively own more than 25 percent of the shares of a bank, staff concluded that unless there is another bond beyond that of common individual shareholders, the shares are not controlled by a company within the meaning of the act. STAFF OP. of April 15, 1971.

A perpetual trust owns 49 percent of the outstanding shares of a bank but, by virtue of a complicated vote-weighing procedure, is entitled to vote only less than 25 percent of the shares. The trust is not a “bank holding company” within the meaning of section 2(a)(2)(A) of the Bank Holding Company Act, which provides that, regardless of the nature of the trust or who votes the trust’s stock holdings, the perpetual trust is a bank holding company if it directly or indirectly, or acting through one or more persons, owns, controls, or has power to vote 25 percent or more of any class of voting securities of a bank. STAFF OP. of Sept. 13, 1971.

Authority: BHCA § 2(a)(2)(A) and (c), 12 USC 1841(a)(2)(A) and (c).

A general business corporation became a bank holding company by virtue of its power to vote 25 percent or more of the outstanding shares of a bank, notwithstanding that the corporation’s control is through a voting trust that will terminate within 25 years. A general business corporation is a “company” within the meaning of section 2(b) of the Bank Holding Company Act. STAFF OP. of Oct. 22, 1971.

A company holds more than 5 percent but less than 25 percent of the shares of a bank, and the company is owned by members of one family, who also hold shares of bank. The shares held by the family members may be attributed to the company if the family holdings were mere subterfuge to disguise the company’s actual control of these shares. Shares held by family members are not attributable per se to the company, but shares held by the family combined with the company’s greater-than-5-percent share holding raises a rebuttable presumption of control over bank. In the absence of an adequate rebuttal of the presumption, the Board may determine that the company exercises a controlling influence over the bank.

Four individuals own 25 percent of the voting stock of a company, which is organized solely for the purpose of acquiring 13.6 percent of the outstanding voting shares of a bank. After the acquisition, three directors of the company would individually own an aggregate of 25 percent or more of the bank’s voting securities. Also, members of the immediate families of two of the company’s officers control approximately 40 percent of the bank’s outstanding voting shares. Although the company’s relationship with the bank gives rise to the rebuttable presumption of control under section 225.2(b)(2) of Regulation Y, the individuals rather than the company would control the bank, because a majority (54.85 percent) of the voting shares of the bank would be subject to the control of individual members of two families after the 13.6 percent acquisition. Therefore, prior Board approval under section 3(a)(1) of the Bank Holding Company Act for the acquisition is not required. STAFF OP. of Jan. 17, 1973.

A company engaged in nonbank activities that are impermissible for a bank holding company is 75 percent owned by members or trusts for members of one family and will later be 58 percent owned by that family because of public share offerings. The company owns 7.42 percent of a bank and members of that family own another 1.31 percent. A family member is president of the company and a director and a member of the bank’s executive committee, and the chairman of the board of directors of the company is on the advisory board of the bank.

An individual owned 100 percent of the shares of Corporation A, which wholly owned, except for qualifying shares, Corporation B. Corporation B and the individual owned an aggregate total of 24.9 percent of the voting shares of a bank holding company. The Board decided to take no action regarding determination of whether Corporation B controlled the bank holding company. The Board also declared it would take no action if the aggregate total owned by Corporation B and the individual were to exceed 25 percent. The Board’s decision was based on its understanding that actual control rests with the individual as an individual and not with the corporations and was conditioned on the following: (1) that neither corporation will at any time directly or indirectly own, control, or have power to vote 25 percent or more of the outstanding voting shares of the bank holding company or its subsidiary bank; (2) that the combined direct or indirect shareholdings of the corporations, and of any other companies in which the individual or members of his immediate family have a controlling stock interest or hold the position of director or officer, shall at no time aggregate 25 percent or more of the outstanding voting shares of the bank holding company or its bank subsidiary. BD. RULING of Dec. 16, 1974.

Prior to 1955, the transfer of the shares of a one-bank holding company was conditioned upon the similar transfer of shares of a nonsubsidiary bank. This stock-stapling agreement was terminated in 1955. The stock-stapling control provision of section 225.3(a) of Regulation Y was premised on the expanded authority granted by the Bank Holding Company Act Amendments of 1970 and is not susceptible to retroactive application. Accordingly, because the formal stock-stapling transfer restriction was eliminated before passage of the 1970 amendments, no violation of the act resulted. Section 225.3(a) provides that restrictions on the transferability of 25 percent or more of any class of voting securities of a company in any manner will lead to a finding of control of that company. However, the form of the restriction on transferability of shares must be legally binding. If they are not legally binding, informal restrictions on transferability of shares do not come under section 225.2(b)(4). Therefore, the bank holding company does not “control” the bank within the meaning of section 225.2(a). STAFF OP. of March 28, 1975.

Authority: BHCA §§ 2 and 3, 12 USC 1841 and 1842; 12 CFR 225.2(a) and (b)(4).

See also American Security & Trust and American Security Corporation, 1974 Fed. Res. Bull. 875.

The language of section 2(a)(2)(A) of the Bank Holding Company Act, concerning when a company is deemed to control a bank or another company, is clear and unambiguous. Therefore, staff did not agree with the contention of a real estate investment trust that the section should not be read literally and that control should be determined on the basis of ownership of common voting stock rather than preferred voting stock. Although preferred stockholders can act only in concert with the common stockholders, staff concluded that ownership of 35.1 percent of preferred voting stock constituted control for the purposes of section 2(a)(2)(A). STAFF OP. of Nov. 14, 1975.

Corporation A holds 18.78 percent of the voting shares of Corporation B, which intends to buy 35 percent of the shares of Bank C. Seventy-five percent of the voting shares of Corporation A is owned by a husband and wife, who also own 35.56 percent of Corporation B. These individuals and one other person serve as either directors or officers of both Corporations A and B, and several other officers and directors of Corporation A own voting shares of Corporation B. If Corporation B were to become a bank holding company, a rebuttable presumption that Corporation A controls the bank holding company would exist under section 225.2(b)(2) of Regulation Y, by virtue of (1) Corporation A’s ownership of 18.78 percent of the voting shares of Corporation B and (2) the fact that the additional voting shares of Corporation B that are owned by an individual who is either a director or officer of Corporation A total more than 25 percent of the voting shares of Corporation B.

A bank holding company proposes to acquire 100 percent of the voting preferred shares of a nonbanking company. Although the preferred shares amount to only 4.76 percent of all voting shares, the acquisition is not exempt from the nonbanking prohibitions in section 4 of the Bank Holding Company Act pursuant to section 4(c)(6) of that act. Section 4(c)(6) must be read in conjunction with section 2(a)(2)(A), which defines control as acquisition of 25 percent or more of any class of voting stock. STAFF OP. of March 17, 1977.

Authority: BHCA §§ 2(a)(2)(A), 4(a), and 4(c)(6), 12 USC 1841(a)(2)(A), 1843(a), and 1843(c)(6).

See also Board policy statement at 4-172.1.

Shareholders of Bank A propose an interim loan from Bank B in order to purchase Bank A’s loan receivables. A bank holding company, of which the lead bank is Bank B, is negotiating to acquire shares of Bank A. Staff concluded that the bank holding company had not acquired indirect control of the voting shares of Bank A, because (1) none of Bank A’s shares were submitted as collateral to secure the loan, and (2) there were no agreements or understandings between the borrower and lender or the holding company involving voting rights, control, influence, or management of Bank A or the conduct of its business. STAFF OP. of June 13, 1977.

A principal of a bank holding company owns 40 percent of the shares of a bank in which the bank holding company has a 38.5 percent interest. The bank maintains an employee stock ownership plan and proposes to acquire approximately 25 percent of the bank’s stock from the principal over the next 15 to 18 years. The bank is deemed to control both the shares held by the trustees of the employee stock ownership plan, pursuant to section 2(g)(2) of the Bank Holding Company Act, and those held by the principal of the bank holding company, pursuant to section 2(g)(3). Prior Board approval of the purchases from the principal by the employee stock ownership plan is not required, because the bank holding company would not be acquiring ownership or control of any shares that it is not already deemed to control. STAFF OP. of July 13, 1977.

