(1) Capital.
(i) A bank holding company shall maintain
adequate capital on a fully consolidated basis. If operating a section
20 authorized to underwrite and deal in all types of debt and equity
securities, a bank holding company shall maintain strong capital on
a fully consolidated basis.
(ii) In the event that a bank or thrift
affiliate of a section 20 subsidiary shall become less than well capitalized
(as defined in section 38 of the Federal Deposit Insurance Act, 12
U.S.C. 1831o), and the bank holding company shall fail to restore
it promptly to the well-capitalized level, the Board may, in its discretion,
reimpose the funding, credit-extension, and credit-enhancement firewalls
contained in its 1989 order allowing underwriting and dealing in bank-ineligible
securities,
1 or order the bank holding company to divest the section 20
subsidiary.
(iii)
A foreign bank that operates a branch or agency in the United States
shall maintain strong capital on a fully consolidated basis at levels
above the minimum levels required by the Basle Capital Accord. In
the event that the Board determines that the foreign bank’s capital
has fallen below these levels and the foreign bank fails to restore
its capital position promptly, the Board may, in its discretion, reimpose
the funding, credit extension, and credit enhancement firewalls contained
in its 1990 order allowing foreign banks to underwrite and deal in
bank-ineligible securities,
2 or order the foreign
bank to divest the section 20 subsidiary.
(2) Internal controls.
(i) Each bank holding company or foreign
bank shall cause its subsidiary banks, thrifts, branches, or agencies
3 to adopt policies and procedures, including
appropriate limits on exposure, to govern their participation in transactions
underwritten or arranged by a section 20 affiliate.
(ii) Each bank holding company
or foreign bank shall ensure that an independent and thorough credit
evaluation has been undertaken in connection with participation by
a bank, thrift, or branch or agency in such transactions, and that
adequate documentation of that evaluation is maintained for review
by examiners of the appropriate federal bank agency and the Federal
Reserve.
(3) Interlocks restriction.
(i) Directors,
officers, or employees of a bank or thrift subsidiary of a bank holding
company, or a bank or thrift subsidiary or branch or agency of a foreign
bank, shall not serve as a majority of the board of directors or the
chief executive officer of an affiliated section 20 subsidiary.
(ii) Directors, officers,
or employees of a section 20 subsidiary shall not serve as a majority
of the board of directors or the chief executive officer of an affiliated
bank or thrift subsidiary or branch or agency, except that the manager
of a branch or agency may act as a director of the underwriting subsidiary.
(iii) For purposes
of this standard, the manager of a branch or agency of a foreign bank
generally will be considered to be the chief executive officer of
the branch or agency.
(4) Customer
disclosure.
(i)
Disclosure
to section 20 customers. A section 20 subsidiary shall provide,
in writing, to each of its retail customers,
4 at the time an investment account is opened,
the same minimum disclosures, and obtain the same customer acknowledgement,
described in the Interagency Statement on Retail Sales of Nondeposit
Investment Products (statement) as applicable in such situations.
These disclosures must be provided regardless of whether the section
20 subsidiary is itself engaged in activities through arrangements
with a bank that are covered by the statement.
(ii) Disclosures
accompanying investment advice. A director, officer, or employee
of a bank, thrift, branch, or agency may not express an opinion on
the value or the advisability of the purchase or the sale of a bank-ineligible
security that he or she knows is being underwritten or dealt in by
a section 20 affiliate unless he or she notifies the customer of the
affiliate’s role.
(5) Intraday
credit. Any intraday extension of credit to a section 20 subsidiary
by an affiliated bank, thrift, branch, or agency shall be on market
terms consistent with section 23B of the Federal Reserve Act.
(6) Restriction on funding purchases of securities during underwriting
period. No bank, thrift, branch, or agency shall knowingly extend
credit to a customer secured by, or for the purpose of purchasing,
any bank-ineligible security that a section 20 affiliate is underwriting
or has underwritten within the past 30 days, unless—
(i) the
extension of credit is made pursuant to, and consistent with any conditions
imposed in a preexisting line of credit that was not established in
contemplation of the underwriting; or
(ii) the extension of credit is made
in connection with clearing transactions for the section 20 affiliate.
(7) Reporting requirement.
(i) Each
bank holding company or foreign bank shall submit quarterly to the
appropriate Federal Reserve Bank any FOCUS report filed with the NASD
or other self-regulatory organizations, and any information required
by the Board to monitor compliance with these operating standards
and section 20 of the Glass Steagall Act, on forms provided by the
Board.
(ii) In the
event that a section 20 subsidiary is required to furnish notice concerning
its capitalization to the Securities and Exchange Commission pursuant
to 17 CFR 240.17a-11, a copy of the notice shall be filed concurrently
with the appropriate Federal Reserve Bank.
(8) Foreign banks. A foreign bank shall ensure that any extension
of credit by its branch or agency to a section 20 affiliate, and any
purchase of such branch or agency, as principal or fiduciary, of securities
for which a section 20 affiliate is a principal underwriter, conforms
to sections 23A and 23B of the Federal Reserve Act, and that its branches
and agencies not advertise or suggest that they are responsible for
the obligations of a section 20 affiliate, consistent with section
23B(c) of the Federal Reserve Act.
