Each depositor insured to at least $250,000 per insured bank

Home > Regulation & Examinations > Laws & Regulations > FDIC Law, Regulations, Related Acts



[Table of Contents] [Previous Page] [Next Page] [Search]

2000 - Rules and Regulations



Preamble to Part 362 (October 27, 1992)

Description of Statute

The preamble accompanying the proposed regulation contained a description of section 24. That description is republished below with one or two notable changes based upon the comments. In several instances the description has not changed despite comments that the FDIC's reading of the statute is flawed. Our response to those comments can be found elsewhere in this document. Insured state banks should keep in mind when reading through the final regulation that it focuses solely on equity investments. The remainder of section 24 (notably section 24(a) and 24(d)), 12 U.S.C. 1831a(a) and 1831(d)) which deals with "activities" of insured state banks and their subsidiaries will be dealt with by the FDIC in a subsequent proposal. The FDIC anticipates to publish that proposal in the very near future.

While much of section 24 (notably sections 24(a) and 24(d)) does not become effective until December 19, 1992, the provisions of section 24 that deal with equity investments (section 24(c) and section 24(f)) were effective upon the date of enactment of FDICIA, December 19, 1991. Paragraph (c) of section 24 (12 U.S.C. 1831a(c)), "Equity Investments by Insured State Banks", provides that no insured state bank may directly or indirectly acquire or retain any equity investment of a type that is not permissible for a national bank. Several exceptions to the general prohibition to making or retaining equity investments are found in paragraph (c) itself and in subsequent paragraphs of section 24. In addition, paragraph (c) provides a "transition rule" that requires insured state banks to divest prohibited equity investments as quickly as can be prudently done but in no event later than December 19, 1996. The FDIC is given the authority to establish conditions and restrictions governing the retention of the prohibited investments during the divestiture period. Paragraph (c) expressly provides for an exception for the retention or acquisition of equity investments in majority owned subsidiaries and equity investments in qualified low income housing.

Section 24(f) (12 U.S.C. 1831a(f)), "Common and Preferred Stock Investment", also effective upon enactment of FDICIA, provides that no insured state bank may directly or indirectly acquire or retain any equity investment of a type, or in an amount, that is not permissible for a national bank and is not otherwise permitted under section 24. Like paragraph (c), paragraph (f) contains several exceptions to the general prohibition.

Paragraph (f)(2) creates a limited exception for investments in common or preferred stock listed on a national securities ex change or shares of registered investment companies. The exception allows insured state banks that (a) are located in a state that as of September 30, 1991 permitted banks to invest in common or preferred stock listed on a national securities exchange (listed stock) or shares of an investment company registered under the Investment Company Act of 1940 (15 U.S.C. 80a--1 et seq.) (registered shares), and (b) which made or maintained investments in listed stock or registered shares during the period from September 30, 1990 to November 26, 1991, to acquire and retain, subject to the FDIC's approval, listed stock or registered shares up to a maximum of 100 percent of the bank's capital. A bank must file a written notice with the FDIC of its intent to take advantage of the exception and must receive the FDIC's approval before it can lawfully retain or acquire listed stock or registered shares pursuant to the exception. If a bank made investments during the relevant period in listed stock or registered shares that exceed in the aggregate 100 percent of the bank's capital as measured on December 19, 1991, the bank must divest the excess over the three year period beginning on December 19, 1991 at a rate of no less than 1/3 of the excess each year.

Paragraph (d)(2)(B) provides an exception for the retention by a well-capitalized insured state bank of an equity interest in a subsidiary that was engaged "in a state" in insurance activities "as principal" on November 21, 1991 so long as the subsidiary's activities continue to be confined to offering the same type of insurance to residents of the state, individuals employed in the state and any other person to whom the subsid iary provided insurance as principal without interruption since such person resided in or was employed in the state.

Paragraph (e) indicates that nothing in section 24 shall be construed as prohibiting an insured state bank in Massachusetts, New York or Connecticut from owning stock in a savings bank life insurance company provided that consumer disclosures are made.

Section 24(g) grants the FDIC the authority to make determinations under section 24 by regulation or order and section 24(i) indicates that nothing in section 24 shall be construed as limiting the authority of the FDIC to impose more stringent restrictions than those set out in section 24.

Comment Summary

The FDIC received 279 comments in response to the proposed regulation. Overall, the comments were critical of the restrictions that would be imposed under the regulation on the ability of state banks to make equity investments. These comments were critical despite the fact that most of those who so commented recognized that the FDIC's discretion in this matter was largely taken away by the statute.

The majority of the comments focused on nine areas, a brief summary of which follows. The remainder of the comments, as well as a more detailed discussion of the comments discussed immediately below, will be addressed where appropriate in the context of the description of the final rule and how it differs from the proposed regulation.

Of the total comments, 151 objected to the manner in which the proposal grandfathered equity investments in what was universally referred to as a "two basket" approach, i.e., treating listed common and preferred stock separately from shares of registered investment companies and limiting banks eligible for the exception under section 24(f) of the FDI Act and § 362.3(b)(4) of the proposal to the highest level of investment they had in each category during the period from September 30, 1990 to November 26, 1991 (the window period, or relevant period). Most if not all of these comments, and a number of additional comments for a total of 180, objected to the proposal limiting banks eligible to make and retain equity investments in listed common or preferred stock and/or shares of registered investment companies to the highest aggregate amount invested during the window period.

Collectively these comments expressed the opinion that the statute allows eligible banks to invest up to 100 percent of their capital in listed common or preferred stock and/or shares of registered investment companies. While many of the comments recognized that the FDIC does have the authority under the statute to limit a bank's investments under the exception, these same comments urged the FDIC not to limit the investments across the board in the fashion proposed. The FDIC was urged rather to tailor the regulation more to the individual circumstances of any given bank. Likewise, the comments which addressed the "two basket" approach pointed out that the proposal could have an adverse affect on safety and soundness as it would prevent banks from diversifying their securities portfolios and would eliminate the flexibility necessary to the proper management of that portfolio.

Sixty-four comments requested that the FDIC simplify the notice required to be filed in order for an eligible bank to take advantage of the exception provided for by section 24(f) and § 362.3(b)(4) of the proposal. These comments argued that it would be burdensome for a bank to put the information together, that the FDIC should al-ready be familiar with a bank's investment policies etc. based upon previous examinations, and that the amount of information requested was not justified in view of the fact that the FDIC has not previously objected to the exercise of these investment powers by banks.

Seventy-five comments objected to the manner in which the proposal defined "change in control" for the purposes of setting out what events will result in the loss of the right to make investments in listed common or preferred stock and/or shares of registered investment companies. The comments universally stated that the proposal was too broad in its definition and that events such as conversion from mutual to stock form, the formation of a one bank holding company, the merger of two eligible banks, and the acquisition of 10 percent of the stock of an eligible bank should not be considered changes in control that result in the loss of the exception under the proposal. Several comments indicated that the intent of the statute was that the grandfather would only be lost if an eligible bank was acquired by an ineligible bank.

On the issue of what the FDIC should consider to be an equity investment "permissible" for a national bank, 48 comments said that the FDIC should treat state banks on a par with national banks and recognize an investment as being "permissible" if a national bank could make the investment regardless of whether a national bank looked to statute, regulation, circular, bulletin, or staff interpretation for authority to do so. Sixty-three comments urged the FDIC to at a minimum recognize OCC Circular 220 which sets out the extent to which a national bank may invest in shares of a mutual fund. Twelve comments expressed concern that it will be extremely difficult for state banks to determine what is and is not a permissible equity investment for a national bank. These comments urged the FDIC to include a list of permissible investments in the regulation or to establish a procedure by which a state bank could go to the Office of the Comptroller of the Currency for a determination. Some banks expressed concern that a national bank has a mechanism to seek approval for an investment that has not theretofore been approved whereas a state bank lacks the same avenue.

The proposal defined the term "equity investment" to include certain interests in real estate. Thirteen of the comments objected to the FDIC's intention to define the phrase "equity investment in real estate" to include real estate acquisition, development or construction arrangements which cause the bank to have "in substance * * * virtually the same risks and potential rewards as an investor in the borrower's real estate". According to the comments, the definition is overly broad and the FDIC is not justified in going beyond the Generally Accepted Accounting Principles (GAAP) in deciding when an acquisition, development or construction loan (ADC loan) is an investment. The comments particularly objected to discussion contained in the preamble accompanying the proposed definition citing a portion of the Federal Financial Institutions Examination Council Call Report Instructions which identifies six direct and indirect investments that will be included as real estate ventures. The last item is an ADC loan. The preamble then goes on to set out several factors any one of which may cause the FDIC to consider an ADC loan to be an investment if the bank participates in the residual profits of the project. (57 FR 30438--30339). In the view of the comments, the FDIC's approach is ill founded and will deter ADC lending.

Eleven of the comments objected to the definition of "significant risk" contained in the proposal. The definition was found to be overly broad because it focuses on whether there is any likelihood that the fund may suffer a loss regardless of how small. The comments pointed out that any investment has some risk and that by defining the phrase "significant risk" as proposed the FDIC has totally read the word "significant" out of the statute.

Fourteen comments strongly criticized the FDIC for indicating that the exception contained in § 362.3(b)(7) of the proposal (grandfathered investments in insurance subsidiaries) would only apply in the state in which the bank is chartered and the state in which the bank's insurance subsidiary was incorporated and doing business on November 21, 1991. The comments indicated that this construction of the phrase "in a state" as used in section 24(d)(2)(B) of the statute is contrary to the provision's clear language as well as its legislative history and that the regulation would have the practical effect of eliminating the grandfathered insurance activities due to the way in which the insurance business operates. Two comments indicated that the FDIC's proposed construction of the statute was correct. Eight of the comments which addressed the exception for certain insurance subsidiaries commented that the FDIC should broadly construe the phrase "type of insurance" when applying the exception, i.e., to consider different insurance products that fall within the same category of insurance as being the "same type of insurance."

Finally, seventeen comments addressed the proposed definition of the term "well-capitalized". Three comments indicated that the regulation should define the term in the same way that it is defined for the purposes of section 38 of the FDI Act (12 U.S.C. 1831(o)) dealing with prompt corrective action. Two comments indicated that the definition should not be the same. Six comments objected to the proposed definition requiring that a bank must meet the indicated levels of capital after deducting its investment in any subsidiary or department of the bank that is engaging in any activity that is not permissible for a national bank. Four comments although not objecting to the capital deduction suggested that the capital deduction be imposed on a case-by-case basis, only be imposed for that portion of any investment attributable to the impermissible activity in the case of a subsidiary or department that conducts permissible as well as impermissible activities, and/or suggested that a bank only be required to be adequately capitalized after the capital deduction in order for the bank to be considered "well-capitalized". One comment suggested that the capital deduction be phased-in.

Description of Final Regulation

The following discussion contains a description of the final regulation and how it differs from the proposed rule that was published for comment.

Definitions

1.  Company

The proposed regulation defined the term "company" to mean any corporation, partnership, business trust, association, joint venture, pool, syndicate or other similar business organization. The preamble accompanying the proposed regulation indicated that the term was intended to include entities organized to conduct a specific business or businesses but did not include sole proprietorships. The final regulation adopts the definition as proposed without change.

2.  Control

The proposed regulation defined the term "control" to have the same meaning as set forth in § 303.13(a)(2) of the FDIC's regulations. As defined therein, "control" means the power to directly or indirectly vote 25 percent or more of the voting stock of a bank or company, the ability to control in any manner the election of directors or trustees, or the ability to exercise a controlling influence over the management and policies of a bank or company. The definition of "control" has been adopted in the final regulation as proposed without any change.

3.  Convert its Charter

The phrase "convert its charter" was defined in the proposed regulation to refer to any instance in which a bank undergoes any transaction which causes the bank to operate under a different form of charter than that under which it operated as of December 19, 1991. The preamble accompanying the proposed regulation indicated that the definition was intended to encompass any transaction as a result of which a bank will from that point forward conduct business pursuant to a type of charter created by state statute that is new as to the particular bank. For example, if a bank that is operating under a savings bank charter begins to operate under a commercial bank charter, the savings bank will be said to have converted its charter regardless of how the transaction is accomplished.

In response to comments received during the comment period urging the FDIC not to consider a change from mutual to stock form to constitute a charter conversion, the final regulation as adopted provides that a change from mutual to stock form shall not be considered to constitute a charter conversion.

4.  Depository Institution

The proposed regulation defined the term "depository institution" to mean any bank or savings association, i.e., the same meaning as set out in section 3(c)(1) of the FDI Act (12 U.S.C. 1813(c)(1)). The definition has been adopted as proposed without change.

5.  Equity Interest in Real Estate

The term "equity interest in real estate" is defined under the final regulation to mean any form of direct or indirect ownership of any interest in real property, whether in the form of an equity interest, partnership, joint venture or other form, which is accounted for as an investment in real estate or a real estate joint venture under generally accepted accounting principles or is otherwise determined to be an investment in a real estate venture under Federal Financial Institutions Examination Council Call Report Instructions. These instructions require that the following be included as direct and indirect investments in real estate ventures:

(1)  Any real estate acquired, directly or indirectly, and held for development, resale, or other investment purposes, but does not include real estate acquired in any manner for debts previously contracted.

(2)  Any equity investments by the bank in subsidiaries that have not been consolidated, associated companies, corporate joint ventures, unincorporated joint ventures, and general and limited partnerships that are primarily engaged in the holding of real estate for development, resale, or other investment purposes and any extensions of credit to these entities.

(3)  Real estate acquisition, development or construction arrangements which are accounted for as direct investments in real estate or as real estate joint ventures in accordance with guidance prepared by the American Institute of Certified Public Accountants in Notices to Practitioners issued in November 1983, November 1984, and February 1986.

