10703

Rules and Regulations Federal Register Vol. 86, No. 34

Tuesday, February 23, 2021

This section of the FEDERAL REGISTER Review Examiner, (508) 698–0361, nonmember banks,1 including industrial contains regulatory documents having general Extension 8027, [email protected]; Don banks and industrial loan companies applicability and legal effect, most of which Hamm, Special Advisor, (202) 898– (together, ‘‘industrial banks’’).2 In are keyed to and codified in the Code of 3528, [email protected]; Patricia granting deposit insurance, issuing a Federal Regulations, which is published under Colohan, Associate Director, Risk non-objection to a change in control, or 50 titles pursuant to 44 U.S.C. 1510. Management Examinations Branch, approving a merger, the FDIC must 3 The Code of Federal Regulations is sold by (202) 898–7283, [email protected], consider the factors listed in sections 6, the Superintendent of Documents. Division of Risk Management 7(j),4 and 18(c),5 respectively, of the Supervision. Federal Deposit Insurance Act (FDI Act). Congress expressly made all industrial FEDERAL DEPOSIT INSURANCE SUPPLEMENTARY INFORMATION: banks eligible for Federal deposit CORPORATION 6 Table of Contents insurance in 1982. As deposit insurer and as the appropriate Federal banking 12 CFR Part 354 I. Policy Objectives agency for industrial banks, the FDIC RIN 3064–AF31 II. Background supervises industrial banks. A key part A. History of its supervision is evaluating and Parent Companies of Industrial Banks B. Industrial Bank Exclusion Under the mitigating the risks arising from the and Industrial Loan Companies BHCA activities of the control parties and C. Industry Profile owners of insured industrial banks to AGENCY: Federal Deposit Insurance D. Supervision ensure they do not threaten the safe and Corporation. E. GAO and OIG Reports sound operations of those industrial ACTION: Final rule. F. FDIC Moratorium and Other Agency Actions banks or pose undue risk to the Deposit SUMMARY: The Federal Deposit G. 2007 Notice of Proposed Rulemaking— Insurance Fund (DIF). Insurance Corporation is adopting a Part 354 Existing State and Federal laws allow final rule that requires certain H. Dodd-Frank Act and Industrial Banks both financial and commercial conditions and commitments for each III. The Proposed Rule companies to own and control deposit insurance application approval, IV. Discussion of General Comments and industrial banks. Congress expressly non-objection to a change in control Final Rule adopted an exception to permit such notice, and merger application approval A. General Comments companies to own and control that would result in an insured 1. Banking and Commerce industrial banks, without becoming a 2. Lack of Federal Consolidated industrial bank or industrial loan bank holding company (BHC) under the Supervision Bank Holding Company Act (BHCA), as company becoming, on or after the 3. Consumer Protection Risks effective date of the final rule, a part of the Competitive Equality 4. Justification for the Proposed Rule Banking Act of 1987 (CEBA).7 Industrial subsidiary of a company that is not B. Description of the Final Rule banks today are owned by financial and subject to consolidated supervision by 1. Section 354.1—Scope the Federal Reserve Board. The final 2. Section 354.2—Definitions nonfinancial commercial firms. The rule also requires that before any 3. Section 354.3—Written Agreement FDIC has in recent years received industrial bank or industrial loan 4. Section 354.4—Required Commitments applications from groups seeking to company may become a subsidiary of a and Provisions of Written Agreement establish new industrial banks that company that is not subject to 5. Section 354.5—Restrictions on Industrial would be owned by commercial parents. consolidated supervision by the Federal Bank Subsidiaries of Covered Companies Proposals regarding industrial banks Reserve Board, such company and the 6. Section 354.6—Reservation of Authority have presented unique risk profiles industrial bank or industrial loan 7. Responses to Additional Questions compared to traditional community company must enter into one or more V. Expected Effects written agreements with the Federal A. Overview of Industrial Banks 1 See 12 U.S.C. 1811, 1818, 1821, 1831o–1, B. Analysis of the Commitments Deposit Insurance Corporation. 1831p–1. C. Safety and Soundness of Affected Banks 2 Herein, the term ‘‘industrial bank’’ means any DATES: The rule is effective on April 1, D. Broad Effects on the Banking Industry insured State-chartered bank that is an industrial 2021. E. Expected Effects on Consumers bank, industrial loan company, or other similar FOR FURTHER INFORMATION CONTACT: F. Expected Effects on the Economy institution that is excluded from the definition of ‘‘bank’’ in the Bank Holding Company Act pursuant Amanda Ledig, Attorney, (202) 898– VI. Regulatory Analysis to 12 U.S.C. 1841(c)(2)(H). State laws refer to both 7261, [email protected]; Merritt Pardini, A. Regulatory Flexibility Act industrial loan companies and industrial banks. For Counsel, (202) 898–6680, mpardini@ B. Paperwork Reduction Act purposes of this rule, the FDIC is treating the two fdic.gov; Joyce Raidle, Counsel, (202) C. Plain Language types of institutions as the same. The rule does not apply to limited purpose trust companies and credit 898–6763, [email protected]; Gregory D. Riegle Community Development and Regulatory Improvement Act of 1994 card banks that also are exempt from the definition Feder, Counsel, (202) 898–8724, gfeder@ of ‘‘bank.’’ E. Congressional Review Act fdic.gov; Catherine Topping, Counsel, 3 12 U.S.C. 1816. (202) 898–3975, [email protected]; I. Policy Objectives 4 12 U.S.C. 1817(j). Mark Flanigan, Senior Counsel, (202) 5 12 U.S.C. 1828(c). 898–7426, [email protected]; Ashby The Federal Deposit Insurance 6 Garn-St. Germain Depository Institutions Act of Corporation (FDIC) monitors, evaluates, 1982, Public Law 97–320, 96 Stat. 1469 (Oct. 15, Hilsman, Assistant General Counsel, 1982). (202) 898–6636, [email protected], and takes necessary action to ensure the 7 Public Law 100–86, 101 Stat. 552 (Aug. 10, Legal Division; Scott Leifer, Senior safety and soundness of State 1987).

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bank proposals. These profiles have industrial banks and their parent of both a State authority and the FDIC.13 included potential owners that would companies.11 The chartering States gradually not be subject to Federal consolidated The FDIC is now issuing a final rule, expanded the powers of their industrial supervision,8 affiliations with which is largely consistent with the banks so that today industrial banks organizations whose activities are proposed rule. The final rule makes four generally have the same commercial and primarily commercial in nature, and substantive changes to the proposed consumer lending powers as non-community bank business models.9 rule. First, the final rule requires commercial banks. compliance from covered entities on or Under the FDI Act, industrial banks Given the continuing interest in the are ‘‘State banks’’ 14 and all of the industrial bank charter and the evolving after the effective date of the rule rather than simply after, as proposed. Second, existing FDIC-insured industrial banks business models, the FDIC proposed a 15 the final rule requires additional are ‘‘State nonmember banks.’’ As a rule in March 2020 to codify existing result, the FDIC is the appropriate practices utilized by the FDIC to reporting by Covered Companies regarding systems for protecting the Federal banking agency for industrial supervise industrial banks and their 16 security, confidentiality, and integrity of banks. Each industrial bank is also parent companies, to mitigate undue consumer and nonpublic personal regulated by its respective State risk to the DIF that may otherwise be information. Third, the threshold chartering authority. The FDIC generally presented in the absence of Federal regarding the limitation of a Covered exercises the same supervisory and consolidated supervision of an Company’s representation on the board regulatory authority over industrial industrial bank and its parent company, of a subsidiary industrial bank has been banks as it does over other State and to ensure that the parent company raised in the final rule from 25 percent, nonmember banks. that owns or controls an industrial bank as proposed, to less than 50 percent. B. Industrial Bank Exclusion Under the serves as a source of financial strength Lastly, the final rule modifies the BHCA for the industrial bank, consistent with restrictions on industrial bank section 38A of the FDI Act.10 The subsidiaries concerning the In 1987, Congress enacted the CEBA, proposed rule described certain appointment of directors and senior which exempted industrial banks from commitments that would be required as executive officers to apply to the the definition of ‘‘bank’’ in the BHCA. a condition of the FDIC’s approval of, or industrial bank only during the first As a result, parent companies that non-objection to, each deposit insurance three years after becoming a subsidiary control industrial banks are not BHCs under the BHCA and are not subject to application, change in control notice, or of a Covered Company. These changes the BHCA’s activities restrictions or FRB merger application resulting in an are discussed in sections IV.B.1., supervision and regulation. The industrial bank becoming a subsidiary IV.B.4., and IV.B.5. of this Supplementary Information section industrial bank exception in the BHCA of a company not subject to therefore allows for commercial firms to consolidated supervision by the Federal below. In addition to providing this comprehensive framework for own or control a bank. By contrast, Reserve Board (FRB; each such parent BHCs and savings and loan holding company a Covered Company). The supervision, the final rule also provides interested parties with certainty and companies (SLHCs) are subject to proposed rule required such a company Federal consolidated supervision by the and the subsidiary industrial bank to transparency regarding the FDIC’s practices when making determinations FRB and are generally prohibited from enter into one or more written 17 on filings involving industrial banks. engaging in commercial activities. agreements with the FDIC that contain More specifically, the CEBA redefined certain commitments to be undertaken II. Background the term ‘‘bank’’ in the BHCA to by the company to ensure the safe and include: (1) Any FDIC-insured sound operation of such industrial bank. A. History institution, and (2) any other institution The required commitments include Industrial banks began as small State- that accepts demand or checkable capital and liquidity support from the chartered loan companies in the early deposit accounts and is engaged in the parent to the industrial bank that have 1900s to provide small loans to been incorporated in some form in the industrial workers. Initially, many 13 Prior to 1982, the FDIC had allowed some FDIC’s prior actions to create an industrial banks to become federally insured, but industrial banks did not accept any FDIC insurance was typically limited to those appropriate supervisory structure for deposits and funded themselves instead industrial banks chartered by States where the by issuing investment certificates. relevant State’s law allowed them to receive 8 In the context of the proposed rule, ‘‘Federal However, the Garn-St. Germain ‘‘deposits’’ or to use ‘‘bank’’ in their name. For consolidated supervision’’ referred to the Depository Institutions Act of 1982,12 additional historical context regarding industrial supervision of a parent company and its bank supervision, see The FDIC’s Supervision of subsidiaries by the Federal Reserve Board (FRB). among other effects, made all industrial Industrial Loan Companies: A Historical Consolidated supervision of a bank holding banks eligible for Federal deposit Perspective, Supervisory Insights (2004). company by the FRB encompasses the parent insurance. This expanded eligibility for 14 12 U.S.C. 1813(a)(2). company and its subsidiaries, and allows the FRB Federal deposit insurance brought 15 12 U.S.C. 1813(e)(2). to understand ‘‘the organization’s structure, industrial banks under the supervision 16 12 U.S.C. 1813(q)(2). activities, resources, and risks, as well as to address 17 Section 4 of the BHCA generally prohibits a financial, managerial, operational, or other BHC from acquiring ownership or control of any deficiencies before they pose a danger to the BHC’s 11 In March of 2020, the FDIC approved two company which is not a bank or engaging in any subsidiary depository institutions.’’ See SR Letter deposit insurance applications for industrial banks activity other than those of banking or of managing 08–9, ‘‘Consolidated Supervision of Bank Holding owned by firms whose businesses are or controlling banks and other subsidiaries Companies and the Combined U.S. Operations of predominantly financial in nature, Square Financial authorized under the BHCA. See 12 U.S.C. Foreign Banking Organizations’’ (Oct. 16, 2008). Services, Inc., Salt Lake City, Utah (Square 1843(a)(1) and (2). The Home Owners’ Loan Act 9 See FDIC Deposit Insurance Applications, Financial), and Nelnet Bank, Salt Lake City, Utah (HOLA) governs the activities of SLHCs, as Procedures Manual Supplement, Applications from (Nelnet). As part of both approvals, the FDIC amended by the Dodd-Frank Act, which generally Non-Bank and Non-Community Bank Applicants, required the industrial banks and their parent subjects these companies to the permissible FIL–8–2020 (Feb. 10, 2020). companies to enter into written agreements with the financial holding company activities under section 10 Parent Companies of Industrial Banks and FDIC that are consistent with the requirements of 4(k) of the BHCA (12 U.S.C. 1843(k), activities that Industrial Loan Companies, 85 FR 17771, 17772–73 the proposed and this final rule. are financial in nature or incidental to a financial (Mar. 31, 2020). See also 12 U.S.C. 1831o–1(b). 12 96 Stat. 1469. activity). See 12 U.S.C. 1467a(c)(2)(H).

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business of making commercial loans.18 offered by industrial banks.23 Industrial aggregate total assets. Four industrial This change effectively closed the so- banks have branching rights, subject to banks reported total assets of $10 billion called ‘‘nonbank bank’’ exception certain State law constraints. or more; ten industrial banks reported implicit in the prior BHCA definition of C. Industry Profile total assets of $1 billion or more but less ‘‘bank.’’ The CEBA created explicit than $10 billion. The industrial bank exceptions from this definition for The industrial bank industry has sector today includes a diverse group of certain categories of federally insured evolved since the enactment of the insured financial institutions operating institutions, including industrial banks, CEBA. The industry experienced a variety of business models. A credit card banks, and limited purpose significant asset growth between 1987 significant number of the existing trust companies. The exclusions from and 2006 when total assets held by industrial banks support the commercial the definition of the term ‘‘bank’’ industrial banks grew from $4.2 billion or specialty finance operations of their 24 created in 1987 by the CEBA remain in to $213 billion. From 2000 to 2006, 24 parent company and are funded through 25 effect today. To be eligible for the CEBA industrial banks became insured. As non-core sources. exception from the BHCA definition of of January 30, 2007, there were 58 ‘‘bank,’’ an industrial bank must have insured industrial banks with $177 The reduction in the number of received a charter from one of the billion in aggregate total assets.26 The industrial banks from 2007 to 2020 was limited number of States eligible to ownership structure and business due to a variety of factors, including issue industrial bank charters, and the models of industrial banks evolved as mergers, conversions, voluntary law of the chartering State must have industrial banks were acquired or liquidations, and the failure of two 28 required Federal deposit insurance as of formed by a variety of commercial firms, small institutions. For business, March 5, 1987. In addition, an industrial including, among others, BMW, Target, marketplace, or strategic reasons, bank must meet one of the following Pitney Bowes, and Harley Davidson. For several industrial banks converted to criteria: (i) Not accept demand instance, certain companies established commercial banks and thus became deposits,19 (ii) have total assets of less industrial banks, in part, to support the ‘‘banks’’ under the BHCA. Four than $100 million, or (iii) have been sale of the manufactured products (e.g. industrial banks were approved in 2007 acquired prior to August 10, 1987.20 automobiles) or other services, whereas and 2008; however, none of those Industrial banks are currently certain retailers established industrial institutions exist today.29 Moratoria chartered in California, Hawaii, banks to issue general purpose credit imposed by the FDIC and Congress (as Minnesota, Nevada, and Utah. Under cards. In addition, certain financial discussed below) were also a factor. the CEBA, these States were permitted companies also formed or acquired Since the beginning of 2017, the FDIC to grandfather existing industrial banks industrial banks to provide access to has received 12 Federal deposit and continue to charter new industrial Federal deposit insurance for brokerage insurance applications related to banks.21 Generally, industrial banks customers’ cash management account proposed industrial banks. Of those, two offer limited deposit products, a full balances. The cash balances their have been approved,30 eight have been range of commercial and consumer customers maintain with the securities withdrawn, and two are pending.31 The loans, and other banking services. affiliate are swept into insured, interest- FDIC anticipates potential continued Although some industrial banks that bearing accounts at the industrial bank interest in the establishment of have total assets of less than $100 subsidiary, thereby providing the industrial banks, particularly with million accept demand deposits, most brokerage customers with FDIC-insured regard to proposed institutions that plan industrial banks do not offer demand deposits during the period of time that to pursue a specialty or limited purpose deposits. Negotiable order of cash is held for future investment. business model. withdrawal (NOW) accounts 22 may be Since 2007, the industrial bank industry has experienced contraction 18 in Minnesota. An additional industrial bank, Nelnet 12 U.S.C. 1841(c)(1). both in terms of the number of Bank, began operations in November of 2020. 19 Regulation D, 12 CFR part 204, implements the institutions and aggregate total assets. Square Financial was approved in March and has reserve requirements of section 19 of the Federal not opened for business. Reserve Act and defines a demand deposit as a As of September 30, 2020, there were 23 28 Security Savings Bank, Henderson, Nevada, deposit that is payable on demand, or issued with 27 industrial banks with $173 billion in failed in February 2009, and Advanta Bank an original maturity or required notice period of less than seven days, or a deposit representing Corporation, Draper, Utah, failed in March 2010. 23 12 U.S.C. 1832(a). Only certain types of 29 funds for which the depository institution does not In each case, the institution pursued a customers may maintain deposits in a NOW reserve the right to require at least seven days’ voluntary transaction that led to termination of the account. 12 U.S.C. 1832(a)(2). written notice of an intended withdrawal. Demand respective institution’s industrial bank charter. One 24 deposits may be in the form of (i) checking Most of the growth during this period is institution converted to a commercial bank charter accounts; (ii) certified, cashier’s, teller’s, and attributable to financial services firms that and continues to operate, one merged and the officer’s checks; and (iii) traveler’s checks and controlled industrial banks offering sweep deposit resultant bank continues to operate, and two money orders that are primary obligations of the programs to provide Federal deposit insurance for terminated deposit insurance following voluntary issuing institution. Other forms of accounts may customers’ free cash balances and to American liquidations. Such transactions generally result also meet the definition of ‘‘demand deposit.’’ See Express moving its credit card operations from its from proprietary strategic determinations by the 12 CFR 204.2(b)(1). Delaware-chartered credit card bank to its Utah- institutions and their parent companies or 20 12 U.S.C. 1841(c)(2)(H). chartered industrial bank. investors. 25 21 Colorado was also grandfathered but it has no During this time period, the FDIC received 57 30 In March of 2020, the FDIC approved the active industrial banks and has since repealed its applications for Federal deposit insurance for deposit insurance applications of Nelnet Bank and industrial bank statute. industrial banks, 53 of which were acted on. Also Square Financial. Square Financial has not yet 22 A NOW account is an interest-earning bank during this time period, 21 industrial banks ceased commenced operations. account whereby the owner may write drafts against to operate due to mergers, conversions, voluntary 31 Decisions to withdraw an application are made the money held on deposit. NOW accounts were liquidations, and one failure (Southern Pacific at the discretion of the organizers and can be developed when certain financial institutions were Bank, Torrance, CA, failed in 2003). attributed to a variety of reasons. In some cases, an prohibited from paying interest on demand 26 Of the 58 industrial banks existing at this time, application is withdrawn and then refiled after deposits. The prohibition on paying interest on 45 were chartered in Utah and California. The changes are incorporated into the proposal. In such demand deposits was lifted when the FRB repealed remaining industrial banks were chartered in cases, the new application is reviewed by the FDIC its Regulation Q, effective July 21, 2011. See 76 FR Colorado, Hawaii, Minnesota, and Nevada. without prejudice. In other cases, the applicant 42015 (July 18, 2011). Many provisions of the 27 Of the 23 industrial banks existing as of June may, for strategic reasons, determine that pursuing repealed Regulation Q were transferred to the FRB’s 30, 2020, 14 were chartered in Utah, four in an insured industrial bank charter is not in the Regulation D. Nevada, three in California, one in Hawaii, and one organizers’ best interests.