When a bank holding company transfers all of its shares of a bank to its parent company, which is itself a bank holding company, section 2(g)(3) of the Bank Holding Company Act raises a presumption that the transferor retains indirect control of the bank. However, since the company would continue to be subject to Board jurisdiction by virtue of being the subsidiary of a bank holding company the transfer would not result in the Board’s loss of regulatory control. STAFF OP. of Sept. 8, 1977.

Two individuals have a 60.1 percent stock interest in a bank and are the only two stockholders of a corporation that has a 16.4 percent stock interest in the bank. This wholly owned corporation is not considered to be a bank holding company, because it does not control the bank through the individuals; rather, the individuals themselves are the controlling factor. BD. RULING of Nov. 15, 1977. STAFF OP. of June 16, 1977.

A bank holding company seeks to invest in corporate convertible preferred securities issued by an insurance holding company engaged in the general insurance business. Solely at the option of the holder, the preferred securities involved are convertible at any time into voting common stock of the insurance holding company. A question arises about the extent to which the Bank Holding Company Act and Board regulations permit bank holding companies to invest in such corporate convertible preferred securities.

The Board issued a preliminary determination that a member bank holding company exercises a controlling influence over the management or policies of another bank, pursuant to the rebuttable presumptions of control in section 225.2(b)(1) of Regulation Y. The Board’s determination was based upon (1) the bank holding company’s ownership of 13.7 percent of the voting shares of another bank; (2) the fact that no other person owned, controlled, or had powers to vote as much as 5 percent of any class of voting securities of the second bank; and (3) the existence of at least three interlocking management positions.

No 2(g)(3) noncontrol determination is necessary when shares of a divested subsidiary are distributed pro rata to shareholders of the bank holding company. The fact that certain directors and officers of the transferor received shares of the divested subsidiary was a predictable result of the distribution. Moreover, the indebtedness of certain shareholders to banking subsidiaries of the transferor is not of concern, since no individual holds in excess of 5 percent of the divested subsidiary’s shares. Lastly, at the time of the divestiture, the Board had not established its policy of applying section 2(g)(3) presumptions to such situations. STAFF OP. of June 30, 1981.

Authority: BHCA § 2(g)(3), 12 USC 1841(g)(3); 12 CFR 225.2(b) and 225.139.

A bank holding company and its subsidiary bank had long-standing relationships with 16 correspondent banks, and although the bank holding company directly owned no stock in the correspondent associates, many of its present directors and former officers, directors, and employees purchased stock of the correspondent associates with the expectation that the banks would be organized and operated under the guidance of the bank holding company and would eventually be part of the bank holding company as subsidiary banks. Staff concluded that shares of the correspondent associates would not be attributed to the company so long as it did not finance the purchase of the shares.

A company owns 9.9 percent of the voting securities of a bank holding company and holds options to purchase an additional 22.5 percent. It filed a notice under the Change in Bank Control Act proposing (1) to exercise options for its own account sufficient to bring its share ownership up to 24.9 percent of the shares of the bank holding company and (2) to sell to third parties, either as options or as shares, the remaining 7.5 percent of the voting shares held under option. The company has granted to a second bank holding company an option to purchase the entire block of 32.4 percent of shares owned or under option to the company and has agreed to bind third parties who would purchase the excess 7.5 percent to the escrow arrangements included in the agreement with the second bank holding company and to grant the second bank holding company the right to approve any third-party purchasers of the excess 7.5 percent. The company will receive an option price based on total number of shares placed in escrow by the company and third parties who purchase shares from the company only if the company places its 24.9 percent in escrow and arranges for placement in escrow of a majority of the excess 7.5 percent sold to third parties.

A bank holding company that is controlled by a group of individuals purchased nonvoting stock equal to 25 percent of the total equity of another bank that is owned by the same group. The bank holding company did not have to file an application under section 3 of the Bank Holding Company Act, because the bank was controlled by the group of individuals and not by the company. Moreover, the group of individuals was not deemed to be a bank holding company, because no formalized structure was found. BD. RULING of May 25, 1983.

A bank holding company proposed a pilot research program that would offer banking services as well as nonbanking informational services such as home shopping, travel planning, and general news and information. These services would be offered through general-purpose hardware provided to 100 household customers for 12 months. The purpose of the pilot program is to determine if banking, financial, and economic data are viable components in a home information system and to test consumer willingness to pay for such services by charging a nominal fee of approximately $7.50 per month.

A bank holding company requested that its data processing subsidiary be permitted to continue certain design and assembly activities associated with providing a data services package. In approving the acquisition of the subsidiary, the Board had ordered the divestiture of these operations unless the bank holding company could demonstrate that they were necessary to ensure the availability and reliability of its computer components.

A bank holding company (“the applicant”) applied for Board approval under section 4(c)(8) of the Bank Holding Company Act to acquire all the voting shares of a company (“the company”) and to engage through the company in certain data processing and data transmission activities pursuant to section 225.25(b)(7) of Regulation Y.

The company also proposes to furnish participants in the medical-payments system with statistical and other data derived from the information contained in its database. It expects that, in most instances, raw data will be transmitted to a customer from the network’s central computer upon the customer’s electronic request, without any intervention by company personnel. In some cases, however, pursuant to a customer’s instructions, the company may perform limited selection, combination, and similar functions upon raw data so that it can be transmitted to the customer in a reorganized and more usable form. It would not, however, render advisory or consulting services in connection with the provision or use of these capabilities and would not engage in any scientific, actuarial, or clinical research or analysis of the information contained in the database. Moreover, it would not, under any circumstances, make data available to the general public.

With respect to the divestiture of bank stock acquired by a bank holding company in violation of the Bank Holding Company Act, the purchasers do not hold any stock in, nor are they indebted to, the holding company; the sales of the shares were not financed by the holding company or its subsidiaries; and none of the divested shares will be held or controlled, directly or indirectly, for the benefit of the holding company or any of its subsidiaries or for the benefit of the shareholders or employees of the holding company or any of its subsidiaries. On this basis, the Board found that the bank shares had been disposed of in such a manner as to rebut any presumption of control under section 2(g)(3) of the Bank Holding Company Act. The facts relating to the transaction, including the prompt divestiture of the shares, indicated that the violation was not willful. BD. RULING of Dec. 30, 1969.

The existence of interlocking directorships between a bank holding company and its wholly owned subsidiary, which is to be divested by spin-off, creates a presumption of continued control of the transferred shares and precludes certification, for the purpose of obtaining tax benefits for the spin-off divestiture, that the distribution to the company’s shareholders is necessary to effectuate section 4 of the Bank Holding Company Act. BD. RULING of Sept. 28, 1971.

Authority: BHCA §§ 2(g)(3) and 4(a)(2), 12 USC 1841(g)(3) and 1843(a)(2); 12 CFR 225.2.

Section 2(g)(3) of the Bank Holding Company Act provides a rebuttable presumption that when a bank holding company, or any company that would be one but for the transfer, directly or indirectly transfers stock to a transferee who is indebted to the transferor, the transferred stock is indirectly controlled by the transferor. If, instead of accepting a debt of the transferee, the transferor accepts nonvoting preferred stock, the presumption of section 2(g)(3) would not apply, unless there is an interlocking relationship of officers, directors, and beneficiaries of the transferor and transferee, or unless the transferee is subject to the control of the transferor. Also, the transferor may be found to control the transferee under section 2(a) of the act or under section 225.2 of Regulation Y. STAFF OP. of Nov. 9, 1972.

A bank holding company may acquire shares of a newly organized corporation in order to transfer to it assets and liabilities of its impermissible nonbanking operations, provided it promptly divests itself of the shares of the newly organized company. BD. RULING of Jan. 4, 1973.

Authority: BHCA §§ 2(a)(2)(C) and (g)(3), 4(a), and 12 USC 1841(a)(2)(C) and (g)(3), and 1843(a).

The Board has previously indicated its general position that divestitures down to less than 5 percent of the voting shares of a bank is regarded as an effective means to terminate bank holding company status. This position is supported by the statutory presumption under section 2(a)(4) of the Bank Holding Company Act that any company that controls less than 5 percent of the voting securities of a bank does not have control over that bank. However, in certain cases, the Board has accepted something less than divestiture down to 5 percent or less of the voting shares of a bank as effective divestiture. In these cases, the Board has followed a case-by-case approach and has indicated that convincing evidence must be presented that the company does not and cannot control or exercise a controlling influence over the management or policies of the bank. In particular, the Board considers whether the company has divested to well below 25 percent and whether there are any common directors and officers between the divesting and divested firm. STAFF OP. of June 25, 1974.