(4)  Real estate acquired and held for investment that has been sold under contract and accounted for under the deposit method of accounting in accordance with FASB Statement No. 66, "Accounting for Sales of Real Estate".

(5)  Receivables resulting from sales of real estate acquired and held for investment accounted for under the installment, cost recovery, reduced profit, or percentage-of-completion method of accounting in accordance with FASB Statement No. 66, "Accounting for Sales of Real Estate" when the buyer's initial investment is less than 10 percent of the sales value of the real estate sold.

(6)  Any other loans secured by real estate and advanced for real estate acquisition, development, or investment purposes if the insured depository institution has virtually the same risks and potential rewards as an investor in the borrower's real estate venture.

Characterization as an investment under item 6 above might include instances in which the insured depository institution has accounted for a real estate acquisition, development or construction arrangement as a loan but the FDIC, based on the facts and circumstances surrounding the arrangement, has determined that the arrangement should be accounted for as a direct investment in real estate or as a real estate joint venture under generally accepted accounting principles.

As discussed previously, thirteen comments were received which objected to the FDIC's proposed definition of equity investment in real estate as being overly broad in relation to acquisition, development and construction loans primarily because of the language in the proposal indicating that an ADC loan could be reclassified if the bank had in substance virtually the same risks and potential rewards as an investor. This language has been dropped from the final regulation. In general, the FDIC intends to treat an acquisition, development or construction loan as an equity interest in real estate on the basis of item 6 when the depository institution is expected to participate in a majority of the expected residual profit from the project or when the depository institution participates in less than a majority of the expected residual profit from the project and none of the following characteristics of a loan is present: (a) The borrower has an equity investment which is substantial in relation to the project and which is not funded by the depository institution, (b) the depository institution has recourse to substantial tangible saleable assets of the borrower that have determinable sales value other than the project itself that are not pledged as collateral for other loans, (c) the borrower has provided the depository institution with an irrevocable letter of credit from a creditworthy, independent third party for a substantial amount of the loan over the entire term of the loan, (d) a take-out commitment for the full amount of the loan has been obtained from a creditworthy, independent third-party and the conditions for the take-out are reasonable and their attainment possible, (e) noncancelable sales contracts or lease commitments from creditworthy, independent third parties are in effect that will provide sufficient net cash flow on completion of the project to service normal loan amortization and the conditions for the sales or leases are probable of attainment, or (f) a personal guarantee for a substantial amount of the loan has been provided to the depository institution by the borrower and/or a third party and the substance of the guarantee and the guarantor's ability to perform can be reliably measured.

As bank lending standards have evolved over the past several years, in many cases bank assets which are carried as loans on the bank's books have taken on more characteristics associated with investments rather than loans. Accounting for income from real estate loans and for real estate investment is substantially different and the improper classification of these assets can distort an institution's earnings picture. Accounting convention recognizes that, depending upon the circumstances, there is little substantive difference between certain loans and direct investments in real estate and that in those instances the loans should in fact be accounted for as direct real estate investments. The FDIC rejects the concept that its approach will deter lending since the definition is intended to cover only those transactions which would be considered an equity investment in real estate under gen- erally accepted accounting rules. The discussion above is intended to clarify those situations by specifying the characteristics of a loan which, if absent, would cause the transaction to be classified as an equity investment in real estate rather than a loan.

One comment asked if reverse annuity mortgages and shared appreciation mortgages would be classified as equity investments in real estate. The treatment of each of these transactions depends upon the terms of the contract. The FDIC would have to look at the specific facts and circumstances of a situation before making a determination of the proper classification of these assets.

The final regulation contains three exclusions from the definition of "equity interest in real estate": (1) real property used, or intended to be used, as offices or related facilities for the conduct of the bank's or its subsidiaries' business, (2) an interest in real estate that arises out of a debt previously contracted provided that the real estate is not held any longer than the shorter of the period allowed for holding such real estate under state law or the time period national banks may hold such property, and (3) interests that are primarily in the nature of charitable contributions to community development corporations provided contributions to any one community development corporation do not exceed 2 percent of the bank's tier one capital and total contributions to all such corporations do not exceed 10 percent of the bank's tier one capital (provided the bank's appropriate federal banking agency has determined that an investment up to 10 percent of tier one capital does not pose a significant risk to the deposit insurance fund). These exclusions parallel §§ 7.3005, 7.3020, 7.3025 and 7.7480 of the Office of the Comptroller of the Currency's regulations (12 CFR 7.3005, 7.3020, 7.3025, 7.7480), new paragraph Eleventh of 12 U.S.C. 24, and recent amendments to section 9 of the Federal Reserve Act (12 U.S.C. 321--338) both of which were enacted into law as part of H.R. 6050 which the President signed into law on October 23, 1992.

The exceptions are the same as were contained in the proposal except that the community development corporation exception has been amended to conform with the statutory changes to 12 U.S.C. 24 (Eleventh) and the Federal Reserve Act which allow national banks and state member banks to make investments designed primarily to promote the public welfare up to an aggregate of 5 percent of unimpaired capital and surplus. Under those changes, a national bank and a state member bank may make aggregate investments not to exceed 10 percent of unimpaired capital and surplus if the Comptroller of the Currency (in the case of a national bank) or the Board of Governors of the Federal Reserve System (in the case of a state member bank) determines that the additional investment will not pose a significant risk to the deposit insurance fund. The final regulation provides that in the case of an insured state nonmember bank the FDIC's Board of Directors has determined that it will not pose a significant risk to the fund for a bank to make community development corporation investments up to an aggregate of 10 percent of the bank's tier one capital. Under the final regulation, if the Board of Governors of the Federal Reserve System determines that it does not present a significant risk to the fund for a state member bank to make such investments up to an aggregate of 10 percent of the bank's tier one capital, such investments will not be considered equity investments in real estate.

No comments were received concerning the exception for premises used to conduct the bank's business. One comment was received concerning the community development corporation exception as proposed which questioned limiting the exclusion of investments in these corporations. The limitation is based on a similar limitation for national banks. The noted exclusion merely provides that insured state banks can hold equity in such corporations on its books to the same extent that a national bank may do so provided of course that state law so permits. If the "investment" is completely charged off as a charitable contribution, the interest does not appear on the bank's books and is not considered an equity investment.

Ten comments were received concerning the exclusion for real estate held for debts previously contracted. Some of the comments objected to the time frames for holding DPC property citing state laws which are substantially different from national bank law, i.e., in some cases provide for a longer holding period. Limiting the holding period for this real estate to the shorter of the period allowed for holding such real estate under state law or the time period national banks may hold such property, may put state banks at a disadvantage. A number of comments indicated that national banks may request a five year extension of time for holding DPC property beyond the five years otherwise applicable and that state banks should likewise be able to obtain an additional five year extension.

The FDIC is of the opinion that as a matter of law a state bank is limited to the shorter of the state or federal period allotted for holding DPC property. Since a national bank cannot hold equity in real estate except in very limited circumstances, section 24 only allows a state bank to hold an interest in real estate if a national bank could do so. For the purposes of the final regulation, however, the FDIC construes the applicable limit on holding of DPC property to be a maximum of ten years. Thus, if the period for holding DPC property under state law is longer than the basic five-year period allowed for national banks and an extension of time is needed to dispose of the property, the FDIC will recognize any such extension granted by the insured state bank's chartering authority provided that such extension does not purport to allow a state bank to hold the DPC property in excess of ten years.

Several comments urged the FDIC to allow a state bank that had acquired DPC property before December 19, 1991 to follow the state holding period. As indicated above, the FDIC is of the opinion that the shorter period must apply. Section 24 clearly not only affected the future acquisitions of equity investments but also affected current holdings in that banks were specifically directed to divest any impermissible equity investments acquired before December 19, 1991. If, for example, on December 19, 1991 a state bank held a piece of DPC property and had held such property for three years and state law allows the bank to hold that property for a total of fifteen years, the bank may hold the property for ten years from December 19, 1991 without that property being considered an equity investment. If the property is not disposed of prior to that time, continued holding of the property may be cited as in violation of the regulation.

6.  Equity Investment

The proposed regulation defined the term "equity investment" to mean any equity security, partnership interest, any equity interest in real estate and any transaction which in substance falls within any of these categories, even though it may be structured as some other form of business transaction. The definition of equity investment as proposed is the same as that which is used under § 303.13 of the FDIC's regulations governing a prohibition for savings associations found under section 28 of the FDI Act that is similar to section 24.

The definition is being adopted as proposed with one change. One comment noted that the term "equity investment" did not contain an exception for investments taken DPC whereas the terms "equity investment in real estate" and "equity security" had such an exclusion. The result of the omission is that a partnership interest taken for a debt previously contracted ("DPC") is considered an equity investment. In response to this comment, a DPC exclusion has been added to the definition of equity investment.

Another comment expressed a concern with the possibility that the definition of equity investment which includes "any transaction which in substance falls within these categories even though it may be structured as some other form of business transaction" may be read to include loans to companies which by their nature are highly leveraged and "start-up" loans to small businesses. The FDIC does not intend for the definition to be interpreted in that manner. The intention of the FDIC is to cover only those "in substance" transactions in which there is a legal or accounting basis to consider the transaction to be an equity investment.

7.  Equity Security

"Equity security" was defined under the proposed regulation to mean any stock, certificate of interest or participation in any profit-sharing agreement, collateral trust certificate, pre-organization certificate or subscription, transferable share, investment contract, or voting-trust certificate; any security immediately convertible at the option of the holder without payment of substantial additional consideration into such security; any security carrying any warrant or right to subscribe to or purchase any such security; and any certificate of interest or participation in, temporary or interim certificate for, or receipt for any of the foregoing unless it is acquired through foreclosure or settlement in lieu of foreclosure. The definition is the same as that used in § 303.13(a) of the FDIC's regulations.

The FDIC received 15 comments addressing the issue of whether the regulation should exclude from the definition of equity security investment grade preferred stock and other preferred stock issues that are very debt like. The comments focused on two categories of preferred stock, money market preferred stock and adjustable rate preferred stock. Adjustable rate preferred stock refers to shares for which dividends are established contractually by a formula in relation to Treasury rates or other readily available interest rate levels. Money market preferred stock refers to those issues in which dividends are established through a periodic auction process that establishes yields in relation to short term rates paid on commercial paper issued by the same or a similar company. Dividends are not declared by the issuer's board and the credit quality of the issuer determines the value of the stock. Money market preferred shares are sold at auction rather than on a national securities exchange.

The FDIC agrees after reviewing the comments that money market (auction rate) preferred stock and adjustable preferred stock are essentially substitutes for money market investments such as commercial paper and are closer in their characteristics to debt than to equity. The final regulation therefore has been amended to specifically exclude money market preferred stock and adjustable preferred stock from the definition of equity investment. As a result, such investments are not subject to the provisions of § 362.3(a) of the final regulation. Investing in such instruments will be an "activity" for the purposes of section 24. Whether or not a state bank may continue to make such investments after December 19, 1992 will depend, among other things, on whether a national bank could make a similar investment.

The FDIC received one comment urging that the definition be amended so as to not encompass any debt security that carries with it a warrant to purchase equity. The FDIC has rejected this suggestion. If the warrant is for an equity security in which a national bank could not invest (and the equity security cannot be acquired pursuant to an exception under the regulation), the bank would be prohibited from exercising the warrant in any event.

8.  Equity Investment Permissible for a National Bank

The proposed regulation defined the phrase "equity investment permissible for a national bank" to mean any equity investment expressly authorized for national banks under the National Bank Act or any other federal statute, regulations issued by the Office of the Comptroller of the Currency, or any order or formal interpretation issued by the Office of the Comptroller of the Currency.

The FDIC requested comment on the propriety of including equity investments authorized by an order or formal interpretation of the Office of the Comptroller of the Currency as "permissible" for the purposes of the proposal and further sought comment on what the FDIC should consider to constitute a formal interpretation if it is in fact deemed appropriate to recognize formal interpretations. Insured state banks were also advised that regardless of how the FDIC defines "permissible for a national bank", they should be prepared to document to the FDIC's satisfaction that their equity investments are permissible for a national bank.

The FDIC received forty-eight comments which indicated that the definition of permissible for a national bank as proposed was too narrowly drawn. It was suggested that in order to avoid creating a competitive disadvantage for state banks, the regulation should recognize all directives and staff opinions of the Office of the Comptroller of the Currency. In short, if a national bank can rely upon an issuance of the Office of the Comptroller of the Currency then a state bank should have the same advantage regardless of how informal the issuance may be.

In response to the comments, the final regulation modifies the proposed regulation and defines a permissible equity investment by reference to the underlying statutory authorities. It provides further that any equity investment expressly authorized by statute or recognized as permissible in official bulletins or circulars issued by the OCC or in any interpretation issued in writing by the OCC will be accepted as permissible for state banks under section 24. Written staff opinions will be considered to evidence the position of the Office of the Comptroller of the Currency so long as the opinion is considered to be valid by the Office of the Comptroller of the Currency. Thus, an opinion will not be recognized if it is not the current opinion of the Comptroller's Office, i.e., it is no longer considered valid, the opinion is overruled by the Office of the Comptroller of the Currency, or the opinion is found by a court of law to be incorrect. Even though staff opinions are not necessarily binding on the Comptroller of the Currency, the FDIC is satisfied that they embody the current opinion of the Office of Comptroller of the Currency and that to not recognize them would in fact unnecessarily put state banks at a disadvantage. State banks should note that the FDIC will generally expect any conditions or restrictions set out in the Comptroller of the Currency's regulations, bulletins, circulars, and staff opinions to be met if the equity investment is to be considered permissible under Part 362 when made by a state bank.