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D. Supervision industrial bank. Such written insurance, enter into written agreements Because industrial banks are insured agreements provide required during the acquisition of an insured State nonmember banks, they are commitments for the parent company to depository institution, and to pursue subject to the FDIC’s Rules and provide financial resources and a means enforcement actions. for the FDIC to pursue formal Regulations, as well as other provisions F. FDIC Moratorium and Other Agency of law, including restrictions under the enforcement action under sections 8 and 39 Actions Federal Reserve Act governing 50 of the FDI Act should a party fail In 2005, Wal-Mart Bank’s application transactions with affiliates,32 anti-tying to comply with the agreements. for Federal deposit insurance drew provisions of the BHCA,33 and insider E. GAO and OIG Reports extensive public attention to the lending regulations. Industrial banks are Beginning in 2004, the FDIC Office of industrial bank charter. The FDIC also subject to regular examination, Inspector General (OIG) conducted two received more than 13,800 comment including examinations focused on evaluations and the Government letters regarding Wal-Mart’s proposal. safety and soundness, Bank Secrecy Act Accountability Office (GAO) conducted Most of the commenters were opposed and Anti-Money Laundering a statutorily mandated study regarding to the application. Commenters also compliance, consumer protection the FDIC’s supervision of industrial raised broader concerns about industrial including Community Reinvestment Act banks, including its use of prudential banks, including the risk posed to the (CRA) compliance, information conditions.40 An OIG evaluation DIF by industrial banks owned by technology (IT), and trust services, as published in 2004 focused on whether parent companies that are not subject to appropriate. Pursuant to section 10(b)(4) industrial banks posed greater risk to Federal consolidated supervision. of the FDI Act, the FDIC has the the DIF than other financial institutions, Similar concerns were expressed by authority to examine the affairs of any and reviewed the FDIC’s supervisory witnesses during three days of public industrial bank affiliate, including the approach in identifying and mitigating hearings held by the FDIC in the spring parent company, as may be necessary to material risks posed to those institutions of 2006 concerning the Wal-Mart determine the relationship between the by their parent companies. A July 2006 application. Also in 2006, The Home institution and the affiliate, and the OIG evaluation reviewed the FDIC’s Depot filed a change in control notice in effect of such relationship on the process for reviewing and approving connection with its proposed depository institution.34 In addition, under section 38A of the industrial bank applications for deposit acquisition of EnerBank, a Utah- FDI Act, as amended by the Dodd Frank insurance and monitoring conditions chartered industrial bank. The FDIC Wall Street Reform and Consumer imposed with respect to industrial bank received approximately 830 comment Protection Act (Dodd-Frank Act),35 the business plans. A September 2005 GAO letters regarding the notice, almost all of FDIC is required to impose a study cited several risks posed to banks which expressed opposition to the requirement on companies that directly operating in a holding company proposed acquisition. Ultimately, the or indirectly own or control an structure, including adverse Wal-Mart application and The Home industrial bank to serve as a source of intercompany transactions, operations Depot’s notice were withdrawn. To evaluate the concerns and issues financial strength for that institution.36 risk, and reputation risk. The GAO raised with respect to the Wal-Mart and In addition, subsection (d) of section study also discussed concerns about the The Home Depot filings and industrial 38A of the FDI Act provides explicit FDIC’s ability to protect an industrial banks generally, on July 28, 2006, the statutory authority for the appropriate bank from those risks as effectively as FDIC imposed a six-month moratorium Federal banking agency to require the Federal consolidated supervisory 41 on FDIC action with respect to deposit reports from a controlling company to approach under the BHCA. These reports acknowledged the insurance applications and change in assess the ability of the company to FDIC’s supervisory actions to ensure the control notices involving industrial comply with the source of strength independence and safety and soundness 42 The FDIC suspended agency requirement, and to enforce compliance banks. of commercially owned industrial by such company.37 action in order to further evaluate (i) Consistent with section 38A and other banks. The reports further industry developments; (ii) the various authorities under the FDI Act, the FDIC acknowledged the FDIC’s authorities to issues, facts, and arguments raised with has historically required capital and protect an industrial bank from the risks respect to the industrial bank industry; liquidity maintenance agreements posed by its parent company and (iii) whether there were emerging safety (CALMAs) 38 and other written affiliates. These authorities include the and soundness issues or policy issues agreements between the FDIC and FDIC’s authority to conduct involving industrial banks or other risks controlling parties of industrial banks as examinations, impose conditions on and to the DIF; and (iv) whether statutory, well as the imposition of prudential enter into written agreements with an regulatory, or policy changes should be conditions when approving or non- industrial bank parent company, made in the FDIC’s oversight of objecting to certain filings involving an terminate an industrial bank’s deposit industrial banks in order to protect the DIF or important Congressional 39 See 12 U.S.C. 1818 and 1831aa. 43 32 See 12 U.S.C. 1828(j)(1)(A). objectives. 40 See OIG Evaluation 04–048, The Division of 33 In connection with this moratorium, For purposes of section 106 of the BHCA, an Supervision and Consumer Protection’s Approach industrial bank is treated as a ‘‘bank’’ and is subject for Supervising Limited-Charter Depository on August 23, 2006, the FDIC published to the anti-tying restrictions therein. See 12 U.S.C. Institutions (2004), available at https:// a notice and request for comment on a 1843(f)(1). www.fdicig.gov/reports04/04-048.pdf; OIG 34 12 U.S.C. 1820(b)(4). wide range of issues concerning Evaluation 06–014, The FDIC’s Industrial Loan 44 35 industrial banks. The FDIC received Public Law 111–203, 124 Stat. 1376 (July 21, Company Deposit Insurance Application Process 2010). (2006), available at https://www.fdicig.gov/ 36 12 U.S.C. 1831o–1(b). reports06/06-014.pdf; U.S. Gov’t Accountability 42 See Moratorium on Certain Industrial Loan 37 See 12 U.S.C. 1831o–1(d). Office, GAO–05–621, Industrial Loan Corporations: Company Applications and Notices, 71 FR 43482 38 When the FDIC has required a CALMA, the Recent Asset Growth and Commercial Interest (Aug. 1, 2006). capital levels required generally have exceeded the Highlight Differences in Regulatory Authority (Sept. 43 Id. at 43483. average thresholds required of community banks, 2005), available at https://www.gao.gov/products/ 44 See Industrial Loan Companies and Industrial due to the risks involved in the business plans of GAO-05-621(GAO-05-621). Banks, 71 FR 49456 (Aug. 23, 2006). The Notice many industrial banks. 41 GAO–05–621. included questions concerning the current risk

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over 12,600 comment letters in response to assess the parent company’s the advent of the crises, applications to to the notice.45 The substantive continuing ability to serve as a source of form de novo insured institutions, or to comments related to the risk profile of strength for the insured industrial bank, acquire existing institutions, declined the industrial bank industry, concerns and to identify and respond to problems significantly, including with respect to over the mixing of banking and or risks that may develop in the industrial banks. commerce, the FDIC’s practices when company or its subsidiaries. H. Dodd-Frank Act and Industrial Banks making determinations in industrial Similar to this final rule, the 2007 bank applications and notices, whether NPR would have required a parent As discussed above and in reaction to commercial ownership of industrial company to enter into a written the 2008–09 financial crisis, the Dodd- banks should be allowed, and perceived agreement with the FDIC containing Frank Act amended the FDI Act by needs for supervisory change. required commitments related to the adding section 38A.50 Under section The moratorium was effective through examination of, and reporting and 38A, for any insured depository January 31, 2007, at which time the recordkeeping by, the industrial bank, institution that is not a subsidiary of a FDIC extended the moratorium one the parent company, and its affiliates. BHC or SLHC, the appropriate Federal additional year for deposit insurance The majority of commenters did not banking agency for the insured applications and change in control oppose these requirements, noting the depository institution must require any notices for industrial banks that would FDIC already has authority to collect company that directly or indirectly be owned by commercial companies.46 such information under section 10(b)(4) controls such institution to serve as a The moratorium was not applicable to of the FDI Act.48 Many commenters, source of financial strength for the industrial banks to be owned by however, objected to limiting parent institution.51 financial companies. company representation on the Through the Dodd-Frank Act, G. 2007 Notice of Proposed Rulemaking industrial bank subsidiary’s board of Congress also imposed a three-year (NPR)—Part 354 directors to 25 percent, and argued moratorium on the FDIC’s approval of instead for requiring that a majority of deposit insurance applications for In addition to extending the directors be independent. The majority industrial banks that were owned or moratorium for one year with respect to 52 of commenters stated that the FDIC controlled by a commercial firm. The commercial parent companies, the FDIC should not impose capital requirement Dodd-Frank Act moratorium also published for comment a proposed rule commitments as contemplated in the applied to the FDIC’s non-objection to designed to strengthen the FDIC’s 2007 NPR on commercial parents of any change in control of an industrial consideration of applications and industrial banks because a one-size-fits bank that would place the institution notices for industrial banks to be all regulatory approach to capital under the control of a commercial controlled by financial companies not firm.53 The moratorium expired in July subject to Federal consolidated bank requirements would not be appropriate due to the idiosyncratic business 2013, without any further action by supervision, identified as part 354 (2007 Congress. NPR).47 The 2007 NPR would have models and operations of such parent companies. In addition, the Dodd-Frank Act imposed requirements on applications directed the GAO to conduct a study of for deposit insurance, merger Though the 2007 NPR did not affect industrial banks that would be the implications of removing all applications, and notices for change in exceptions from the definition of control that would result in an controlled by companies engaged in commercial activities, several ‘‘bank’’ under the BHCA. The GAO industrial bank becoming a subsidiary report was published in January of of a company engaged solely in commenters addressed the distinction between industrial banks owned by 2012.54 This report examined the financial activities that is not subject to number and general characteristics of Federal consolidated bank supervision financial and nonfinancial companies. by either the FRB or the then-existing Two commenters contended that the FDIC lacked authority to draw a kinds, both inside and outside the traditional Office of Thrift Supervision (OTS). The banking system, and thus endangered the financial rule would have established safeguards distinction between financial and system itself. Second, a banking crisis, nonfinancial industrial bank owners accompanied by a swiftly increasing number of both troubled and failed insured depository profile of the industrial bank industry, safety and absent a change in law. Several soundness issues uniquely associated with commenters argued that drawing such a institutions, began in 2008 and continued until ownership of such institutions, the FDIC’s practice 2013. distinction would essentially repeal the 50 with respect to evaluating and making See 12 U.S.C. 1831o–1. exception of industrial banks from the 51 determinations on industrial bank applications and 12 U.S.C. 1831o–1(b). This amendment also notices, whether a distinction should be made definition of ‘‘bank’’ in the BHCA. There requires the appropriate Federal banking agency for when the industrial bank is owned by an entity that was little consensus among commenters a BHC or SLHC to require the BHC or SLHC to serve is commercial in nature, and the adequacy of the as to whether commercially owned as a source of financial strength for any subsidiary FDIC’s supervisory approach with respect to of the BHC or SLHC that is a depository institution. industrial banks. industrial banks pose unique safety and 12 U.S.C. 1831o–1(a). 45 Approximately 12,485 comments on the notice soundness issues. 52 Public Law 111–203, title VI, section 603(a), were generated either supporting or opposing the The FDIC did not finalize the 2007 124 Stat. 1597 (2010). Section 603(a) also imposed proposed industrial bank to be owned by Wal-Mart NPR. Although multiple factors a moratorium on FDIC action on deposit insurance or the proposed acquisition of Enerbank, also an contributed to the FDIC’s decision to not applications by credit card banks and trust banks industrial bank, by The Home Depot. The remaining owned or controlled by a commercial firm. The comment letters were sent by individuals, law advance a final rule, the most significant Dodd-Frank Act defined a ‘‘commercial firm’’ for firms, community banks, financial services trade factor was the onset of two this purpose as a company that derives less than 15 associations, existing and proposed industrial banks interconnected and overlapping crises: percent of its annual gross revenues from activities or their parent companies, the Conference of State that are financial in nature, as defined in section Bank Supervisors, and two members of Congress. the financial crisis of 2008–09, and the 4(k) of the BHCA (12 U.S.C. 1843(k)), or from 49 46 See Moratorium on Certain Industrial Bank banking crisis from 2008 to 2013. With ownership or control of depository institutions. Applications and Notices, 72 FR 5290 (Feb. 5, 53 Id. 2007). 48 See 12 U.S.C. 1820(b)(4). 54 See U.S. Government Accountability Office, 47 See Industrial Bank Subsidiaries of Financial 49 See Crisis and Response, An FDIC History, GAO–12–160, Characteristics and Regulation of Companies 72 FR 5217 (Feb. 5, 2007); see also 2008–2013, available at https://www.fdic.gov/bank/ Exempt Institutions and the Implications of https://www.fdic.gov/news/news/press/2007/ historical/crisis/. The financial crisis in 2008 and Removing the Exemptions (Jan. 2012), available at pr07007.html. 2009 threatened large financial institutions of all https://www.gao.gov/products/GAO-12-160.

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exempt institutions, the Federal • Causing an independent annual FDI Act,59 including rules to ensure the regulatory system for such institutions, audit of each industrial bank. safety and soundness of industrial banks and potential implications of subjecting • Limiting the Covered Company’s and to protect the DIF. Moreover, as the the holding companies of such representation on the industrial bank’s only agency with the power to grant or institutions to BHCA requirements. The board of directors or managers (board), terminate deposit insurance, the FDIC GAO report noted that the industrial as the case may be, to 25 percent. has a unique responsibility for the safety bank industry experienced significant • Maintaining the industrial bank’s and soundness of all insured 60 asset growth in the 2000s and, during capital and liquidity at such levels as institutions. In granting deposit this time, the profile of industrial banks insurance, the FDIC must consider the deemed appropriate and take other 61 changed: Rather than representing a action necessary to provide the factors in section 6 of the FDI Act; class of small, limited-purpose industrial bank with a resource for these factors generally focus on the institutions, industrial banks became a additional capital or liquidity. safety and soundness of the proposed diverse group of insured institutions institution and any risk it may pose to • Entering into a tax allocation with a variety of business lines.55 the DIF. The FDIC is also authorized to agreement.58 Ultimately, the GAO found that Federal permit or deny various transactions by regulation of the exempt institutions’ The proposal also set forth the FDIC’s State nonmember banks, including parent companies varied, noting that authority to require, as an additional merger and change in bank control FDIC officials interviewed in connection commitment, a contingency plan that, transactions, based to a large extent on with the study indicated that among other items, provides a strategy safety and soundness considerations supervision of exempt institutions was for the orderly disposition of the and on its assessment of the risk to the adequate, but also noted the added industrial bank without the need for the DIF.62 benefit of Federal consolidated appointment of a receiver or The FDIC has the responsibility to supervision. Finally, data examined by conservator. consider filings based on statutory the GAO suggested that removing the Recently, a number of companies criteria and make decisions. Following BHCA exceptions would likely have a have considered options for providing the publication of the proposed rule, the limited impact on the overall credit financial products and services by FDIC approved two deposit insurance market, chiefly because the overall establishing an industrial bank applications, by Square Financial and market share of exempt institutions was, subsidiary. Many companies have Nelnet, to create de novo industrial at the time of the study, small.56 publicly noted the benefits of deposit banks, the first such approvals since insurance and establishing a deposit- 2008. The FDIC determined that the III. The Proposed Rule taking institution. Although many applications satisfied the seven On March 31, 2020, the FDIC interested parties operate business statutory factors under section 6 of the published a notice of proposed models focused on traditional FDI Act, and the FDIC’s approval of rulemaking (NPR or proposal) to community bank products and services, deposit insurance for these industrial establish a supervisory framework for others operate unique business models, banks fulfilled the Agency’s statutory industrial banks and their parent some of which are focused on responsibility. As part of both companies that are not subject to innovative technologies and strategies, approvals, the FDIC required the Federal consolidated supervision.57 The including newer business models industrial banks and their parent proposed rule required certain employed by fintech firms that utilize companies to enter into CALMAs and conditions, commitments, and novel or unproven products or Parent Company Agreements to protect restrictions for each deposit insurance processes. the industrial bank and address application approval, non-objection to a Some of the companies recently potential risks to the DIF. change in control notice, and merger exploring an industrial bank charter The FDIC invited comment on all application approval that would result engage in commercial activities or have aspects of the March 2020 proposal, in an industrial bank becoming a diversified business operations and including questions posed by the subsidiary of a company not subject to activities that would not otherwise be Agency. The comment period for the 63 consolidated supervision by the FRB. permissible for BHCs under the BHCA proposed rule ended on July 1, 2020. The proposal required such a Covered and applicable regulations. Given the continuing interest in the establishment 59 ‘‘[T]he Corporation . . . shall have power . . . Company to enter into one or more [t]o prescribe by its Board of Directors such rules written agreements with the FDIC and of industrial banks, particularly with and regulations as it may deem necessary to carry the industrial bank subsidiary. The regard to proposed institutions that plan out the provisions of this chapter or of any other commitments included: to implement specialty or limited law which it has the responsibility of administering • purpose business models, including or enforcing (except to the extent that authority to Furnishing an initial listing, with issue such rules and regulations has been expressly annual updates, of the Covered those focused on innovative and exclusively granted to any other regulatory Company’s subsidiaries. technologies, the FDIC believes a rule is agency).’’ 12 U.S.C. 1819(a)(Tenth). • Consenting to FDIC examination of appropriate to provide necessary 60 See 12 U.S.C. 1815, 1818(a). 61 the Covered Company and its transparency for market participants. Such factors are the financial history and Through this final rule, the FDIC is condition of the depository institution, the subsidiaries. adequacy of the depository institution’s capital • Submitting an annual report on the formalizing its framework to supervise structure, the future earnings prospects of the Covered Company and its subsidiaries, industrial banks and mitigate risk to the depository institution, the general character and fitness of the management of the depository and such other reports as requested. DIF that may otherwise be presented in the absence of Federal consolidated institution, the risk presented by such depository • institution to the DIF, the convenience and needs Maintaining such records as the supervision of an industrial bank and its FDIC deemed necessary. of the community to be served by such depository parent company. institution, and whether the depository institution’s The FDIC has the authority to issue corporate powers are consistent with the purposes 55 Id. at 13. of the FDI Act. See 12 U.S.C. 1816. 56 The GAO did not recommend repeal of the rules to carry out the provisions of the 62 See 12 U.S.C. 1817(j), 1828(c), and 1828(d). exemption. 63 Given the disruptions caused by the COVID–19 57 85 FR 17771 (Mar. 31, 2020). 58 See proposed § 354.4(a)(1) through (8). global pandemic, the FDIC announced on May 27,

