Types of Financial Activities

Financial subsidiaries may engage in:

• Lending, exchanging, transferring, investing for others, or safeguarding money or securities.

• Activities as agent or broker in any state for purposes of insuring, guaranteeing, or indemnifying against loss, harm, damage, illness, disability, death, or defects in title (under certain conditions); or providing annuities as agent or broker.

• Providing financial, investment, or economic advisory services, including advising an investment company as defined in section 3 of the Investment Company Act (15 USC 880a-3).

• Issuing or selling instruments representing interests in pools of assets permissible for a bank to hold directly.

• Underwriting, dealing in, or making a market in securities.

• Any activity that the Board of Governors of the Federal Reserve System has determined, by order or regulation in effect on November 12, 1999, to be a proper incident of banking (subject to the same terms and conditions contained in the order or regulation, unless the order or regulation is modified by the Board of Governors of the Federal Reserve System).

• Any activity, in the United States, that a bank holding company may engage in outside the United States and that the Board of Governors of the Federal Reserve System has determined, under regulations prescribed or interpretations issued pursuant to section 4(c)(13) of the Bank Holding Company Act of 1956 (12 USC 1843(c)(13)) as in effect on November 11, 1999, to be usual in connection with the transaction of banking or other financial operations abroad.

• Other activities that the Secretary of the Treasury, in consultation with the Board of Governors of the Federal Reserve System, as provided in 12 USC 24a, determines to be financial in nature or incidental to a financial activity.

• As provided by regulations issued by Secretary of the Treasury pursuant to 12 USC 24a:

  • Lending, exchanging, transferring, investing for others, or safeguarding financial assets other than money or securities;

  • Providing any device or other instrumentality for transferring money or other financial assets; and

  • Arranging, effecting, or facilitating financial transactions for the account of third parties.

Financial subsidiaries of a national bank are generally prohibited from engaging as principal in insurance underwriting (except for "authorized products," as defined in the GLBA, and certain other insurance products as provided by the GLBA), real estate investment and development, or merchant banking activities that are permitted under paragraph (H) or (I) of section 4(k)(4) of the Bank Holding Company Act of 1956 (12 USC 1843(k)(4)(H) and (I)) unless the Board of Governors of the Federal Reserve System and the Secretary of the Treasury adopt joint regulations after November 12, 2004, that allow financial subsidiaries to engage in merchant banking activities under subparagraph H.

Filing Qualifications

A bank that intends to acquire control of, or hold an interest in, a financial subsidiary, or to commence a new activity in an existing financial subsidiary, must obtain OCC approval through certification and notice procedures. Because GLBA requires OCC approval to be based only on specific statutory factors, the OCC considers a filing to be approved upon receipt of the bank’s submission of the notice and appropriate certification that it meets the statutory criteria.

Pursuant to 12 CFR 5.39, there are two options for filing a notice. Under the first option, the bank files a "Financial Subsidiary Certification" at any time and files a notice at the time it acquires control of or holds an interest in a financial subsidiary, or commences a new activity in an existing financial subsidiary. Under the second method, the bank files a combined certification and notice five business days before it acquires control of, or holds an interest in, a financial subsidiary, or commences a new activity in an existing financial subsidiary.

Only qualifying banks are permitted to file. To meet the qualifying bank requirement, a national bank and each of its depository institution affiliates must meet certain criteria to control or hold an interest in a financial subsidiary. These criteria are as follows:

• The national bank and each of its depository institution affiliates must:

  • Be "well managed." That is, unless otherwise determined in writing by the appropriate federal banking agency, it must have a composite rating of 1 or 2, as well as a rating of 1 or 2 on the management element, under the Uniform Financial Institutions Rating System or an equivalent system. If the institution has not been examined, then it must have managerial resources that the OCC determines are satisfactory; and

  • Be "well capitalized." That is, its capital level must satisfy the definition of "well capitalized" in 12 CFR 6, Prompt Corrective Action.

• The aggregate consolidated total assets of all financial subsidiaries of the national bank must not exceed the lesser of 45 percent of the consolidated total assets of the parent bank or $50 billion. (The $50 billion limit is subject to adjustment according to an indexing mechanism established jointly by the Secretary of the Treasury and the Federal Reserve Board (FRB).)

• A national bank that is one of the 100 largest insured banks, determined on the basis of the bank’s consolidated total assets at the end of the calendar year, must have outstanding eligible long-term debt that is currently rated in one of the three highest investment-grade rating categories by a nationally recognized statistical rating organization. If a national bank is one of the second 50 of the 100 largest insured banks, the bank may satisfy the eligible debt requirement either by meeting the standard above or by receiving a qualifying long-term issuer credit rating from at least one nationally recognized statistical rating organization. The rating must be one of the three highest investment grade ratings issued by the organization, and it must be current. A long-term issuer credit rating is a written opinion, issued by a nationally recognized statistical rating organization, of the bank’s overall capacity and willingness to pay on a timely basis its unsecured, dollar-denominated financial obligations maturing in not less than one year. If the financial subsidiary is engaging solely in activities in an agency capacity, the eligible debt requirement does not apply.

Community Reinvestment Act (CRA) Requirements

A national bank cannot commence a new financial activity in a financial subsidiary or acquire control of a financial subsidiary if the bank or any of its insured depository institution affiliates received a less than "satisfactory" CRA rating on its most recent CRA exam prior to the bank’s filing of its notice. National banks that have not yet received a CRA rating and special purpose banks which are not CRA-rated may submit a notice if they meet all of the other qualifications and safeguards.

Safety and Soundness Safeguards

GLBA and 12 CFR 5.39 require a national bank to meet certain safeguards when engaging in activities through a financial subsidiary:

• For purposes of determining regulatory capital:

  • The bank must deduct the aggregate amount of its outstanding equity investment, including retained earnings, in its financial subsidiaries from its total assets and tangible equity, and deduct such investment from its total risk-based capital (this deduction shall be made equally from Tier 1 and Tier 2 capital); and

  • The bank may not consolidate the assets and liabilities of a financial subsidiary with those of the bank.

• Any published financial statement of the bank shall, in addition to providing information prepared in accordance with generally accepted accounting principles, separately present financial information for the bank in the manner provided above.

• The bank must have reasonable policies and procedures to maintain the separate corporate identity and limited liability of the national bank and the financial subsidiaries of the bank.

• The bank must have procedures for identifying and managing operational and financial risk within the bank and the financial subsidiary that adequately protect the bank from those risks.

• The bank must treat the financial subsidiary generally as if it were a nonbank affiliate and not a subsidiary of the bank for purposes of the affiliate transaction and the anti-tying rules.

The bank and, as appropriate, any affiliated depository institutions must continue to satisfy the well-capitalized and well-managed requirements and the safeguards described above after acquiring control of, or investing in, a financial subsidiary. Failure to do so could result in limits on the activities of the national bank, its subsidiaries, or an insured depository institution affiliate, or even a requirement to divest control of the financial subsidiary.