In expanding the definition the FDIC also addressed the 63 comments which stated that the regulation should recognize Banking Circular 220 issued by the Comptroller of the Currency on November 21, 1986 relating to national bank investment in investment companies composed wholly of bank eligible investments. This Circular offers the opinion that it is permissible for a national bank to purchase for its own account shares of investment companies as long as the portfolios of such companies consist solely of obligations which are eligible for purchase by national banks for their own account. By recognizing this circular and similar bulletins or circulars, the FDIC is excluding from the coverage of this regula-tion such investments, i.e., any investments consistent with the Circular 220 would be considered an equity investment permissible for a national bank.

Sixteen comments expressed concern that state banks do not have access to the Office of the Comptroller of the Currency for interpretive opinions and that these banks cannot make a determination if an investment is allowed for a national bank. Several comments suggested the establishment of a procedure in which state banks would have direct access to the Office of the Comptroller of the Currency to obtain interpretive opinions. The FDIC does not have authority to establish such a procedure and the implementing statute does not require such a response from the Office of the Comptroller of the Currency. Information on what investments are permissible for national banks is publicly available in a variety of sources, including various banking law reporters, publications of the OCC Communications Division ("Interpretations and Actions" and the Quarterly Journal), and a database on LEXIS. Recognizing that investments in addition to those addressed to date in written interpretations of the OCC may be permissible for national banks, the FDIC and the OCC are working together to develop inter-agency procedures for resolving those questions as they arise. In addition, to address the many questions about permissible national bank powers that the FDIC has received since FDICIA was enacted, the FDIC is working in conjunction with the OCC to develop basic guidance to state banks on investments and powers of national banks. It is intended that a financial institution letter containing the guidance will be sent out to state banks.

9.  Lower Income

One of the exceptions to the general prohibition on acquiring equity investments not permissible for a national bank allows insured state banks to become limited partners in partnerships that develop housing projects designed to primarily benefit "lower income" persons. The proposed regulation defined "lower income" to mean an income that is less than or equal to the median income (as determined by state or federal statistics) for the area in which the housing project is located. Under the proposed definition the "area" in which a housing project is located referred to the relevant Metropolitan Statistical Area (MSA) if the project is located within an MSA. If the project is not located in an MSA, the median income of the "area" referred to the median income of the state or territory as a whole exclusive of the designated MSA's.

The FDIC invited comment generally on the issue of what state or federal statistics the FDIC should recognize for the purposes of applying this definition; how the term "area" should be construed for the purposes of applying the definition; and what federal and state statistics are readily available to insured state banks. Two comments were received, both of which expressed concern relating to the definition of "area" in rural parts of a state. These comments felt that by using statewide statistics certain depressed rural areas may be overlooked. In response to these concerns the definition as adopted in the final regulations has been amended so that statistics for the state or territory (exclusive of designated MSA's in the state) would be used for a project not located in an MSA only when no statistics for a local area are available.

10.  National Securities Exchange

The term "national securities exchange" was defined under the proposal to mean an exchange that is registered as a national securities exchange by the Securities and Exchange Commission pursuant to section 6 of the Securities Exchange Act of 1934 (15 U.S.C. 78f) and the National Market System. "National Market System" referred to the top tier of the three tiers of the over-the-counter securities traded through the National Association of Securities Dealers Automated Quotation system (NASDAQ). It was the stated opinion of the FDIC when the proposal was published for comment that if a security is listed on a registered exchange or is traded in the National Market System the security will be more liquid due to a wide market, sufficient information will be available about the security and the issuer to enable the market to make informed pricing decisions about the security, and the opportunities for fraud and manipulation of the security are minimized.

Nine comments addressed this definition. Of the nine, seven requested that the regulation give the same treatment to common or preferred stock listed on a foreign exchange that is accorded stock listed on a national exchange. One comment approved of defining "national securities exchange" to take in the National Market System and one comment indicated that any security traded on NASDAQ should be considered to be listed on a national securities exchange.

The final regulation adopts the definition as proposed. Although securities listed on foreign exchanges may have the same liquidity characteristics of securities listed on a national securities exchange as defined herein, the statute does not leave the FDIC the discretion to extend the exception in § 362.3(b)(4) of the final regulation to foreign exchanges. Lastly, the FDIC continues to believe that securities traded on the bottom two tiers of NASDAQ do not have the same assurance of liquidity and are more volatile. Thus, the FDIC has rejected the comment to include all of NASDAQ.

11.  Significant Risk to the Deposit Insurance Fund

The proposed regulation defined the phrase "significant risk to the deposit insurance fund" so as to indicate that a significant risk is to be understood to be present whenever it is likely that any insurance fund administered by the FDIC may suffer any loss whatever. Eleven comments objected to the proposed definition saying that it did not take into account the plain meaning of the word significant. Furthermore, as any investment by a bank can be said to pose the possibility of some loss, and the definition can essentially be said to create a standard of risklessness, no equity investment or activity would ever pass the standard. Several of the comments objected to the discussion in the preamble accompanying the proposed regulation which indicated that, in the FDIC's opinion, it is not necessary that making the equity investment will result in the failure of threatened failure of a bank before a significant risk of loss to the fund is considered to be present.

In response to the comments, the definition has been reworded slightly as follows: "significant risk to the deposit insurance fund shall be understood to be present whenever there is a high probability that any insurance fund administered by the FDIC may suffer a loss". The rewording has been done in an attempt to remove the implication that because an investment or activity cannot be said to be "riskless" under all circumstances the FDIC will determine that the investment or activity will pose a significant risk of loss to the fund. The emphasis is properly whether there is a high degree of likelihood, under all of the circumstances, that an investment or activity by a particular bank, or by banks in general in a given market or region, may ultimately produce a loss to either of the funds. The relative or absolute size of the loss that is projected in comparison to the fund will not be determinative of the issue.

The definition as adopted in final is consistent with passages of the legislative history of section 24. (See, S. Rep. No. 102--167, 102d Cong., 1st Sess. 54 (1991)). Additionally this definition (actually the definition precisely as set out in the proposal) has been applied to other provisions of the FDIC's regulations for some time now. (See, § 303.13, 12 CFR 303.13). What is more, given the recent strains on the resources of the deposit insurance funds, it is the agency's position that it is appropriate to approach this issue conservatively. For much the same reasons the FDIC is rejecting the comment that the FDIC is being overly broad when it has announced its intention not to require that an equity investment or activity be expected to result in the imminent failure of a bank before the equity investment or activity can be said to present a significant risk to the fund.

12.  Subsidiary

The term "subsidiary" is defined under the final regulation to mean any company directly or indirectly controlled by an insured state bank. This term has the same meaning as found in § 337.4 of the FDIC's regulations (12 CFR 337.4) and is the same meaning that was contained in the proposed regulation. The FDIC received one comment that the definition of subsidiary should be expanded to state, "For the purposes of Section 362.4, subsidiary means any company directly or indirectly controlled by more than one insured state bank operating as a subsidiary consistent with state law." The FDIC has not amended the definition as requested. It is the FDIC's reading of section 24 that only a majority owned subsidiary is granted an exception under paragraph (c) and that, furthermore, after December 19, 1992 the activities of such a subsidiary as principal must conform to the activities permissible for a subsidiary of a national bank unless the FDIC gives its approval. Activities in subsidiaries that are less than majority-owned, even if control is present, must be consistent with activities that are permissible for a national bank.

One comment inquired as to how a partnership that is controlled by a state bank is to be treated under the regulation. Is the partnership interest an equity investment or is the partnership treated as a subsidiary since a subsidiary is defined to include among other things a partnership controlled by a bank? If the bank holds the majority interest in the partnership, it will be treated as a majority owned subsidiary that falls within the exception contained in § 362.3(b)(1) of the final regulation. If the bank controls the partnership but is not the majority interest holder, the partnership interest is subject to divestiture if the partnership conducts an activity that is not permissible for a national bank unless one of the exceptions in the regulation is applicable.

13.  Tier One Capital

Under the final regulation, "tier one capital" has the same meaning as found in Part 325 of the FDIC's regulations when that term is used with reference to an insured state nonmember bank. The term shall be understood to refer to "tier one capital" as defined by the Board of Governors of the Federal Reserve System when the term is used with reference to an insured state member bank. At this time Part 325 defines "tier one capital" as common stockholders' equity, noncumulative perpetual preferred stock and minority interests in consolidated subsidiaries, minus all intangible assets other than mortgage servicing rights eligible for inclusion in core capital and supervisory goodwill eligible for inclusion in core capital. The Board of Governors of the Federal Reserve System defines tier one capital in appendix A to 12 CFR Part 208. As defined therein tier one capital generally means common stockholders' equity, qualifying noncumulative perpetual preferred stock (including related surplus) plus minority interests in the equity accounts of consolidated subsidiaries minus goodwill. Only those capital elements that technically meet the definition of tier one capital can be included as tier one capital for the purposes of this proposal. No comments were received pertaining to the definition of Tier 1 capital, and the definition stands as proposed.

14.  Well-Capitalized

The final regulation defines the term "well-capitalized" by cross referencing § 325.103 of the FDIC's regulations which implements the prompt corrective active provisions of the FDI Act. That definition is as follows: A "well-capitalized" insured state bank means an insured state bank that has a ratio of total capital to risk-weighted assets of not less than 10.0 percent; a ratio of Tier 1 capital to risk-weighted assets of not less than 6.0 percent; a ratio of Tier 1 capital to total book assets of not less than 5.0 percent; and which is not subject to any order or final directive issued by its appropriate federal banking agency requiring that it meet and maintain a specific capital level for any capital measure. In order to be considered well-capitalized for the purposes of § 362.3(b)(7) of the final regulation, an insured state bank must meet the above requirements before excluding the bank's investment in its insurance underwriting subsidiary of the bank and the following capital levels must be met after such investment is excluded. The bank's total risk-based capital must equal or exceed 8.0 percent and the bank's tier one risk-based capital must equal or exceed 4.0 percent and the bank's leverage ratio must equal or exceed 4.0 percent; or 3.0 percent or greater if the bank is rated composite 1 under the CAMEL rating system and the bank is not experiencing or anticipating significant growth. These requirements are the same as that which are necessary under the FDIC's prompt corrective actions regulations for a bank to be considered to be adequately capitalized. The bank's "investment" in its subsidiary will be considered to equal the amount invested in the subsidiary's equitysecurities plus any debt issued by the subsidiary that is held by the bank. The bank's investment in a department will be considered to equal the total of any funds transferred to the department which is represented on the department's accounts and records as an accounts payable, a liability, or equity of the department except that transfers of funds to the department in payment of services rendered by the department will not be considered an investment in the department.

Although a number of changes have been made to the definition from that which was contained in the proposed regulation, in many ways the definition has been adopted essentially as proposed. The requirement that a bank not be in a "troubled condition" in order to be considered "well-capitalized" has been deleted in the final regulation so that the definition as contained in Part 362 will be consistent with § 325.103 of the FDIC's regulations. (Three comments were received supporting using the same definition of "well-capitalized" as used for the implementation of section 38 of the FDI Act and two comments opposed using the same definition. The FDIC has decided to cross reference the prompt corrective action regulations in order to ensure consistency.) In addition, in response to comments that it was overly restrictive to require that a bank be "well-capitalized" after deducting the bank's investment in an insurance subsidiary, the regulation has been amended to indicate that a bank need only be adequately capitalized after making the capital deduction. It had been suggested that the FDIC make this change since the FDIC should only be concerned with whether a bank could sustain a total loss of its investment and still have sufficient capital to safely conduct its operations. Several comments objected to defining "well-capitalized" so as to require a capital deduction for a bank's investment in any subsidiary or department that engages in activities that are not permissible for a national bank. These comments were concerned with the implication that the FDIC may, for the purposes of section 24(d), require that a bank be "well-capitalized" before the FDIC will grant approval for any of its subsidiaries to conduct any activity as principal that a national bank subsidiary could not con- duct. The final regulation makes clear that the capital deduction is only relevant for the purposes of whether a bank is eligible for the exception contained in § 362.3(b)(7), "Interests in insurance subsidiaries". The FDIC will consider the issue of whether a capital deduction is appropriate whenever a subsidiary engages in any activity as principal that is not permissible for a national bank when the agency considers regulations implementing section 24(d)(1) of the FDI Act which pertains to "activities" of insured state banks and their majority owned subsidiaries.

Eleven comments addressed excluding the bank's investment in an insurance underwriting subsidiary from the bank's capital. Six of the comments objected to the deduction. One comment suggested a phase-in of the requirement. The FDIC continues to be of the belief that it is appropriate for the regulation to contain the capital deduction. Taking the deduction will provide assurance that the bank could lose its entire investment in the subsidiary and still have enough capital left to absorb other losses, should they arise, from more "traditional" banking functions. Any bank which has an investment subject to the capital deduction requirement will not be required to consolidate the subsidiary for the regulatory capital requirements. These entities would be consolidated, however, for the purposes of preparing the bank's Report of Condition and Report of Income. The final regulation does, however, provide for a phase-in of the capital deduction on a case-by-case basis (see § 362.3(b)(7)(ii) of the final regulation).

Those banks which hold stock in an insurance underwriting subsidiary or have an insurance underwriting department and which would not be adequately capitalized if they were to take the entire capital deduction at once may apply to the FDIC for permission to retain their investment in the subsidiary and/or continue to operate their insurance department. The application cannot be granted unless the bank is expected to meet the definition of "well-capitalized" no later than three years from the effective date of the final regulation and the FDIC determines that the retention of the subsidiary, or continued operation of the department, in the interim will not posea significant risk to the insurance fund. The bank would in effect be asking for permission to stagger the capital deduction over a period of time not to exceed three years at the end of which the bank could absorb the entire capital hit and be adequately capitalized. The application may be in letter form and should set out the bank's plan to become well-capitalized taking into consideration the gradual deduction of the bank's investment.