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The FDIC received 29 comments from proposed rule and expressed a range of Congressional exception of industrial industry group/trade associations, concerns, which are discussed below. banks from the BHCA’s restrictions on insured depository institutions, commercial affiliations and the FDIC’s 1. Banking and Commerce consumer and public interest groups, statutory obligations to receive and State banking regulator(s), law firms, a Commenters’ criticism of the process applications related to member of Congress, academics, and industrial bank charter, and by industrial banks. other interested parties.64 In addition, extension the proposed rule, is focused, These commenters also argued that the FDIC received three letters related to in part, on the mixing of banking and allowing commercial firms and the subject matter considered in the commerce through the commercial industrial banks to combine could proposed rule prior to the formal ownership of an industrial bank. The potentially lead to conflicts of interest comment period. The FDIC is now main argument is that commercial in the lending process and undue finalizing the proposed rule, with ownership of an industrial bank concentrations of economic power— changes based on public comments, as disregards the policy of separation of concerns they contend underlie the described in detail below. banking and commerce embodied in the general prohibition against the mixing BHCA 65 and raises risk to the DIF as a of commerce and banking in the BHCA. IV. Discussion of General Comments result of a lack of Federal consolidated As noted above, the decision to allow and Final Rule supervision over the commercial parent commercial firms to own industrial A. General Comments company. banks was a decision made by Congress. Although Federal banking regulation Industrial banks are restricted from Many commenters were supportive of has historically advanced a policy of making favorable loans to their affiliates the FDIC’s overall effort to provide separating banking and commerce, there by sections 23A and 23B of the Federal certainty, clarity, and transparency to is an express Congressional exception of Reserve Act, which quantitatively and the supervisory framework for the industrial banks from the BHCA’s qualitatively limit transactions between parent companies and affiliates of restrictions on commercial affiliations.66 an industrial bank and its affiliates.67 industrial banks. A number of The CEBA exception does not limit Furthermore, section 23B of the Federal commenters were generally supportive eligible parent companies to those Reserve Act requires that any of the industrial bank charter citing the engaged in financial activities. The transaction between a bank and its benefits of charter choice, increased FDIC’s responsibility is to implement affiliates must be ‘‘on terms and under competition, and the provision of the law as it exists today. Whether circumstances, including credit financial services. These commenters commercial firms should continue to be standards, that are substantially the asserted the charter poses no increased able to own industrial banks is a policy same, or at least as favorable to [the] risk to the DIF. In their view, the parent decision for Congress to make. bank or its subsidiary as those companies serve as an important source Some commenters requested that the prevailing at the time for comparable of strength and governance for the FDIC impose a new moratorium on transactions’’ with unaffiliated subsidiary industrial bank. They deposit insurance applications companies.68 All covered transactions asserted that in times of stress, a involving industrial banks to allow for between an industrial bank and its diversified parent may be in a better legislative action. Certain commenters affiliates must be on terms and position to provide capital support to a argued that a moratorium, or a delay in conditions that are consistent with safe bank subsidiary than a BHC whose the rulemaking more generally, was and sound banking practices.69 assets consist almost entirely of the important in light of the current Commenters’ competition concerns bank subsidiary. These commenters also economic stress and uncertainty caused were based on the possibility that large argued that an industrial bank benefits by the COVID–19 pandemic. The commercial or technology firms will from its business relationship with the purpose of this final rule is to ensure acquire industrial banks and lead to parent, for example, through marketing adequate oversight of industrial banks commercial and financial conglomerates support and fewer start-up costs. State owned by financial and commercial with concentrated and excessive regulators stated that the joint companies. Additional moratoria or economic power. These commenters supervisory approach to supervising delays in processing and considering were concerned that the FDIC will not industrial banks with the FDIC has been applications are outside the scope of adequately consider the anti-trust effective, and industrial banks with this rulemaking and would be implications of commercial and commercial parents do not present an inconsistent with the express financial conglomerates. The FDIC outsized safety and soundness risk. recognizes that there is a possibility that Comments submitted by bank trade 65 See Federal Reserve Bank of San Francisco, Economic Letter 1998–21, The Separation of large and complex companies may seek associations, consumer groups, and Banking and Commerce (July 3, 1998), available at to acquire an industrial bank as academics were generally critical of the https://www.frbsf.org/economic-research/ emerging technologies and other trends publications/economic-letter/1998/july/separation- are leading to changes in the provision banking-commerce/. 2020, that it would extend the comment period of banking services. The FDIC has from June 1, 2020, to July 1, 2020, to allow 66 The legislative history of the CEBA offers no interested parties additional time to analyze the explanation of why this exception was adopted. discretion to evaluate the competitive proposal and prepare comments. While the industrial bank exception was included effects of such proposals when 64 On March 15, 2020, bank trade groups, and in the Senate version of the Act, the House version considering a deposit insurance omitted it. The Conference report does not shed consumer and civil rights groups sent a letter to the application, specifically the statutory FDIC urging the agency not to approve deposit much light: insurance applications submitted by industrial INDUSTRIAL LOAN COMPANY EXEMPTION factors of the risk to the DIF and the banks until the NPR is finalized. See https:// SECTION 2(C) (2) (H) OF THE BANK HOLDING convenience and needs of the bpi.com/consumer-civil-rights-groups-industry- COMPANY ACT community to be served, in order to urge-fdic-halt-approval-of-industrial-bank- The Senate amendment exempts from the ensure the market for the provision of applications-close-ilc-loopholes-first/. On July 29, definition of ‘‘bank’’ certain industrial banks; 2020, some of the same groups sent a letter to industrial loan companies, or other similar Congress requesting a three-year moratorium on institutions. The House recedes to the Senate. 67 12 U.S.C. 371c(a)(1), 371c–1(a)(1); see also 12 industrial bank licensing applications. See https:// Conference Report to accompany H.R. 27— U.S.C. 1828(j). bpi.com/banking-and-consumer-groups-call-on- Competitive Equality Banking Act of 1987 (July 31, 68 12 U.S.C. 371c–1(b). congress-to-close-ilc-loophole/. 1987), at 121. 69 12 U.S.C. 371c(a)(4).

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banking services remains competitive As discussed in the proposed rule, the Reserve Act and need not pose and safe and sound.70 Moreover, the FDIC has both the authority and the excessive risk to the bank or the banking FDIC must consider the anticompetitive capacity to effectively regulate system. effects of a transaction when it is industrial banks and their parent The rule also strengthens the FDIC evaluating a notice under the Change in companies, and this rule strengthens the supervisory framework in the area of Bank Control Act (CBCA) or an FDIC’s supervision. The FDIC uses its contingency planning. This rule allows application under the Bank Merger supervisory authorities to mitigate the the FDIC to impose a contingency plan Act.71 Recognizing that the business risks posed to insured depository requirement, as needed, which will lead models proposed by industrial banks are institutions whose parent companies are the FDIC, as well as the Covered evolving (e.g., the increasing interplay not subject to consolidated supervision. Company and its subsidiary industrial of services between the bank and its In considering applications for deposit bank, to a better understanding of the nonfinancial affiliates), the FDIC is insurance and mergers, as well as interdependencies, operational risks, issuing this rule in order to help ensure change in control notices, the FDIC uses and other circumstances or events that the safety and soundness of industrial prudential conditions, as needed, to could create safety and soundness banks that become subsidiaries of ensure sufficient autonomy and concerns for the insured industrial bank Covered Companies. insulation of the insured depository and attendant risk to the DIF. When institution from its parent and affiliates. imposed, this additional commitment 2. Lack of Federal Consolidated The FDIC also requires CALMAs, which will provide for recovery actions that Supervision generally exceed the minimum capital address any financial or operational Many commenters that were critical requirements for traditional community stress that may threaten the industrial of the proposed rule also argued that the banks, and other written agreements bank. potential future expansion of banks between the FDIC and controlling Finally, the FDIC’s oversight and operating under the CEBA exception parties of industrial banks. These enforcement power extends to the threatens the Federal safety net because agreements are enforceable under parent or affiliates of any industrial the FDIC lacks the statutory tools to sections 8 and 50 of the FDI Act. In bank whose activities affect that bank, adequately examine and supervise addition, under section 38A of the FDI further protecting the industrial bank 76 industrial banks and their parents and Act, the FDIC is required to impose a from risky activities of affiliates. affiliates. These commenters noted for requirement on companies that directly The FDIC has not found that instance the many ecommerce affiliate or indirectly own or control an industrial banks pose unique safety and relationships of a large, overseas parent industrial bank to serve as a source of soundness concerns based on the company. The FDIC sought comment on financial strength for that institution.73 activities of the parent organization. whether the commitments requiring Subsection (d) of section 38A of the FDI Industrial banks are subject to all of the examination and reporting included in Act also provides explicit statutory same restrictions and requirements, the proposed rule were the best authority for the appropriate Federal regulatory oversight, and safety and approach to gain transparency and banking agency to require reports from soundness exams as any other kind of insured depository institution. As such, identify any potential risk to the a controlling company to assess the the risks posed are substantially similar industrial banks. A number of ability of the company to comply with to those of all other charter types. A commenters argued that the eight the source of strength requirement, and number of commenters noted that two commitments in the FDIC’s proposed to enforce compliance by such 74 industrial banks failed during the recent rule ‘‘fail to achieve parity with the company. These prudential conditions financial crisis. While these failed regime of consolidated supervision and requirements will be embodied in institutions were owned by parent required for BHCs.’’ Elements they written agreements consistent with the companies not subject to Federal viewed as lacking included framework established by this final rule. consolidated supervision, the failures consolidated capital and liquidity In addition, an important focus of the FDIC’s examination and supervision were not the result of factors related to standards for the Covered Company, the industrial bank charter, as further including both the industrial bank and program is evaluating and mitigating risk to insured depository institutions discussed below. all affiliated entities under common Certain commenters also observed ownership, examination for compliance from affiliates. This includes examining the insured depository institution for that several large corporate owners of with the Volcker Rule requirements, industrial banks experienced stress sections 23A and 23B, and provisions in compliance with laws and regulations, including affiliate transaction limits and during the 2008–09 financial crisis. In the Gramm-Leach-Bliley Act (GLBA) 72 capital maintenance.75 some cases, the parent organizations on data safeguards and privacy of The examination reviews envisioned under this final rule ultimately filed bankruptcy, while customer information. Such others pursued strategies to resolve the commenters also argued that the FDIC provide the basis and opportunity to more fully evaluate the institution’s stress, including through access to does not have the authority to conduct government programs intended to full-scope examinations across any and affiliate relationships. As noted above, most conflict situations affecting banks alleviate the effects of the crisis within all affiliates, including the parent the financial services sector. These company, in their own right. Several and their affiliates can be mitigated through the supervisory process and programs included the FDIC’s commenters suggested that the FDIC ask Temporary Liquidity Guarantee Program Congress to transfer the supervision of application of the restrictions in sections 23A and 23B of the Federal (TLGP) and the Troubled Asset Relief parent companies of industrial banks to Program (TARP) administered by the the FRB to conduct consolidated 73 12 U.S.C. 1831o–1(b). Department of the Treasury. Desired supervision. 74 See 12 U.S.C. 1831o–1(d). access to these programs contributed to 75 See Report to the Congress and the Financial several companies pursuing conversions 70 As part of its considerations, the FDIC may also Stability Oversight Council Pursuant to Section 620 of an industrial bank to a commercial seek the views of other Federal agencies. of the Dodd-Frank Act (Sept. 2016). The 2016 joint 71 See 12 U.S.C. 1817(j)(7)(A), (B); 1828(c)(5). report evaluated the risks of bank activities and bank, which required approval of the 72 Financial Services Modernization Act of 1999, affiliations, as required by section 620 of the Dodd- Public Law 106–102, 113 Stat. 1338 (1999). Frank Act. 76 See 12 U.S.C. 1820(b) and 1820(b)(4)(A).

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parent company to become a BHC institutions, including industrial banks, In the absence of a single, subject to regulation and supervision by that exceed those imposed on most comprehensive Federal law regulating the FRB. other business types. Specifically, the privacy and the collection use, However, it is important to note that GLBA and implementing rules (1) processing, disclosure, security, and each institution or company described impose limitations on information disposal of personal information, the in the comments was engaged in sharing between financial institutions FDIC will continue to supervise and activities permissible for all Federal and and nonaffiliated third parties and examine industrial banks and enforce State banks, BHCs, or financial holding require disclosure of information compliance with the GLBA and all other companies, as evidenced by the ability sharing policies and practices to Federal consumer protection laws and to gain approval for the conversions to consumers and customers, and (2) regulations. In addition, and in response commercial banks and BHCs. Further, require financial institutions to develop, to the concerns expressed by the types and degree of stress were also implement, and maintain commenters that a Covered Company experienced by many other insured comprehensive information security and affiliates that are not engaged in depository institutions and banking programs.78 However, businesses that financial services would not be covered companies, some of which also sought are not subject to the GLBA are not free by the GLBA, the FDIC is including in participation in TLGP and/or TARP, from all privacy and data protection the final rule a requirement for a failed, or pursued transactions to requirements. There are other Federal Covered Company to inform the FDIC restructure the organization, merge, or laws that address privacy and data about its systems for protecting the raise capital to alleviate stress or avert protection that may apply to a Covered security, confidentiality, and integrity of failure. As such, the circumstances Company and its affiliates as well as consumer and nonpublic personal involving the companies highlighted in financial institutions. As one example, information, as part of the Covered the comments were not dissimilar to the Fair Credit Reporting Act (FCRA) Company’s commitment to submit an those facing other banking companies, establishes standards for collection and annual report to the FDIC. This including companies subject to Federal permissible purposes for dissemination reporting will provide the FDIC with a consolidated supervision. of data by consumer reporting agencies better understanding across all of a 3. Consumer Protection Risks and obligations on furnishers of Covered Company’s financial and information. As another example, nonfinancial affiliates and activities and Commenters opposed to the proposed section 5 of the Federal Trade provide the means to monitor for rule also argued that the growth in Commission Act (FTC Act) provides potential consumer protection risks. industrial banks poses broader broad authority to the FTC to pursue The FDIC will evaluate privacy and consumer protection risks. They unfair and deceptive trade acts and data protection issues presented by a asserted that the parent companies of practices against most businesses arising deposit insurance application, a change industrial banks are not subject to in control notice, or a merger Federal financial privacy and from privacy and data protection 79 application involving an industrial bank information security requirements and practices. Further, the Dodd-Frank Act on a case-by-case basis. When the absence of these requirements granted the Consumer Financial appropriate, the FDIC may consider creates risk for customers of the Protection Bureau (CFPB) broad imposing heightened requirements industrial banks, whether or not they authority to enforce unfair, deceptive, specific to industrial banks and Covered also obtain products and services from and abusive acts and practices related to Companies regarding the use of the parent companies or nonfinancial consumer financial products and consumer financial data for commercial affiliates. BHCs and SLHCs are limited services that may cover the activities of 80 purposes. Decisions will be based on the in their use of consumer financial data a Covered Company and its affiliates. size and complexity of the industrial for commercial purposes. These Adding to the complexity at the Federal bank, the nature and scope of its commenters asserted that industrial level, States have enacted laws bank parent companies should be governing the collection, use, activities, the sensitivity of any subject to the same restrictions. protection, and disclosure of personal customer information at issue, and the While there is no general Federal information. Many States have unique facts and circumstances of the regime covering how nonpublic consumer protection and privacy laws filing before the FDIC. personal information held in the U.S. as well as laws similar to the FTC Act Certain commenters expressed may be disclosed or how it must be that prohibit unfair or deceptive concerns about industrial bank and secured, financial institutions, business practices.81 nonbank partnerships that the including industrial banks, are subject commenters believe have led to 82 to Title V of the GLBA.77 The GLBA and 78 See, e.g., 12 CFR part 332, Privacy of Consumer increased predatory lending. A major its implementing regulations, cited by Financial Information. 79 The FTC is empowered to seek injunctive relief Cal. Legis. Serv. Prop. 24 (2020). The Massachusetts some commenters, impose a range of and voluntary consent decrees that can result in Data Security Regulation includes State-level privacy obligations on financial FTC oversight of a company for a period of up to general data protection security requirements. 201 20 years and may carry financial penalties for future Mass. Code Regs. 17.00 et seq. The Act to Protect 77 Subtitle A of Title V of the GLBA, captioned violations. The Federal banking agencies enforce the Privacy of Online Consumer Information ‘‘Disclosure of Nonpublic Personal Information,’’ section 5 as to financial institutions under their enacted by the Maine legislature is another example limits the instances in which a financial institution supervision. of a State law governing the privacy of consumer may disclose nonpublic personal information about 80 The CFPB has been active in the privacy area information. 35–A M.R.S. section 9301. These a consumer to nonaffiliated third parties, and and recently issued an advanced notice of proposed examples underscore the fact that although a requires a financial institution to disclose certain rulemaking (ANPR) seeking input on the financial uniform Federal law has not been enacted, privacy information sharing practices. ‘‘Nonpublic personal records access right granted by section 1033 of the is increasingly in the forefront of the public and information’’ is defined to mean any personally Dodd-Frank Act pertaining to consumer legislators alike. identifiable financial information that is provided information in the control or possession of 82 The concern appears to arise from perceived by the consumer to the financial institution; results consumer financial services providers. 85 FR 71003 abuses of longstanding statutory authority rather from any transaction with the consumer or service (Nov. 6, 2020). than the proposed rule. Congress enacted section 27 performed for the consumer; or is otherwise 81 For example, the California Consumer Privacy of the FDI Act, 12 U.S.C. 1831d, in 1980, permitting obtained by the financial institution, but which is Act of 2018 serves as an omnibus law governing State banks to charge interest at the rate permitted not ‘‘publicly available information.’’ See 15 U.S.C. privacy rights. It was recently amended and by the law of the State where the bank is located, 6801–09. expanded by the California Privacy Rights Act. 2020 Continued