A company that originally held 36 percent of the voting shares of a bank retained 23 per cent of the bank’s voting shares. Three officers and directors of the company remained on the board of directors of bank, and no other individual or organization controlled more than 9 percent of the bank’s voting shares. The Board found that company’s attempt to divest control of bank was ineffective. BD. RULING of June 25, 1974.

In the absence of statutory authority, the Board may not extend the divestiture period for a bank holding company, even if the extension is requested to make the sale more economically feasible. BD. RULING of Aug. 30, 1974.

A company that sought to terminate its status as a bank holding company divested its interests in a number of banks but continued to hold 16.5 percent of Bank A and 4.94 percent of Bank B. No directors, officers, or employees of the company served in any policy-making capacity with Bank A; a director of the holding company was chairman and chief executive officer of Bank B. This individual directly, and through his family, owned or controlled over 50 percent of Bank B. The rebuttable presumptions of control found in section 225.2(b) of Regulation Y would not apply in this case, because neither the individual in question nor his family would fall within the definition of the term “company.” Thus, the bank holding company status of the company that owned the bank shares was terminated. STAFF OP. of Aug. 9, 1976.

Authority: BHCA § 2(g)(3), 12 USC 1841(g)(3); 12 CFR 225.2(b).

To divest itself of sufficient interests to be deemed a one-bank holding company, a bank holding company transferred stock in a bank to a number of individuals. Among these transactions was a 60 percent transfer to an individual who is indebted to a wholly owned insurance subsidiary of the bank holding company, and a 14.6 percent purchase by three directors of the bank holding company who also became custodians of 15.6 percent of the stock for six purchasers under the Uniform Gifts to Minors Act. The divestiture is not sufficient, because the bank holding company is presumed to continue to control these shares by virtue of section 2(g)(3) of the Bank Holding Company Act. STAFF OP. of June 16, 1977.

The Bank Holding Company Act exempts certain savings banks insured by the Federal Deposit Insurance Corporation from bank holding company status. To remain eligible for this exemption, the savings bank must divest a wholly owned direct subsidiary engaged in nonbanking activities that are not permissible for national banks. Alternatively, it could transfer the nonbanking subsidiary to another subsidiary that is a registered bank holding company after that company has obtained the Board’s prior approval under section 4(c)(8) of the Bank Holding Company Act to acquire the nonbanking subsidiary. STAFF OP. of Dec. 14, 1977.

An order requiring termination of interlocking relationships to ensure termination of a control relationship between a bank and company that is in violation of the Bank Holding Company Act does not operate in perpetuity. Therefore, an application by one of the companies for permission to reestablish an interlocking relationship is not prohibited. In determining whether to allow the interlock, the Board will consider the likelihood that the prior relationship will be reestablished; the length of time that has elapsed between the termination of holding company status and filing of the request for permission to establish an interlock; changes in management; the identity, background, and prior involvement of the individual involved; and the business reasons for wanting to establish the interlock. STAFF OP. of Jan. 6, 1978.

To resolve an apparent violation of the Bank Holding Company Act, a nonbank company and its profit-sharing plan transferred shares of a bank to one of the two principal shareholders, who is also an officer of one of the two transferring organizations and a trustee of the other. Because there are no common officers or directors between the principal and nonbank company and there is no debt outstanding between the bank and the nonbank company, the divestiture does not appear to have been a means to perpetuate control. Also, the nonbank company agreed that it would not attempt to control the transferee or bank in question. Therefore, the nonbank company and its profit-sharing plan are not deemed to be bank holding companies. STAFF OP. of April 25, 1979.

Authority: BHCA § 2(g)(3), 12 USC 1841(g)(3); 12 CFR 225.2(b).

When a bank holding company divested impermissible assets and provided financing to the purchasers of these assets, a presumption of continued control of the assets by the bank holding company existed. This presumption was rebutted, however, by the submission of a corporate resolution stating that the bank holding company would not attempt to control the property and that the holding company would dispose of property held as collateral within six months if the holding company reacquired this property. In addition, the purchasers signed affidavits stating that they would not be influenced or controlled by the holding company. STAFF OP. of May 9, 1979.

A bank holding company proposes to divest a nonbanking subsidiary through a pro rata spin-off of nonbank subsidiary’s shares to its shareholders. As a result of the pro rata spin-off, directors and officers of bank holding will acquire more than 25 percent of the shares of the divested company. This alone does not make the divestiture ineffective, since it is a predictable result of a pro rata spin-off. STAFF OP. of Oct. 9, 1979.

A bank holding company sold a nonbank company in exchange for cash and a note. Because the transferee was indebted to the bank holding company, a presumption arose under section 2(g)(3) that the company controlled the transferred property. The company then sold the note to its principal shareholder. It was found that the Board need not make a determination pursuant to section 2(g)(3) that the bank holding company does not control the sold property, because the principal shareholder paid the bank holding company the fair value of the note at the time of sale. Moreover, since the principal shareholder and members of his family own all of the stock of the bank holding company and serve as its only directors and officers, it does not appear that the principal shareholder is controlled by the bank holding company. STAFF OP. of Oct. 11, 1979.

A separation of bank and nonbanking interests by a bank holding company and distribution of each to separate new corporations is adequate divestiture if there will be no indebtedness or officer/director interlocks between the corporations and if the facts do not give rise to any rebuttable presumptions of control. STAFF OP. of Jan. 3, 1980.

A bank holding company committed to the Board to divest its interest in a prohibited real estate (a building). It did not divest this interest in the original two-year divestiture period or in a one-year extension. Under authority delegated from the Board, the director of the Division of Banking Supervision and Regulation denied the request for another extension, since the holding company did not indicate that it will be in any better position in the future to fulfill its commitment. Also, it does not appear that undue hardship would occur if the building were sold immediately at a discount from its value, since at the time of acquisition a portion of the purchase price was put in a reserve fund to cover any losses due to divestiture.

A bank holding company submitted a plan of divestiture to the Board’s general counsel to terminate its status as a bank holding company under the Bank Holding Company Act. The proposed divestiture includes a distribution of common stock of its subsidiary to the holding company’s shareholders, retention of the subsidiary’s cumulative preferred stock with a commitment that the holding company will not vote the stock, retention of the subsidiary’s variable subordinated capital note, and employment of the subsidiary’s president and chief executive officer as a consultant with limited duties in operations of the holding company. The Board’s general counsel accepted the plan of divestiture. BD. RULING of Dec. 23, 1982.

A bank holding company may not make loans for its own account without prior Board approval pursuant to section 4(c)(8) of the Bank Holding Company Act. Making two loans within a 15-month period without prior Board approval violates the act. The only other possible provision allowing a holding company to make loans is section 4(a) (2), which generally permits a bank holding company to engage in the activity of banking or of managing or controlling banks. However, the term “banking” applies only when the bank holding company itself is a bank. BD. RULING of Nov. 2, 1973.

It is proposed to transfer unauthorized and poor-quality assets of a mortgage company subsidiary of a bank holding company to a liquidating subsidiary established under section 4(c)(1)(D) of the Bank Holding Company Act. Those assets cannot be transferred to the liquidating subsidiary, since section 4(c)(1)(D) applies to shares of a company engaged in liquidating assets of the bank holding company itself or its bank subsidiary and not assets of a nonbank subsidiary. It was also noted that section 4(c)(1)(D) provides an exemption from the prohibitions of section 4 of the act for shares of the liquidating company only and not for the assets held by that company. Therefore, transfer of those assets does not relieve a bank holding company from meeting any divestiture deadlines applicable to the assets, and such assets must be divested pursuant to the provisions of 4(a)(2) and 4(c)(2). Notwithstanding the foregoing, it is reasonable to assume that a corporation formed to liquidate the assets lawfully acquired by a mortgage company subsidiary of a bank holding company, a permissible activity under section 4(c)(8), is also permissible pursuant to section 4(c)(8). STAFF OP. of Sept. 20, 1978.

Authority: BHCA § 4(a)(2), (c)(1)(D), (c)(2), and (c)(8), 12 USC 1843(a)(2), (c)(1)(D), (c)(2), and (c)(8); 12 CFR 225.4(a)(1).

A nonbank subsidiary wishes to arrange placement of equity interest in commercial and industrial developments as a substitute for traditional long-term fixed-rate mortgage financing. The subsidiary does not contemplate acquiring the equity interests on its own behalf, nor would any affiliate of the subsidiary acquire such interests.