One comment suggested that a bank not be required to deduct its entire investment if the subsidiary engages in permissible activities in addition to impermissible activities. As the final regulation clearly provides that the capital deduction only comes into play with respect to insurance underwriting subsidiaries and departments (and then only if the underwriting activities are ones that are not permissible for a national bank) the FDIC does not anticipate that the concern raised by the comment should be a problem.

15.  Insured State Bank

The proposed regulation defines the term "insured state bank" to mean any state bank, whether or not a member of the Federal Reserve System, that is insured by the FDIC including any insured branch of a foreign bank that is not a federal branch. The FDIC received one comment which urged that the final regulation delete the reference to foreign branches. The comment noted that subsection 7(h) of the International Banking Act as amended by section 202 of FDICIA (12 U.S.C. 3105(h)) establishes a regulatory scheme governing the activities of state branches of foreign banks that, while similar to section 24 of the FDI Act, is somewhat different. It would not be appropriate, according to the comment, to bring foreign branches within the ambit of section 24 because a separate regulatory system was contemplated by the Congress. In response to this comment the final regulation has been amended so as to delete the reference to insured branches of foreign banks.

General Prohibition on Acquiring or Retaining Equity Investments That Are Not Permissible for a National Bank

Section 362.3(a) of the proposed regulation contained a restatement of the overall prohibition on making or retaining equity investments of a type or in an amount that is not permissible for a national bank. The FDIC received twelve comments which objected to restricting state bank equity investments. Some of the comments objected to restricting such investments at all (such investments were described as beneficial for banks) and some of the comments specifically objected to restricting state banks to investments that are permissible for a national bank. Two comments expressed the opinion that the FDIC had misread the statute insofar as it was the FDIC's expressed opinion that section 24(c) of the FDI Act was immediately effective upon enactment. The comments indicated that section 24(c) should be read as not being effective until December 19, 1992 as section 24(a) which governs "activities" is not effective until that time and the statute defines "activity" to include making any investment. According to the comments, since an "equity investment" is an "investment", the FDIC is able to approve or deny a state bank making an otherwise impermissible equity investment if the bank meets its capital requirements and the FDIC determines that the equity investment does not pose a significant risk to the fund. The comments also stated that the FDIC was misguided in relying in part for its opinion on how section 24 operates on section 28 of the FDI Act as added by the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA, 12 U.S.C. 1831(e)). Five comments urged the FDIC not to adopt its announced position on commitments to acquire equity investments. The preamble accompanying the proposed regulation had indicated that any state bank that had entered into a commitment prior to December 19, 1991 to acquire what is now an impermissible equity investment may not proceed with the acquisition. (57 FR 30436, July 9, 1992, column 3). Two comments urged the FDIC to distinguish between commitments, capital calls and what was referred to as phased construction.

Section 362.3(a) of the final regulation has been adopted as proposed without any change. The statute leaves the FDIC no discretion on the matter of whether equity investments of state banks should be restricted and whether the restriction should be tied into the powers of a national bank. The FDIC has rejected the construction of section 24(c) as urged by the above described comment. Unlike paragraph (a) of section 24, paragraph (c) does not contain any language delaying its effectiveness until December 19, 1992. We do not feel that this omission was by oversight nor is it appropriate as a matter of law in the agency's opinion to import the December 19, 1992 date from paragraph (a) into paragraph (c). Paragraphs (a) and (c) draw a clear distinction between investments that are equity investments and other types of investments. It is a maxim of statutory construction that the specific governs the general thus it would be inconsistent with that tenet to ignore the treatment accorded equity investments in paragraph (c) and paragraph (f). What is more, the reading of section 24 urged on the FDIC by the comment would make paragraphs (c) and (f) superfluous. If paragraph (a) were intended to govern all investments, there would be no need for paragraph (c) or paragraph (f). Congress could simply have stopped after drafting paragraph (a) but it did not. Lastly, the FDIC's reading of section 24 is consistent with the reading Congress stated should be given to section 28 of the FDI Act.1 The FDIC is justified in looking to section 28 for guidance in construing section 24 even though section 28 dealt with savings associations and may have been prompted by a set of circumstances not entirely replicated in the banking industry. The two statutes are structurally very similar. In many respects the language is similar if not identical and the stated intent of both provisions is to ensure that the activities and equity investments of federally insured depository institutions do not present a risk to the deposit insurance funds. In fact, the legislative history of section 24 references the losses experienced by thrifts and Congress's legislative response to those losses (section 28 of the FDI Act) and describes section 24 as being similar to the rules previously adopted for thrifts in FIRREA. (S. Rep. 102--167 accompanying S. 543, October 1, 1991, p. 5).

As to commitments, the FDIC has again reviewed the case law and continues to be of the opinion that a state bank may not proceed under a preexisting commitment to acquire an equity investment that a national bank could not acquire. We are confident that such an institution will have a defense to a breach of contract claim on the basis of impossibility of performance. The agency does not consider this position to be tantamount to retroactive rulemaking. Congress has the authority to nullify outstanding contracts by subsequent legislation and did so by enacting section 24. The statute clearly prohibits acquisitions after December 19, 1991 and just as clearly requires divestiture of existing investments, that although lawful when made, are no longer lawful.

The FDIC is willing to take a case-by-case approach in applying the final regulation to phased construction arrangements and capital calls. As was indicated in the preamble accompanying the proposal, partially performed contracts will need to be reviewed on the facts in order to determine whether it can be said that an equity investment was "acquired" before December 19, 1991 and that such investment is eligible to be retained over the divestiture period set out in the final regulation. The issue with respect to capital calls and phased construction is whether a capital infusion, or construction done in stages, gives rise under the facts to an additional equity investment.

A number of state banks expressed concern about equity investments that may have been made after December 19, 1991 under the mistaken understanding that the equity investment restrictions of section 24 would not take effect until December 19, 1992. The FDIC recognizes that many state banks may have not been aware of the equity investment restrictions until only recently and that many banks may have been operating under the assumption that the restrictions were not yet effective. It is not the FDIC's intent to take enforcement action against these banks for a violation of section 24, however, banks that did acquire impermissible investments after December 19, 1991 must divest those assets. Such banks should file a divestiture plan as provided by § 362.3(c)(2) of the final regulation. Although the agency could conclude that the investments are not eligible to be divested over the five year period as the assets were not held by the bank on December 19, 1991, the FDIC has determined that it is more prudent to handle the timing of divestiture on a case-by-case basis under the regulation rather than to force immediate divestiture which could have an adverse impact on the affected banks.

Exceptions to General Prohibition on Acquiring or Retaining Prohibited Equity Investments

The statute contains several exceptions to the general prohibition on acquiring or retaining equity investments that are not permissible for a national bank. Those exceptions are set out in the final regulation in § 362.3(b). A description of the exceptions and a discussion of the comments which addressed those exceptions follows.

1.  Majority Owned Subsidiary

Section 362.3(b)(1) of the proposal provided that an insured state bank is not prohibited from acquiring or retaining a majority stock interest in a subsidiary even if the stock investment in that subsidiary is one which would not be permissible for a national bank. If an insured state bank holds less than a majority interest in the subsidiary, and that equity investment is of a type that would be prohibited to a national bank, the exception does not apply and the investment is subject to divestiture.2

Majority ownership for the exception is understood to mean ownership of greater than 50% of the outstanding voting stock of the subsidiary.

The proposal also indicated that an insured state bank that is a member of SAIF will not be permitted to retain its majority interest in a subsidiary pursuant to the exception if the bank was required under § 333.3 of the FDIC's regulations to request the FDIC's permission to retain the investment and the application was denied. In such case, the SAIF member state bank must divest the interest in the subsidiary in accordance with whatever conditions were previously established by the FDIC.

Section 333.3 applies to state banks that are members of SAIF. Under § 333.3 a SAIF member state bank may not acquire or retain an equity investment that is not permissible for a federal savings association. An association that meets its capital requirements may apply for permission to retain an interest in a subsidiary that would otherwise be prohibited. In order for the application to be approved the FDIC must determine that retaining the equity investment in the subsidiary will not pose a significant risk to SAIF. The preamble accompanying the proposed regulation indicated that, although FDIC proposed to delete the above described portion of § 333.3, (see 57 FR 30433) it is the FDIC's belief that any denial previously made by the FDIC pursuant to § 333.3 would operate to limit the exception because the FDIC had already determined that retaining the investment will pose a significant risk to SAIF. It was the expressed opinion of the FDIC that it would jeopardize SAIF to hold otherwise as to do so would in effect allow the bank to retain an investment expected to adversely affect the fund only to require the bank to seek the FDIC's permission to retain the investment pursuant to whatever procedures the FDIC adopts to implement the portion of section 24 dealing with activities of subsidiaries.

Approximately twelve comments addressed § 362.3(b)(1) of the proposal. The comments did not raise any objections to the provision as drafted. The comments almost exclusively raised questions regarding what activities the FDIC will determine that a majority owned subsidiary may engage in without posing a significant risk to the fund. Those issues will be addressed by the FDIC in another rulemaking in the near future. As no objections to the exception were received, § 362.3(b)(1) is being adopted in final as proposed.

Insured state banks are reminded that the exception for majority owned subsidiaries is itself limited. Section 24(d) provides that no subsidiary of an insured state bank may engage as principal, after December 19, 1992, in any activity that is prohibited to a subsidiary of a national bank unless the bank meets its applicable capital requirements and the FDIC determines that the conduct of the activity in question will not pose a significant risk to the deposit insurance fund. As already stated, the FDIC will consider further proposed rulemaking to implement the requirement that activities by majority owned subsidiaries be approved by the FDIC. That rulemaking will consider such things as whether certain activities should be prohibited by regulation, whether certain activities should be listed as having been found not to present a significant risk to the fund, and whether the FDIC should establish parameters for operations of majority owned subsidiaries, e.g., structural and/or operational restrictions to ensure that the conduct of the activity in question will not present a significant risk to the insurance fund.

2.  Qualified Housing Projects

Section 362.3(b)(2) of the proposed regulation set out an exception for qualified housing projects. Under the exception, an insured state bank is not prohibited from investing as a limited partner in a partnership, the sole purpose of which is direct or indirect investment in the acquisition, rehabilitation, or new construction of a residential housing project intended to primarily benefit lower income persons throughout the period of the bank's investment. The bank's investments, when aggregated with any existing investment in such a partnership or partnerships, may not exceed 2% of the bank's total assets. The proposed regulation indicated that banks are to take as the measure of their total assets the figure reported on the bank's most recent consolidated report of condition. The FDIC chose the most recent report of condition as the comparison point in an attempt to provide a more stable asset base against which the bank's investments can be measured. If an investment in a qualified housing project does not exceed the limit at the time the investment was made, the investment shall be considered to be a legal investment even if the bank's total assets subsequently decline. In that event, however, no further investments in qualified housing projects would be permissible until the bank's total assets increase.

Comment was requested on how the FDIC should construe the terms "primarily" and "residential" as used in this exception (i.e., how much commercial activity can go on in a building before it is no longer residential or no longer is intended to primarily benefit lower income persons); whether or not the FDIC should include unfunded commitments as part of the bank's investment in partnerships under this exception; and what problems, if any, the exception as written poses for bank's meeting their Community Reinvestment Act obligations.

The preamble accompanying the proposed regulation also reminded state banks that as the proposed definition of equity investment did not include an interest in community development corporations up to an aggregate of 5% of a bank's tier 1 capital (see discussion of "equity investment in real estate" definition) insured state banks may invest in qualified housing projects excepted by § 362.3(b)(2) up to 2% of their total assets in addition to investing in community development corporations up to an aggregate maximum of 5% of their tier 1 capital. With the exception of the changes discussed below, § 362.3(b)(2) is being adopted in final as proposed.

In response to comments, the final regulation indicates that a qualified housing project includes, but is not necessarily limited to, projects eligible for federal low income housing tax credits under section 42 of the Internal Revenue Code (26 U.S.C. 42). Inclusion of such projects was suggested by three of the comments. A review of the information available regarding projects which qualify for such tax credit indicates that they should be available for the exemption. Under the Internal Revenue Code, to be a "qualified low-income housing project" the project must meet one or the other of the following two tests; 20 percent or more of the residential units are rent restricted and are occupied by individuals whose income is 50 percent or less of the area median gross income, or 40 percent or more of the residential units are rent restricted and occupied by individuals whose income is 60 percent or less of the area median gross income. Part of the building in which the qualified low-income housing project is located may be used for purposes other than residential rental purposes without the project losing its eligibility for the tax credit.

Specific comment was requested regarding the meaning to be given "primarily" and "residential" as used in the final regulation. Four comments addressed this area. In each case, the comment indicated the opinion that projects should not be disqualified from the exception if they are not 100% residential properties. Two of the comments indicated that if a project does not qualify for the low income housing tax credit under federal law the project should be considered a qualified low income housing project if at least 50% of the available residential properties are available to lower income individuals and that such projects should still qualify provided no more than 20% of the total square footage of such projects is available for commercial usage. The remaining comment indicated that 51% of the project should be required to be residential and any commercial development should be found to be incidental to the qualified housing. If the commercial development is wholly unrelated to qualified housing, then 71% of the available space should be residential.

The FDIC agrees that some commercial development may be both incidental and beneficial to a housing development. Therefore, the final regulation provides that a residential real estate project which does not qualify for tax credits under section 42 of the Internal Revenue Code may be considered primarily for the benefit of lower income persons if 50% or more of the housing units are to be occupied by lower income persons. Additionally, a project will be considered primarily residential despite the fact that some portion of the total square footage is utilized for commercial purposes provided such commercial use is not the primary purpose of the project. Therefore, any project with less than 50% of the total available square footage dedicated to housing would not qualify for the exemption.