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component of the FDIC’s mission is to legal, and policy considerations for the institutions across the banking industry. ensure that financial institutions treat proposed rule, such that interested In addition, interest in industrial bank consumers and depositors fairly, and parties were able to—and did—submit a charters was affected by changes in operate in compliance with Federal variety of comments on a number of certain State laws that limited the consumer protection, anti- issues raised in and by the proposed ability to form or acquire industrial discrimination, and community rule. banks, and was reflected in the number reinvestment laws. The FDIC addresses A few commenters argued that the of industrial banks seeking conversions the problem of predatory lending by NPR did not adequately discuss the to commercial bank charters. The taking supervisory action, by FDIC’s decision to allow industrial bank factors, collectively, argued against encouraging and assisting banks to serve applications in the wake of both the moving forward with a final rule, as did all sectors of their community, and by temporary moratorium the FDIC put the opportunity to closely monitor the providing consumers with information into place from 2006 to 2008 and the performance of industrial banks during to help make informed financial subsequent 2010 to 2013 moratorium a period of significant stress.88 Congress enacted through the Dodd- decisions. Overall, the performance and Frank Act. To reverse the industrial condition of industrial banks during the 4. Justification for the Proposed Rule bank moratorium without additional most recent banking crises was Several commenters raised concerns details, these commenters suggest, is generally consistent with other FDIC- that the FDIC offered insufficient arbitrary and capricious and violates the justification for the proposed rule. In APA. insured institutions based on assigned particular, commenters argued that the As the Supreme Court has noted, supervisory ratings, which consider proposed rule did not set out a ‘‘Agencies are free to change their each institution’s unique business sufficient factual, legal, or policy basis existing policies as long as they provide model, complexity, and risk profile. for proposed rule, and that there was a reasoned explanation for the From the beginning of 2009 through insufficient discussion of the risks, change.’’ 85 The explanation need not 2011, on average, industrial banks were public policy concerns, and statutory prove that ‘‘the reasons for the new assigned composite and component public interest factors concerning policy are better than the reasons for the ratings similar to other charter types industrial banks. old one; it suffices that the new policy with regard to safety and soundness, The Administrative Procedure Act is permissible under the statute, that consumer protection, and the CRA. (APA) 83 requires a notice of proposed there are good reasons for it, and that Further, the portfolio of industrial banks rulemaking to provide sufficient factual the agency believes it to be better, which reflected similar proportions of detail and rationale for the rule to the conscious change of course institutions that were composite rated 3, permit interested parties to comment adequately indicates.’’ 86 Specifically, 4, or 5 89 during the crisis, as well as a meaningfully.84 ‘‘the agency must examine the relevant similar rate of failure as the portfolio of The proposed rule set out a clear data and articulate a satisfactory traditional community banks. description of the basis for the proposed explanation for its action including a Looking more specifically at financial rule. The NPR discussed the history of rational connection between the facts performance, and notwithstanding their industrial banks in the U.S., both found and the choice made.’’ 87 general focus on nontraditional business generally and in the context of The NPR provided a reasoned models, industrial banks have controversies over the past two decades. discussion of the decision to move experienced, by most key measures of The NPR acknowledged the arguments forward with the proposed rule, as performance and condition, comparable raised by critics, reviewing the potential discussed above. Furthermore, the NPR results to other insured institutions. risks inherent in approving and also explained why it was proceeding Industrial banks tend to maintain higher supervising industrial banks. These now when it chose not to do so with the levels of capital and generate higher include concerns over the mixing of 2007 rulemaking. The NPR noted that earnings. At year-ends 2009 through banking and commerce as well as the the FDIC’s decision not to go forward 2011, industrial banks maintained a risk to the DIF posed by the lack of with the 2007 proposal was rooted in a median tier 1 leverage capital (T1LC) Federal consolidated supervision of number of factors. More specifically, ratio between 13.1 percent and 15.4 parent companies. The NPR also set out while the FDIC considered the percent, whereas, other insured the justification for the proposed rule, comments received on the 2007 institutions maintained a median T1LC including the need to codify and clarify rulemaking, industry conditions and ratio between 9.3 percent and 9.7 supervisory expectations for industrial other factors had the effect of reducing percent. As of June 30, 2020, the median banks and the importance of imposing organizer interest in establishing new T1LC ratio for industrial banks was 14.6 commitments on parent companies to industrial banks. Most notably, interest in organizing new institutions of all ensure the parent company can serve as 88 As noted above in section II.H of this a source of strength for its subsidiary charter types, including industrial Supplementary Information section, after 2013, the industrial bank. The NPR provided banks, diminished given the moratorium imposed by Congress in the Dodd- sufficient discussion of the factual, deteriorating economic and market Frank Act expired by its terms and was not conditions identified as early as mid- renewed. 89 Each financial institution is assigned composite even if that rate exceeds the rate permitted by the 2007. In part, this diminished interest and component ratings for safety and soundness law of the borrower’s State. Federal court reflected the market uncertainty, under the Uniform Financial Institutions Rating precedents reviewing this authority have upheld restricted liquidity, reduced availability System (UFIRS). Under the UFIRS, composite this practice for decades. Section 27 also permits of capital, and difficult interest rate ratings are based on an evaluation and rating of six States to opt out of its coverage by adopting a law, environment experienced by all essential components of an institution’s financial or certifying that the voters of the State have voted condition and operations: Adequacy of capital, the in favor of a provision which states explicitly that quality of assets, the capability of management, the the State does not want section 27 to apply with 85 Encino Motorcars, LLC v. Navarro, 136 S.Ct. quality and level of earnings, the adequacy of respect to loans made in such State. 2117, 2126 (2016). liquidity, and the sensitivity to market risk. 83 5 U.S.C. 551 et seq. 86 F.C.C. v. Fox Television Stations, Inc., 556 U.S. Evaluations of the components take into 84 5 U.S.C. 553(b); see, e.g., National Lifeline 502, 515 (2009). consideration the institution’s size and Association v. F.C.C., 921 F.3d 1105, 1115 (D.C. Cir. 87 Motor Vehicle Mfrs. Ass’n v. State Farm Mut. sophistication, the nature and complexity of its 2019). Auto. Ins. Co., 463 U.S. 29, 43 (1983). activities, and its risk profile.

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percent as compared to 10.3 percent for experienced by industrial banks during approval of the BHC applications was other insured institutions.90 the crisis were not dissimilar from the warranted, based on evaluation of the Similarly, industrial banks reported a circumstances confronting other insured relevant statutory factors and regulatory median return on average assets (ROAA) institutions and were not the result of requirements. Given these ratio of between 0.6 percent and 2.5 factors related to the industrial bank circumstances, the conversions and percent at year-ends 2009 through 2011, charter. In general, the FDIC’s participation in crisis-related programs versus a median ROAA ratio of between supervision helped to isolate the reflected responses to the broader 0.4 percent and 0.7 percent for other insured industrial bank from the stress conditions in all segments of the insured institutions. The median ROAA of the parent organization, which economy, including the financial sector. ratio for industrial banks and other helped in managing the potential risk to Finally, industrial banks did not insured institutions as of June 30, 2020, the industrial bank and the DIF. experience a disproportionate rate of were 1.1 percent and 0.9 percent, Nevertheless, as discussed above, failures when compared to other types respectively.91 several commenters noted the of institutions, and there have not been The capital and earnings ratios for participation of industrial banks or their any industrial bank failures since industrial banks is reflective of the parent organizations in various 2010.94 higher degree of risk inherent in their government programs established This experience with supervision in business models. The specialty nature of during the crisis. There were six the industrial banking space informs the most industrial bank business models, industrial banks (or their parent present rulemaking. The heightened particularly when compared to companies) among the more than 110 source of strength requirements, along traditional community banks (which companies that accessed the debt with other regulatory requirements constitute a large proportion of all other guarantee program component of the included in the final rule, are examples insured institutions), have contributed TLGP, including several owned by of how the FDIC is applying lessons to the maintenance of higher levels of parent companies organized as thrift learned in this rulemaking process. capital and earnings, generally. holding companies. However, it is Some commenters also questioned Additionally, since the mid-2000s, important to note that establishment of why the proposed rule applies to approved filings for industrial banks the TLGP was prompted by the industrial banks that would be owned have largely included CALMAs that unexpected and precipitous market by financial and commercial companies, required higher capital requirements conditions brought on by the related when the FDIC’s 2007 rulemaking was than other insured institutions. housing, financial, and banking crises limited to financial companies and the Further, industrial banks have been that occurred over the period of 2007 FDIC’s extended moratorium applied assigned examination ratings for the through 2011.92 These conditions only to commercial companies. As the capital and earnings components that, impacted even the largest banking FDIC discussed in the proposed rule, on average, were very similar to those of companies in the U.S. and abroad.93 commenters on the 2007 rulemaking other insured institutions. This Some comments noted the crisis-era observed that the FDIC lacked authority generally indicates that industrial banks conversions of industrial banks and to draw a distinction between financial have implemented and maintained their parent organizations to commercial and nonfinancial industrial bank appropriate risk management practices banks and BHCs. Of the conversions owners absent a change in law. The that, given financial condition and noted by commenters, the majority FDIC agrees that the CEBA exception performance, have adequately involved industrial banks that were does not distinguish between compensated for the risks inherent in fundamentally sound, based on the most commercial and financial parent the business models. recent examinations prior to the companies of industrial banks in When compared to other insured conversions. The same held with excluding them from the definition of institutions, industrial banks typically respect to the respective parent ‘‘bank.’’ As discussed above, the FDIC’s maintain a lower volume of liquid assets companies, one of which converted supervisory experience has shown that and rely more heavy on non-core from a thrift holding company to a bank a distinction based on the activities of liabilities to fund longer-term earning holding company during the crisis. In the parent company is not warranted in assets. As a result, while still each case, the FRB determined that this final rule. satisfactory, the liquidity posture for Most crucial, though, is the fact that industrial banks was considered slightly 92 As has been noted in Crisis and Response, the the most recent of the moratoriums lower both during and subsequent to the housing bubble that developed during the early commenters reference expired in 2013. 2000s burst in 2007, bringing the financial system In the ensuing years, Congress has 2008–09 financial crisis. In the FDIC’s ‘‘relatively quickly to the brink of collapse’’ and experience, asset quality has been resulted in the worst economic dislocation in declined to act with regard to industrial comparable between industrial banks decades. Large losses in economic output and large banks. The FDIC, as all agencies, is and other insured institutions, declines in economic indicators were evident, charged with enacting the laws as they including with respect to steep declines in exist today. Therefore, given that the indicating both a manageable volume of employment and household wealth, among other past due loans or other problem assets, indicators. The related banking crisis was also rule is permissible under the statute, as well as satisfactory risk management severe, with almost 500 institutions failing during that it is sufficiently supported by the practices. In addition, management the period of 2008 through 2013. In addition, reasoning presented in the NPR and this between March 2008 and December 2009, the Supplementary Information section, and practices for industrial banks also have number of problem banks rose from 90 to over 700, been in line with that of other insured and ultimately peaked at almost 900 in early 2011. that there is a clear connection between institutions, both during and after the This level constituted nearly 12 percent of all FDIC- the facts at hand and the choice to insured institutions. See note 49. proceed, the rule is a permissible financial crisis. 93 Despite the above, it is important to Some of the industrial banks that were owned change in policy. by thrift holding companies had sister financial The FDIC believes that the final rule, note that some industrial banks institutions that were also FDIC-insured. experienced stress during the 2008–09 Ownership of an industrial bank was not the which is largely consistent with the financial crisis. The circumstances driving force that caused or allowed these entities to issue guaranteed debt through the TLGP. Rather, 94 As noted above, Security Savings Bank, the companies could have accessed the program Henderson, Nevada, failed in February 2009, and 90 FDIC Call Report Data, June 30, 2020. simply by virtue of being a thrift holding company Advanta Bank Corporation, Draper, Utah, failed in 91 Id. or owning an FDIC-insured institution. March 2010.

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proposed rule, is an appropriate that, as of the effective date, are a appropriate means to ensure the safe response to safety and soundness issues subsidiary of a parent company that is and sound operation of the industrial surrounding financial and commercial not subject to Federal consolidated bank. Further, the commenter’s ownership of industrial banks under supervision by the FRB. A number of suggestion would be difficult to existing law. Specific suggestions from commenters expressed the view that the administer because the recommended commenters on the regulation itself are rule, if adopted, should apply only triggers for applicability of the rule— described below in the appropriate prospectively; that is, to industrial engaging in ‘‘nonfinancial’’ activities— sections of this preamble on the specific banks that become a subsidiary of a historically has proven difficult to sections of the rule. parent company that is a Covered define and measure. Accordingly, the Company as of the effective date of the final rule does not adopt the B. Description of the Final Rule rule, noting that existing industrial commenter’s recommendation. 1. Section 354.1—Scope banks and their parents are subject to However, the FDIC will continue to This section of the proposed rule most of the standards of the proposed apply all appropriate supervisory and described the industrial banks and rule. Three commenters requested that enforcement authorities to existing parent companies that would be subject the rule apply to a parent company and industrial banks and their parent to the rule. The proposed rule applied its subsidiary industrial bank if the organizations, as appropriate, to ensure to industrial banks that, after the parent company became a Covered the continued safety and soundness of effective date, become subsidiaries of Company after either the date of FDIC’s the industrial bank. companies that are Covered Companies, notice announcing the FDIC board The FDIC also sought comment on as such term is defined in § 354.2. meeting at which the proposed rule was whether the rule should apply to Industrial bank subsidiaries of considered or the date of the FDIC board industrial banks that do not have a companies that are subject to Federal meeting, rather than the effective date. parent company or to industrial banks consolidated supervision by the FRB Some commenters supported the that are controlled by an individual would not have been covered by the retroactive application of the proposed rather than a company. Several proposed rule. An industrial bank that, rule to all industrial banks that, as of the commenters asserted that it was not on or before the effective date, is a effective date, are a subsidiary of a necessary to apply the requirements of subsidiary of a company that is not parent that is not subject to Federal the proposed rule to industrial banks subject to Federal consolidated consolidated supervision. These without parent companies (or that are supervision by the FRB (a grandfathered commenters asserted that otherwise controlled by an individual rather than industrial bank) generally would not existing industrial banks would enjoy a a company), in part because industrial have been covered by the proposed regulatory advantage over new banks themselves are subject to the rule.95 A grandfathered industrial bank industrial banks. They also argued that same regulatory treatment as State could become subject to the proposed retroactive application would enhance nonmember banks. By contrast, several rule following a grant of deposit the FDIC’s ability to perform its commenters asserted the requirements insurance, change in control, or merger supervisory responsibilities. However, should be applied to such industrial occurring on or after the effective date other commenters expressed concerns banks and/or also to an individual that in which the resulting institution is an that applying the rule retroactively controls an industrial bank. The FDIC industrial bank that is a subsidiary of a would violate the APA as parent believes that industrial banks that are Covered Company. Thus, a companies of existing industrial banks owned by individuals or do not have a grandfathered industrial bank would had no opportunity to consider these parent company generally do not have been subject to the proposed rule, requirements in their decision to present the same potential risks as as would its parent company that is not establish or acquire an industrial bank. industrial banks owned by companies. subject to Federal consolidated These commenters also argued that Industrial banks that are controlled by a supervision, if such a parent company existing industrial banks have a record parent company, whether engaged in acquired control of the grandfathered of sound operations under the existing commercial or financial activities, that supervisory framework. industrial bank pursuant to a grant of are not subject to Federal consolidated In addition, one commenter deposit insurance after the effective supervision present the risks that are recommended that the final rule apply date, a change in bank control addressed by the safeguards in this final to grandfathered industrial banks that rule. In addition, applying the rule to transaction that closes after the effective undergo certain other changes, such as date, or if the grandfathered industrial industrial banks that have a parent when the industrial bank parent company and requiring that the parent bank is the surviving institution in a company acquires a subsidiary engaged merger transaction that closes after the company provide capital support is in nonfinancial activities, or the consistent with the statutory effective date. Industrial banks that are industrial bank parent company engages not subsidiaries of a company, for requirements of section 38A of the FDI in new nonfinancial activities. The final Act. example, those wholly owned by one or rule operates prospectively on the basis more individuals, would not have been After considering these comments of a filing that would result in an regarding the scope of the proposed subject to the proposed rule. industrial bank becoming a subsidiary The FDIC specifically sought rule, the final rule will apply only of a company not subject to prospectively as of the effective date of comment on whether to apply the rule consolidated Federal supervision. In prospectively or to all industrial banks the rule, to industrial banks that become contrast, the suggested triggers, as subsidiaries of companies that are described, would be applied to existing 96 95 Although generally not subject to the rule, Covered Companies. The FDIC must grandfathered industrial banks and their parent industrial banks and their parent companies that are not subject to Federal companies, would not be related to a 96 The proposed rule divided the rule into two consolidated supervision by the FRB will remain filing, and would not necessarily result temporal states, on or before the effective date on subject to FDIC supervision, including but not in any impact to the industrial bank. the one hand, and after the effective date on the limited to examinations and capital requirements. other hand. The final rule amends the dividing line See also the discussion of the reservation of Should such an impact be identified, so that the relevant timeframes would be before the authority in section IV.B.6. of this Supplementary the FDIC would rely on its supervisory effective date and on or after the effective date. This Information. or enforcement authority as the change was made because the effective date is

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consider the requirements of the APA where the FDIC would require a person shares, or otherwise, including to and the Riegle Community Development that controls a Covered Company to join maintain the capital and liquidity levels and Regulatory Improvement Act as a party, such person would be of the subsidiary industrial bank at or (RCDRIA) in determining the effective required to vote their shares or take above FDIC-specified levels. The FDIC date of new regulations, and both of such other appropriate actions to cause intends to make such a determination these statutory schemes generally the Covered Company to fulfill its on a case-by-case basis and will provide for an effective date that follows obligations under the written consider the business plan, capital the date on which the regulations are agreements. The obligation to maintain structure, risk profile, and business published in final form. Thus, the final the subsidiary industrial bank’s capital activities of the Covered Company. rule will be effective on April 1, 2021.97 and liquidity rests with the Covered 2. Section 354.2—Definitions The FDIC also sought comment on Company. whether an individual that controls the Other commenters noted that the This section of the proposed rule parent company of an industrial bank parent company already commits in the listed the definitions that applied to part should be responsible for the CALMA to provide support and were 354. Terms that were not defined in the maintenance of the industrial bank’s concerned that requiring the parent proposed rule that are defined in section capital and liquidity at or above FDIC- company’s shareholders to also provide 3 of the FDI Act had the meanings given specified levels and for causing the a guarantee of support will drive away in section 3 of the FDI Act.98 parent company to comply with the investors. These commenters, however, The term ‘‘control’’ was defined to written agreements, commitments, and were not opposed to a requirement for mean the power, directly or indirectly, restrictions imposed on the industrial the controlling shareholder to commit to to direct the management or policies of bank. The FDIC also asked whether an vote his or her shares to comply with a company or to vote 25 percent or more individual who is the dominant the CALMA. One commenter noted that of any class of voting securities of a shareholder of a Covered Company the Office of the Comptroller of the company and specifically would have should be required to commit to the Currency (OCC) may impose certain included the rebuttable presumption of maintenance of appropriate capital and commitments on the controlling control at 12 CFR 303.82(b)(1) and the liquidity levels. As discussed below, shareholder related to the ownership of presumptions of acting in concert at 12 § 354.3(b) of the proposed rule provided shares and how the controlling CFR 303.82(b)(2) 99 in the same manner that the FDIC may condition a grant of shareholder exercises shareholder and to the same extent as if they applied deposit insurance, issuance of a non- rights. to an acquisition of securities of a objection to a change in control, or Several commenters supported the company instead of a ‘‘covered approval of a merger on an individual approach of imposing certain conditions institution.’’ These definitions are at the level of the Covered Company’s who is a controlling shareholder of a nearly the same as the definitions of controlling shareholder as necessary to Covered Company joining as a party to ‘‘control’’ in the CBCA 100 and the ensure the safety and soundness of the the written agreements required under FDIC’s regulations implementing the subsidiary industrial bank. Some the rule. In such cases where the FDIC CBCA 101 except that they would have commenters asserted that the FDIC would require the controlling broadened the term to apply to control should require the dominant shareholder to join as a party, the of a company and not solely insured shareholders of a parent company to controlling shareholder would be depository institutions so that the maintain appropriate levels of capital required to cause the Covered Company definition can accurately describe the and liquidity. Another commenter to fulfill its obligations under the relationship between the parent argued that the choice of ownership company of an industrial bank and any written agreements through the voting structure should not relieve an of its nonbank subsidiaries, which also of shares, or otherwise. These individual from source of strength and would be affiliates of the industrial obligations include, among other things, other obligations. maintaining each subsidiary industrial The FDIC believes that in order to bank. bank’s capital and liquidity at such ensure that a Covered Company serves Two commenters suggested that the levels as the FDIC deems necessary for as a continuing source of financial rule should incorporate the definition of the safe and sound operation of the strength to the subsidiary industrial control used in the BHCA and its industrial bank (commitment (7)). bank, the FDIC may exercise its implementing regulations. One trade Several commenters criticized the supervisory discretion to require a group commenter argued that such an controlling shareholder requirement. controlling, or dominant, shareholder of approach would lead to consistency in Some commenters argued that an a Covered Company to join as a party to the treatment of parent companies of individual who controls or owns a the written agreements required under insured depository institutions. An parent company should not be held the rule. An individual with controlling industrial bank commenter suggested personally liable for maintaining the ownership has a direct and effective that aligning the proposed rule’s industrial bank’s capital or liquidity. means by which to influence the major definition of control with the BHCA and 102 These commenters expressed concern decisions of the Covered Company by the FRB’s regulatory framework that such a requirement would make it voting shares or by exercising an would create a more uniform system more difficult to attract shareholders influence as a member of the Covered that would make it easier for investors and capital. As noted above, in cases Company’s board of directors. 98 Accordingly, the FDIC is finalizing this 12 U.S.C. 1813. 99 The proposed rule erroneously referred to the commonly understood to be the date upon which requirement in § 354.3(b) as proposed. a rule is effective, not the day before a rule would presumptions set forth at 12 CFR 303.83(b)(1) and take effect. As discussed in the proposed rule, in (2). The final rule corrects that technical error to 97 During the period before the effective date of such cases where FDIC would require correctly refer to § 303.82(b)(1) and (2). the final rule, the FDIC will consider pending the controlling shareholder to join as a 100 12 U.S.C. 1817(j)(8)(B). deposit insurance applications, change in control party, the controlling shareholder would 101 12 CFR 303.80 through 303.88. notices, and merger applications for industrial 102 85 FR 12398 (Mar. 2, 2020); see also banks on a case-by-case basis and impose be required to cause the Covered Regulation Y—Frequently Asked Questions, conditions and requirements as appropriate and Company to fulfill its obligations under available at https://www.federalreserve.gov/ that are consistent with current practice. the written agreements through voting supervisionreg/reg-y-faqs.htm.