The question has arisen whether a mortgage banking subsidiary of a bank holding company may participate in the U.S. Department of Housing and Urban Development’s Single Family Coinsurance Program under section 4(c)(8) of the Bank Holding Company Act and section 225.4(a)(1) and (3) of Regulation Y. The program operates as follows. Certain HUD-approved mortgagee lenders underwrite and make mortgage loans for the purchase of single-family homes, for which HUD guarantees to assume 90 percent of any loss, while the mortgagee retains 10 percent of the risk of loss. For the assumption of risk, the mortgagee owes HUD an insurance fee equal to one-half of a point on the amount of the mortgage, which the mortgagee collects from the mortgagor as part of the monthly payment.

De novo making of mortgage loans, at below market interest rates, to executives of a subsidiary for the purpose of relocation need not be approved by the Board if these loans represent bona fide compensation to the bank’s executive officers such as would be paid by a business competitor. STAFF OP. of Dec. 21, 1981.

Family corporations, as defined in section 4(c)(ii) of the Bank Holding Company Act, are exempt only from the prohibitions of section 4 and are required to comply with all other sections of the act. STAFF OP. of April 15, 1971.

The shares of a bank holding company are owned by two unrelated individuals, who each own 50 percent of the company. One of the individuals holds an option to buy the other’s stock at will, and the other individual is obligated to buy the other’s stock if he wishes to sell or if he dies. The Board concludes that while the first individual may exercise control or controlling influence over the other’s shares, section 4(c)(ii) requires actual ownership before the bank holding company may qualify for that exemption. BD. RULING of Dec. 20, 1973.

A family-owned bank holding company that is exempted from the prohibitions of section 4 of the Bank Holding Company Act by section 4(c)(ii) also controls a second-tier bank holding company that was 71 percent controlled by the first-tier bank holding company on June 30, 1968. The second-tier bank holding company does not also qualify for the exemption of section 4(c)(ii). Section 4(c)(ii) is to be narrowly construed, and its exemptions do not automatically flow from the parent company to its subsidiary. STAFF OP. of Jan. 4, 1974.

A family-owned bank holding company qualifying for the exemption in section 4(c)(ii) of the bank holding company merged with a wholly owned nonbanking corporation without prior Board approval. This was not a violation of the act since no prior Board approval was required under that section. STAFF OP. of Nov. 27, 1974.

In aggregating a family’s share ownership for the purpose of the 85 percent ownership requirement of section 4(c)(ii) of the bank holding company, future interests in shares of company acquired on or before June 30, 1968, but not realized on that date, do not count toward the 85 percent requirement. STAFF OP. of Aug. 12, 1977.

Two bank holding companies, one of which is a wholly owned subsidiary of the other, are exempted from the prohibitions of section 4 of the Bank Holding Company Act by the family exemption in section 4(c)(ii). They inquired whether the acquisition by a national bank subsidiary (subsidiary) of up to 5 percent of the voting shares of another bank holding company (BHC A) that controls a bankers’ bank would be considered engaging in the management of banks and therefore disqualify the bank holding companies from the family exemption. In the past, the Board has considered a family-owned bank holding company that acquires a significant ownership interest in an additional bank to be actively engaged in the management of banks and therefore no longer eligible for the exemption from the prohibitions of section 4 because of its ability to exert a significant influence over the bank’s management policy. However, the subsidiary will control only 5 percent of BHC A, no affiliate of the two holding companies or the subsidiary will acquire any additional voting shares or nonvoting equity investments in BHC A or its subsidiary bank, and BHC A’s subsidiary bank is limited by law to serving only banks and other depository institutions. Thus it is unlikely that a bank holding company could misuse or abuse the resources of a bankers’ bank in order to gain an advantage in the operation of its nonbanking activities. The subsidiary may therefore acquire up to 5 percent of BHC A without losing its family exemption. STAFF OP. of Jan. 11, 1985.

Authority: BHCA § 4(c)(ii), 12 USC 1843 (c)(ii); Garn-St Germain Depository Institutions Act § 404, 96 Stat. 1511; S. Rept. 1084, 91 Cong. 2 Sess. (1970).

See also Multi-Line, Inc., 1981 Fed. Res. Bull. 51.

The question has arisen whether a bank holding company (the company) may retain its exemption under section 4(c)(ii) of the Bank Holding Company Act after its subsidiary bank merges with another bank.

See 4-446.

See 4-418.

A bank holding company holds more than 5 percent of the voting shares of a company. An agreement not to vote more than 5 percent of the voting shares of that company does not qualify those shares as permissible for acquisition, without prior Board approval, under section 4(c)(6) of the Bank Holding Company Act. BD. RULING of Aug. 30, 1974.

An insurance company proposes to offer to bank holding companies stock interests in a company engaged in underwriting credit insurance. Each participant would hold less than 5 percent of the outstanding voting shares of the company, but each investment would be represented by a separate class of voting security. As a result, each bank holding company investor would own 100 percent of its respective class. Each investor would receive an investment return based upon the profitability of the insurance business it had generated. Prior Board approval is required for a bank holding company to invest in this company, because control would exist by virtue of section 2(a)(2)(A) of the Bank Holding Company Act, which provides that a bank holding company has control over a company if it owns 25 percent or more of any class of voting securities. Therefore, the exemption provided by section 4(c)(6) of the act is inapplicable. BD. RULING of Dec. 10, 1976.

A bank holding company proposes to acquire 100 percent of a class of preferred shares of a company that amount to less than 5 percent of the company’s equity. The voting rights attached to those shares are limited to significant changes in corporate structure, and the investment appears to be essentially a passive financing device that does not permit the bank holding company to control the company. This investment would be permissible under section 4(c)(6). If the investment is made through an intermediate company, the transaction would be permissible under section 4(c)(7), which authorizes a bank holding company or its subsidiary to invest in a company organized solely to make investments the holding company could directly make under section 4(c)(6). STAFF OP. of Aug. 24, 1979.

On June 6, 1977, the Board approved the formation of a bank holding company and permitted the holding company to retain a 20 percent interest in a foreign nonbank company pursuant to section 4(c)(13) of the Bank Holding Company Act. Because of foreign tax considerations, the foreign company involved was reorganized into five separate functional components. The holding company proposed to retain a 20 percent interest in each of the new entities. The activities of the foreign company would not change as a result of the reorganization, and the holding company’s interest in the new entities would be acquired for less than $15,000. In addition, the provisions of the joint venture agreement between the bank holding company and the foreign company permitting the bank holding company to terminate the agreement at any time was not affected by the reorganization. Therefore, the acquisition and retention of a 20 percent interest in each of the new entities was consistent with the Board’s 1977 order. STAFF OP. of Jan. 6, 1981.

Authority: BHCA § 4(c)(13), 12 USC 1843(c)(13).

See also 1977 Fed. Res. Bull. 691.

See 3-744.1.

A grandfathered bank holding company that controls both a savings and loan holding company and a bank holding company is prohibited from acquiring two additional going savings and loans associations after June 30, 1968. STAFF OP. of Sept. 18, 1972.

The grandfather rights allowed under section 4(a)(2) of the Bank Holding Company Act would not continue if the bank holding company concurrently disposed of the bank interests that qualified it for the exemption and acquired control of another bank. The exemption inures only to the specific relationship that gave rise to the privileges and does not apply to subsequent similar relationships, regardless of the Board’s prior determination that a grandfathered bank holding company may acquire additional banks without forfeiting its grandfather privilege. STAFF OP. of Nov. 23, 1976.

A company that became a bank holding company because of the enactment of the Bank Holding Company Act Amendments of 1970 did not violate section 4(a)(1) of the act by buying and selling, without prior Board approval, shares of a savings and loan association that it has controlled since June 20, 1968. Even if the company had not maintained majority control of the savings and loan association continuously since June 30, 1968, it may still be entitled to purchase and retain shares of the savings and loan association if it can demonstrate that it has had controlling influence over the savings and loan association at all times. STAFF OP. of April 20, 1977.

A company became a bank holding company in 1961 without prior Board approval and at that time was engaged in impermissible nonbank activities. The bank holding company does not qualify for the grandfather privileges of section 4(a)(2) and (c)(ii) of the Bank Holding Company Act. These provisions apply only to companies that became a bank holding company as a result of the Bank Holding Company Act Amendments of 1970. STAFF OP. of June 16, 1977.