The two comments addressed counting unfunded commitments as part of the bank's investment in partnerships under the exception had opposing viewpoints. One comment indicated that, by analogy to a national bank's lending limit, it would be appropriate to exclude unfunded commitments to encourage qualified housing investment. The other comment felt including legally binding, unfunded commitments as part of the bank's investment in a partnership is appropriate. Another comment indicated that investments in qualified housing projects should be based on capital and not asset size.

The final rule adopts the position that legally binding commitments are to be included as part of the bank's investment under the exception in § 362.3(b)(2). Such investments are not analogous to lending relationships (any excess investment cannot be sold as easily as a loan can be participated out if the bank's asset base does not grow in an amount which offsets the additional funding of the commitment).

3.  Savings Bank Life Insurance

Section 362.3(b)(3) of the proposed regulation provided that an insured state bank located in Massachusetts, New York, or Connecticut may own stock in a savings bank life insurance company provided that the insurance company prominently disclosed to purchasers of life insurance policies, annuities, and other insurance products that the policies, annuities and other products offered to the public are not insured by the FDIC, are not obligations of, and are not guaranteed by, any insured state bank. The proposal indicated that the following or a similar statement will satisfy the disclosure requirement: "This [policy, annuity, insurance product] is not a federally insured deposit and is not an obligation of, nor is it guaranteed by, any federally insured bank."

The agency received eleven comments on this section of the proposal. Several of the comments argued that the FDIC is attempting to require disclosure provisions in the absence of any statutory authority. According to these comments, while section 24(e)(1)(B) of the FDI Act provides that, in order for the savings bank life exception to be available, the consumer disclosure provisions of section 18(k) of the FDI Act (12 U.S.C. 1828(k)) must be met, since section 18(k) of the FDI Act does not contain any consumer disclosure provisions Congress clearly did not intend that disclosure be required. The comments also argued that to require disclosure is unnecessary as the relevant state laws already require that a similar type of disclosure appear on the face of the instruments that are sold. The comments further pointed out that since the inception of savings bank life insurance there have been no reports of consumers confusing savings bank life insurance with an insured deposit. These comments suggested delaying the effectiveness of the disclosure requirement for a waiting period ranging from six months to a year (if disclosure is in fact imposed) in order to allow the banks an opportunity to produce the documentation necessary. Some of the comments indicated that they were not opposed to the inclusion of a disclosure statement on the face of an instrument sold by a savings bank life insurance company, as many already include a similar type of disclosure on the instrument, or in their promotional materials.

The FDIC also sought comment on the timing of any disclosure and whether the regulation should require that any disclosure be signed. The comments which addressed these areas all indicated that to require the consumer to acknowledge receipt of the disclosure, either at the time of the application or at some later date, would be extremely burdensome to banks and that it would lead to potentially higher costs in production and postage. Those higher costs would be passed on to the customers.

The final regulation retains the requirement for disclosure. The FDIC continues to believe that Congress intended some type of disclosure and that the absence of a consumer disclosure provision in section 18(k) of the FDI Act does not negate the intent of Congress that disclosure be made. The regulation does not require that the disclosure appear on the face of an instrument sold through a savings bank life insurance company nor does it require a signature acknowledgement by a consumer. Under the final regulation the disclosure must appear, however, in a separate document that is clearly labeled "consumer disclosure" if the disclosure does not appear on the face of the instrument. The disclosure must be prominent, made prior to the time the purchase of any savings bank life insurance policy or other product is made, and must read substantially as follows: "This [policy, annuity, insurance product] is not a federally insured deposit and is not an obligation of, nor is it guaranteed by, any federally insured bank." If state law or regulation provides for substantially similar disclosure (including the timing of disclosure), compliance with the state imposed disclosure requirements will satisfy the requirements of the final regulation. Allowing a bank to follow state law should in many, if not all cases, remove the concern that the regulation will create additional costs.

4.  Director and Officer Liability Insurance

The proposed exception for owning stock of a company that provides director and officer liability insurance (proposed § 362.3(b)(5)) is being adopted in final without any modification. Under the final regulation, an insured state bank is not prohibited from acquiring up to 10% of the voting stock of a company that solely provides or reinsures directors', trustees', and officers' liability insurance coverage or bankers' blanket bond group insurance coverage for insured depository institutions. Any shares in excess of this limit that were purchased before December 19, 1991 must be divested as quickly as prudently possible but in no event later than December 19, 1996 unless another exception applies.

The term "provides" shall be understood to mean underwriting or assuming the insurance risk rather than acting in the capacity of an agent. As the proposal to amend § 333.3 was adopted in final without any amendments, insured state banks that are members of SAIF and which were not permitted to acquire or retain voting stock in a directors and officers liability insurance company unless that company insured the bank's officers and directors are no longer under those constraints.

One comment requested clarification as to whether a state bank could own stock in a directors and officers (D&O) liability insurer which engages in other activities. The exception does not extend to such situations as section 24(f)(3) of the FDI Act specifically limits the exception to companies that "only" provide D&O insurance or reinsure such risks. Ownership of such stock may be permitted, however, under § 362.3(b)(4) of the regulation if the bank is eligible for use of that exception and the voting stock of the company is listed on a national securities exchange. Another comment requested clarification as to whether an insurance underwriter may write bonds that benefit securities firms (i.e., bonds guaranteeing the authenticity of a customer's signature) and still qualify for the exception in § 362.3(b)(5). Again, the answer is no.

5.  Shares of Depository Institutions

Section 362.3(b)(6) of the proposal provided that an insured state bank is not prohibited from acquiring or retaining the voting shares of a depository institution if the institution engages only in activities permissible for national banks; the institution is subject to examination and regulation by a state bank supervisor; 20 or more depository institutions own voting shares of the institution but no one institution owns more than 15% of the voting shares; and the voting shares are only held by depository institutions (other than directors' qualifying shares or shares held under or acquired through a plan established for the benefit of the officers and employees). The section is being adopted in final without any changes.

Two comments were received in response to this section of the proposal. Both requested clarification on whether a bank may invest in a "banker's bank". Such investment is allowable if the above criteria are met, some other exception in the regulation is available, or the investment is permissible for a national bank.

6.  Interests in Insurance Subsidiaries

Section 362.3(b)(7) of the proposed regulation set out an exception for a well-capitalized bank to retain an equity investment in a majority owned subsidiary that was lawfully providing insurance as principal on November 21, 1991 provided that the activities of the subsidiary continue to be limited to underwriting insurance of the same type as provided by the subsidiary as of November 21, 1991 to residents of the state, individuals employed in the state, and any other person to whom the subsidiary provided insurance as principal without interruption since such person resided in or was employed in the state. The preamble accompanying the proposal indicated that "principal" would be understood to mean underwriting or assuming the risk of insurance rather than acting in the capacity of an agent; "in a state" would be construed to except insurance underwriting activities by an insured state bank only in the state in which the bank was chartered as of November 21, 1991 and by a subsidiary of an insured state bank only in the state in which the subsidiary was incorporated and doing business as of November 21, 1991; "lawfully providing insurance as principal" as of November 21, 1991 would be construed as requiring that the bank and/or subsidiary must have actually underwritten policies and/or other insurance products that were outstanding as of November 21, 1991; and that "type" of insurance should be understood to encompass whatever type of insurance policies and/or products that the bank and/or its subsidiary were authorized by state law to issue as of November 21, 1991 and were in fact providing to the public.

Fourteen comments, several of which were from members of Congress, criticized the proposed rule because of the interpretation of the phrase "in a state" which excepted insurance underwriting activities by an insured state bank only in the state in which the bank was chartered as of November 21, 1991 and the insurance underwriting activities of a subsidiary of the bank only in the state in which the subsidiary was incorporated and doing business as of November 21, 1991. These comments urged the FDIC to be guided by the clear, unambiguous language of section 24(d)(2)(B) which did not limit the exception as the FDIC had indicated. In short, "a state" did not mean "in the home state". The comments pointed out that if the FDIC felt compelled to review the legislative history of the provision, a careful reading of that legislative history demonstrates that Congress specifically rejected the approach the FDIC is now advocating by regulation. According to these comments, there was a managers' amendment to the bill on the Senate floor which changed the language in the proposed bill limiting insurance underwriting activities of a state bank from "in that State" to "in a State" (emphasis added) (See, 137 Cong. Rec. S16.683--85 (daily ed. Nov. 14, 1991)). Only two changes of note were subsequently made: the insertion of the requirement that the bank be well-capitalized and the elimination of a transition rule that was designed to allow banks and their subsidiaries to phase-out activities that would no longer be permissible. The latter was pointed to as evidence that Congress anticipated that all existing insurance underwriting activities would be grandfathered and that there was therefore no need for a transition rule. Senator Roth described the provision as enacted on the Senate floor as grandfathering all existing activities of state banks and their subsidiaries. "Apparently, the grandfather clause, which was drafted originally to exclude Delaware, did not and does not limit its protection to the home State, so to speak, but rather covers any State in which the bank was providing insurance it underwrites. Thus, when Delaware was included within the grandfather clause, its banks obtained the same rights as others.

Those rights are described as the "continuation of existing activities" in the head note preceding the text in the Senate bill * * * [T]he conference agreement preserves the rights of State banks authorized to underwrite insurance to continue to underwrite the same type of insurance in any State in which they provided such insurance as of November 21, 1991." (Cong. Rec. S18626, November 27, 1991, remarks of Senator Roth). Lastly, it was pointed out that the exchange between Senator Graham and Senator Garn cited by the FDIC in the preamble accompanying the proposed regulation pertained to interstate insurance sales restrictions that had been contained in the Senate bill and that the FDIC had taken from those remarks an incorrect inference.

After carefully reviewing the comments and reexamining the legislative history of section 24(d)(2)(B), the FDIC is persuaded that its initial reading of the provision was flawed. In response to the comments, the final regulation expands the FDIC's interpretation of the phrase "in a state" as excepting insurance underwriting activities by an insured state bank in a state where it was lawfully underwriting insurance as of November 21, 1991 and excepting the insurance underwriting activities of a bank's subsidiary of the bank to insurance underwriting activities in the state where the subsidiary was lawfully engaged in that activity as of November 21, 1991. Section 362.3(b)(7) has also been modified to make clear that the exception is only necessary when the insurance subsidiary is engaging in insurance underwriting activities that are not permissible for a national bank.

A discussion of the final regulation's treatment of "type of insurance" is found below under the heading "Notification of Exempt Insurance Underwriting Activities".

The provision in the proposed regulation indicating that a bank may retain its equity investment in a majority owned title insurance underwriting subsidiary if the bank was required before June 1, 1991 to provide title insurance as a condition of its charter is carried into the final regulation with one change. The exception as proposed indicated that it did not apply if the bank had converted its charter since June 1, 1991 or any transaction that is described in § 362.3(b)(4)(ii) occurs after June 1, 1991. The final regulation provides that the exception does not apply if any transaction that is described in § 362.3(b)(4)(ii) occurs except for a charter conversion. Upon closer review of section 24, the FDIC realized that the statute provides for loss of the exception only in the case of a change in control and not in the event of a charter conversion. The change in the final regulation corrects what had been an overly broad cross reference to § 362.3(b)(4)(ii) in that that provision not only encompasses a change incontrol but also takes in a charter conversion.

7.  Common or Preferred Stock: Shares of Investment Companies

Section 362.3(b)(4)(i) of the final regulation provides that to the extent permitted by the FDIC, and subject to the limitations of § 362.3(d) of the final regulation, an insured state bank that is located in a state which as of September 30, 1991 authorized banks to invest in common or preferred stock listed on a national securities exchange or shares of an investment company registered under the Investment Company Act of 1940 (15 U.S.C. 80a--1) and which during any time in the period beginning on September 30, 1990 and ending on November 26, 1991 made or maintained an investment in such stock or registered shares, may retain the listed stock or registered shares that it lawfully acquired or held prior to December 19, 1991 and may continue to acquire listed stock or registered shares. This language tracks the language found in section 24(f)(2) of the FDI Act.

The FDIC received five comments on this provision. One comment criticized the wording of the exception because, in the commentor's opinion, section 24(f)(2) of the FDI Act permits state banks to invest in any type of equity investment that is not permissible for a national bank and is not limited to permitting state banks to invest in listed stock or registered shares. Four comments objected to the requirement that common or preferred stock be "listed" in order for the stock to be eligible under the exception. (A large number of comments focused on § 362.3(d) of the proposal which set out limits on the permissible investments that can be made pursuant to the exception. Those comments are discussed below under the heading, "Notice and Approval of Intent to Invest in Listed Common or Preferred Stock or Shares of Investment Company: Divestiture of Stock or Shares in Excess of 100% of Capital".)

The FDIC is of the opinion that to read section 24(f)(2) as broadly as suggested by the commentor who opined that section 24(f)(2) goes to any impermissible equity investment is neither consistent with the language of the provision nor the provi- sion's legislative history. If the exception were intended to be as expansive as suggested, there would be no need for the provision to require that the bank actually have made or maintained investments during the indicated time period in listed stock or registered shares and the heading of paragraph (f) of section 24 would not read "Common and Preferred Stock Investment". What is more, the legislative history of section 24(f) reveals an intent by the drafters to create an exception for banks that had invested in listed common and preferred stock and registered shares. There is no indication that the exception was to extend beyond those types of securities. In view of the above, § 362.3(b)(4)(i) of the proposed regulation has been adopted in final as proposed.