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to balance their investment decisions policies of any industrial bank or any to organizationally distance the bank with the regulatory implications of parent company if the company will, from the primary source of strength, certain levels of investment. directly or indirectly, own, control, or most commonly the top tier parent The FDIC has considered these hold with power to vote at least 10 company. Another commenter strongly comments and has decided to retain the percent of any class of voting securities opposed the possible requirement, definition used in the proposed rule. of any industrial bank or any parent arguing that in many cases it would not First, the definition of control proposed company, and either the industrial make sense to create a corporate in the NPR is consistent with the bank’s shares or the parent company’s structure in service of an industrial bank definition of control that the FDIC uses shares are registered under section 12 of that is a small part of the overall in other contexts, namely changes in the Securities Exchange Act of 1934, or activities or assets of a Covered bank control. The FDIC in 2015 no other person (including a company) Company. amended its filing requirements and will own, control, or hold with power Another commenter argued that processing procedures for notices filed to vote a greater percentage of any class complex diversified Covered Companies under the CBCA with respect to of voting securities. If two or more that conduct nonfinancial activities proposed acquisitions of State companies, not acting in concert, will must be required to structure their nonmember banks and certain parent each have the same percentage, each financial activities under an companies thereof.103 Among other such company will have control. As intermediate holding company so that things, the FDIC’s CBCA implementing noted above, control of an industrial the intermediate holding company may regulations adopted the best practices of bank can be indirect. For example, be subjected to enhanced supervision. the related regulations of the OCC and company A may control company B, The final rule will not require a FRB, rendering more consistent the which in turn may control company C Covered Company that conducts CBCA implementing regulations of the which may control an industrial bank. activities other than financial activities Federal banking agencies. Company A and company B would each to conduct some or all of its financial Second, the FDIC is not the Federal have indirect control of the industrial activities (including ownership and banking agency responsible for bank, and company C would have direct control of an industrial bank) through implementing and interpreting the control. As a result, the industrial bank an intermediate holding company.109 BHCA and has not developed precedent would be a subsidiary of companies A, The FDIC believes that such a structure for the implementation of the BHCA. In B, and C. is not required to adequately supervise adopting the CBCA implementing One commenter observed that the industrial banks and their parent regulations, the FDIC noted that it found Supplementary Information for the companies. the logic of the FRB’s interpretations proposed rule characterized BHCs and The final rule includes the definition regarding control under the BHCA SLHCs as generally prohibited from of Covered Company as proposed with 108 useful in analyzing fact patterns under engaging in commercial activities. one revision: The proposed rule defined the CBCA, but did not adopt the FRB’s This commenter noted that a Covered Company as a company that interpretations, preferring instead to grandfathered unitary SLHCs are is not subject to Federal consolidated review each case based on the facts and permitted to engage in certain supervision by the FRB and that circumstances presented.104 ‘‘grandfathered’’ activities, which may controls an industrial bank as a result of The term ‘‘Covered Company’’ meant include commercial activities and the non-objection to a change in bank any company that is not subject to requested that the FDIC clarify its control, or approval of a merger position with respect to grandfathered Federal consolidated supervision by the transaction or deposit insurance after unitary SLHCs. The FDIC recognizes FRB and that, directly or indirectly, the effective date. The final rule applies that certain grandfathered unitary controls an industrial bank (i) as a result where such a non-objection or approval SLHCs may be able to engage in of a change in bank control under occurs on or after the effective date. commercial activities. Further, as the section 7(j) of the FDI Act,105 (ii) as a This revision is not a change in FDIC FDIC intends to apply the final rule result of a merger transaction pursuant policy, but rather a recognition that the prospectively, a grandfathered unitary to section 18(c) of the FDI Act,106 or (iii) effective date is commonly understood SLHC that is subject to Federal that is granted deposit insurance under to be the date upon which a rule is consolidated supervision would not be section 6 of the FDI Act,107 in each case effective.110 after the effective date of the rule. subject to the final rule. In response to question 5 in the NPR, The FDIC received no comment on a Under these provisions, a company commenters were split on whether to number of definitions: The terms ‘‘FDI would control an industrial bank if the require a Covered Company to form an Act,’’ ‘‘filing,’’ ‘‘FRB,’’ ‘‘industrial company would have the power, intermediate holding company from bank,’’ and ‘‘senior executive officer.’’ directly or indirectly, (i) to vote 25 which to conduct its financial activities. The final rule adopts these terms as percent or more of any class of voting One commenter suggested that there proposed. shares of any industrial bank or any would be limited benefit to requiring a In the NPR, the FDIC requested company that controls the industrial Covered Company that conducts comment on whether the rule should bank (i.e., a parent company), or (ii) to activities other than financial activities include other types of nonbank banks, direct the management or policies of to conduct some or all of its financial in addition to industrial banks. One any industrial bank or any parent activities (including ownership and commenter stated that all bank and company. In addition, the FDIC control of an industrial bank) through financial service companies, including presumes that a company would have an intermediate holding company, industrial banks and other institutions the power to direct the management or observing that any potential benefit that have been excluded from the BHCA could be significantly outweighed by definition of bank (such as credit card 103 80 FR 65889 (Oct. 28, 2015). The FDIC the complexity and cost of received no comments on its approach. 109 The FDIC may consider requiring an 104 implementing an intermediate holding 80 FR 65889, 65893. intermediate holding company in the case of a 105 12 U.S.C. 1817(j). company structure, and may only serve Covered Company that is not located in the United 106 12 U.S.C. 1828(c). States and presents unique circumstances. 107 12 U.S.C. 1816. 108 See 85 FR at 17772–73. 110 See also supra note 96.

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and limited purpose trust banks) should bank or of a company that controls an maintain the safety and soundness of be subject to a level playing field, industrial bank, the stock of which is industrial banks that are controlled by including subjecting the parent registered under section 12 of the Covered Companies. These required company to Federal consolidated Securities Exchange Act of 1934, or (ii) commitments and other provisions are supervision. Another commenter stated when one Covered Company will intended to establish a level of that it was not necessary to include control another Covered Company that information reporting and parent credit card banks and trust companies directly controls an industrial bank. company obligations similar to that in the scope of the rule because they are Section 354.3(a) of the final rule is which would be in place if the Covered limited purpose institutions. Another unchanged from the proposal. Company were subject to Federal commenter suggested that the rule may As discussed above, proposed consolidated supervision. The be appropriate for other kinds of banks § 354.3(b) allowed the FDIC, in its sole requirements reflect commitments and whose owners are not subject to the discretion, to require, as a condition to additional provisions that, for the most BHCA, but cautioned that there may be the approval of or non-objection to a part, the FDIC has previously required unique issues related to those charters filing, that a controlling shareholder of as a condition of granting deposit that should be considered before a Covered Company join as a party to insurance to industrial banks. The FDIC extending the rule to such institutions. any written agreement required in proposed to include these required The FDIC has decided not to extend § 354.3. In such cases, the controlling commitments in the rule to provide the scope of the final rule at this time shareholder would be required to cause transparency to current and potential to other types of banking institutions the Covered Company to fulfill its industrial banks, the companies that that have parent companies not subject obligations under the written agreement, control them, and the general public. to Federal consolidated supervision. through the voting of shares, or In order to provide the FDIC with These other types of institutions (credit otherwise. more timely and more complete card banks and limited purpose trust In addition to the written agreements, information about the activities, companies) operate under a limited commitments, and restrictions of the financial performance and condition, purpose charter, which narrows the final rule, the FDIC will condition an operations, prospects, and risk profile of range of services they may offer. As a approval of an application or a non- each Covered Company and its result, the FDIC’s experience indicates objection to a notice on one or more subsidiaries, the proposed rule required these charter types have generally not actions or inactions of the applicant or that each Covered Company furnish to presented the broad issues as presented notificant, as deemed appropriate by the the FDIC an initial listing, with annual by industrial banks. FDIC.111 The FDIC may enforce updates, of all of the Covered Commenters also suggested additional conditions imposed in writing in Company’s subsidiaries (commitment terms for which definitions would be connection with any action on any (1)); consent to the FDIC’s examination useful. The FDIC believes that the final application, notice, or other request by of the Covered Company and each of its rule is sufficiently clear that such an industrial bank or a company that subsidiaries to monitor compliance with additional definitions were not controls an industrial bank,112 so it is any written agreements, commitments, determined to be necessary, although not necessary to include provisions conditions, and certain provisions of section IV.B.5. of this Supplementary regarding conditions in the proposed law (commitment (2)); submit to the Information section provides examples rule. FDIC an annual report on the Covered of what will and will not be considered 4. Section 354.4—Required Company and its subsidiaries, and such a ‘‘material change’’ to a business plan Commitments and Provisions of Written other reports as the FDIC may request requiring prior FDIC approval. Agreement (commitment (3)); maintain such 3. Section 354.3—Written Agreement records as the FDIC deems necessary to The FDIC historically has included assess the risks to the industrial bank This section of the proposed rule conditions in deposit insurance and to the DIF (commitment (4)); and prohibited any industrial bank from approval orders for industrial banks that cause an independent audit of each becoming a subsidiary of a Covered are intended to create a sufficient subsidiary industrial bank to be Company unless the Covered Company supervisory structure with respect to a performed annually (commitment (5)). enters into one or more written Covered Company. The commitments In the NPR, the FDIC sought comment agreements with the FDIC and its that the FDIC has required industrial on whether the proposed commitments subsidiary industrial bank. In such banks and their parent companies to requiring examination and reporting agreements, the Covered Company undertake in written agreements have serve the supervisory purpose of would make certain required varied on a case-by-case basis, transparency and identifying any commitments to the FDIC and the depending on the facts and potential risks to the industrial bank industrial bank, including those listed circumstances and the particular and whether there was a better approach in paragraphs (a)(1) through (8) of concerns the FDIC has identified during for supervising a Covered Company. As § 354.4, the restrictions in § 354.5, and the review of the application materials. discussed above in section IV.A.2. of such other provisions as the FDIC may Section 354.4 of the proposed rule this Supplementary Information section, deem appropriate in the particular required each party to a written a number of commenters were generally circumstances. When two or more agreement to comply with paragraphs critical of the proposed commitments as Covered Companies will control (as the (a)(1) through (8). These required being inadequate and failing to achieve term ‘‘control’’ is defined in § 354.2), commitments are intended to provide parity with the regime of consolidated directly or indirectly, the industrial the safeguards and protections that the supervision required for BHCs. The bank, each such Covered Company FDIC believes are prudent to impose to FDIC believes that the examination would be required to execute such reviews envisioned under the final rule written agreement(s). This circumstance 111 See 12 CFR 303.11(a) (‘‘The FDIC may enhance the existing supervisory could occur, for example, (i) when two approve, conditionally approve, deny, or not object practices and allow for a more robust to a filing after appropriate review and or more Covered Companies will each consideration of the record.’’). See 12 CFR 303.2(bb) evaluation of the industrial bank’s have the power to vote 10 percent or for a list of standard conditions. affiliate relationships. In addition, the more of the voting stock of an industrial 112 12 U.S.C. 1818(b); 1831aa(a). FDIC believes the enhanced reporting

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requirements in the final rule are organization that are relevant to the condition and results of operations of consistent with section 38A(d) of the industrial bank. One commenter the Covered Company, which may FDI Act, which provides explicit supported carving out functionally negatively impact its ability to serve as statutory authority for the FDIC to regulated entities from the scope of the a source of strength for the industrial require reports from a controlling required commitments in § 354.4 to be bank. company of an industrial bank to assess consistent with ‘‘jurisdictional The FDIC believes that the the ability of the company to comply boundaries’’ contemplated by the GLBA. relationship of a bank with its affiliated with the source of strength requirement, While functionally regulated financial organizations is important to the and to enforce compliance by such firms do not raise the types of concerns analysis of the condition of the bank company.113 The final rule adopts these that commercial firms do with respect to itself. Because of commonality of commitments as proposed, other than as industrial banks, different regulatory ownership or management that may described below. Implementation of the supervisors will have different exist, transactions with affiliates may rule positions the FDIC to better protect supervisory approaches and will be not be subject to the same sort of the industrial bank from activities of a focused, by design, on the aspects of a objective analysis that exists in parent organization that present business that concern that regulator.116 transactions between independent heightened risk to the organization and The FDIC serves as the regulator for the parties. Also, affiliates offer an the bank and to ensure that the parent industrial bank and exercises oversight opportunity to engage in types of company is a continuing source of of the parent company to the extent business activities that are prohibited to financial strength.114 necessary to ensure the safety and the bank itself yet those activities may In response to the concerns expressed soundness of the industrial bank affect the condition of the bank. In by commenters that a Covered Company subsidiary and to protect the DIF. recognition of the importance of these that is not engaged in financial services Through examination and reporting, the relationships, the FDIC has been granted would not be covered by the GLBA, the FDIC will be able to gauge and monitor authority, under certain conditions to FDIC is revising the commitment in the the operational risks an industrial bank examine affiliates in connection with its final rule that a Covered Company affiliate, whether functionally regulated examination of a bank to disclose the submit an annual report to the FDIC or unregulated, presents to the relationship between the bank and a (commitment (3)) to include a industrial bank. The FDIC may take given affiliate, as well as the effect of requirement for a Covered Company to action to prevent or redress an unsafe or that relationship on the bank.117 The inform the FDIC about its systems for unsound practice if action to address FDIC also has been granted authority to protecting the security, confidentiality, that risk when limited to the industrial bring enforcement actions against and integrity of consumer and bank would not effectively protect insured State nonmember banks and 118 nonpublic personal information. This against the risk. their institution-affiliated parties. As reporting will provide the FDIC The FDIC sought comment on discussed above in section IV.A.2., appropriate information across all of a whether a Covered Company should be industrial banks are subject to these Covered Company’s financial and required to disclose to the FDIC certain same examination and enforcement nonfinancial activities to monitor for additional affiliates or portfolio authorities as other banks, as well as potential consumer protection risks. companies of the Covered Company sections 23A and 23B of the Federal The FDIC also sought comment on because these affiliates could engage in Reserve Act and Regulation W, which whether the commitment and transactions with, or otherwise impact, govern transactions with affiliates. In requirements of the rule are the subsidiary industrial bank. One addition, section 38A of the FDI Act appropriately tailored in light of the trade association commenter opposed provides authority for the FDIC to GLBA’s restrictions on the extent to any further extension of the reporting require reports from a company that which a Federal banking agency may requirement as being burdensome. A controls an industrial bank to assess the regulate and supervise a functionally number of commenters acknowledged ability of the company to comply with regulated affiliate of an insured the FDIC’s authority to understand the source of strength requirement, and depository institution. affiliate relationships and their impact to enforce compliance by such 119 Most commenters supported the on the industrial bank, but suggested company. Section 38A of the FDI Act reporting 115 and examination that the reporting be tailored by therefore provides an additional requirements that enable the FDIC to including a materiality threshold. supervisory tool to the FDIC in monitor and evaluate financial and Otherwise, these commenters believed regulating Covered Companies, other conditions in the parent the reporting would be burdensome including their subsidiaries. while potentially providing information In supervising industrial banks, the 113 See 12 U.S.C. 1831o–1(d). with no real relevance to the industrial FDIC considers each industrial bank’s 114 See 12 U.S.C. 1820(b) and 1820(b)(4)(A). bank. purpose and placement within the 115 If the Covered Company is required to submit Other commenters argued that the organizational structure and tailors reports to the Securities and Exchange Commission final rule should require a Covered reporting and other requirements (SEC), the requirement to submit an annual report Company to disclose its affiliates and accordingly. Requiring the disclosure of may be satisfied through submission of SEC Form portfolio companies that could engage 10–K (or equivalent), along with the company’s the Covered Companies’ subsidiaries annual audit report and management letter (with in transactions with, or otherwise along with the other reporting tools management responses), provided that the impact, the subsidiary industrial bank available to the FDIC as discussed above combination of reports addresses each requirement in order to provide the FDIC a complete are sufficient and will appropriately as stated in the rule. In some cases, it may be and transparent picture of the business necessary or appropriate to also submit evaluations cover those affiliates of the industrial of the Covered Company’s internal operations, model. These commenters observed that bank of most concern to the FDIC. along with management responses, satisfying the related entities may impact the financial Accordingly, the FDIC is adopting Statement on Standards for Attestation § 354.4(a)(1) as proposed. Engagements (SSAE) Number 18, Report on 116 For example, in a situation where a parent Controls at a Service Organization Relevant to User company issues securities, the SEC’s role and 117 Entities’ Internal Control over Financial Reporting, expertise lies in supervising the parent company as 12 U.S.C. 1820(b)(4). as issued or amended by the Auditing Standards an issuer of securities, not in the role of a parent 118 12 U.S.C. 1813(u) and 1818. Board, or similar reports or evaluations. company of an industrial bank. 119 See 12 U.S.C. 1831o–1(d).