A bank holding company with indefinite grandfather rights in connection with certain real estate development and leasing activities may not alter these activities or expand their proportionate size in relation to its other activities. STAFF OP. of July 20, 1979.

A bank holding company is engaged in permanently grandfathered activities of acting as manager, investment advisor, transfer and dividend-disbursing agent, and principal underwriter of three open-end mutual investment funds that invest primarily in equity forms of investment, but also from time to time invest surplus funds in bonds and in short-term debt obligations such as commercial paper and treasury bills. The bank holding company proposes to form an additional mutual fund for which it would act as manager, investment advisor, transfer and dividend-dispersing agent, and principal underwriter. This mutual fund would invest primarily in money market instruments such as U.S. government securities, instruments of banks and savings and loan associations, corporate debentures, and prime commercial paper as well as instruments secured by such obligations.

A bank holding company with one subsidiary bank is a “company covered in 1970” as defined in section 2(b) of the Bank Holding Company Act. The holding company is altogether exempt from the act’s prohibitions on nonbanking activities under the family exemption of section 4(c)(ii) of the act. The holding company’s nonbanking activities are also entitled to indefinite grandfather privileges under section 4(a)(2). The question has arisen whether the holding company will lose its family exemption and grandfather privileges if it acquires a new banking affiliate, either directly as a subsidiary, or as an affiliate through the creation of a new parent company, which would own 100 percent of the existing holding company as well as 100 percent of the new bank.

Company A proposes to make certain loans as a member of a consortium composed of several banks. Company A became a bank upon the enactment of the Competitive Equality Banking Act of 1987 (CEBA) and was controlled by a nonbanking company (Company B) on March 5, 1987. Company B may therefore retain its ownership of Company A and not be treated as a bank holding company if both companies observe certain limitations.

In the sale or brokering of credit-related insurance, (1) the amount of such insurance must be limited to the amount of the extension of credit; (2) the debtor may name a beneficiary for the proceeds of such an insurance policy, but only if the beneficiary is obligated to pay off the loan in the event of the borrower’s death; (3) the proceeds of the insurance policy cannot exceed the amount of the loan; and (4) such insurance can be sold to cover both husband and wife co-debtors in an amount not exceeding the amount of the loan. STAFF OP. of Oct. 16, 1978.

An individual suggests that the rates charged for single-interest coverage insurance on items financed by a bank are too high and should be limited by federal law.

A bank holding company proposes to act as agent for the sale of life and accident and health insurance related to individual retirement accounts offered by the holding company’s subsidiary banks. Title VI of the Garn-St Germain Depository Institutions Act of 1982 amended section 4(c)(8) of the Bank Holding Company Act generally to restrict bank holding companies from engaging in insurance activities. The Garn Act provides a number of exceptions, including the sale of insurance that is functionally equivalent to coverages sold, or approved to be sold, on or before May 1, 1982. In 1972, the holding company received Board approval to act as agent for the sale of insurance directly related to the provision of a financial service as authorized by section 225.4(a)(9)(i)(b) of Regulation Y. The proposed insurance activity is permissible because (1) the offering of IRAs is a financial service within the meaning of section 225.4(a)(9)(i)(b) and (2) the proposed insurance is related to the provision of this financial service. Thus, the sale of such insurance is permissible under section 4(c)(8)(D)(ii) of the Bank Holding Company Act as insurance functionally similar to insurance activities the Board previously approved for the holding company. STAFF OP. of Feb. 26, 1983.

A bank holding company proposes to purchase, through its insurance subsidiary, substantially all the assets and 50 percent of the capital stock of a property and casualty insurance agency upon giving notice to the Board, but without submitting an application for prior approval. The holding company cites section 4(c)(8)(G) of the Bank Holding Company Act, which is the codification of title VI of the Garn-St Germain Depository Institutions Act of 1982 (96 Stat. 1469, 1536-38). The legislative history of title VI clearly indicates that Congress intended to preserve the applicability of the net-public-benefits test to particular insurance proposals. Further, the legislative history of title VI requires the Board to examine proposals to engage in insurance activities in light of the financial stability and soundness of bank holding companies making use of title VI exemptions. Moreover, the legislative history offers no evidence to support the claim that Congress intended to eliminate the net-public-benefits test under the section 4(c)(8)(G) exemption. The holding company therefore may not purchase a property and casualty agency without submitting an application for the Board’s prior approval and satisfying both the “closely related” and “net public benefits” tests of section 4(c)(8) of the act. STAFF OP. of Oct. 3, 1983.

Authority: BHCA § 4(c)(8)(G), 12 USC 1843(c)(8)(G); H. Rept. 845, 96 Cong. 2 Sess. (1980), pp. 15-16; S. Rept. 536, 99 Cong. 2 Sess. (1982), pp. 41- 42; S. Rept. 923, 96 Cong. 2 Sess. (1980), pp. 9-10. See also Whitewater Bancorporation, 1983 Fed. Res. Bull. 815.

A bank holding company asked whether it could take the following actions without having to apply for the Board’s prior approval under section 4(c)(8) of the Bank Holding Company Act (BHC Act): (1) open a de novo insurance agency (new agency) in its home state which would be a subsidiary engaging in general insurance agency activities and (2) transfer an existing general insurance agency subsidiary of one of its subsidiary banks to an existing nonbank insurance subsidiary. The activities of the new agency and the transferred agency are of the type authorized by the Board for the insurance subsidiary.

A Maryland bank holding company proposes to participate in an insurance marketing program wherein it would provide its subsidiary bank’s customer list to an unrelated insurance underwriter, which will prepare and bear the cost of distributing promotional materials for insurance plans. The holding company’s insurance agency subsidiary will include a “benign” cover letter announcing the availability of the insurance, receive the orders for insurance, account for and remit premiums to the underwriter, and receive a percentage of the premium income. Under Maryland law, the insurance agency subsidiary will have to be licensed as an agent in order to engage in the activity of “influencing the purchase of insurance.” This marketing program involves property and other types of insurance that may not be sold or underwritten by bank holding companies.

The Board has not considered whether investment in real estate mortgages in an activity incidental to the activity of underwriting credit life and accident and health insurance. If a bank holding company wants to conduct this activity, it must demonstrate that real estate mortgage investment is necessary to the underwriting business. STAFF OP. of March 23, 1978.

An insurance company requested an opinion concerning the permissibility of bank holding companies’ investing in a company (the company) that would engage in the underwriting of credit life and health insurance generated by bank holding companies or their affiliates. Under the proposal, no bank holding company, holding company affiliate or subsidiary, nor any officer, director, or employee with management functions of any holding company or holding company subsidiary would own any voting stock of the company. No one holding company would acquire more than 1 percent of the nonvoting stock. There would be no agreements or understandings among the nonvoting stockholders regarding the disposition of their shares or any other aspect of their relationship with the company. No representative nor any officer or director of a holding company would serve on the board of directors of the company or otherwise be involved in the management of the company; however, a separate account would be maintained on the company’s books for each holding company, and the return to each holding company stockholder would be based primarily on the underlying profitability of the insurance placed by that stockholder.

See 4-675.

Although the Board prohibits bank holding companies and their subsidiaries from providing property management services for nonaffiliated third parties, it has sanctioned the use of property managers to fulfill a contractual obligation of a bank holding company or its subsidiary to manage properties owned by a third party. The Board in one case required a bank holding company to retain a property manager to fulfill a contractual obligation to manage a defaulted property when the bank holding company, with Board approval, acquired a firm engaged in negotiating, acquiring, and servicing mortgage loans on behalf of institutional investors.

A bank holding company does not violate provisions of Regulation Y, related interpretive ruling or the Glass-Steagall Act by operating and sponsoring an open-end investment company that does not continuously issue its shares in this country. The investment company makes a single-day offering of shares under which shares of the fund would be purchased on only one business day, 30 days after the initial solicitation of shares. No other share offering has been made in the past 10 years, and no future offering of shares is contemplated. Shares would not be distributed publicly, but only to a limited class of persons with some connection to the holding company. Provided that no list of customers of the subsidiary bank is made available to the fund or its adviser and bank employees express no opinions about purchase of fund shares the holding company has not violated Regulation Y, Board interpretation 12 CFR 225.125 (at 4-177), or the Glass-Steagall Act. STAFF OP. of Dec. 15, 1981.

