B-199866.OM, FEB 25, 1981

B-199866.OM: Feb 25, 1981

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SFRO - STEVE REED: THIS IS IN RESPONSE TO YOUR REQUEST CONCERNING THE ABOVE SUBJECT. YOU HAVE ASKED THE FOLLOWING QUESTIONS: (1) SECTION 5(C) OF THE BANK HOLDING COMPANY ACT AUTHORIZES THE FEDERAL RESERVE TO MAKE EXAMINATIONS OF HOLDING COMPANIES BUT ADDS THAT BANK EXAMINATIONS SHOULD BE RELIED UPON AS FAR AS POSSIBLE. WOULD THIS SECTION (OR OTHERS) ALLOW THE FEDERAL RESERVE TO REQUEST THE FDIC AND OCC TO PERFORM HOLDING COMPANY INSPECTION PROCEDURES ON ITS BEHALF? (2) DO THE FDIC AND OCC HAVE AUTHORITY TO ENTER A BANK HOLDING COMPANY AND PERFORM PROCEDURES ON BEHALF OF THE FEDERAL RESERVE WHICH ARE DIRECTLY RELATED TO THE HOLDING COMPANY BUT NOT THE BANKS THEY SUPERVISE? THAT IS. BOTH FDIC AND OCC HAVE AUTHORITY TO EXAMINE THE AFFAIRS OF BANK HOLDING COMPANIES WHICH CONSTITUTE "AFFILIATES" OF STATE OR NATIONAL BANKS WHICH ARE SUBJECT TO THEIR EXAMINATIONS.

B-199866.OM, FEB 25, 1981

SUBJECT: REQUEST FOR LEGAL OPINION ON MATTERS RELATED TO THE REVIEW OF BANK HOLDING COMPANY INSPECTION PROCEDURES (FILE B-199866; CODE 232020)

TEAM LEADER, SFRO - STEVE REED:

THIS IS IN RESPONSE TO YOUR REQUEST CONCERNING THE ABOVE SUBJECT. YOU HAVE ASKED THE FOLLOWING QUESTIONS:

(1) SECTION 5(C) OF THE BANK HOLDING COMPANY ACT AUTHORIZES THE FEDERAL RESERVE TO MAKE EXAMINATIONS OF HOLDING COMPANIES BUT ADDS THAT BANK EXAMINATIONS SHOULD BE RELIED UPON AS FAR AS POSSIBLE. WOULD THIS SECTION (OR OTHERS) ALLOW THE FEDERAL RESERVE TO REQUEST THE FDIC AND OCC TO PERFORM HOLDING COMPANY INSPECTION PROCEDURES ON ITS BEHALF?

(2) DO THE FDIC AND OCC HAVE AUTHORITY TO ENTER A BANK HOLDING COMPANY AND PERFORM PROCEDURES ON BEHALF OF THE FEDERAL RESERVE WHICH ARE DIRECTLY RELATED TO THE HOLDING COMPANY BUT NOT THE BANKS THEY SUPERVISE?

NEITHER SECTION 5(C) NOR ANY OTHER PROVISION OF THE BANK HOLDING COMPANY ACT AUTHORIZES THE FDIC OR OCC TO PERFORM HOLDING COMPANY INSPECTION PROCEDURES ON BEHALF OF THE FEDERAL RESERVE. THAT IS, THE FEDERAL RESERVE CANNOT DELEGATE ITS RESPONSIBILITIES UNDER THE ACT TO THESE BANK REGULATORY AGENCIES. HOWEVER, FDIC AND OCC CAN, AT THE REQUEST OF THE FEDERAL RESERVE OR AT THEIR OWN INITIATIVE, ENTER CERTAIN BANK HOLDING COMPANIES IN THE EXERCISE OF THEIR OWN REGULATORY AUTHORITIES. BOTH FDIC AND OCC HAVE AUTHORITY TO EXAMINE THE AFFAIRS OF BANK HOLDING COMPANIES WHICH CONSTITUTE "AFFILIATES" OF STATE OR NATIONAL BANKS WHICH ARE SUBJECT TO THEIR EXAMINATIONS. REPORTS OF SUCH EXAMINATIONS COULD BE MADE AVAILABLE TO THE FEDERAL RESERVE BOARD FOR THE BOARD'S USE IN ACCORDANCE WITH SECTION 5(C) OF THE BANK HOLDING COMPANY ACT.