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In order to limit the extent of each Companies, these commenters noted written agreement to commit to Covered Company’s influence over a that the higher threshold may enhance maintain each subsidiary industrial subsidiary industrial bank, the proposed coordination between the industrial bank’s capital and liquidity at such rule required each Covered Company to bank and Covered Companies. By levels as the FDIC deems necessary for commit to limit its representation on the extension, the increased coordination the safe and sound operation of the industrial bank’s board of directors to 25 would enable the Covered Companies to industrial bank, and to take such other percent of the members of the board, or have a better understanding of the actions as the FDIC finds appropriate to if the bank is organized as a limited industrial bank’s obligations. One provide each subsidiary industrial bank liability company and is managed by a comment also noted that the FDIC with the resources for additional capital board of managers, to 25 percent of the would retain its full enforcement or liquidity (commitment (7)). As members of the board of managers, or if authority should circumstances require discussed above, the FDIC is finalizing the bank is organized as a limited action. § 354.3(b) as proposed, which provides liability company and is managed by its The FDIC understands the challenges that the FDIC may require the members, to 25 percent of managing involved in the selection of directors of controlling or dominant shareholder of member interests (commitment (6)). For insured institutions. However, the prior a Covered Company to join as a party to example, if company A, which has 15 approval requirement should not the written agreements required under percent representation on the subsidiary substantially interfere in a well- the rule, including commitment (7). The industrial bank’s board, controls qualified candidate’s ability to assume final rule includes commitment (7) as company B, then the companies’ the responsibilities of the position in a proposed. representation would be aggregated and timely manner, and thereby to achieve Lastly, the proposed rule required that limited to no more than 25 percent. the noted benefits of appropriate each Covered Company and its Thus, company B’s representation coordination between the industrial subsidiary industrial bank(s) enter into would be limited to no more than 10 bank and the Covered Company. As to a tax allocation agreement that expressly percent. the possibility that an independent recognizes an agency relationship The FDIC sought comment on director’s departure from a board may between the Covered Company and the whether this threshold is appropriate. result in temporary non-compliance subsidiary industrial bank with respect Three commenters argued against any with the established threshold, the to tax assets generated by such limitation of a Covered Company’s FDIC’s construction and use of written industrial bank, and that further states representation on the board of a agreements provides sufficient that all such tax assets are held in trust subsidiary industrial bank. These mechanisms by which compliance can by the Covered Company for the benefit commenters noted the burden in be timely achieved without the extreme of the subsidiary industrial bank and identifying independent director consequence of removing other directors promptly remitted to such industrial candidates and obtaining the prior or requiring FDIC actions to enforce the bank (commitment (8)). As proposed, a approval for candidates associated with commitment. tax allocation agreement would have a Covered Company. In addition, these As to the specific threshold, the FDIC also provided that the amount and commenters argued that the restriction is revising the commitment in the final timing of any payments or refunds to would limit the coordination necessary rule to establish a less than 50 percent the subsidiary industrial bank by the and appropriate among entities within threshold, which will maintain a Covered Company should be no less an organization. One commenter sufficient number of independent favorable than if the subsidiary expressed the concern that there could directors while addressing a number of industrial bank were a separate be a negative effect on the remaining the commenters’ concerns. In making taxpayer. directors if an independent director this change, the FDIC considered the One commenter questioned the leaves a board. That is, the potential potential numeric challenges that could FDIC’s statutory authority to impose need to eliminate a director associated confront industrial banks whose boards such a requirement. The FDIC has the with a Covered Company in order to are comprised of a comparatively small power to issue rules to carry out the comply with the rule on a continuing number of directors. In addition, the provisions of the FDI Act,120 including basis. change enables Covered Companies and rules to ensure the safety and soundness One commenter asserted that there industrial banks to select director of industrial banks and to protect the may be conflicts between the rule candidates believed to be most qualified DIF. As the FDIC discussed in the limitation and unspecified State law, to direct and oversee the institution. As proposed rule, companies and their while another noted the lack of such, the change enables Covered subsidiaries, including insured comparable limitations on other legal Companies and industrial banks to depository institutions and their parent structures, creating a distinct difference exercise some additional flexibility companies, will often file a consolidated between Covered Companies and other when selecting directors. Nevertheless, income tax return. A 1998 interagency operating entities. A number of the FDIC retains the authority, as policy statement issued by the Federal commenters also suggested that relying appropriate, to require a higher banking agencies and the U.S. on the simple majority of independent threshold of director independence. Department of the Treasury, and an directors, as has been applied in other Finally, one comment requested addendum thereto 121 (collectively, instances, has not led to issues or clarification as to whether officers of the concerns regarding the subsidiary industrial bank would be included 120 ‘‘[T]he Corporation . . . shall have power . . . industrial bank. within the limitation. In short, if an [t]o prescribe by its Board of Directors such rules To address the concerns regarding the officer in question is associated with a and regulations as it may deem necessary to carry out the provisions of this chapter or of any other limitation, commenters suggested either Covered Company, the individual law which it has the responsibility of administering raising the threshold from 25 percent to would be counted against the limitation. or enforcing (except to the extent that authority to one-third, or requiring that a simple In order to ensure that a subsidiary issue such rules and regulations has been expressly majority be independent. While industrial bank has available to it the and exclusively granted to any other regulatory agency).’’ 12 U.S.C. 1819(a)(Tenth). acknowledging the need for some degree resources necessary to maintain 121 See Interagency Policy Statement on Income of director independence to limit the sufficient capital and liquidity, the Tax Allocation in a Holding Company Structure, 63 potential influence from Covered proposed rule required each party to a Continued

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Policy Statement), acknowledges this these considerations in the final rule. shareholder of a Covered Company in practice, noting that a consolidated The other commenter stated that, while addition to those described in § 354.4(a) group may prepare and file Federal and dissolution requirements may be or (b) in order to ensure the safety and State income tax returns as a group so appropriate for large complex soundness of the industrial bank and long as the interests of any insured institutions that pose a risk to the DIF, reduce potential risk to the DIF. depository institution subsidiaries are smaller banks do not pose the same Several commenters specifically not prejudiced. Given the potential risks nor require the same level of addressed § 354.4(c).122 One commenter harm to insured subsidiary institutions, complex planning. According to this raised concerns that the rule would be the Policy Statement encourages parent commenter, the cost of contingency applied to Covered Companies or companies and their insured depository planning would outweigh its benefit for controlling shareholders of existing institution subsidiaries to enter into smaller institutions. This commenter industrial banks. As discussed above, written, comprehensive tax allocation also stated that, at a minimum, any because the rule is constructed to apply agreements, and notes that inconsistent contingency planning requirement prospectively, parties will become practices regarding tax obligations may should be no more stringent than the subject to the rule only as the result of be viewed as an unsafe and unsound requirement for other FDIC-insured (1) the formation of an industrial bank practice prompting either informal or intuitions of the same size. on or after the effective date of the final formal corrective action. The final rule, As discussed in the NPR, a rule, or (2) a merger transaction or consistent with the proposed rule, contingency plan commitment would change in control on or after the similarly seeks to avoid potential harm only be required in certain effective date of the final rule, assuming to a subsidiary industrial bank by circumstances based upon the facts and the institution retains its industrial bank requiring such a written tax allocation circumstances presented, and after charter. agreement. The final rule includes taking into consideration size, A second commenter raised concerns commitment (8) as proposed. complexity, interdependencies, and that § 354.4(c) vests open-ended In addition to the eight commitments other relevant factors. The final rule authority in the FDIC to change, at any discussed above, § 354.4(b) of the preserves the FDIC’s supervisory time and for any reason, the obligations proposed rule permitted the FDIC to discretion to tailor the contents of any of a Covered Company or controlling condition the approval of an application contingency plan to a specific Covered shareholder. The commenter further or non-objection to a notice on the Company and its insured industrial suggested that agreements should be Covered Company and industrial bank bank subsidiary. This ability to tailor negotiated at the outset. Another committing to adopt, maintain, and the requirements of a contingency plan commenter also suggested that the FDIC implement an FDIC-approved serves to minimize the burdens of should rely on its enforcement authority contingency plan that presents one or developing and implementing such a rather than including additional more actions to address potential plan. It should also be noted that commitments in the written agreements. significant financial or operational contingency plans are not the same as In response to commenters’ concerns stress that could threaten the safe and resolution plans under section 165(d) of about the application of this section, the sound operation of the insured the Dodd-Frank Act or § 360.10 of the FDIC is removing § 354.4(c) to avoid industrial bank. The plan also would FDIC’s Rules and Regulations, and the confusion that the FDIC would reflect strategies for the orderly contents of a contingency plan (if unilaterally impose additional disposition of the industrial bank required) would be far less complex. A commitments (or restrictions). without the need for the appointment of contingency plan is an explanation of Notwithstanding this deletion, the FDIC a receiver or conservator. Such the steps the industrial bank and retains its general supervision, disposition could include, for example, Covered Company could take to mitigate examination, and enforcement sale of the industrial bank to, or merger the impacts of financial and operational authorities (as reserved by § 354.6) to with, a third party. stress outside of the receivership take any actions beyond the scope of the The FDIC received two comments on process. Finally, the FDIC believes that final rule, including actions to ensure the contingency plan requirement. One a contingency plan, when required, may the safe and sound operation of any commenter stated that the FDIC should help the FDIC, the Covered Company, insured depository institution, consider size, complexity, and its industrial bank subsidiary to including an industrial bank, and interdependencies, and other relevant better understand the relevant further to ensure that a parent of an factors in requiring, reviewing, and interdependencies, operational risks, industrial bank acts as a source of approving a contingency plan—similar and other circumstances or events that financial strength to that insured to the ‘‘living will’’ requirements under could create safety and soundness institution. For example, the FDIC may section 165(d) of the Dodd-Frank Act concerns and attendant risk to the DIF. require additional, unique commitments where the FRB has tiered certain Accordingly, the FDIC is finalizing this from a Covered Company or a requirements based upon an requirement as proposed. controlling shareholder of a Covered institution’s asset size. This commenter While the contingency plan is one Company when the FDIC determines it also suggested that the FDIC formalize type of commitment that the FDIC is necessary to address specific elements would be able to require of Covered of a filing or circumstances related to FR 64757 (Nov. 23, 1998); Addendum to the Companies and their industrial bank the filer. Additional commitments may Interagency Policy Statement on Income Tax subsidiaries, there may be other be derived, for instance, from elements Allocation in a Holding Company Structure, 79 FR commitments that the FDIC may 35228 (June 19, 2014). The 2014 Addendum to the of the business model presented, determine to be appropriate given the including the nature and scope of Interagency Policy Statement on Income Tax business plan, capital levels, or Allocation in a Holding Company Structure also activities conducted, the risk profile of clarifies that all tax allocation agreements are organizational structure of a Covered the activities, and the complexity of subject to the requirements of section 23B of the Company or its subsidiary industrial operations. The proposed relationships Federal Reserve Act, and tax allocation agreements bank. Section 354.4(c) of the proposed that do not clearly acknowledge that an agency relationship exists may be subject to additional rule provided that the FDIC may require 122 These commenters raised the same or similar requirements under section 23A of the Federal such additional commitments from a concerns with respect to § 354.5(b), which the FDIC Reserve Act. Covered Company or controlling also is deleting in the final rule.

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and transactions with the parent restrictions, like the required to the de novo period except for organization that may impact the commitments discussed above, are paragraph (a)(4) covering employment industrial bank also could be taken into generally intended to provide the of a senior executive officer who is also consideration. safeguards and protections that the FDIC currently associated with an affiliate of The FDIC also sought comment on believes would be prudent to impose the industrial bank. Most of these whether the rule should include a with respect to maintaining the safety commenters were concerned that the commitment that the parent company and soundness of industrial banks that ongoing restrictions in these sections will maintain its own capital at some become controlled by companies that created greater burdens on industrial defined level on a consolidated basis. A are not subject to Federal consolidated banks than required of non-industrial number of commenters argued that supervision. Accordingly, the proposed banks. creating consolidated capital rule required prior FDIC approval for By contrast, other commenters argued requirements for the parent company the subsidiary industrial bank to take that these restrictions should be would ensure that it is able to serve as any of five actions set forth in § 354.5(a). perpetual in duration and viewed them a source of strength for its subsidiary In order to ensure that the industrial as important safeguards on the actions industrial bank. Some commenters bank does not immediately after of a Covered Company with respect to argued that such capital standards becoming a subsidiary of a Covered an industrial bank subsidiary. One should be comparable to those imposed Company engage in high-risk or other commenter argued that given the unique on BHCs of similar size and systemic inappropriate activities, the subsidiary and significant risks posed by industrial significance. These commenters also industrial bank would have been banks and their parent companies, the argued that the absence of a required to obtain the FDIC’s prior restrictions should not be limited to any consolidated capital standard for the approval to make a material change in number of years after an industrial bank parent company creates a lower its business plan after becoming a becomes a subsidiary of a Covered standard of supervision than is imposed subsidiary of a Covered Company Company. by the BHCA. One commenter (paragraph (a)(1)). In order to limit the The FDIC previously has imposed recommended that such requirements influence of the parent Covered restrictions similar to those contained in should be greater than the requirements Company, the subsidiary industrial § 354.5 in prior actions on filings applicable to other FDIC-insured bank would have been required to involving industrial banks. The agency’s depository institutions due to the obtain the FDIC’s prior approval to add experience indicates that there are enhanced risk of the Covered Company or replace a member of the board of advantages and disadvantages to on the industrial bank and the DIF. directors or board of managers or a imposing such restrictions on a By contrast, several commenters managing member, as the case may be perpetual basis, just as there are argued that applying a capital standard (paragraph (a)(2)); add or replace a advantages and disadvantages to on the parent company itself is not senior executive officer (paragraph imposing the restrictions on a time- encompassed within the FDIC’s (a)(3)); employ a senior executive officer limited basis. The relative advantages statutory mandate to preserve the safety who is associated in any manner with and disadvantages vary depending on and soundness of insured depository an affiliate of the industrial bank, such the nature of the particular restriction. institutions. Other commenters as a director, officer, employee, agent, Nevertheless, certain items are believed observed that for many industrial bank owner, partner, or consultant of the so directly related to the industrial parent companies, measures of tangible Covered Company or a subsidiary bank’s ongoing safe and sound equity are not often the most pertinent thereof (paragraph (a)(4)); or enter into operation that a perpetual restriction is indicator of the financial health of the any contract for material services with warranted. As such, the FDIC is company or its ability to serve as a the Covered Company or a subsidiary adopting the restrictions regarding source of strength. These commenters thereof (paragraph (a)(5)). Pursuant to material changes to business plans, argued that given the diversity of proposed § 354.5(b), the FDIC would entering into contracts for material industrial bank parent company have been able to, on a case-by-case services with a Covered Company or its operations, a more tailored approach basis, impose additional restrictions on subsidiaries, and employing a senior would be appropriate. the Covered Company or its controlling executive officer that is associated with The FDIC does not believe that the shareholder if circumstances warrant. an affiliate of the industrial bank as final rule should impose capital The FDIC is adopting revisions to the proposed, with one exception noted requirement commitments on Covered restrictions in § 354.5(a)(2), (3), and (4) below. Companies because a one-size-fits all and removing § 354.5(b), as discussed However, having considered regulatory approach to capital below. commenters’ suggestions regarding the requirements would not be appropriate, The FDIC sought comment on restrictions on the appointment of given the idiosyncratic business models whether these restrictions should be directors (paragraph (a)(2)) and senior and operations of such parent time-limited. A number of commenters executive officers (paragraph (a)(3)), the companies. The FDIC believes that the generally argued that the restrictions FDIC is modifying the final rule to apply final rule and its supervisory framework should only apply during the industrial a three-year period to filings approved adequately ensure that a parent bank’s de novo period (i.e., the first by the FDIC for an industrial bank that company of an industrial bank has the three-years of operation). Some is a subsidiary of a Covered Company. ability to serve as a source of strength. commenters suggested that the FDIC This modification provides flexibility should or could apply ongoing for industrial banks to timely appoint 5. Section 354.5—Restrictions on restrictions (beyond the de novo period) directors and officers. The FDIC’s Industrial Bank Subsidiaries of Covered when special circumstances exist. One supervisory efforts and enforcement Companies commenter proposed that the FDIC authorities remain fully accessible if an Section 354.5 of the proposed rule implement a process to allow an industrial bank’s director or officer required the FDIC’s prior written industrial bank to request a waiver of selection raises concerns. Further, approval before an industrial bank that the requirements at the conclusion of consistent with § 354.6 of the final rule, is a subsidiary of a Covered Company the de novo period. Two commenters the FDIC may impose additional may take certain actions. These recommended limiting the restrictions restrictions if appropriate to a particular

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filing. Thus, as circumstances warrant, Act and other laws.123 The reservation the communities in which the industrial the FDIC may extend the three-year of authority in § 354.6 clarifies that, bank operates. Two community group period or impose the restriction on a notwithstanding the final rule, the FDIC commenters went further indicating that perpetual basis. retains the authority to exercise those the FDIC should not move forward with In light of the changes to paragraphs powers, as it would for any insured this rule until CRA assessment area (a)(2) and (3) above, the FDIC is also depository institution where it is the procedures are updated. adopting a revision to the restriction on appropriate Federal banking agency, In January of 2020, the FDIC joined employment of a senior executive which includes industrial banks. While the OCC in issuing a CRA proposal to officer who is currently associated with the final rule establishes certain modernize CRA regulations.124 On May an affiliate of the industrial bank commitments and restrictions with 20, 2020, the OCC issued its CRA final (paragraph (a)(4)). The restriction is respect to industrial banks and Covered rule.125 The FDIC did not move forward modified in the final rule to cover a Companies, § 354.6 recognizes that the with a final rule following the proposal senior executive officer who is or was FDIC could require industrial banks and and continues to enforce its existing during the past three years associated their parent companies that are not CRA regulation.126 More recently, on with an affiliate of the industrial bank subject to Federal consolidated September 21, 2020, the FRB issued an to prevent evasion of the restriction. As supervision by the FRB to enter into ANPR to solicit public input regarding noted above, this restriction is not written agreements, provide additional modernizing the FRB’s CRA regulatory otherwise modified with respect to its commitments, or abide by additional and supervisory framework.127 perpetual duration. restrictions if necessary to maintain the Modernizing CRA regulations As discussed above, proposed safety and soundness of the industrial applicable to FDIC-supervised § 354.5(b) has been removed to align bank. Additionally, the FDIC’s powers institutions is an important endeavor, with the change the FDIC made to and authorities may be applied to and the FDIC is considering further § 354.4(c). require written commitments and/or to rulemaking in this area, which may Several commenters requested that impose restrictions in the context of a include seeking additional public input the FDIC clarify what is meant by a particular industrial bank and its parent and engaging with the other prudential ‘‘material change’’ to the industrial to mitigate risk and ensure the safe and regulators. For the time being, however, bank’s business plan that requires the sound operation of the insured the FDIC will continue to operate under FDIC’s written approval prior to depository institution, even if not in the existing CRA regulations, which effecting such change. Because business connection with a filing pursuant to this contain provisions including public plan changes or deviations may alter the part. participation in strategic plans and facts and circumstances that supported The FDIC received only one comment consideration for community the FDIC’s action on a filing in which that addressed the proposed reservation development activity in insured the business plan condition was of authority, noting that the FDIC’s use institutions’ broader State-wide and imposed, the following generally have of its discretion in applying the regional areas. been determined to constitute a material restrictions on industrial banks However, the statutory factor contained in § 354.5, together with a change in or deviation from an addressing convenience and needs of reservation of its examination authority, institution’s business plan: the community to be served is broader would allow for a practical • Increases in financial statement than the CRA. In assessing the statutory implementation of the FDIC’s powers. categories or subcategories (such as factor convenience and needs of the The FDIC is adopting § 354.6 as types of loans, funding, revenue, or community to be served, the essential proposed. During the period before the capital) of 25 percent or more; considerations are the deposit and effective date of the final rule, the FDIC • Introduction of distinctly new or credit needs of the community to be will consider pending deposit insurance served, the nature and extent of the different business strategies or applications, change in control notices, objectives, including products or opportunity available to the applicant in and merger applications for industrial that location, and the willingness and services, target markets, delivery banks on a case-by-case basis and channels, or business development ability of the applicant to serve those impose conditions and requirements as 128 strategies; financial needs. The markets to be • appropriate and that are consistent with served and the economic and Changes to the institution’s current practice and the FDIC’s general financial strategies, or the acquisition of competitive conditions within the examination, supervision, and markets are important to these assets, an operating entity, or the enforcement authorities. assumption of deposits or other considerations. The applicant’s CRA liabilities; or 7. Responses to Additional Questions Plan is an important part of the FDIC’s • Changes in organizational evaluation of the convenience and In addition to the questions discussed needs to be served, but it is not the only relationships such that the manner in above, the FDIC sought responses to which the institution implements or consideration. The FDIC believes the several additional questions. In benefits to finalizing this rule are carries out its business strategies or response to the FDIC’s question whether objectives is impacted. significant, and formalizing and there were additional categories of strengthening FDIC’s existing 6. Section 354.6—Reservation of information that the FDIC should supervisory processes and policies that Authority consider in evaluating an industrial bank’s ability to meet the convenience 124 The FDIC proposed to clarify that it 85 FR 1204. and needs of the community to be 125 retains the authority to take supervisory 85 FR 34734. served, some commenters opposed to 126 State savings associations will be examined by or enforcement actions, including the rule expressed concern that the CRA the FDIC under the CRA regulations of the OCC, 12 actions to address unsafe or unsound requires modernization or is otherwise CFR part 25 and 12 CFR part 195, as may be practices, or violations of law. inadequate to ensure industrial banks amended from time to time. The FDIC has broad supervision, 127 85 FR 66410. are properly serving the credit needs of 128 See Statement of Policy on Applications for examination and enforcement powers Deposit Insurance, 63 FR 44756 (Nov. 20, 1998), and authorities granted to it by the FDI 123 See supra notes 59–62 and accompanying text. amended by 67 FR 79276 (Dec. 27, 2002).