The final regulation retains the reference to common or preferred stock "listed" on a national securities exchange. It is the FDIC's opinion that the FDIC is bound to give full recognition to the word "listed" in section 24(f)(2). Nothing in the legislative history of the provision provides any basis upon which to construe the language in any other fashion than to simply require that the stock in question be listed. In short, the FDIC is of the opinion that it lacks the discretion to deviate from the standard set out in the statute that the common or preferred stock must be "listed". The FDIC has therefore rejected the comments urging the FDIC to allow unlisted preferred stock to be eligible under the exception provided that the company which issued the stock is listed and the comment urging the FDIC to allow the acquisition of privately placed stock pursuant to the exception.

Paragraph (4)(ii) of § 362.3(b) of the proposal provided that the exception for listed stock and registered shares ceases to apply in the event that the bank converts its charter or the bank undergoes four types of transactions. Those transactions were: any time a bank undergoes a transaction for which a notice is required to be filed under section 7(j) of the FDI Act; any time a bank undergoes a transaction subject to section 3 of the Bank Holding Company Act (12 U.S.C. 1842); any time control of the bank's parent company changes; and any time the bank is merged into another depository institution. This provision of theproposal is based upon section 24(f)(5) of the FDI Act which indicates that the exception created by section 24(f)(2) would cease to operate if the bank converts its charter or undergoes a change in control.

The FDIC received 75 comments on this aspect of the proposal. In every case the comments expressed the opinion that the proposal was overly broad in what it considered to be a change in control that would terminate the ability to take advantage of the exception. Some of these comments indicated that section 24(f)(5), "Loss of Exception Upon Acquisition", should only be construed as coming into play when a true acquisition occurs. Specifically, the FDIC was urged only to consider a transaction to be a change in control that would terminate the operation of the exception if the transaction brought about an actual, substantive change. The FDIC was urged to amend the proposal so as to not encompass one bank holding company formations, acquisitions of 10 percent of a bank's stock, and mergers between two banks each of which are eligible to make investments under the exception.

Based upon the comments, the final regulation has been modified as follows: A transaction subject to section 3 of the Bank Holding Company Act will not result in the loss of the exception if the transaction is a one bank holding company formation in which all or substantially all of the shares of the holding company will be owned by persons who were shareholders of the bank; a transaction that is presumed to be an acquisition of control under section 303.4(a) of the FDIC's regulations thus triggering a change in bank control notice pursuant to section 7(j) of the FDI Act (12 U.S.C. 1817(j)), will not result in the loss of the exception; and the exception will not be lost if the bank is acquired by or merged into a depository institution that is itself eligible for the exception. Thus, an acquisition of 10 percent of the voting stock of an eligible bank will not cause the loss of the exception nor will a one bank holding company formation.

State banks should be aware that, depending upon the circumstances, the exception will be considered lost after a merger transaction in which an eligible bank is the survivor. For example, if a state bank that is not eligible for the exception is merged into a much smaller state bank that is eligible for the exception, the FDIC may determine that in substance the eligible bank has been acquired by a bank that is not eligible for the exception.

Lastly, the final regulation provides that in the event an eligible bank undergoes any of the transactions which result in the loss of the exception the bank is not prohibited from retaining its existing investments unless the FDIC determines that retaining the investments will adversely affect the bank's safety and soundness and the FDIC orders the bank to divest the stock and/or shares. This provision has been adopted in the final regulation without any changes from the proposal inasmuch as no comments were received. State banks should be aware that the fact that the FDIC has not taken action to order divestiture does not preclude a bank's appropriate banking agency (when that agency is an agency other than the FDIC) from taking steps to require divestiture of the stock and/or shares.

Divestiture of Prohibited Equity Investments

1.  Requirement To Divest

Section 362.3(c)(1) of the proposed rule indicated that any insured state bank which acquired prior to December 19, 1991 any equity investment that is not of a type, or in an amount, that is permissible for a national bank must divest the equity investment as quickly as prudently possible but in no event later than December 19, 1996 unless one of the exceptions of the proposed rule applies. The preamble accompanying the final regulation indicated that, although the FDIC is required by statute to see that a bank divests any prohibited equity investment as quickly as prudently possible, it is not the FDIC's responsibility to determine exactly how a bank will accomplish the divestiture. The FDIC is the final arbiter, however, of when divestiture can be prudently accomplished. Banks were advised that in the FDIC's opinion it would not be prudent to arbitrarily hold equity investments that are subject to divestiture until the final divestiture date without adequate documentation as to the reasons why prolonging the divestiture program is prudent. Lastly, it was the FDIC's stated intent to review a bank's plan for divestiture and take such action as may be appropriate if the plan does not allow for divestiture as quickly as prudently possible.

Several comments were received which expressed some concern over the level of involvement by the FDIC in the divestiture process. These comments expressed the opinion that the FDIC's involvement should be very limited so as not to usurp management of the bank. Some comments stated that a divestiture plan presented by a bank for approval would reflect a clearer understanding of the overall impact of the timing of the divestiture on the bank's performance than the FDIC could derive and that rejection of the plan by the FDIC could result in the FDIC requiring divestiture when to do so would be inconsistent with the prudent management of the bank.

The FDIC takes note of this criticism and wishes to emphasize that the agency does not intend to become involved in the bank's management. However, in order to fulfill its statutory responsibility to ensure that prohibited equity investments are divested in a timely and prudent manner, the FDIC may require divestiture in a more timely fashion than the bank has planned if it is the FDIC's judgment that it can be done prudently.

One comment asked that the FDIC waive the prohibitions of section 23A of the Federal Reserve Act (12 U.S.C. 371c) if a bank wishes to accomplish divestiture by transferring the equity investment to an affiliate. The FDIC cannot waive any applicable prohibition under section 23A. That provision of federal law should not be a problem, however, as the sale of an asset to a nonbank affiliate does not usually trigger section 23A.

Section 362.3(c)(1) of the proposed regulation also indicated that any SAIF member state bank which holds an equity investment that is subject to divestiture pursuant to § 333.3 of the FDIC's regulations and which is also subject to divestiture under the proposal are not allowed until 1996 to complete divestiture. In such a case, the equity investment must be divested as quickly as prudently possible but in no event later than July 4, 1994 or any earlier date established by a divestiture plan that was filed with and approved by the FDIC pursuant to § 333.3. The preamble accom- panying the proposed regulation stated that it was the FDIC's belief that it is inappropriate to allow such institutions a longer time to accomplish divestiture as it has been established that the institution can prudently accomplish divestiture in advance of December 19, 1996. It was also the FDIC's opinion that it would be an inappropriate diversion of the FDIC's resources to revisit the question of divestiture of these assets. No comments were received with respect to this aspect of § 362.3(c)(1).

Section 362.3(c)(1) is being adopted as proposed with one technical change. It has come to the FDIC's attention that § 362.3(c)(1) as proposed inadvertently contained the date July 4 rather than July 1. The operative divestiture date under § 333.3 of the FDIC's regulations is July 1, 1994. The final regulation corrects this error.

2.  Divestiture Plan

The preamble accompanying the proposed rule states that any insured state bank that is required to divest an equity investment must submit a divestiture plan with the regional director for the Division of Supervision for the region in which the bank's principal office is located not later than 60 days from the effective date of the regulation. The divestiture plan must describe the obligor, type, amount, book and market values (estimated or known) of the equity investments subject to divestiture as of the bank's most recent call report date prior to the filing; set forth the bank's plan to comply with the divestiture period; describe the anticipated gain or loss, if any, from the divestiture of the investment(s) and the impact on the bank's capital; and include a copy of the resolution by the bank's board of directors or board of trustees authorizing the filing of the divestiture plan. The regional director may request additional information as deemed appropriate. The preamble indicated that it was the FDIC's intent to review each plan for the purpose of determining whether or not the insured state bank that filed the plan can prudently divest the equity investments in question in a more expeditious fashion than that contemplated under the plan filed with the regional office. The proposal also specifically provides that an insured state bank that has filed a divesti-ture plan may act in accordance with its plan until such time as the bank is informed in writing by the appropriate FDIC official that the plan is unacceptable.

None of the comments objected to the content of the divestiture plan as set out in § 362.3(c)(3) of the proposal. That provision is being adopted without change. As stated above, numerous comments were received which questioned the FDIC's need to closely scrutinize divestiture plans that had been provided by the bank's management and approved by the bank's board of directors. The commentors felt that as long as the plan provides for a divestiture by the December 19, 1996 date the FDIC should not be overly concerned with the manner in which the divestiture is accomplished. The FDIC believes, however, that the statute requires the FDIC to ensure that not only are the impermissible equity investments divested by the December 19, 1996 date but that divestiture is accomplished prior to that date if divestiture can be accomplished sooner in a prudent manner given the nature and type of the equity investments.

3.  Retention of Equity Investment During Divestiture Period

Section 362.3(c)(4) of the proposed regulation indicated that the FDIC may impose such conditions and restrictions on the retention of the equity investments as the FDIC deems appropriate including requiring divestiture in advance of December 19, 1996. No comments were received in response to this provision and it is being adopted in final without any change.

It is contemplated that the FDIC will communicate in writing its objection or non-objection to the bank's divestiture plan. The FDIC's decision concerning the adequacy of the divestiture plan will be based on the information presented. As subsequent events may alter the continued validity of the FDIC's original determination, any non-objection on the part of the FDIC will typically be conditioned upon the continued validity of any assumptions upon which the plan is based, the continued vitality of the bank in question, and the continuation of facts and circumstances existing at the time the non-objection was communicated.

Notice and Approval of Intent to Invest in Listed Common or Preferred Stock or Shares of Investment Company; Divestiture of Stock or Shares in Excess of 100% of Capital

1.  Requirement to File Notice and Receive FDIC Approval

Paragraph (1) of § 362.3(d) of the proposed regulation provided that an insured state bank could only acquire or retain listed stock or registered shares pursuant to the exception contained in § 362.3(b)(4) of the proposal, "Common or preferred stock; shares of investment companies", if the bank filed a one-time notice with the FDIC setting forth the bank's intention to acquire and retain such securities and the FDIC determined that acquiring or retaining such securities would not pose a significant risk to the insurance fund. The proposal directed that the notice be submitted to the regional director for the Division of Supervision for the region in which the bank's principal office is located. The preamble accompanying the proposal further indicated that a bank may retain the listed stock or registered shares that it lawfully held on December 19, 1991 while the notice is pending (provided that those investments do not exceed 100 percent of the bank's tier one capital), but that they may not make any new investments in listed stock or registered shares until the bank receives the FDIC's approval. It was further FDIC's expressed opinion that a bank could not take advantage of the exception in § 362.3(b)(4) until the FDIC responded to the notice even if the FDIC did not do so prior to the elapse of 60 days from the date on which the notice was filed with the FDIC. The following text, which discusses the timing of FDIC's response to the notice, appeared in the preamble accompanying the proposed regulation.

The FDIC recognizes that section 24 contemplates that notices will normally be reviewed and a determination be made within 60 days. It is therefore the FDIC's intention to respond to the notices within 60 days to the extent practicable. However, the FDIC has concluded that the 60-day period in paragraph (f)(6)(B) of section 24 does not allow a bank to make additional investments if the FDIC does not respond before expiration of the 60-day period from the FDIC's receipt of the notice. Paragraph (f)(6) which is captioned, "Notice and Approval" [emphasis added] contemplates affirmative approval by the FDIC.3 In addition, paragraph (f)(6) does not expressly indicate that the bank may proceed in the absence of a determination by the FDIC within the 60-day period,4 nor does it require that the FDIC "shall" or "must" make a determination within the 60-day period.5

Neither the earlier provision found in H.R. Rep. No. 102--330 nor the statute as enacted expressly specifies a consequence for any failure by the FDIC to act within the 60-day period. A well-recognized rule uniformly applied by the courts holds that:

A statutory time period is not mandatory unless it both expressly requires an agency or public official to act within a particular time period and specifies a consequence for failure to comply with the provision.6

The FDIC Board of Directors has followed this rule.7

The FDIC has therefore concluded that section 24(f)(6) does not require the FDIC to act within the 60-day period. Although the FDIC is not required by law to do so, it is the FDIC's intent to respond to notices filed pursuant to § 362.3(d) within 60 days of receipt of the notice.

The FDIC received one comment which objected to the proposal requiring that a bank file a notice in order to take advantage of the exception in § 362.3(b)(4). Three comments objected to the FDIC effectively eliminating the 60-day time period in the statute. One of the three comments suggested that the FDIC consider allowing a bank that has filed a notice to proceed to make investments under the exception unless the FDIC affirmatively objects.

The FDIC is adopting § 362.3(d)(1) as proposed without any changes. It is the FDIC's considered opinion that section 24(f) does not provide the FDIC any discretion in this matter, i.e., section 24(f) requires that the FDIC receive prior notice and that the FDIC must affirmatively respond to the notice before a bank can proceed to make investments. Likewise, the FDIC continues to be of the opinion, for the reasons set forth above, that the failure of the FDIC to respond to a notice before 60 days has elapsed does not operate as an approval under the statute. The FDIC is hopeful that notices can be processed in advance of 60 days and will do everything possible to do so.