ANY FDIC OR OCC EXAMINATIONS OF BANK HOLDING COMPANIES AS "AFFILIATES" OF BANKS SUBJECT TO THE EXAMINATION AUTHORITY OF THESE AGENCIES WOULD HAVE TO BE RELATED TO AN EXAMINATION OF THE AFFILIATED BANKS. HOWEVER, THE FDIC OR OCC OFFICIALS HAVE BROAD POWER TO EXAMINE THE AFFAIRS OF A COVERED BANK HOLDING COMPANY TO THE EXTENT RELEVANT TO THE RELATIONSHIP BETWEEN THE HOLDING COMPANY AND AFFILIATED BANK. THUS, FOR EXAMPLE, AN EXAMINATION OF A ONE-BANK HOLDING COMPANY WOULD BE ESSENTIALLY COEXTENSIVE WITH AN EXAMINATION OF THE AFFILIATED BANK.

A DETAILED ANALYSIS OF OUR CONCLUSIONS IS ATTACHED.

ATTACHMENT

DIGEST:

NEITHER SECTION 5(C) NOR ANY OTHER PROVISION OF BANK HOLDING COMPANY ACT AUTHORIZES OFFICE OF COMPTROLLER OF CURRENCY (OCC) OR FEDERAL DEPOSIT INSURANCE CORPORATION (FDIC) TO PERFORM BANK HOLDING COMPANY INSPECTION "ON BEHALF OF" FEDERAL RESERVE. HOWEVER, OCC, UNDER 12 U.S.C. 481, AND FDIC, UNDER 12 U.S.C. 1820(B), MAY INSPECT CERTAIN BANK HOLDING COMPANIES AFFILIATED WITH BANKS UNDER THEIR SUPERVISION TO EXTENT SUCH INSPECTIONS RELATE TO SUCH EXAMINATION OF AFFILIATED BANKS. RESULTS OF SUCH INSPECTIONS CAN BE USED BY FEDERAL RESERVE BOARD UNDER SECTION 5(C) OF BANK HOLDING COMPANY ACT.

SECTION 5(C) OF THE BANK HOLDING COMPANY ACT, AS AMENDED, 12 U.S.C. 1844(C), EMPOWERS THE FEDERAL RESERVE BOARD TO REQUIRE COMPLIANCE REPORTS, TO EXAMINE EACH BANK HOLDING COMPANY AND ITS SUBSIDIARIES, AND, AS FAR AS POSSIBLE, TO MAKE USE OF EXAMINATION REPORTS MADE BY OCC, FDIC, AND STATE BANK SUPERVISORY AUTHORITIES:

"(C) THE BOARD FROM TIME TO TIME MAY REQUIRE REPORTS UNDER OATH TO KEEP IT INFORMED AS TO WHETHER THE PROVISIONS OF THIS CHAPTER AND SUCH REGULATIONS AND ORDERS ISSUED THEREUNDER HAVE BEEN COMPLIED WITH; AND THE BOARD MAY MAKE EXAMINATIONS OF EACH BANK HOLDING COMPANY AND EACH SUBSIDIARY THEREOF, THE COST OF WHICH SHALL BE ASSESSED AGAINST, AND PAID BY, SUCH HOLDING COMPANY. THE BOARD SHALL, AS FAR AS POSSIBLE, USE THE REPORTS OF EXAMINATIONS MADE BY THE COMPTROLLER OF THE CURRENCY, THE FEDERAL DEPOSIT INSURANCE CORPORATION, OR THE APPROPRIATE STATE BANK SUPERVISORY AUTHORITY FOR THE PURPOSES OF THIS SECTION."