Authority: BHCA § 4(c)(8) and Glass-Steagall Act § 20, 12 USC 1843(c)(8) and 377; 12 CFR 225.4(a)(5)(ii), and 225.125.

For a limited period of time, a bank holding company that acts as an investment advisor to mutual funds may provide initial capitalization to newly formed mutual funds that it advises. As a result of providing this initial capitalization, the holding company would own all or a significant percentage of the shares of these funds for some period of time after they begin operations to enable the funds to establish a performance record prior to soliciting public investors. The holding company has committed to reduce its ownership of voting shares in each of these funds to no more than 24.9 percent within six months of the funds’ organization. The holding company’s objective in providing initial capitalization to the new mutual funds is not to obtain control over and manage an entity that continuously is marketing securities, but to facilitate the holding company’s primary activity of providing investment advice and other services to the mutual funds, which is a permissible activity for bank affiliates under the Glass-Steagall Act. In addition, the holding company has committed to certain other limitations regarding ownership or control of the mutual funds. STAFF OP. of June 24, 1999.

By virtue of section 225.4(a)(6) of Regulation Y, a bank holding company may serve as an agent, broker, or advisor only in connection with a full-payout lease. STAFF OP. of March 24, 1972.

The term “unconditional guarantee by a lessee, independent third party or manufactor” as it relates to the leasing of personal property does not require a “guarantee” as defined by state law. Rather, the term is intended to require that the lessee’s obligation to provide the additional amount is without qualification and that the lessee is absolutely liable for the amount guaranteed. This additional amount may be included in the full payout formula for purposes of the Board’s leasing regulation (Regulation M, 12 CFR 213). STAFF OP. of June 13, 1974.

A bank holding company’s automobile leasing subsidiary may not purchase automobile insurance for the benefit of the lessee. It may, however, purchase damage insurance for its own benefit and pass the cost on to the lessee. Such a purchase may be viewed as an incidental activity necessary to carry out the permissible activity of automobile leasing. STAFF OP. of Aug. 5, 1977.

A wholly owned bank holding company subsidiary, authorized under Regulation Y to engage in full-payout leasing of personal property and equipment, may form special-purpose leasing partnerships to engage in syndicated leasing transactions without prior Board approval.

Management consulting is neither a general banking activity nor an activity deemed by the Board to be permissible abroad. Therefore, foreign branches of member banks may not provide such services. Although the Board has granted its consent for Edge corporations and bank holding companies to acquire shares of companies that engage in management consulting at locations outside the United States, management consulting services offered outside the United States by foreign subsidiaries and affiliates of U.S. banking organizations relating to the U.S. market and to the activities of a client company in the United States must be confined to advice concerning the initial entry of foreign companies into the U.S. market. STAFF OP. of Jan. 14, 1975.

For purposes of the registration and reporting requirements of the Bank Holding Company Act, an individual’s being named pursuant to an oral agreement as merely the nominee of a bank holding company for stock purchases should be disregarded, and the bank holding company should be listed as the owner of the stock. BD. RULING of Jan. 30, 1961.

When a bank holding company submitted a list of banks it proposed to acquire and a list of banks it proposed to divest over a period of time, the Board concluded that it could not lawfully approve the bank holding company’s plan, because it would, in effect, be approving the acquisition of banks before applications are filed without properly evaluating the facts. The Board instead uses such lists as guides to bank holding companies’ intentions, and each application is judged and acted upon on the merits, after it has been filed. BD. RULING of Oct. 25, 1973.

A bank holding company proposes to merge two legally acquired and wholly owned nonbank subsidiaries engaging in the same permissible activity. Because the bank holding company will not be engaging in any new activity or acquiring shares of any new company, the merger may take place without any prior notice or application. STAFF OP. of Dec. 19, 1973.

A bank holding company with a nonbanking subsidiary that must be divested pursuant to section 4(a)(2) of the Bank Holding Company Act proposes to transfer that nonbanking subsidiary’s business and offices to another nonbanking subsidiary of the bank holding company by having that subsidiary establish de novo offices at the locations of the first subsidiary’s offices and closing the first subsidiary’s offices. The bank holding company’s proposal is for acquisition of a going concern and does not qualify for the de novo acquisition notice procedure of Regulation Y. The bank holding company must apply for the Board’s prior approval to acquire a going concern. STAFF OP. of Sept. 12, 1978.

By submitting a request in accordance with section 262.3(a) of the Board’s Rules of Procedure (at 8-020), an applicant may obtain a Board determination on whether its pending application should be deemed to have been granted by operation of the 91-day rule of section 3(b) of the Bank Holding Company Act. The Board will issue a decision within 10 business days of receiving a request conforming to the requirements of the Rules of Procedure. STAFF OP. of May 17, 1982.

An application need not be filed under the Bank Holding Company Act in the case of a merger of two insured banks when the merger is subject to the prior approval of a federal banking agency under the Bank Merger Act and the proposal does not involve formation of a bank holding company or a bank holding company’s acquisition of an additional subsidiary bank. STAFF OP. of Nov. 19, 1982.

A bank holding company (Company A) inquired whether its proposed merger with an in-state bank holding company (Company B) is subject to the prior approval of the Board under section 3(a)(5) of the Bank Holding Company Act. This proposed merger would immediately follow the merger of Company B’s subsidiary banks into Company A’s existing subsidiary national bank. Company A’s national bank is in the process of filing an application under the Bank Merger Act with the Comptroller of the Currency because the bank that resulted from the bank merger transaction would be a national bank.

A bank holding company subsidiary seeks to perform appraisals of real estate in connection with a loan application under consideration by an affiliated bank. The holding company subsidiary also seeks to perform appraisals of single-family residences.

A bank holding company was informed that the activity of providing construction-analysis services including appraisal of construction projects at various stages of development and disbursal of construction loan funds in accordance with the terms of a loan agreement is included within the permissible activities of real estate appraising and loan servicing. Therefore, if a bank holding company has received permission to engage in real estate appraisals and loan servicing, a separate application need not be filed for construction analysis services. STAFF OP. of June 10, 1983.

A bank holding company nonbank subsidiary engaged in discount securities brokerage (the broker) has presented a proposal regarding the sale of shares of a proposed newly organized closed-end investment company (the fund). An underwriter not affiliated with the broker would make an initial public offering of the shares of the fund, which is a load fund. The broker would sell its customer list to the fund’s underwriter in return for a fixed fee. The underwriter would mail prospectus-related offering material to the broker’s customers and would inform retail customers that the broker would serve as the customer’s agent in purchasing shares of the fund. If customers purchase shares of the fund through the broker, the customer would pay the broker a transaction-related fee. Neither the bank holding company nor any of its subsidiaries would serve as investment advisor to the fund.

A bank holding company asked for confirmation that three types of transactions currently engaged in by its subsidiary bank and section 20 subsidiary would be consistent with the conditions in the Board’s January 1989 order approving debt and equity underwriting for bank holding companies (1989 Fed. Res. Bull. 192). First, the section 20 subsidiary engages in repurchase and reverse repurchase agreements involving U.S. Treasury securities with certain indirect foreign subsidiaries of the bank, in order to accommodate operational needs of the foreign subsidiaries. Second, the section 20 subsidiary engages in certain swap and options transactions, including interestrate and foreign-currency swaps and foreign-exchange spot, forward, and futures contracts with the bank. The sole purpose of these transactions is to hedge the exposure of the section 20 subsidiary, and not to fund the subsidiary. The Board determined that the section 20 subsidiary may continue to engage in the two types of transactions with its bank affiliate as long as the Bank Holding Company provides a guarantee indemnifying the bank for any losses that might arise from the section 20 subsidiary’s nonperformance.

In connection with a bank holding company’s application to engage in debt and equity underwriting activities through a section 20 subsidiary, the Board stated that to ensure that any perpetual preferred stock issued in connection with a bank holding company’s capital plan meets the permanence requirement for tier 1 capital, any redemption of the preferred shares may be only at the bank holding company’s option and only with prior Federal Reserve approval.

