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Section 4(C)(8) of the BHC Act (EDP Servicing Company) Section 3160.0

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Section 4(C)(8) of the BHC Act (EDP Servicing Company) Section 3160.0 Section 4(c)(8) of the BHC Act (EDP Servicing Company) Section 3160.0 3160.0.1 PROVISION OF DATA request of a customer if the service is not PROCESSING AND TRANSMISSION otherwise reasonably available in the rel- SERVICES evant market area. Under section 4(c)(8) of the BHC Act, the per- missibility of bank holding company data pro- 3160.0.3 SECTION 4(c)(8) vs. cessing activities is generally predicated upon SECTION 4(c)(1) the type of data processed or transmitted. Sub- sidiaries formed under this section may engage Section 4(c)(1) data processing subsidiaries, in business directly with outside customers, which do not require prior approval, are limited unlike section 4(c)(1) subsidiaries, which can as follows: act only as servicers for affiliates1 and cannot deal directly with outside customers. 1. They can furnish computer services only for The intent of section 4(c)(8) is to permit bank the internal operations of the bank holding holding companies and their nonbank subsidi- company and its bank affiliates. 1 aries to directly provide to customers financially 2. Direct computer services to nonaffiliated cus- or economically oriented services (or services tomers are not permitted. Any contract to that are similar to these services) that banks furnish services to nonaffiliated customers have traditionally used in their own internal must be between the affiliate bank and its operations and provided to their customers. Such customer, with the data processing subsidiary services (with prior approval) are unrestricted as acting as a servicer for its affiliate bank. In to location and may be provided from out-of- addition, the kinds of services furnished are state locations. limited to those that a bank can normally provide. 3160.0.2 INCIDENTAL ACTIVITIES Section 4(c)(8) data processing subsidiaries The Board regards the following as incidental may deal directly with the customer. In accor- activities necessary to carrying on permissible dance with section 4(c)(8) of the BHC Act and data processing activities: section 225.28(b)(14) of Regulation Y, the kinds of services nonbank subsidiaries of bank hold- 1. Making excess computer time available to ing companies may provide to others are— anyone as long as the only involvement by the bank holding company system is furnish- 1. data processing and transmission services, ing the facility and the necessary operating facilities (including hardware, software, docu- personnel. This stipulation applies when— mentation, or operating personnel), data- a. the equipment is not purchased solely for bases, advice, and access to such services, the purpose of creating excess capacity to facilities, or databases by any technological sell; means, if— b. hardware is not offered in conjunction a. the data to be processed or furnished are with excess capacity; and financial, banking, or economic data and c. the facilities for the use of the excess b. the hardware provided in connection with capacity do not include providing any the data processing and transmission ser- software other than systems software vices is offered only in conjunction with (including language), network communi- software designed and marketed for the cations support, and the operating person- processing and transmission of financial, nel and documentation necessary for main- banking, or economic data, and the general- taining and using these facilities. purpose hardware does not constitute more 2. Selling byproducts of permissible data pro- than 30 percent of the cost of any pack- cessing and data transmission activities when aged offering. theyarenotdesigned,orappreciablyenhanced, 2. data processing, data storage, and data trans- for the purpose of marketability. mission services for a third party that are not 3. Furnishing any data processing service upon financial, banking, or economic related if the subsidiary’s total annual revenue derived from 1. In this context, ‘‘affiliates’’ is limited to other organiza- tions that have subsidiaries of the same parent bank holding BHC Supervision Manual June 2004 company as the servicer. Page 1 Section 4(c)(8) of the BHC Act (EDP Servicing Company) 3160.0 those activities does not exceed 30 percent of ises of the customer is closely related to banking its total annual revenues derived from data if conducted within the limits of Regulation Y. processing, data storage, and data transmis- sion activities. On November 26, 2003, the Board approved an increase of this limit to 49 percent, effective January 8, 2004. See 3160.0.7 EXCESS CAPACITY 1993 FRB 1158, 2004 FRB 55, and section 3160.2. The Board currently recognizes that, The sale of excess computer time is currently in certain situations, a bank holding com- treated in a Board interpretation as a permissible pany may have bona fide operational reasons incidental activity. The interpretation (12 C.F.R. for conducting its financial and related