THE REQUIREMENT IN SECTION 5(C) THAT THE BOARD USE THE EXAMINATION REPORTS OF THESE OTHER REGULATORY AGENCIES IS INTENDED TO PREVENT UNNECESSARY DUPLICATION. SEE S. REPT. NO. 1095, 84TH CONG., 2D SESS. (1955), REPRINTED AT 1956 U.S.C. CONG. & AD. NEWS, 2482, 2496. HOWEVER, NEITHER SECTION 5(C) NOR ANY OTHER PROVISION OF THE ACT AUTHORIZES THE FEDERAL RESERVE BOARD TO DELEGATE ANY OF ITS HOLDING COMPANY RESPONSIBILITIES TO THE OTHER SUPERVISORY AGENCIES. FN1 THEREFORE, WHILE THE BOARD COULD REQUEST OCC AND FDIC TO PERFORM HOLDING COMPANY INSPECTION PROCEDURES, CONSISTENT WITH THEIR OWN AUTHORITIES, THERE IS NOTHING IN SECTION 5(C) OR ANY OTHER PROVISION OF THE BANK HOLDING COMPANY ACT ENLARGING THE POWERS OF OTHER AGENCIES TO CARRY OUT SUCH INSPECTIONS.

THE OCC'S STATUTORY AUTHORITY TO PERFORM INSPECTIONS IS CONTAINED IN 12 U.S.C. SEC. 481, WHICH PROVIDES IN PART:

"THE COMPTROLLER OF THE CURRENCY, WITH THE APPROVAL OF THE SECRETARY OF THE TREASURY, SHALL APPOINT EXAMINERS WHO SHALL EXAMINE EVERY NATIONAL BANK AS OFTEN AS THE COMPTROLLER OF THE CURRENCY SHALL DEEM NECESSARY. THE EXAMINER MAKING THE EXAMINATION OF ANY NATIONAL BANK SHALL HAVE POWER TO MAKE A THOROUGH EXAMINATION OF ALL THE AFFAIRS OF THE BANK AND IN DOING SO HE SHALL HAVE POWER TO ADMINISTER OATHS AND TO EXAMINE ANY OF THE OFFICERS AND AGENTS THEREOF UNDER OATH AND SHALL MAKE A FULL AND DETAILED REPORT OF THE CONDITION OF SAID BANK TO THE COMPTROLLER OF THE CURRENCY: PROVIDED, THAT IN MAKING THE EXAMINATION OF ANY NATIONAL BANK THE EXAMINERS SHALL INCLUDE SUCH AN EXAMINATION OF THE AFFAIRS OF ALL ITS AFFILIATES OTHER THAN MEMBER BANKS AS SHALL BE NECESSARY TO DISCLOSE FULLY THE RELATIONS BETWEEN SUCH BANK AND SUCH AFFILIATES AND THE EFFECT OF SUCH RELATIONS UPON THE AFFAIRS OF SUCH BANK;

"THE EXAMINER MAKING THE EXAMINATION OF ANY AFFILIATE OF A NATIONAL BANK SHALL HAVE POWER TO MAKE A THOROUGH EXAMINATION OF ALL THE AFFAIRS OF THE AFFILIATE, AND IN DOING SO HE SHALL HAVE POWER TO ADMINISTER OATHS AND TO EXAMINE ANY OF THE OFFICERS, DIRECTORS, EMPLOYEES, AND AGENTS THEREOF UNDER OATH AND TO MAKE A REPORT OF HIS FINDINGS TO THE COMPTROLLER OF THE CURRENCY. ***"

UNDER SECTION 481, OCC IS AUTHORIZED TO EXAMINE ANY NATIONAL BANK AND THE AFFAIRS OF ALL SUCH BANK'S "AFFILIATES," OTHER THAN FEDERAL RESERVE MEMBER BANKS, TO THE EXTENT NECESSARY TO DISCLOSE FULLY THE RELATIONS BETWEEN THE BANK AND ITS AFFILIATES AND THE EFFECT OF SUCH RELATIONS UPON THE AFFAIRS OF THE BANK. THE DEFINITION OF "AFFILIATE" UNDER 12 U.S.C. 221AB) IS APPLICABLE TO THAT TERM AS IT IS USED IN SECTION 481. UNDER 12 U.S.C. SEC. 221AB)(4), CERTAIN BANK HOLDING COMPANIES ARE AFFILIATES OF NATIONAL BANKS AND THEREFORE MAY BE EXAMINED BY OCC. FN2