2.  Content of Notice

Section 362.3(d)(2) of the proposal stated the content of the one-time notice to be provided to the Regional Director must include the following:

i.  A description of the obligor, type, amount, and book and market values of the listed stock and/or registered shares held as of December 19, 1991;

ii.  The highest dollar amount of the bank's investments in listed stock and/or registered shares between September 30, 1990 and November 26, 1991, both in the aggregate and individually in each of the two categories, expressed as a percentage of Tier 1 capital as reported in the consolidated report of condition for the quarter in which the high dollar amount of investment occurred;

iii.  A description of the bank's funds management policies and how the bank's investments (planned or existing) in listed stock and/or registered shares relate to the objectives set out in the bank's funds management policies;

iv.  A description of the bank's investment policies and a discussion as to what extent those policies:

A.  Limit concentrations in listed stocks and/or registered shares by both issue and industry;

B.  Set an aggregate limit on investment in listed stock and/or registered shares; and

C.  Deal with the sale of listed stock and/or registered shares in light of market conditions;

v.  A discussion of the parameters used to determine the quality of the bank's outstanding investments in listed stock and/or registered shares as well as future investments;

vi.  A copy of the resolution by the board of directors or board of trustees, authorizing the filing of the notice; and

vii.  Such additional information as deemed appropriate by the regional director.

Numerous comments indicated that the notice as proposed was too detailed and requested that the FDIC provide a standardized format for the notice. Several comments indicated that much of the requested information was already available through examinations and had already been evalu- ated by the FDIC during the examination process. Only one of the comments suggested information to be included in the notice as an alternative to the proposal.

While certain changes have been made to the notice to reflect changes in other portions of the final regulation, the requirement for a somewhat detailed notice remains. The FDIC continues to be of the opinion that the information is essential if the FDIC is to properly evaluate whether the retention of the bank's existing investments and the continued exercise of the investment authority under the exception poses a significant risk to the deposit insurance fund. While a bank's investment portfolio and its funds management policies and procedures may have remained essentially static over time, changes in the marketplace since the bank's last examination may dictate the need to reevaluate the FDIC's assessment of that portfolio and those policies. This is especially so as the time period between the date of the bank's most recent examination and the date of the bank's notice lengthens. Thus the FDIC does not feel that it can simply rely upon data previously gathered during the supervisory process in order to evaluate the notice. Nor do we feel that a standardized notice form is appropriate. The information called for by the final regulation does not lend itself to submission in a prepared format. All in all it is our opinion that allowing a bank to submit the requested information in letter form (perhaps even accompanied by photocopies of relevant bank policies) will prove the least time consuming and costly for banks. Much of the information that is called for by the final regulation should be readily available to the bank in some form or another and banks are encouraged to rely upon existing documents already in their possession. Submitting a copy of the relevant portions of existing policies supplemented if necessary by a brief discussion pertaining to areas of the notice not specifically covered by the bank's written policies should suffice. Should questions arise as to how much information to include, banks are encouraged to contact their appropriate regional office for clarification.

Changes to the content of the notice from the proposal include a deletion of the requirement for a description of the listed stock and/or registered shares held by the bank on December 19, 1991. In its stead, the bank must state the bank made or maintained investments in listed stock and/or registered shares during the period between September 30, 1990 and November 26, 1991. Such a statement is needed to ensure that the bank does in fact qualify for the exception. The requirement that the highest dollar amount of listed stock and registered shares computed separately and not in the aggregate, held during the window period has been deleted. A bank is required, however, to provide the aggregate highest dollar amount of its investment in listed shares and/or registered securities as a percentage of Tier 1 capital for the quarter in which such investment occurred as well as the aggregate dollar amount of such investments expressed as a percentage of Tier 1 capital as of December 19, 1991. (The bank may use Tier 1 capital as reported on the bank's consolidated report of condition for December 31, 1991 if that is more convenient.) This information is necessary in order to determine compliance with the limitations on such holdings as provided by § 362.3(d)(4) of this regulation. Lastly, the reference to book value has been inserted in the final regulation. This change is in response to comments that are more fully discussed under the heading "Maximum Permissible Investment" below.

3.  FDIC Determination

Section 362.3(d)(3) of the proposal, "FDIC Determination", set out the standard against which the FDIC proposed to evaluate notices filed pursuant to paragraph (d)(1), i.e., whether there is a significant risk to the fund posed by the exercise of the investment authority pursuant to the exception. It also indicated that the FDIC may condition or restrict approval as necessary or appropriate and provided that the FDIC may require the notifying bank to divest some or all of its investments in listed stock and/or registered shares if upon a review of the notice it is determined that the exercise of the excepted investment authority poses a significant risk to the fund. A notice may also be denied in its entirety.

The preamble accompanying the proposed regulation indicated that the recitation in § 362.3(d)(3) that the FDIC may impose conditions or restrictions in connection with an approval was nothing more than a restatement of the FDIC's existing implied authority to take such action. The preamble also indicated that insured state banks should note that section 24(i) of the FDI Act specifically provides that nothing in section 24 shall be construed as limiting the authority of the FDIC to impose more stringent conditions and that section 24 does not limit the authority of the FDIC to take cease-and-desist action against any insured state bank in the event the exercise of the excepted investment authority is found to constitute under the circumstances an unsafe and unsound banking practice.

Under § 362.3(d)(3) as proposed, divestiture of listed stock and/or registered shares may be ordered if the FDIC has reason to believe that retention of the investments in question will have an adverse effect on the safety and soundness of the notifying bank. Divestiture is not limited to investments held by the bank at the time it files its notice. If the FDIC grants approval for an insured state bank to make investments pursuant to § 362.3(b)(4), and it is determined at any time after the approval is given that the retention of listed stock and/or registered shares acquired pursuant to that approval poses a safety and soundness risk to the bank, the FDIC may require the divestiture of any of the investments.

Section 362.3(b)(3) is being adopted in final as proposed without any change. None of the comments received in response to the proposal took issue with any portion of § 362.3(d)(3) as proposed. In fact, many comments conceded that the FDIC has the clear authority under the statute to condition or restrict use of the exception and that the FDIC may withhold entirely its approval for use of the exception. These comments as well as many others, however, uniformly objected to proposed paragraph (4) of § 362.3(d) which set out the proposed maximum permissible investment that a bank could make pursuant to the exception for listed stock and/or registered shares (see discussion below). A few comments urged the FDIC to be flexible when evaluating whether a given security poses a significant risk to the fund and urged the FDIC to make its evaluations based on the portfolio as a whole. It is in fact the FDIC's intent to do so not only in the context of the securities portfolio as a whole but in the context of the bank's overall condition and its stated investment policies.

4.  Maximum Permissible Investment

By far the greatest number of comments received on the proposal addressed proposed § 362.3(d)(4), "Maximum Permissible Investment". As proposed, § 362.3(d)(4) provided that permissible investments under § 362.3(b)(4) would be treated in two groupings, i.e., permissible investments in listed stock and permissible investments in registered shares. As proposed the highest amount of investment in listed stock permitted an insured state bank under the exception would be the highest level of investment in such securities that the bank made during the period from September 30, 1990 to November 26, 1991 expressed as a percentage of the bank's tier one capital as reported for the quarter in which the high investment occurred. Likewise, an insured state bank's investment in registered shares could not exceed the highest level of investment the bank made during that period in such shares expressed as a percentage of the bank's tier one capital as reported for the quarter in which the high investment occurred. In any event, the aggregate of the bank's investments in both groups could not exceed 100 percent of the bank's tier one capital. The following explanation of how proposed § 362.3(d)(4) was to operate appeared in the preamble accompanying the proposed regulation.

The bank's investment in listed stock is treated separately from its investment in registered shares thus, the bank is allotted two limits, the aggregate of which cannot exceed 100 percent of the bank's tier one capital. If for example, the bank's highest investment in listed stock over the period represented 45 percent of the bank's tier one capital, the maximum permissible investment in listed stock that the FDIC may allow is 45 percent of tier one capital. If the bank had not made or maintained any investments in registered shares during the period, the FDIC cannot permit future investments in registered shares.

If the FDIC determines that a significant risk will be posed to the deposit insurance fund if the FDIC approves (1) the retention of existing investments in listed stock and/or registered shares, and (2) the continued or future investment in such stock and/or shares to the maximum possible investment, the FDIC may set a lower percentage of the bank's tier one capital as the bank's maximum permissible investment.

Once the FDIC has determined the bank's permissible maximum investment, investments in listed stock and/or registered shares may be made in the future only if the new investment, when added to outstanding investments, does not cause the bank to exceed the permissible maximum percentage of the bank's tier one capital as reported on the bank's call report for the period immediately preceding the investment. In short, the bank is not limited to the highest dollar amount of the investment that it made during the period from September 30, 1990 to November 26, 1991. The permissible maximum percentage is set based upon that amount, however, the percentage, once determined, is used with reference to the bank's tier one capital at the time an investment is made. What is more, if the investment when made is within the maximum permissible investment percentage, the investment will not be considered to be in violation of the regulation, nor subject to divestiture, merely because the bank's tier one capital later declines.

The preamble accompanying the proposal specifically recognized that there are many possibilities to choose from in deciding when to measure capital for purposes of applying the exception for listed stocks and registered shares and requested comment on what date or time frame would be appropriate when measuring capital. The preamble also sought comment on whether or not the regulation should measure the investment as a percentage of total capital as opposed to tier one capital. In addition, the preamble requested comment on the agency's conclusions regarding section 24(f)(2) of the statute which formed the basis of § 362.3(d)(4) of the proposal. Specifically, the preamble indicated that the FDIC recognized that the language of the section 24(f)(2) of the FDI Act may be susceptible to a different construction than that which the agency had taken even though the position as reflected in the proposal was, in the agency's words, "the most consistent with the overall intent of section 24".

Comments on this aspect of the proposal were overwhelmingly critical of grouping investments in listed stock and registered shares in "two baskets" and of setting the maximum permissible investment to the highest level of investment during the period between September 30, 1991 and November 26, 1991. The comments, including several from members of Congress, indicated that the language and intent of the statute was to permit investments up to a maximum of 100 percent of capital unless the FDIC had a specific concern about a particular bank making such investments. FDIC was urged not to across the board by regulation foreclose any bank from investing up to 100 percent of its capital by setting a lower maximum investment based upon what the bank had invested during the relevant time period. (Some comments objected to the time period itself as being arbitrary.) Many of the comments reminded the FDIC that it has the ability through its safety and soundness oversight to monitor these investments and can address any concerns that arise on a case-by-case basis. Additionally, the "two basket" approach was criticized as not being in the best interests of state banks as it would reduce their ability to effectively manage their investment portfolios.

After carefully considering these comments, the FDIC has decided to make a number of amendments to § 362.3(d)(4). The "two basket" approach has been eliminated. The FDIC is persuaded by the comments that to adopt two separate caps for investments in listed stock and registered shares could undermine the prudent management of a bank's investment portfolio. Therefore, the final regulation allows a bank that is eligible for the exception under § 362.3(b)(4) to change its mix of listed stock and registered shares up to whatever maximum the FDIC has set. Likewise, a bank is not required to have invested in both listed stock and registered shares during the time period from September 30, 1990 and November 26, 1991 in order to be eligible to invest pursuant to the exception. It will suffice that the bank had invested in either listed stock or registered shares.

Finally, the FDIC feels constrained by the language of the statute to test a bank's eligibility to use the exception based upon whether investments were made during the time period set out in the statute. Although the time period may be considered by some to be arbitrary, the statute clearly looks to that time period as a measure of eligibility.

In addition to eliminating the two separate caps on investments in listed stock and registered shares, the final regulation does not automatically limit a state bank to, at most, its highest aggregate investment during the period from September 30, 1990 to November 26, 1991. The FDIC is persuaded after reviewing the comments, some of which came from members of Congress, and after carefully reviewing the language of section 24(f)(2) that that provision of law can be fairly read to allow a bank to invest up to 100 percent of its capital in listed stock and/or registered shares provided that the FDIC gives its approval.

The final regulation adopts what can be best described as basically a case-by-case approach to deciding whether any particular bank will be permitted to invest up to 100 percent of its capital in listed stock and/or registered shares with the benefit of the doubt on the matter given to well-capitalized banks and, to a certain extent, to adequately capitalized banks. Under the final regulation as adopted it will generally be presumed that it will not present a significant risk to the insurance fund for any well-capitalized state bank that files a notice pursuant to § 362.3(d)(1) to invest up to 100 percent of its tier one capital in listed stock and/or registered shares. The same presumption will operate in the case of an adequately capitalized bank absent some mitigating factors. In contrast, however, it is presumed under the final regulation that, in the absence of some mitigating factors, it will present a significant risk to the insurance fund for any state bank that is under-capitalized to invest in listed stock and/or registered shares in excess of the highest aggregate amount that the bank had invested in such stock and/or shares during the period from September 30, 1990 to November 26, 1991 expressed as a percentage of the bank's tier one capital as reported by the bank in its consolidated report of condition for the quarter in which the high aggregate investment occurred. "Adequately capitalized" and "under capitalized" have the same meaning as used for prompt corrective action purposes.

The FDIC feels that it is appropriate, at least initially, to distinguish between banks based upon their capital on the assumption that a better capitalized bank is more able to withstand any losses incurred from its securities portfolio than a bank that has less capital. Thus, unless the FDIC has reason to determine otherwise, well-capitalized banks and adequately capitalized banks can expect to receive approval to exercise the exception up to a maximum of 100 percent of tier one capital.

The final rule treats banks that are under capitalized differently in that the rule still retains the reference to the highest aggregate level of investment during the relevant time period but this time only as a bench mark. A bank that is under capitalized is not absolutely precluded from making investments up to 100 percent of its tier one capital but the FDIC must be satisfied based upon the overall circumstances that for the bank to do so will not pose a significant risk to the insurance fund despite the bank's capital position. If the FDIC determines after reviewing the notice and any additional information that the bank wishes to submit that the bank should be limited to what it has historically invested over the period in listed stock and/or registered shares, limiting a bank to that level of investment should not be disruptive nor be viewed as unfair. It can be fairly presumed that in most instances the high level of investment during the relevant period will reflect a bank's history of investment over time and that that level of investment will be consistent with its overall investment portfolio strategy.