nonfi- 225.123(e)(1)) currently permits a bank holding nancial data processing activities through company to make excess computer time avail- separately incorporated subsidiaries. In these able to anyone so long as the only involvement cases, bank holding companies may request of the holding company is furnishing the facility permission to administer the 49 percent rev- and the necessary operating personnel. Data enue test on a business-line or multiple- processors that process time-sensitive data must entity basis. See section 225.28(b)(14) of maintain sufficient capacity to meet peak Regulation Y (12 C.F.R. 225.28(b)(14)). demand and provide backup in case of equip- ment failure. Excess capacity necessarily results from such needs; thus the sale of excess capac- 3160.0.4 MINICOMPUTER ity is necessary to reduce costs and to remain ACTIVITIES competitive. Bank holding companies are lim- ited in the sale of excess capacity as follows: Some data processing subsidiaries are actively engaged in placing minicomputers with some of 1. A bank holding company may not purchase their customers. However, if the subsidiary acts data processing equipment solely for the pur- as sales agent for the manufacturer and receives pose of creating excess capacity. a commission, it is in violation of section 2. A bank holding company may not sell hard- 225.28(b)(14) of Regulation Y and should be ware in conjunction with excess capacity. advised to cease the practice. 3. A bank holding company may provide only limited types of software in connection with its sale of excess capacity. This includes sys- 3160.0.5 HARDWARE AND tems software (that is, software designed SOFTWARE AS AN INTEGRATED only to control and operate the hardware and PACKAGE not to perform substantive operations), net- work communications support, and the oper- Customers of data processing services require ating personnel and documentation neces- that suppliers provide them with hardware and sary for maintaining and using these facilities. software as an integrated package. Providing general-purpose hardware is permissible only if the cost of the hardware does not exceed 30 per- cent of the cost of the packaged offering, and 3160.0.8 BYPRODUCTS only in conjuction with permissible software. When hardware is provided in a specialized The sale of byproducts for the development of a form (such as ATMs), its provision meets the program for a permissible data processing activ- National Courier test and is closely related to ity is treated in a Board interpretation (12 C.F.R. banking and therefore not subject to the 30 per- 225.123(e)) as a permissible incidental activity. cent limitation. Byproducts may be data, software, or data pro- cessing techniques or information developed by the bank holding company. Byproducts may not 3160.0.6 PACKAGED FINANCIAL be designed or appreciably enhanced for the SYSTEMS purpose of marketability. The Board found that providing packaged finan- cial systems, including data processing hard- 3160.0.9 REQUIREMENT OF ware and software, to be installed on the prem- SEPARATE RECORDKEEPING BHC Supervision Manual June 2004 The Board’s data processing interpretation is Page 2 designed to minimize any possibility of unfair Section 4(c)(8) of the BHC Act (EDP Servicing Company) 3160.0 competition. A bank holding company subsidi- permissibility of services performed, the rev- ary or related entity that provides permissible enue limitations of section 225.28(b)(14) of data processing and data transmission activities Regulation Y, the types of customers serviced, (services, facilities, byproducts, or excess and transactions between affiliates. The inspec- capacity) must keep separate books and records tion should also provide an overall financial and provide the documents to any new or renewal evaluation. customer upon request. 3160.0.12 INSPECTION PROCEDURES 3160.0.10 SUMMARY 3160.0.12.1 Pre-Inspection Holding company EDP proposals are evaluated from the standpoint of whether the proposed 1. Where available, review the EDP examina- data processing activities involve banking, finan- tion report in conjunction with the lead bank cial, or related economic data within the mean- examination for details of the subsidiary’s ing of the Board’s Regulation Y. Processing, operations and management. storing, and transmitting data for third parties, 2. Review correspondence files and the when the data are not financial, banking, or application memo for the history of the economic, is permissible if the revenues derived subsidiary. from those activities do not exceed 49 percent of the subsidiary’s total annual revenues derived from data processing, data storage, and data 3160.0.12.2 On-Site transmission activities. For examples of previ- ous Board authorizations for data processing 3. Have a brief meeting with the chief execu- and transmission services in accordance with tive officer of the subsidiary to establish Regulation Y,see sections 3160.1 through 3160.5. contact and present a brief indication of the The data processing that is permissible under scope of the inspection.
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