HOWEVER, SECTION 481 PROVIDES THAT THE EXAMINATION OF SUCH AFFILIATES SHALL BE MADE "IN MAKING THE EXAMINATION OF A NATIONAL BANK ***." BY THIS LANGUAGE, IT APPEARS THAT ANY AFFILIATE MUST BE EXAMINED IN CONJUNCTION WITH AN AUTHORIZED EXAMINATION OF AN AFFILIATED NATIONAL BANK. THUS, ANY HOLDING COMPANY INSPECTION PERFORMED BY OCC UNDER SECTION 481 WOULD HAVE TO BE IN CONNECTION WITH AN EXAMINATION OF ITS SUBSIDIARY NATIONAL BANK. THIS VIEW IS CONSISTENT WITH OCC'S POSITION. FN3 ON THE OTHER HAND, WE SEE NO REASON WHY THE FEDERAL RESERVE COULD NOT REQUEST OCC TO USE ITS AUTHORITY UNDER 12 U.S.C. SEC. 481 TO PERFORM A HOLDING COMPANY INSPECTION AND INCLUDE SUCH INSPECTION AS PART OF ITS EXAMINATION REPORT ON A NATIONAL BANK. RESULTS OF THE INSPECTION COULD THEN BE USED BY THE FEDERAL RESERVE IN SUPERVISING THE BANK HOLDING COMPANY UNDER SECTION 5(C) OF THE BANK HOLDING COMPANY ACT.

THE EXAMINATION AUTHORITY OF FDIC IS CONTAINED IN 12 U.S.C. SEC. 1820(B), WHICH PROVIDES:

"(B) THE BOARD OF DIRECTORS SHALL APPOINT EXAMINERS WHO SHALL HAVE POWER, ON BEHALF OF THE CORPORATION, TO EXAMINE ANY INSURED STATE NON-MEMBER BANK (EXCEPT A DISTRICT BANK), ANY INSURED STATE BRANCH OF A FOREIGN BANK, ANY STATE BRANCH OF A FOREIGN BANK MAKING APPLICATION TO BECOME AN INSURED BANK, ANY STATE NON-MEMBER BANK OR OTHER INSTITUTION MAKING APPLICATION TO BECOME AN INSURED BANK, AND ANY CLOSED INSURED BANK OR BRANCH, WHENEVER IN THE JUDGMENT OF THE BOARD OF DIRECTORS AN EXAMINATION OF THE BANK IS NECESSARY. IN ADDITION TO THE EXAMINATIONS PROVIDED FOR IN THE PRECEDING SENTENCE, SUCH EXAMINERS SHALL HAVE LIKE POWER TO MAKE A SPECIAL EXAMINATION OF ANY STATE MEMBER BANK AND ANY NATIONAL BANK, INSURED FEDERAL BRANCH OF A FOREIGN BANK, OR DISTRICT BANK, WHENEVER IN THE JUDGMENT OF THE BOARD OF DIRECTORS SUCH SPECIAL EXAMINATION IS NECESSARY TO DETERMINE THE CONDITION OF ANY SUCH BANK FOR INSURANCE PURPOSES. IN MAKING EXAMINATIONS OF INSURED BANKS, EXAMINERS APPOINTED BY THE CORPORATION SHALL HAVE POWER ON BEHALF OF THE CORPORATION TO MAKE SUCH EXAMINATIONS OF THE AFFAIRS OF ALL AFFILIATES OF SUCH BANKS AS SHALL BE NECESSARY TO DISCLOSE FULLY THE RELATIONS BETWEEN SUCH BANKS AND THEIR AFFILIATES AND THE EFFECT OF SUCH RELATIONS UPON SUCH BANKS, AND IN THE CASE OF A FOREIGN BANK, A BINDING COMMITMENT BY SUCH BANK TO PERMIT SUCH EXAMINATION TO THE EXTENT DETERMINED BY THE BOARD OF DIRECTORS TO BE NECESSARY TO CARRY OUT THE PURPOSES OF THIS CHAPTER SHALL BE REQUIRED AS A CONDITION TO THE INSURANCE OF ANY DEPOSITS. EACH EXAMINER SHALL HAVE POWER TO MAKE A THOROUGH EXAMINATION OF ALL OF THE AFFAIRS OF THE BANK AND ITS AFFILIATES, AND SHALL MAKE A FULL AND DETAILED REPORT OF THE CONDITION OF THE BANK TO THE CORPORATION. THE BOARD OF DIRECTORS IN LIKE MANNER SHALL APPOINT CLAIM AGENTS WHO SHALL HAVE POWER TO INVESTIGATE AND EXAMINE ALL CLAIMS FOR INSURED DEPOSITS."