The above approach is consistent with comments which indicated that the statute should be read as allowing investments up to 100 percent of capital but also does not read the language "to the extent permitted by the Corporation" out of the statute. The approach is also consistent with those who commented that the FDIC should rely upon an approach that is more tailored to each individual bank taking into consideration such things as the amount of the bank's risk-based and tier one capital, the bank's earnings, the overall content of the bank's portfolio, the bank's liquidity position, and the level of the bank's non-performing assets.

State banks should note that a well-capitalized bank or adequately capitalized bank whose capital level falls below that necessary to be considered well-capitalized or adequately capitalized may continue to hold its investments that were made pursuant to the exception and continue to manage its existing portfolio unless the FDIC affirmatively directs otherwise. As it may prove more damaging to a bank if the FDIC were to flatly prohibit it from "managing" its existing investments, i.e., replacing listed stock and/or registered shares that have been sold, it is the FDIC's present intention to handle these situations as appropriate on a case-by-case basis under section 24(f)(7), section 8(b) of the FDI Act (12 U.S.C. 1818(b)), Part 325 of the FDIC's regulations (12 CFR Part 325), Part 308 of the FDIC's regulations dealing with prompt corrective action (12 CFR Part 308), and any other provision of law or regulation which grants the FDIC the authority to take supervisory action, address safety or soundness, violations of law, deficient capital levels or other practices.

State banks should also note that a bank which is not well-capitalized or adequately capitalized and which has been denied approval to make investments pursuant to § 362.3(b)(4) up to 100 percent of its tier one capital but which has received approval to make such investments to some lesser extent, may request a modification of the order issued in response to its notice filed pursuant to § 362.3(d)(1) if the bank's capital subsequently meets the definition of well-capitalized or adequately capitalized.

The remainder of paragraph (4) of § 362.3(d) as adopted in final provides that (1) a bank may in no event make investments pursuant to the exception in excess of 100 percent of the bank's tier one capital as measured in its most recent consolidated report of condition; (2) a bank's maximum investment under the exception is to be measured according to book value; (3) to be permissible, any acquisition of listed stock or registered shares made after December 19, 1991 cannot exceed, when made, the maximum permissible investment percentage (as set out in the FDIC's approval of the bank's notice of intent to make investments) of the bank's tier one capital as reported on the bank's consolidated report of condition for the period immediately preceding the acquisition; and (4) the FDIC may set a maximum relevant percentage investment that is lower than either 100 percent of tier one capital or the bank's highest aggregate level of investment during the relevant period.

The reference to book value has been added to the regulation in response to a number of comments which inquired whether a bank's investment is to be measured according to its book value or its market value. The comments urged the FDIC to use book value (i.e., the lower of cost or market value) rather than market value because the latter measurement, if used, could operate to remove a bank's ability to make additional investments if the value of the bank's investments increases. The FDIC agrees that that result should be avoided and has therefore amended the final regulation.

The FDIC did not receive any comments suggesting any alternative times at which to measure capital for the purposes of determining whether a bank's investment is permissible, i.e., within the limit on the bank's maximum permissible investment under the exception. Therefore, the final regulation measures capital as of the time an investment is made, specifically capital as reported in the consolidated report of condition for the period immediately prior to the acquisition. If an acquisition was permissible when made, the investment need not be divested merely because the bank's capital falls. However, the bank may be ordered to divest some or all of the assets in question should the FDIC determine that the investment presents a safety or soundness problem.

The FDIC received five comments which indicated that the regulation should use total capital as opposed to tier one capital. Two comments indicated that tier one capital was an appropriate measure. The final regulation continues to measure a bank's investment against tier one capital. Total capital as presently measured by the FDIC and the Federal Reserve Board includes the reserve for loan losses. Inasmuch as those funds are designed to absorb losses from the loan portfolio and are not available to absorb losses from the investment portfolio, it is the FDIC's opinion that total capital is an inappropriate figure against which to limit the size of a bank's listed stock and/or registered shares.

The statement in the final regulation indicating that the FDIC may set a maximum permissible investment limit lower than that otherwise applicable under § 362.3(d)(4)(i) (in the case of the final regulation 100 percent of tier one capital or the highest aggregate level of investment during the relevant time period) merely reflects the FDIC authority, and obligation under section 24, to approve or deny use of the exception based upon the FDIC's assessment of whether a significant risk will be posed to the fund. It is consistent with section 24(i) which indicates that nothing in section 24 shall be construed as limiting the authority of the FDIC to impose more stringent conditions than those set out therein.

Finally, state banks should note that they are not limited under § 362.3(d)(4) of the final regulation to a fixed dollar amount of investment. The maximum permissible investment is based upon a percentage of the bank's tier one capital. The percentage, once determined, is used with reference to the bank's tier one capital at the time an investment is made.

5.  Divestiture of Excess Stock or Shares

Section 362.3(d)(5) of the proposal governed the divestiture of listed stock and registered shares by state banks which hold such stock and/or shares of 100 percent of tier one capital or in excess of the maximum permissible investment set by the FDIC if that investment limit is lower than 100 percent of tier one capital. Paragraph (d)(5) of § 362.3 is being adopted in final as proposed without any change. The discussion in the preamble which accompanied the proposed version of this paragraph is republished below.

Section 24(f)(4) of the FDI Act provides a transition period during which an insured state bank is required to divest any stock and/or shares that it held as of December 19, 1991 in excess of 100 percent of the bank's capital. Section 362.3(d)(5) of the proposal sets out the divestiture requirement and, as provided by the statute, indicates that the excess must be divested by at least 1/3 in each of the three years beginning on December 19, 1991. The proposal indicates that the excess is to be determined by looking to the bank's tier one capital as measured on December 19, 1991. (Tier one capital as measured in the bank's December 31, 1991 call report may be used if it is more convenient to do so.) Insured state banks are required to reduce the excess to a level that is no greater than 100 percent of the bank's tier one capital by December 19, 1994 if the maximum permissible investment set by the FDIC in connection with a notice filed pursuant to § 362.3(d)(1) is 100 percent of tier one capital. Insured state banks that have such an excess are presently subject to the divestiture requirement and should have already divested 1/3 of the excess or be planning to divest 1/3 of the excess prior to December 19, 1992. The requirement to divest at least 1/3 of the excess each year is waived if divesting a lesser amount will reduce the bank's outstanding investment to 100 percent of the bank's current tier one capital. Banks for which the FDIC has set a maximum permissible investment that is lower than 100 percent of tier one capital, must submit a divestiture plan with the FDIC regional office within 60 days of being so informed. Such excess investment must be divested as quickly as prudently possible but in no event later than December 19, 1996. The divestiture plan should contain the same information specified in § 362.3(c)(3).

Notification of Exempt Insurance Underwriting Activities

Section 362.4 of the proposed regulation set out the information that a state bank was to submit to the FDIC regarding its excepted insurance underwriting activities and those of its subsidiaries. In response to comments received with respect to § 362.3(b)(7) of the proposal the content of the notice as required by the final regulation has been modified. Under the final regulation the notice must contain: the name of the bank and/or subsidiary; the state or states in which the bank and/or subsidiary was underwriting insurance on November 21, 1991; a citation for the bank's/subsidiary's authority to conduct insurance underwriting activities; and a list of the types of insurance that the bank and/or subsidiary provided to the public as of November 21, 1991 in the states previously identified. The provision has also been modified to make clear that a state bank is not required to list any type of insurance underwriting activity that is permissible for a national bank.

The FDIC received 8 comments on the issue of the meaning of "types of insurance". Although most of the comments suggested that the regulation define "type" of insurance broadly according to categories of insurance, some of the comments felt that the regulation should distinguish between insurance products within a category. After reflecting on this issue, the FDIC is of the opinion that the regulation should not have the effect of allowing a bank or its subsidiary to initiate the underwriting of an insurance product that was not underwritten as of November 21, 1991 merely because the insurance product falls within a broad category of insurance in which the bank/subsidiary was actively underwriting policies. For example, a bank may have underwritten medical malpractice insurance (a property and casualty product) but did not underwrite automobile insurance (another property and casualty product). Different insurance products within the same broad category of insurance may be underwritten on entirely different standards and may be subject to entirely different risks. The FDIC does not feel that it was Congress's intent to allow a bank or its subsidiary to take on entirely different underwriting risks nor to allow a bank to initiate the underwriting of a different sort of insurance policies than that which were underwritten as of November 21, 1991. (After all, the heading to section 24(d)(2)(B) reads "Continuation of Existing Activities".) Therefore the FDIC will consider various product lines of insurance to be distinct types of insurance for the purposes of § 362.4 and § 362.3(b)(7).

Finally, the FDIC received one comment that expressed concern that the preamble accompanying the proposed regulation contained a reference to annuities when asking for comment on how to construe "type" of insurance. The comment indicated that annuities are not considered to be insurance even though they are typically issued by insurance companies. According to the comment the ordinary dictionary meaning of the word "insurance" does not include annuities; case law recognizes a distinction between annuities and insurance; an annuity contract does not indemnify against loss, something that is a basic characteristic of insurance; annuities are more akin to investments and have been so recognized; state law often distinguishes between annuities and insurance even when authorizing insurance companies to issue annuities; and the Office of the Comptroller of the Currency has recognized annuities as being primarily financial investments.

The FDIC is persuaded that an annuity contract is not an insurance contract. Therefore, a state bank is not required to list annuities in its notice. The issuance of an annuity is to be considered an "activity". Whether or not a state bank or its subsidiaries may issue annuities will therefore be treated in accordance with section 24(a) and section 24(d)(1) of the FDI Act and regulations promulgated by the FDIC implementing those provisions.

Delegation of Authority

Section 362.5 of the proposed regulation provided that the authority to review and act upon divestiture plans submitted pursuant to § 362.3(c)(2) as well as the authority to approve or deny notices filed pursuant to § 362.3(d) is delegated to the Director, Division of Supervision, and where confirmed in writing by the Director, to an associate director. Division of Supervision or the appropriate regional director or deputy regional director. The provision is being adopted as proposed with one change. The final regulation delegates in the same fashion the authority to act on requests by a bank to retain an equity investment in an insurance underwriting subsidiary despite the fact that the bank does not meet the definition of "well-capitalized".

[Preamble to 12 CFR Part 362 as published at 57 Fed. Reg. 53213, November 9, 1992]

1Section 28(a) of the FDI Act (enacted on August 8, 1989) prohibits state savings associations from engaging in certain activities after January 1, 1990. The provision thus contained a specific delayed effective date. Section 28(c) prohibits state savings associations from making certain equity investments. Section 28(c) has no such delayed effective date reference. Like section 24, section 28 defines "activity" to include acquiring or retaining any investment. The legislative history for section 28 clearly indicates that paragraph (c) was immediately effective upon enactment. Thus, it is clear that making an equity investment is not an "activity" for purposes of paragraph (a). (135 Cong. Rec. S10203 (daily ed. August 4, 1989)). Go back to Text

2It is our understanding that national banks may own a minority interest in certain types of subsidiaries, i.e., a subsidiary of a national bank is not required in all instances to be at least 80% owned. Therefore, an insured state bank may hold a minority interest in a subsidiary if a national bank could do so. Thus the statute and the regulation do not necessarily require a state bank to hold at least 80% of the stock of a company in order for the equity investment in the company to be permissible under the regulation. Go back to Text

3An earlier version of the provision was simply entitled "Notice of Paragraph (2) Activities". The word "approval" was subsequently added to the title, H.R. Rep. No. 102--330, 102d Cong., 1st Sess., at 55 (Nov. 19, 1991). Go back to Text

4The language of paragraph (f)(6) as enacted stands in clear contrast with the language found in H.R. Rep. No. 102--330. The earlier version provided a bank could engage in any investment activity pursuant to paragraph (2) only if notice were filed and "the Corporation has not determined, within 60 days of receiving such notice" [emphasis added] that the investment would pose a significant risk to the appropriate insurance fund. Under the earlier version, one might argue that failure of the FDIC to act within 60 days satisfied the second of the two elements of the provision, thus a bank could proceed with its investments as notice had been filed and the FDIC had not determined within 60 days of receipt of the notice that there is a risk to the fund. However, the above language was not enacted. Go back to Text

5Paragraph (f)(6) thus stands in contrast to other provisions of the FDI Act and other federal statutes, which (a) clearly provide a set time period in which the FDIC must act on a notice, and (b) provide that failure to act cuts off the FDIC's ability to object to the conduct or activity which is the subject of the notice (absent some other independent authority to do so). (See, for example section 7(j) of the FDI Act (12 U.S.C. 1817(j), section 32 of the FDI Act (12 U.S.C. 1831i), and 12 U.S.C. 3204(8)). Go back to Text

6Fort Worth National Corp. v. Federal Savings and Loan Insurance Corp., 469 F.2d 47, 58 (5th Cir. 1972). See e.g., Mayor's Office of Employ v. U.S. Dept. of Labor, 775 F.2d 196, 201 (7th Cir. 1985); St. Regis Mohawk Tribe, New York v. Brock, 769 F.2d 37, 41 (2d Cir. 1985); Thomas v. Barry, 729 F.2d 1469, 1470 n. 5 (D.C. Cir. 1984); Marshall v. Local Union No. 1374, Int. Ass'n of Mach., 558 F.2d 1354, 1357 (9th Cir. 1977); Usery v. Whitin Mach. Works, Inc., 554 F.2d 498, 501 (1st Cir. 1977); and Maryland Casualty Co. v. Cardillo, 99 F.2d 432, 434 (D.C. Cir. 1938). Go back to Text

7FDIC Docket No. 88--43k, par. 5111, A--1205 (January 19, 1988). Go back to Text


[Table of Contents] [Previous Page] [Next Page] [Search]

Last updated September 16, 2013 regs@fdic.gov