A bank holding company that received Board approval to commence to underwrite and deal in debt securities received the following interpretations of conditions included in the Board order:

(1) Asset sales at fair market value from a bank holding company or its nonbank subsidiaries to a section 20 subsidiary would not be inconsistent with the condition in the Board order requiring prior notice to and approval by the Board for all provisions of funds, including transfers of assets, by a bank holding company to its section 20 subsidiary. The condition was intended to cover those transactions that directly or indirectly represent a capital injection. Accordingly, asset sales by the bank holding company to its section 20 subsidiary at fair market value would not be prohibited.

(2) Interest-rate or foreign-currency swaps, and any derivative agreements, entered into between the bank and a customer of the subsidiary would not be deemed impermissible extensions of credit or similar transactions that might be viewed as enhancing creditworthiness or marketability of ineligible securities underwritten by the section 20 subsidiary. The condition in the Board order on extensions of credit was intended to restrict activities that have the effect of placing the bank’s credit behind the securities, such as extensions of credit, standby letters of credit, asset purchase agreements, indemnification, guarantees, and insurance.

The staff received a request from a bank holding company for a determination that revenues earned from dealing in or holding certain custodial receipts known as proprietary strips are bank-eligible for purposes of determining compliance with the Board’s 10 percent limitation on the amount of bank-ineligible revenue earned by section 20 companies. Under the Board’s prior precedent, in order to ensure compliance with the Glass-Steagall Act, a section 20 company may not derive more than 10 percent of its total revenue from underwriting and dealing in securities that a national bank may not underwrite and deal in (bank-ineligible securities). Proprietary strips result from the practice of certain investment banks of stripping coupons from U.S. Treasury bonds and notes and selling the individual coupons to the public at a present value discount of their face value. In this instance, “proprietary strips” shall refer only to those receipts evidencing interests in U.S. Treasury bonds or notes.

A bank holding company proposed to acquire a company formed to acquire a leasehold covering an entire building, only 2.5 percent of which was then occupied by a subsidiary bank. The bank holding company did, however, commit to dispose of the leasehold interest if the building was not substantially occupied by the bank within five years. The acquisition was permissible as holding of property for future substantial use by the bank. The Board reserved the right to reexamine this question at the end of the five-year period. BD. RULING of Dec. 22, 1960.

Authority: BHCA § 4(c)(1)(A), 12 USC 1843(c)(1)(A).

A bank holding company proposes to establish a nonbank subsidiary to perform certain functions in relation to installment loans being generated by the bank holding company’s subsidiary banks (investigating the credit standings of prospective borrowers, inspecting documents executed incident to the loan, and collecting delinquent paper or delinquent installments). If these activities could have been carried out by the banks themselves, the performance of these “services” by the subsidiary is permissible. STAFF OP. of Feb. 19, 1964.

Authority: BHCA § 4(c)(1)(C), 12 USC 1843(c)(1)(C); 12 CFR 225.104.

See also 1958 Fed. Res. Bull. 431.

A bank service corporation may provide only those services that a bank itself can provide for its customer. Whether a bank may render a particular service depends on state laws and regulations and interpretations thereunder (for a state-chartered bank) and on federal laws and regulations and interpretations thereunder (for a national bank). BD. RULING of Aug. 19, 1964.

A bank holding company proposes to acquire a mortgage company subsidiary that would act as agent for the national bank subsidiaries of the bank holding company and as such would solicit applications for mortgage loans, assemble credit information, make property inspections and appraisals, secure title information, solicit investors’ purchases of the mortgage loans made by subsidiary banks, and service the loans after they have been made. The mortgage company would not acquire loans for its own account. Such an acquisition is permissible under section 4(c)(1)(C) of the Bank Holding Company Act. STAFF OP. of Oct. 23, 1967.

A bank holding company proposes to maintain an in-house advertising department to perform advertising services for only the bank holding company and its subsidiaries. This activity can be conducted directly by the bank holding company under section 4(c)(8) of the Bank Holding Company Act or indirectly by a subsidiary under section 4(c)(1)(C). STAFF OP. of Feb. 17, 1971.

A bank holding company may build branch bank facilities and lease them to a subsidiary bank without prior Board approval. The activity is permissible as a performance of services for a subsidiary under section 4(a)(2)(A) of the Bank Holding Company Act, which permits a bank holding company, without prior Board approval, to acquire a company engaged in holding or operating properties used wholly or substantially by any banking subsidiary. STAFF OP. of Nov. 6, 1972.

A bank holding company proposes to invest in a company constructing and owning two seven-story buildings in which a subsidiary bank will occupy one floor. Such use does not qualify as substantial use within the meaning of section 4(c)(1)(A) of the Bank Holding Company Act and is not a permissible investment. However, if the bank plans to occupy increased space in the near future and can make reasonably precise projections of use, the investment may qualify under that section. STAFF OP. of Jan. 4, 1973.

Authority: BHCA § 4(c)(1)(A), 12 USC 1843(c)(1)(A).

A bank holding company proposes to acquire a leasehold interest in a small shopping center where a subsidiary bank would occupy 7,200 square feet of approximately 36,000 square feet of rentable space. Normally, there is no objection to such investment when the bank immediately occupies 25 percent of the rentable space and there is a substantial likelihood that the balance of the rentable space will be used by the bank in the future. However, if there is a considerable question about whether the balance of the property is usable by the bank, the property is not a proper investment under section 4(c)(1)(A) of the Bank Holding Company Act. STAFF OP. of May 28, 1974.

A bank holding company proposes to manage a building that is 40 percent occupied by a bank subsidiary, with the possibility of future expansion. The building is used substantially by the subsidiary bank. This proposed property management activity is permissible under section 4(c)(1)(A) of the Bank Holding Company Act. STAFF OP. of July 15, 1974.

A registered bank holding company proposed to establish a wholly owned subsidiary that would serve to execute transactions for the sale and purchase of gold and silver bullion and would be a member of the Commodity Exchange Metal Clearing Association (CEMCA). The subsidiary would have been involved only in transactions in which its parent holding companies or their subsidiaries had a beneficial interest.

The servicing exemption of section 4(c)(1)(C) provides an exemption from the prohibitions of section 4 for shares of a company engaged solely in furnishing or providing services for the bank holding company and its banking subsidiaries. This exemption does not extend to providing services for nonbank subsidiaries. This conclusion is supported by the fact that section 23A of the Federal Reserve Act provides an exemption from the general prohibition of that section for “stocks, bonds, debentures or other obligations of any company of the kind described in section 4(c)(1) of the Bank Holding Company Act.” To extend the exemption of section 4(c)(1) to a company providing services for nonbank subsidiaries would allow subsidiary banks to invest indirectly in the operations of their nonbank affiliates, contrary to the policy established by section 23A. STAFF OP. of April 5, 1977.

Authority: BHCA § 4(c)(1)(C), 12 USC 1843(c)(1)(C); and FRA § 23A, 12 USC 371c.

The servicing exemption of section 4(c)(1)(C) of the Bank Holding Company Act applies to servicing the wholly owned bank subsidiaries as well as nonbank subsidiaries of a bank, including Edge Act corporations. A servicing corporation for a wholly owned Edge Act corporation should be a domestic company incorporated in the United States, and the appropriate Reserve Bank should satisfy itself that the company is providing only those services that a servicing company may provide. STAFF OP. of May 11, 1977.

A bank holding company organized a second-tier nonbank subsidiary, whose activities are limited exclusively to placing advertising, discussing terms with customers, and reviewing and transmitting purchase contracts to the parent bank holding company, in order to assist in the holding company’s sale of its debt securities. The proceeds of the sale will go to two nonbank subsidiaries of the parent bank holding company. Acquisition of the second-tier subsidiary is permissible under section 4(c)(1)(C) of the Bank Holding Company Act, since the subsidiary’s activities are exclusively administrative and clerical tasks for the holding company and related to the holding company’s sale of its own notes. The exemption of section 4(c)(1)(C) is not limited to performing services for bank subsidiaries but also encompasses certain activities that a parent bank holding company may lawfully engage in directly. BD. RULING of Dec. 27, 1977.

A bank holding company has a subsidiary engaged solely in holding shares of the holding company’s subsidiaries that have been approved by the Board pursuant to section 4(c)(8) of the Bank Holding Company Act. The bank holding company may retain the subsidiary pursuant to the servicing exemption in section 4(c)(1)(C), since the subsidiary is engaged solely in holding shares of subsidiaries that the bank holding company could hold directly. STAFF OP. of Sept. 20, 1978.