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apply to parent companies of industrial planning. These commitments allow the financial services, among others. banks that are not subject to Federal FDIC to ensure that a Covered Company However, during the period of 2017 consolidated supervision should can and will serve as a source of through 2019, the FDIC received nine proceed even in the absence of a unified strength for its industrial bank, and industrial bank deposit insurance interagency rule on CRA. along with the added flexibility to applications and one change in control The FDIC also sought comment on the require additional commitments as application.131 Consistent with the FDIC’s approach to foreign ownership of needed, they are sufficient to address Paperwork Reduction Act (PRA) 132 industrial banks. Some commenters both domestic and foreign Covered estimates presented elsewhere in this argued that foreign ownership of Companies.129 rule, for this analysis the FDIC is industrial banks should not be V. Expected Effects estimating the final rule applies to four permitted, or if permitted, should be filings per year seeking to establish or heavily regulated. A commenter argued As previously discussed, the final rule acquire an industrial bank. that the FDIC would not be well requires or imposes certain conditions, The final rule could indirectly affect positioned to foresee the risks that a commitments, and restrictions for each subsidiaries of Covered Companies. might arise for a foreign Covered deposit insurance application approval, Such Covered Companies operate Company in its home market. Another non-objection to a change in control through a variety of structures that commenter asserted that the proposed notice, and merger application approval include a range of subsidiaries and supervisory approach fell short of the that would result in an industrial bank affiliates. Further, the final rule includes FRB’s consolidated supervision becoming, pursuant to the rule, a the FDIC’s reservation of authority to framework, leaving the FDIC with subsidiary of a Covered Company. The require any industrial bank and its limited examination authority and final rule requires such Covered parent company, if not otherwise therefore unable to adequately monitor Company to enter into one or more subject to part 354, to enter into written foreign companies whose risks might be written agreements with the FDIC and agreements, provide commitments, or spread across multiple entities. Another the industrial bank subsidiary. abide by restrictions, as appropriate. commenter opposed foreign ownership A. Overview of Industrial Banks Therefore, it is difficult to estimate the of industrial banks, but suggested that if As of June 30, 2020, the FDIC number of subsidiaries and affiliates of such arrangements were permitted, prospective Covered Companies, based further commitments such as a high net supervised 3,270 insured depository institutions, with combined assets of on information currently available to the stable funding ratio and a prefunded FDIC. However, based on the FDIC’s orderly liquidation fund should be $3.84 trillion. Of these, 23 institutions were industrial banks, comprising 0.7 experience as the primary Federal required of foreign Covered Companies. regulator of industrial banks,133 the On the other hand, a number of percent of all FDIC-supervised institutions. The industrial banks hold FDIC believes that the number of commenters indicated that there was no subsidiaries of the prospective Covered need to build in additional restrictions combined assets of $169 billion, comprising 4.54 percent of the Companies affected by the final rule is specific to foreign Covered Companies. likely to be small. These commenters noted that the FDIC combined assets of FDIC-supervised already has robust supervisory authority institutions.130 The majority of B. Analysis of the Commitments industrial banks are headquartered in to address unsafe and unsound Under the final rule, prospective Utah and Nevada, and hold nearly all of conditions impacting insured Covered Companies are required to depository institutions, and that the the combined assets of industrial banks. As of June 30, 2020, 14 industrial banks agree to the eight commitments, and FDIC’s practice of securing additional may be required to agree to additional commitments from foreign parent were headquartered in Utah, four in Nevada, three in California, one in commitments under certain companies of industrial banks has been circumstances, which in summary effective. Other commenters also argued Hawaii, and one in Minnesota. The final rule applies prospectively to include commitments by the Covered for flexibility, indicating that Company to: determining what additional deposit insurance, change in control, • and merger transactions resulting in an Furnish an initial listing, with commitments would be necessary in annual updates, of the Covered such instances is a fact-specific inquiry industrial bank that is controlled by a Covered Company. It is difficult to Company’s subsidiaries. and should be based on the parent • Consent to the examination of the company’s ability to be a source of estimate the number of potential Covered Companies that will seek to Covered Company and its subsidiaries. strength for the industrial bank. • Submit an annual report on the The final rule does not contain any establish or acquire an industrial bank, Covered Company and its subsidiaries, specific requirements for foreign as such an estimate depends on considerations that affect Covered and such other reports as requested. Covered Companies beyond those to • Maintain such records as deemed which U.S.-based Covered Companies Companies’ decisions. These considerations, and how they affect necessary. are subject. The FDIC’s supervisory • Cause an independent annual audit experience with foreign parent decision making, are difficult for the FDIC to forecast, estimate, or model, as of each industrial bank. companies of industrial banks has • Limit the Covered Company’s shown that retaining the flexibility to the considerations include external parties’ evaluations of potential representation on the industrial bank’s secure additional commitments from board of directors or managers (board), such entities as needed is an effective business strategies for the industrial bank as well as future financial approach. Such commitments would be 131 conditions, rates of return on capital, During the same period, the FDIC did not in addition to the substantial receive any merger applications involving requirements a Covered Company is and innovations in the provision of industrial banks. subject to in the written agreements 132 44 U.S.C. 3501 et seq. with the FDIC required by the final rule, 129 The FDIC may require, in the case of a 133 Historically, industrial banks have elected not Covered Company located outside the United to become members of the Federal Reserve System. including examination and reporting States, United States-based capital and liquidity The FDIC is the primary Federal regulator for State requirements, capital maintenance of support of the subsidiary industrial bank. nonmember banks and the insurer for all insured the industrial bank, and contingency 130 FDIC Call Report Data, June 30, 2020. depository institutions.

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as the case may be, to less than 50 the orderly disposition of the industrial depending on the facts and percent. bank without the need for a receiver or circumstances identified during the • Maintain the industrial bank’s conservator. review of the respective filings.134 capital and liquidity at such levels as The FDIC historically has imposed The table below presents the FDIC’s deemed appropriate and take such other action to provide the industrial bank prudential conditions similar to the analysis of the estimated costs to with a resource for additional capital or commitments listed above in connection institutions that would be affected by liquidity. with approving or not objecting to the final rule of each required • Enter into a tax allocation certain industrial bank filings. These commitment. In each case, the FDIC agreement. conditions generally relate to the board used a total hourly compensation • Depending on the facts and and senior management, the business estimate of $94.15 per hour.135 The circumstances, provide, adopt, and plan, operating policies, financial FDIC received no comments regarding implement a contingency plan that sets records, affiliate relationships, and other the estimated burden of the rule as forth strategies for recovery actions and conditions on a case-by-case basis, proposed.

Estimated annual Estimated annual Proposed commitment compliance hours compliance costs

Lists of Subsidiaries ...... 4 $376.60 Consent to the FDIC Examination ...... 100 9,415.00 Annual and Such Other Reports as the FDIC may Request ...... 10 941.50 Maintain Such Records as the FDIC Deems Necessary ...... 10 941.50 Independent Audit 1 ...... 100 9,415.00 Limit Membership on Board 2 ...... 0 0.00 Maintain Capital and Liquidity ...... 12 1,129.80 Tax Allocation Agreement 3 ...... 0 0.00

Total ...... 236 22,219.40 1 The disclosure requirement and time to fulfill it are due to satisfying regulatory inquiries about the audit, and do not include the cost of the audit itself because Covered Companies already conduct audits for other purposes. 2 Determinations regarding board membership are considered in the normal course of business. 3 Tax allocation agreements are normal and customary among affiliated corporate entities.

The final rule also authorizes the The FDIC currently lacks such detailed compliance costs annually. To put the FDIC to require additional information on potential future Covered estimated cost of this commitment into commitments, including a contingency Companies. While the contingency plan context, the pre-tax net income of the plan that sets forth strategies for commitment is meaningfully different median industrial bank in 2019 was recovery actions and the orderly from resolution plan requirements for $64,515,000.136 But, because the FDIC disposition of the industrial bank large banks, and while industrial banks would have the supervisory discretion without the appointment of a receiver or that might need to develop such to tailor the contents of any contingency conservator. The additional contingency contingency plans are meaningfully plan to a given Covered Company and plan commitment would be required different from large banks subject to its industrial bank, and because of the only in certain circumstances, based on resolution planning requirements, the unique circumstances of the respective the facts and circumstances presented FDIC considered prior analyses Covered Companies and industrial and taking into consideration the size, regarding resolution planning banks, the compliance costs incurred by complexity, interdependencies, and requirements imposed on certain Covered Companies would vary on a other factors relevant to the industrial institutions to inform its analysis. case-by-case basis, and could be lower. bank and Covered Company. Based in part on the FDIC’s The final rule incorporates an It is difficult to estimate the experience implementing and managing additional element as part of the recordkeeping, reporting, and disclosure the resolution planning requirements of reporting commitment to address costs associated with the contingency § 360.10, the FDIC estimates that Covered Companies’ systems for plan aspect of the final rule because Covered Companies and their industrial protecting the security, confidentiality, such an estimate would depend on the banks subject to the contingency plan and integrity of consumer and organizational structure and activities of commitment could incur $326,000 in nonpublic personal information. potential future Covered Companies. recordkeeping, reporting, and disclosure However, the rule is constructed to

134 See FDIC Deposit Insurance Application Compliance Officers (Compliance Officers, 131041), September 2019 Employer Cost of Employee Procedures Manual Supplement, Applications from Financial Analysts (Financial Analysts, 132051), IT Compensation data, compensation rates for health Non-Bank and Non-Community Bank Applicants, Specialists (Computer and Mathematical and other benefits are 33.8 percent of total FIL–8–2020 (Feb. 10, 2020). Occupations, 150000), and Clerical (Office and compensation. To account for non-monetary 135 Subject matter experts in the FDIC’s Division Administrative Support Occupations, 430000). To compensation, the hourly wage rates reported by of Risk Management Supervision estimated that estimate the weighted average hourly compensation BLS are adjusted by that percentage. The hourly time devoted to complying with the commitments cost of these employees, the 75th percentile hourly wage is adjusted by 2.28 percent based on changes is broken down as follows: 25 percent (Executives wages reported by the Bureau of Labor Statistics in the Consumer Price Index for Urban Consumers and Managers), 15 percent (Legal), 15 percent (BLS) National Industry-Specific Occupational from May 2018 to September 2019 to account for (Compliance Officers), 15 percent (Financial Employment and Wage Estimates as used for the inflation and ensure that the wage information is Analysts), 15 percent (IT Specialists), and 15 relevant occupations in the Depository Credit contemporaneous with the non-monetary percent (Clerical). The Standard Occupational Intermediation sector, as of May 2018. The 75th- compensation statistic. Finally, the benefit-and- Classification System occupations and codes used percentile wage for lawyers is not reported, as it inflation-adjusted wages for each occupation are by the FDIC are: Executives and Managers exceeds $100 per hour, so $100 per hour is used. weighted by the percentages listed above to arrive (Management Occupations, 110000), Lawyers The hourly wage rates reported do not include non- at a weighted hourly compensation rate of $94.15. (Lawyers, Judges, and Related Workers, 231000), monetary compensation. According to the 136 FDIC Call Report Data, December 31, 2019.

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enable affected parties to comply with two deposit insurance applications from inform the FDIC about the Covered the various commitments by relying on entities seeking to organize an industrial Company’s systems for protecting the established and ongoing reports and bank; between 2017 and 2019, the FDIC security, confidentiality, and integrity of records, to the extent possible. As such, received as many as four and as few as consumer and nonpublic personal while recognizing the difficulty in two such applications. Therefore, the information. This aspect of the final rule estimating the costs associated with this FDIC believes it is reasonable to assume is expected to benefit consumers by additional element due to the unique an annual deposit insurance application helping to mitigate potential consumer circumstances of each affected party, the volume of four for the purpose of this protection risks. FDIC believes the enhanced analysis. In addition, the FDIC has commitment should have no material received three change in bank control F. Expected Effects on the Economy impact on the estimated overall burden. notices relating to industrial banks since The final rule’s effects on the As illustrated by the preceding 2010; therefore, the FDIC believes it is economy are likely to be modest, in line analysis, the final rule could pose as reasonable to assume an annual volume with its potential effects on the banking much as $348,000 in additional of one for the purpose of this analysis. industry and consumers. If the final rule recordkeeping, reporting, and disclosure results in a modest increase in the compliance costs for each Covered C. Safety and Soundness of Affected Banks number of industrial banks or Company that seeks to establish or improvement in the provision of acquire an industrial bank.137 Covered The FDIC believes the final rule is banking products and services, the Companies would also be likely to incur consistent with supervisory approaches effects on the economy are likely to be some regulatory costs associated with the FDIC has used to insulate industrial modest. making the necessary changes to banks from risks posed by their parent internal systems and processes. For companies, and that these supervisory VI. Regulatory Analysis context, the estimated $348,000 approaches have been effective. For A. Regulatory Flexibility Act recordkeeping, reporting, and disclosure example, as previously noted, only two costs only comprise 0.8 percent of the small industrial banks failed during the The Regulatory Flexibility Act (RFA) median noninterest expense for the 23 crisis. The FDIC believes the final rule generally requires an agency, in existing industrial banks.138 would provide a prudentially sound connection with a final rule, to prepare The FDIC believes that the final rule framework for reaching decisions on and make available for public comment would benefit the public by providing industrial bank filings that the FDIC a final regulatory flexibility analysis that transparency for market participants receives from time to time. describes the impact of a final rule on and other interested parties. small entities.139 However, a final D. Broad Effects on the Banking Additionally, the FDIC believes that the regulatory flexibility analysis is not Industry final rule would benefit the public by required if the agency certifies that the formalizing a framework by which the To the extent that the final rule results rule will not have a significant FDIC would supervise industrial banks in higher numbers of industrial banks, economic impact on a substantial and mitigate risk to the DIF that may the increase could lead to increased number of small entities.140 The Small otherwise be presented. competition for depositors and Business Administration (SBA) has It is difficult to estimate whether the borrowers. The increased competition defined ‘‘small entities’’ to include final rule would serve as an incentive or could result in one or more of: Higher banking organizations with total assets disincentive for affected parties. yields on deposit products, lower of less than or equal to $600 million.141 Decisions to establish or acquire an interest rates on loan products, reduced Generally, the FDIC considers a industrial bank depend on many fees, less restrictive underwriting significant effect to be a quantified effect considerations that the FDIC cannot standards, greater account opening in excess of 5 percent of total annual accurately forecast, estimate, or model, bonuses for new customers, and other salaries and benefits per institution, or such as future financial conditions, rates benefits. To the extent that the final rule 2.5 percent of total noninterest of return on capital, and innovations in does not result in a higher number of expenses. The FDIC has considered the the provision of financial services. The industrial banks, this would not be potential impact of the final rule on final rule would enhance transparency expected to lead to increased small entities in accordance with the in the FDIC’s evaluation of filings, competition for depositors and RFA. Based on its analysis and for the which could increase the number of borrowers. reasons stated below, the FDIC believes applications received. However, such that this final rule will not have a transparency could also serve to limit E. Expected Effects on Consumers significant economic impact on a the number of applications received. To the degree the final rule results in substantial number of small entities. The FDIC analyzed historical trends an increase in the number of industrial in filings that would be subject to the banks, consumers could benefit from 139 5 U.S.C. 601 et seq. final rule. Based on that analysis, and increased competition within the 140 5 U.S.C. 605(b). consistent with the FDIC’s PRA banking industry. These benefits could 141 The SBA defines a small banking organization analysis, the FDIC assumes four take the form of higher rates on deposit as having $600 million or less in assets, where an applications: Three deposit insurance organization’s ‘‘assets are determined by averaging accounts, improved access to credit the assets reported on its four quarterly financial applications, and one change in bank with better terms or lower rates, and statements for the preceding year.’’ See 13 CFR control notice per year, on average. lower fees for banking services. To the 121.201 (as amended, effective Aug. 19, 2019). In Between 2000 and 2009, the FDIC extent that the proposed rule does not its determination, the SBA ‘‘counts the receipts, received as many as 12 and as few as employees, or other measure of size of the concern result in a higher number of industrial whose size is at issue and all of its domestic and banks, this would not be expected to foreign affiliates, regardless of whether the affiliates 137 $22,219.40 for all Covered Companies that lead to potential benefits from increased are organized for profit.’’ 13 CFR 121.103. seek to establish or acquire an industrial bank, and competition within the banking Following these regulations, the FDIC uses a an additional $326,000 for those institutions covered entity’s affiliated and acquired assets, required to adopt, implement, and adhere to a industry. Finally, in response to averaged over the preceding four quarters, to contingency plan. comments the final rule includes a determine whether the covered entity is ‘‘small’’ for 138 FDIC Call Report Data, December 31, 2019. commitment for a Covered Company to the purposes of RFA.

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As of June 30, 2020, the FDIC since 2010 may be from a small entity, Company that directly or indirectly supervises 3,270 institutions, of which the FDIC believes the aspects of the final controls the industrial bank, must (i) 2,492 are defined as small institutions rule relating to change in control notices agree to furnish the FDIC an initial by the terms of the RFA.142 Of these or merger applications involving listing, with annual updates, of all of the 3,270 institutions, 23 are industrial industrial banks is not likely to affect a Covered Company’s subsidiaries; (ii) banks. substantial number of small entities submit to the FDIC an annual report on As previously discussed, a currently among existing industrial banks. the Covered Company and its chartered industrial bank would be As previously discussed, the final rule subsidiaries, and such other reports as subject to the final rule, as would its applies to industrial banks that, as of the the FDIC may request; 146 (iii) maintain parent company that is not subject to effective date, become subsidiaries of such records as the FDIC deems Federal consolidated supervision, if companies that are Covered Companies, necessary to assess the risks to the such a parent company acquired control as such term is defined in § 354.2. It is industrial bank and to the DIF; and (iv) of the grandfathered industrial bank difficult for the FDIC to estimate the in the event that the FDIC has concerns pursuant to a change in bank control volume of future applications from about a complex organizational transaction that closes after the effective entities who seek to own and operate an structure or based on other date of the final rule, or if the insured industrial bank, or whether circumstances presented by a particular grandfathered industrial bank is the those entities would be considered filing, the FDIC may condition the surviving institution in a merger ‘‘small’’ according to the terms of RFA, approval of an application or the non- transaction that closes after the effective with the information currently available objection to a notice—in each case that date of the final rule. to the FDIC. Such estimates would would result in an industrial bank being Of the 23 existing industrial banks, require detailed information on the controlled, directly or indirectly, by a eight reported total assets less than $600 particular business models of Covered Company—on the Covered million, indicating that they could be institutions, prevailing economic and Company and industrial bank small entities. However, to determine financial conditions, the decisions of committing to providing to the FDIC, whether an institution is ‘‘small’’ for the senior management, and the demand for and thereafter adopting and purposes of the RFA, the SBA requires financial services, among other things. implementing, a contingency plan that consideration of the receipts, However, the FDIC reviewed the firms sets forth, at a minimum, one or more employees, or other measure of size of with industrial bank applications strategies for recovery actions and the the concern whose size is at issue and pending before the FDIC as of December orderly disposition of such industrial all of its domestic and foreign 31, 2019. Each publically traded bank, without the need for the affiliates.143 The FDIC conducted an applicant had a market capitalization of appointment of a receiver or analysis to determine whether each at least $1 billion as of March 6, 2020. conservator. industrial bank’s parent company was Each applicant operates either The FDIC submitted its request to ‘‘small,’’ according to the SBA size nationally within the United States, or OMB for review and approval under standards applicable to each particular operates worldwide, and none appear section 3507(d) of the PRA (44 U.S.C. parent company.144 Of the eight likely to be small for purposes of the 3507(d)) and § 1320.11 of OMB’s industrial banks that reported total RFA. Therefore, the FDIC believes that implementing regulations (5 CFR part assets less than $600 million, the FDIC the aspects of the final rule relating to 1320) at the proposed rule stage. OMB was able to determine that three of these entities who seek to own and operate an filed a comment assigning the FDIC potentially small industrial banks were insured industrial bank is not likely to OMB control number 3064–0213 and owned by holding companies which affect a substantial number of small indicated that OMB would re-review the were not small for purposes of the RFA. entities among existing industrial banks. PRA submission once the proposed rule However, the FDIC currently lacks Therefore, based on the preceding was finalized. The FDIC did not receive information necessary to determine information, the FDIC certifies that the any comments on the PRA. In addition, whether the remaining five industrial final rule does not significantly affect a as stated above, because the final rule banks are small. Therefore, of the 23 substantial number of small entities. has been constructed to enable affected existing industrial banks, 18 are not parties to comply with the various B. Paperwork Reduction Act small entities for purposes of the RFA, reporting commitments by relying on but no more than five, or about 22 In accordance with the requirements established and ongoing reports and percent, may be small entities. of the PRA,145 the FDIC may not records, the FDIC believes that the Additionally, the FDIC has received conduct or sponsor, and the respondent enhanced reporting commitment should three change in control notices relating is not required to respond to, an have no effect on the PRA burden listed to industrial banks since 2010. Of those information collection unless it displays at the proposed rule stage. three, only one was from an industrial a currently valid Office of Management bank that could possibly be small for and Budget (OMB) control number. Information Collection purposes of the RFA. As discussed above, the final rule Title: Industrial Banks and Industrial Therefore, given that no more than imposes PRA reporting and Loan Companies. five of the 23 existing industrial banks recordkeeping requirements for each OMB Number: 3064–0213. are small entities for the purposes of the industrial bank subject to the rule and Affected Public: Prospective parent RFA, and that no more than one change its Covered Company. In particular, companies of industrial banks and in control notice received by the FDIC each industrial bank, and each Covered industrial loan companies.

142 FDIC Call Report Data, September 30, 2019. In an entity’s ‘‘affiliated and acquired assets,’’ are as 145 44 U.S.C. 3501 et seq. order to determine whether an entity is ‘‘small’’ for of September 30, 2019. 146 The final rule requires additional reporting by purposes of the Regulatory Flexibility Act, the FDIC 143 12 CFR 121.103. Covered Companies regarding systems for uses its ‘‘affiliated and acquired assets’’ as 144 For example, if a particular industrial bank’s protecting the security, confidentiality, and described in the immediately preceding footnote. parent company was a motorcycle manufacturer, integrity of consumer and nonpublic personal The latest available bank and thrift holding then the size standards applicable to motorcycle information as part of the annual report. company reports, which the FDIC uses to determine manufacturers were used.

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SUMMARY OF ANNUAL BURDEN AND INTERNAL COST

Total annual Obligation to Estimated Estimated Estimated Frequency of estimated Type of burden respond number of frequency of time per response burden respondents responses response (hours)

Initial listing of all of the Covered Company’s Reporting ...... Mandatory ..... 4 1.00 4 One Time...... 16 subsidiaries. Annual update of listing of all of the Covered Reporting ...... Mandatory ..... 4 1.00 4 Annual...... 16 Company’s subsidiaries. Annual report on the Covered Company and Reporting ...... Mandatory ..... 4 1.00 10 Annual...... 40 its subsidiaries, and such other reports as the FDIC may request. Maintain records to assess the risks to the Recordkeeping ...... Mandatory ..... 4 1.00 10 Annual...... 40 industrial bank and to the DIF. Contingency Plan ...... Reporting ...... Mandatory ..... 1 1.00 345 On Occasion 345

Total Hourly Burden ...... 457

C. Plain Language E. Congressional Review Act of Federal Regulations by adding part 354 to read as follows: Section 722 of the GLBA 147 requires For purposes of the Congressional each Federal banking agency to use Review Act, OMB makes a PART 354—INDUSTRIAL BANKS plain language in all of its proposed and determination as to whether a final rule 150 final rules published after January 1, constitutes a ‘‘major’’ rule. If a rule is Sec. deemed a ‘‘major rule’’ by the OMB, the 354.1 Scope. 2000. The FDIC sought to present the 354.2 Definitions. final rule in a simple and Congressional Review Act generally provides that the rule may not take 354.3 Written agreement. straightforward manner and did not effect until at least 60 days following its 354.4 Required commitments and receive any comments on the use of provisions of written agreement. publication.151 plain language in the proposed rule. 354.5 Restrictions on industrial bank The Congressional Review Act defines subsidiaries of Covered Companies. D. Riegle Community Development and a ‘‘major rule’’ as any rule that the 354.6 Reservation of authority. Regulatory Improvement Act of 1994 Administrator of the Office of Authority: 12 U.S.C. 1811, 1815, 1816, Information and Regulatory Affairs of 1817, 1818, 1819(a) (Seventh) and (Tenth), Pursuant to section 302(a) of the the OMB finds has resulted in or is 1820(g), 1831o–1, 3108, 3207. RCDRIA,148 in determining the effective likely to result in (1) an annual effect on date and administrative compliance the economy of $100,000,000 or more; § 354.1 Scope. requirements for new regulations that (2) a major increase in costs or prices for (a) In addition to the applicable filing impose additional reporting, disclosure, consumers, individual industries, procedures of part 303 of this chapter, or other requirements on insured Federal, State, or local government this part establishes certain depository institutions, each Federal agencies or geographic regions, or (3) requirements for filings involving an banking agency must consider, significant adverse effects on industrial bank or a Covered Company. consistent with principles of safety and competition, employment, investment, (b) The requirements of this part do soundness and the public interest, any productivity, innovation, or on the not apply to an industrial bank that is administrative burdens that such ability of United States-based organized as a subsidiary of a company that is not subject to Federal regulations would place on affected enterprises to compete with foreign- consolidated supervision by the Federal depository institutions, including small based enterprises in domestic and export markets.152 Reserve Board (FRB) before April 1, depository institutions, and customers 2021. In addition, this part does not of depository institutions, as well as the The FDIC will submit the final rule and other appropriate reports to apply to: benefits of such regulations. In addition, (1) Any industrial bank that is or section 302(b) of RCDRIA requires new Congress and the Government Accountability Office for review. becomes controlled by a company that regulations and amendments to is subject to Federal consolidated regulations that impose additional List of Subjects in 12 CFR Part 354 supervision by the FRB; and reporting, disclosures, or other new Bank deposit insurance, Banks, (2) Any industrial bank that is not or requirements on insured depository banking, Finance, Holding companies, will not become a subsidiary of a institutions generally to take effect on Industrial banks, Industrial loan company. the first day of a calendar quarter that company, Insurance, Parent company, § 354.2 Definitions. begins on or after the date on which the Reporting and recordkeeping regulations are published in final Unless defined in this section, terms requirements, Savings associations. shall have the meaning given to them in form.149 The FDIC considered the 12 CFR Chapter III section 3 of the FDI Act. administrative burdens and benefits of Control means the power, directly or the final rule in determining its effective Authority and Issuance indirectly, to direct the management or date and administrative compliance For the reasons stated in the policies of a company or to vote 25 requirements. As such, the final rule preamble, the Federal Deposit Insurance percent or more of any class of voting will be effective on April 1, 2021. Corporation amends title 12 of the Code securities of a company, and includes the rebuttable presumptions of control 147 12 U.S.C. 4809. 150 5 U.S.C. 801 et seq. at § 303.82(b)(1) of this chapter and of 148 12 U.S.C. 4802(a). 151 5 U.S.C. 801(a)(3). acting in concert at § 303.82(b)(2) of this 149 12 U.S.C. 4802(b). 152 5 U.S.C. 804(2). chapter. For purposes of this part, the

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presumptions set forth in § 303.82(b)(1) section. In addition, with respect to an (7) Maintain the capital and liquidity and (2) of this chapter shall apply with industrial bank subject to this part, the of the subsidiary industrial bank at such respect to any company in the same FDIC will condition each grant of levels as the FDIC deems appropriate, manner and to the same extent as if they deposit insurance, each issuance of a and take such other actions as the FDIC applied to an acquisition of securities of non-objection to a change in control, deems appropriate to provide the the company. and each approval of a merger on subsidiary industrial bank with a Covered Company means any compliance with paragraphs (a)(1) resource for additional capital and company that is not subject to Federal through (8) of this section by the parties liquidity including, for example, consolidated supervision by the FRB to the written agreement. As required, pledging assets, obtaining and and that controls an industrial bank: each Covered Company must: maintaining a letter of credit from a (1) As a result of a change in bank (1) Submit to the FDIC an initial third-party institution acceptable to the control pursuant to section 7(j) of the listing of all of the Covered Company’s FDIC, and providing indemnification of FDI Act; subsidiaries and update such list the subsidiary industrial bank; and (2) As a result of a merger transaction annually; (8) Execute a tax allocation agreement pursuant to section 18(c) of the FDI Act; (2) Consent to the examination by the with its subsidiary industrial bank that or FDIC of the Covered Company and each expressly states that an agency (3) That is granted deposit insurance of its subsidiaries to permit the FDIC to relationship exists between the Covered by the FDIC pursuant to section 6 of the assess compliance with the provisions Company and the subsidiary industrial FDI Act, in each case on or after April of any written agreement, commitment, bank with respect to tax assets generated 1, 2021. or condition imposed; the FDI Act; or by such industrial bank, and that further FDI Act means the Federal Deposit any other Federal law for which the states that all such tax assets are held in Insurance Act, 12 U.S.C. 1811, et seq. FDIC has specific enforcement trust by the Covered Company for the Filing has the meaning given to it in jurisdiction against such Covered benefit of the subsidiary industrial bank § 303.2(s) of this chapter. Company or subsidiary, and all relevant and will be promptly remitted to such FRB means the Board of Governors of laws and regulations; industrial bank. The tax allocation the Federal Reserve System and each (3) Submit to the FDIC an annual agreement also must provide that the Federal Reserve Bank. report describing the Covered amount and timing of any payments or Industrial bank means any insured Company’s operations and activities, in refunds to the subsidiary industrial State bank that is an industrial bank, the form and manner prescribed by the bank by the Covered Company should industrial loan company, or other FDIC, and such other reports as may be be no less favorable than if the similar institution that is excluded from requested by the FDIC to inform the subsidiary industrial bank were a the definition of the term ‘‘bank’’ in FDIC as to the Covered Company’s: separate taxpayer. section 2(c)(2)(H) of the Bank Holding (i) Financial condition; (b) The FDIC may require such Company Act, 12 U.S.C. 1841(c)(2)(H). (ii) Systems for identifying, Covered Company and industrial bank Senior executive officer has the measuring, monitoring, and controlling to commit to provide to the FDIC, and, meaning given it in § 303.101(b) of this financial and operational risks; thereafter, implement and adhere to, a chapter. (iii) Transactions with depository contingency plan subject to the FDIC’s institution subsidiaries of the Covered approval that sets forth, at a minimum, § 354.3 Written agreement. Company; recovery actions to address significant (a) No industrial bank may become a (iv) Systems for protecting the financial or operational stress that could subsidiary of a Covered Company unless security, confidentiality, and integrity of threaten the safe and sound operation of the Covered Company enters into one or consumer and nonpublic personal the industrial bank and one or more more written agreements with both the information; and strategies for the orderly disposition of Federal Deposit Insurance Corporation (v) Compliance with applicable such industrial bank without the need (FDIC) and the subsidiary industrial provisions of the FDI Act and any other for the appointment of a receiver or bank, which contain commitments by law or regulation; conservator. the Covered Company to comply with (4) Maintain such records as the FDIC each of paragraphs (a)(1) through (8) in may deem necessary to assess the risks § 354.5 Restrictions on industrial bank § 354.4 and such other written to the subsidiary industrial bank or to subsidiaries of Covered Companies. agreements, commitments, or the Deposit Insurance Fund; Without the FDIC’s prior written restrictions as the FDIC deems (5) Cause an independent audit of approval, an industrial bank that is appropriate, including, but not limited each subsidiary industrial bank to be controlled by a Covered Company shall to, the provisions of §§ 354.4 and 354.5. performed annually; not: (b) The FDIC may, at its sole (6) Limit the Covered Company’s (a) Make a material change in its discretion, condition a grant of deposit direct and indirect representation on the business plan after becoming a insurance, issuance of a non-objection board of directors or board of managers, subsidiary of such Covered Company; to a change in control, or approval of a as the case may be, of each subsidiary (b) Add or replace a member of the merger on an individual who is a industrial bank to less than 50 percent board of directors, board of managers, or controlling shareholder of a Covered of the members of such board of a managing member, as the case may be, Company joining as a party to any directors or board of managers, in the of the subsidiary industrial bank during written agreement required by aggregate, and, in the case of a the first three years after becoming a paragraph (a) of this section. subsidiary industrial bank that is subsidiary of such Covered Company; organized as a member-managed limited (c) Add or replace a senior executive § 354.4 Required commitments and liability company, limit the Covered officer during the first three years after provisions of written agreement. Company’s direct and indirect becoming a subsidiary of such Covered (a) The commitments required to be representation as a managing member to Company; made in the written agreements less than 50 percent of the managing (d) Employ a senior executive officer referenced in § 354.3 are set forth in member interests of the subsidiary who is, or during the past three years paragraphs (a)(1) through (8) of this industrial bank, in the aggregate; has been, associated in any manner (e.g.,

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as a director, officer, employee, agent, I. Introduction union governance and technical matters, owner, partner, or consultant) with an as discussed in the following sections. a. Legal Authority and Background affiliate of the industrial bank; or b. February 2020 Proposed Rule on Part (e) Enter into any contract for services The Board is issuing this rule pursuant to its authority under the 704 material to the operations of the 1 industrial bank (for example, loan Federal Credit Union Act (FCU Act). On February 20, 2020, the Board servicing function) with such Covered Under the FCU Act, the NCUA is the approved a notice of proposed Company or any subsidiary thereof. chartering and supervisory authority for rulemaking to update, clarify, and Federal credit unions (FCUs) and the simplify several provisions of part 704 § 354.6 Reservation of authority. federal supervisory authority for (proposed rule).9 The proposed rule federally insured credit unions (FICUs). Nothing in this part limits the provided for a 60-day comment period, The FCU Act grants the NCUA a broad authority of the FDIC under any other which the Board later extended by 60 mandate to issue regulations governing 10 provision of law or regulation to take days because of COVID–19. The both FCUs and FICUs. Section 120 of supervisory or enforcement actions, comment period ended on July 27, 2020. the FCU Act is a general grant of including actions to address unsafe or regulatory authority and authorizes the c. October 2020 Final Rule on Part 704 unsound practices or conditions, or Board to prescribe regulations for the violations of law. The NCUA received 35 comment administration of the FCU Act.2 Section letters on the proposed rule. Comments Federal Deposit Insurance Corporation. 209 of the FCU Act is a plenary grant were received from credit unions, both By order of the Board of Directors. of regulatory authority to the NCUA to corporate and natural persons, credit Dated at Washington, DC, on December 15, issue regulations necessary or union leagues and trade associations, 2020. appropriate to carry out its role as share individuals, corporate CUSOs, and an James P. Sheesley, insurer for all FICUs.3 The FCU Act also association of state credit union Assistant Executive Secretary. includes an express grant of authority supervisors. In October 2020, the Board [FR Doc. 2020–28473 Filed 2–22–21; 8:45 am] for the Board to subject federally issued a final rule that: (1) Permits a chartered central, or corporate, credit BILLING CODE 6714–01–P corporate credit union to make a unions to such rules, regulations, and minimal investment in a CUSO without orders as the Board deems appropriate.4 the CUSO being classified as a corporate Part 704 of the NCUA’s regulations CUSO and subject to heightened NCUA NATIONAL CREDIT UNION implements the requirements of the oversight; (2) expands the categories of FCU Act regarding corporate credit senior staff positions at member credit ADMINISTRATION 5 unions. In 2010, the Board unions eligible to serve on a corporate 12 CFR Part 704 comprehensively revised the regulations credit union’s board; (3) removes the governing corporate credit unions to experience and independence provide longer-term structural RIN 3133–AF13 requirement for a corporate credit enhancements to the corporate system union’s enterprise risk management Corporate Credit Unions in response to the financial crisis of 6 expert; (4) clarifies the definition of a 2007–2009. The provisions of the 2010 collateralized debt obligation; and (5) AGENCY: National Credit Union rule successfully stabilized the simplifies the requirement for net Administration (NCUA). corporate system and improved interest income modeling.11 corporate credit unions’ ability to ACTION: Final rule. The October 2020 final rule deferred function and provide services to natural final action on the provisions in the person credit unions. Since 2010, and as SUMMARY: The NCUA Board (Board) is proposed rule that addressed the part of the Board’s continuous issuing a final rule that amends the permissibility and capital treatment for reevaluation of its regulation of NCUA’s corporate credit union corporate credit union purchases of corporate credit unions, the Board has regulation. The final rule updates the subordinated debt instruments under amended part 704 on several occasions.7 definitions in this regulation and makes the Board’s January 2020 proposed rule In 2017, the Board amended corporate clear that corporate credit unions may on subordinated debt.12 In the October credit union capital standards to change purchase subordinated debt instruments 2020 final rule, the Board discussed the the calculation of capital after a issued by natural person credit unions. comments on this part of the proposed consolidation and to set a retained The final rule also specifies the capital rule and noted that the commenters that earnings ratio target in meeting prompt treatment of these instruments for addressed these provisions all corrective action (commonly referred to corporate credit unions that purchase supported them. The Board did not as PCA) standards.8 In October 2020, the them. adopt the provisions at that time Board issued a final rule to amend because it had not yet finalized the DATES: The final rule is effective January several provisions relating to corporate January 2020 proposed rule on 1, 2022. credit union investments in credit union subordinated debt. service organizations (CUSOs) and other FOR FURTHER INFORMATION CONTACT: provisions relating to corporate credit d. Final Rule on Subordinated Debt Policy and Analysis: Robert Dean, National Supervision Analyst, Office of The Board has now adopted the 1 12 U.S.C. 1751 et seq. National Examinations and Supervision, 2 January 2020 proposed rule on 12 U.S.C. 1766(a). 13 (703) 518–6652; Legal: Rachel 3 12 U.S.C. 1789. subordinated debt as final. These Ackmann, Senior Staff Attorney, Office 4 12 U.S.C. 1766(a). of General Counsel, (703) 548–2601; or 5 12 CFR part 704. 9 85 FR 17288 (Mar. 27, 2020). by mail at National Credit Union 6 75 FR 64786 (Oct. 20, 2010). 10 85 FR 20431 (Apr. 13, 2020). Administration, 1775 Duke Street, 7 See e.g., 80 FR 25932 (May 6, 2015), 80 FR 11 85 FR 71817 (Nov. 12, 2020). Alexandria, VA 22314. 57283 (Sept. 23, 2015), and 82 FR 55497 (Nov. 22, 12 85 FR 13982 (Mar. 10, 2020). 2017). 13 See, https://www.ncua.gov/files/agenda-items/ SUPPLEMENTARY INFORMATION: 8 82 FR 55497 (Nov. 22, 2017). AG20201217Item5b.pdf.

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