The servicing exemption provided by section 4(c)(1)(C) of the Bank Holding Company Act should be read literally, and consequently applies to bank holding companies or their banking subsidiaries and not to nonbank subsidiaries. STAFF OP. of Sept. 27, 1978.

A bank holding company proposes that its insurance underwriting subsidiaries underwrite and/or reinsure the group life insurance, optional group life insurance, accidential death and dismemberment insurance, retirement life insurance, and retirement annuity policies that the bank holding company provides to its employees and former employees only. Staff believes that the holding company’s insurance underwriting subsidiary could engage in those activities under section 4(a)(2) and (c)(1)(C) of the Bank Holding Company Act. Section 4(a)(2) permits a bank holding company to engage in “furnishing services to or performing services for its subsidiary.” Section 4(c)(1)(C) permits a bank holding company to acquire shares of a subsidiary engaged in “furnishing services to or performing services for such bank holding company or its banking subsidiaries.” Moreover, the Board has previously stated that it regards section 4(c)(2) and (c)(1)(C) as authorizing bank holding companies to act as agents for the sale of insurance for themselves and their subsidiaries. Finally, staff concluded that the employee benefit plans involved here represent a form of compensation for employees, and it is clear that bank holding companies possess inherent authority to provide compensation to their employees. STAFF OP. of Aug. 19, 1981.

Authority: BHCA § 4(a)(2) and (c)(1)(C), 12 USC 1843(a)(2) and (c)(1)(C); 12 CFR 225.141.

See also S. Rept. 1095, 84 Cong. 2 Sess. (GPO, 1956), p. 2.

A bank holding company seeks to form a de novo subsidiary that would act as a servicing company for the holding company’s subsidiary bank. The new subsidiary would dispose of property for which the bank is the lessor in a commercial equipment lease. Formation of this servicing subsidiary is permissible under section 4(c)(1)(C) of the Bank Holding Company Act, which permits bank holding companies to acquire shares of any company engaged solely in “furnishing services to or performing services for [a] bank holding company or its bank subsidiaries.” Prior Board approval is not required under section 4(c)(1)(C).

Bank holding companies are not prohibited from incurring and paying necessary organizational expenses that are incidental to the formation of a company that would engage in permissible nonbanking activities. Section 4(a)(2) of the Bank Holding Company Act authorizes a bank holding company to manage and control banks and other subsidiaries permitted under the act and to furnish services to its subsidiaries. It is reasonable to conclude that encompassed within this authority is the authority to pay reasonable organizational expenses that may be incurred in the process of organizing a company to engage in permissible nonbanking activities. Of course, if the applications are denied or the bank holding company investors later decide not to pursue the venture, any funds held in escrow would have to be returned. STAFF OP. of Jan. 20, 1983.

Authority: BHCA § 4(a)(2) and (c)(8), 12 USC 1843(a)(2) and (c)(8).

The offering of debt collection services by a bank holding company or its nonbank subsidiaries to other lenders in connection with loans made by the other lenders but not serviced by the bank holding company or its subsidiaries prior to default is not within the scope of the permitted nonbank activity of servicing loans and other extensions of credit. STAFF OP. of Feb. 24, 1975.

See 4-270.2

A bank holding company acquired shares of its subsidiary bank in December of 1968 from a company that became a bank holding company in December of 1970. The transferee cannot claim grandfather privileges as successor to the transferor, since the transferor was not a bank holding company at the time of the transfer. Also, a transfer that was effected in a transaction in which the transferor acquired 40 percent of the transferee in exchange for 40 percent of the shares of the bank does not satisfy the requirement that no substantial change in the control of the bank or beneficial ownership of the bank shares occur. BD. RULING of Jan. 2, 1973.

A company proposes to become a bank holding company by acquiring the successor, by merger, of a national bank that is also a bank holding company because of its control of a second bank. The company would be the successor to the bank holding company status of the national bank if the transaction did not effect a substantial change in the control of the second bank or a substantial change in beneficial ownership of the shares of that bank. The company will not be the successor to the national bank, however, because (1) control by a national bank is different from control by a company, because of differing restrictions on permissible activities; (2) the second bank will become part of a multibank holding company system where previously it was part of a one-bank holding company system; (3) the second bank will have two parents, the company and the national bank, with the company the sole shareholder of the national bank, and the company’s shareholders may not be the same as the bank’s previous shareholders because of a related merger transaction; and (4) the company is not a substitute for the national bank, since direct control of the second bank stays with the national bank. Thus, the company would not qualify for any grandfather rights that the national bank may have had, since it is not a successor to the national bank. Also, even if it were a successor to the national bank, it would not qualify as a company covered in 1970, because it would have been a two-bank holding company on June 30, 1968 and would not have been affected by the Bank Holding Company Act Amendments of 1970. BD. RULING of Sept. 10, 1973.

Authority: BHCA §§ 2(a)(6) and (e), and 4(a)(2), 12 USC 1841(a)(6) and (e), and 1843(a)(2).

It is proposed that a new corporation be formed to merge with an existing bank holding company in order to reduce the number of shareholders of the existing holding company from 3,430 to 9. Such a merger would represent a substantial change in the beneficial ownership of the holding company’s banking subsidiary. Therefore, the new corporation would not be regarded as a “successor” to the existing holding company and would not be entitled to the grandfather privileges of the existing holding company. Also, the new corporation would become a bank holding company and therefore must apply for the Board’s prior approval of the merger. STAFF OP. of Nov. 18, 1974.

Company A requested a prior tax certification under the Bank Holding Company Tax Act for a proposed spin-off of certain bank holding company stock. Company A owned less than 25 percent of the voting shares of a bank up until August 1982, when the bank became a wholly owned subsidiary of Company B and Company A exchanged its shares in the bank for the same percent of shares in Company B. In December 1982, as a result of Company B’s redemption of stock, Company A’s percentage ownership in the bank increased to 36 percent and Company A became a bank holding company. At the time Company A became a bank holding company it was in violation of the Bank Holding Company Act because it owned nonbanking assets that the act prohibits a bank holding company from owning. Company A proposed to divest all of its Company B stock by transferring the shares to a new bank holding company subsidiary, and then to its shareholders on a pro rata basis.

A bank holding company requested that the Board determine that tie-in arrangements for loans, discounts, deposits or trust services between all of its wholly owned subsidiary banks be deemed permissible pursuant to section 106(b) of the Bank Holding Company Amendments of 1970. Section 106(b) generally prohibits any practice whereby a bank requires its customers to accept or provide some service or product or refrain from dealing with other parties in order to obtain a desired bank service or product. Such tie-in practices are permissible either when the two tied products or services are loans, discounts, deposits, or trust services available from the same bank or when the Board has determined by order or regulation that a particular tying relationship is not contrary to the purposes of section 106(b).

A bank holding company requested confirmation that insurance products may be included among the products offered by a bank as part of a combined-balance discount program (“eligible products”) operated pursuant to the Board’s safe harbor for such programs from the restrictions of the anti-tying prohibitions of section 106 of the Bank Holding Company Act Amendments of 1970. The bank and its affiliates wished to offer incentives to their credit card, mortgage, or loan customers who maintained a combined minimum balance in a package of products and services that included annuities, auto, homeowner’s, life, and/or long-term care insurance from insurance affiliates of the bank.

A bank holding company and its subsidiary bank holding company own a subsidiary engaged in providing data processing services to both bank holding companies and their bank subsidiaries under the servicing exemption. An application to begin de novo activities was filed twice in order to acquire Board approval for the data processing subsidiary to expand activities to provide services to nonsubsidiary banks. Both times, the de novo application was returned because of material deficiencies. The data processing subsidiary began the expanded services to nonsubsidiary banks without Board approval and in violation of the Bank Holding Company Act and Regulation Y. Both bank holding companies disclaimed responsibility for the violation, alleging that the activity was begun on counsel’s advice that proper submissions were made and the prior approval granted. However, prior to receipt of counsel’s advice, the data processing subsidiary had been in violation of the Bank Holding Company Act for providing data processing services to correspondent banks of the subsidiary bank of the two bank holding companies beyond the limits of permissibility of Board interpretation 12 CFR 225.118 (at 4-195). In view of the bank holding companies’ two previous violations of the Bank Holding Company Act and Regulation Y and their failure to abide by previous commitments to prevent further violations, staff considered these violations extremely serious and recommended Board enforcement action. STAFF OP. of June 26, 1979.

See 4-268.