SECTION 1820(B) THUS AUTHORIZES FDIC TO EXAMINE INSURED STATE BANKS WHICH ARE NOT FEDERAL RESERVE MEMBERS AND TO MAKE SPECIAL EXAMINATIONS OF STATE MEMBER BANKS OR NATIONAL BANKS FOR INSURANCES PURPOSES. THE STATUTE ALSO SPECIFICALLY AUTHORIZES EXAMINATIONS OF THE AFFAIRS OF ALL "AFFILIATES" OF SUCH BANKS "AS SHALL BE NECESSARY TO DISCLOSE THE RELATIONS BETWEEN SUCH BANKS AND THEIR AFFILIATES AND THE EFFECT OF SUCH RELATIONS UPON SUCH BANKS ***."

HOWEVER, THE APPLICABLE DEFINITION OF "AFFILIATE" (AND THUS THE EXTENT TO WHICH BANK HOLDING COMPANIES MAY BE INCLUDED) DIFFERS WITH THE TYPE OF BANK INVOLVED. THE APPLICABLE DEFINITION OF "AFFILIATES" OF INSURED STATE NON-MEMBER BANKS WOULD INCLUDE BANK HOLDING COMPANIES TO THE SAME EXTENT THAT AFFILIATES OF NATIONAL BANKS WOULD BE SUBJECT TO OCC EXAMINATION, DISCUSSED IN FOOTNOTE 2, SUPRA. FN4 ON THE OTHER HAND, THE APPLICABLE DEFINITION OF "AFFILIATES" OF OTHER BANKS SUBJECT TO FDIC EXAMINATION - E.G., STATE MEMBER BANKS AND NATIONAL BANKS SUBJECT TO SPECIAL EXAMINATION - INCLUDES "*** ANY BANK HOLDING COMPANY OF WHICH SUCH INSURED BANK IS A SUBSIDIARY WITHIN THE MEANING OF THE BANK HOLDING COMPANY ACT. ***" SEE 12 U.S.C. SEC. 1820(D), 370(C). THIS WOULD PROVIDE BROADER COVERAGE OF BANK HOLDING COMPANIES.

FINALLY, AS IN THE CASE OF OCC, THE FDIC IS PERMITTED TO EXAMINE HOLDING COMPANY AFFILIATES "IN MAKING EXAMINATIONS OF INSURED BANKS ***." THUS, ANY HOLDING COMPANY INSPECTION PERFORMED BY FDIC UNDER 12 U.S.C. SEC. 1820(B) WOULD HAVE TO BE DONE IN CONNECTION WITH A REGULAR OR SPECIAL EXAMINATION OF AN INSURED BANK.

SPECIAL STUDIES AND ANALYSIS

FN1 UNDER 12 U.S.C. SEC. 248(K), THE FEDERAL RESERVE IS GRANTED AUTHORITY TO DELEGATE MOST OF ITS FUNCTIONS. HOWEVER, THAT AUTHORITY IS SPECIFICALLY LIMITED TO DELEGATIONS TO ADMINISTRATIVE LAW JUDGES, MEMBERS OR EMPLOYEES OF THE BOARD, AND FEDERAL RESERVE BANKS.

FN2 12 U.S.C. SEC. 221AB)(4) DEFINES AN "AFFILIATE" TO INCLUDE ANY CORPORATION, BUSINESS, TRUST, ASSOCIATION OR SIMILAR ORGANIZATION:

"WHICH OWNS OR CONTROLS, DIRECTLY OR INDIRECTLY, EITHER A MAJORITY OF THE SHARES OF CAPITAL STOCK OF A MEMBER BANK OR MORE THAN 50 PER CENTUM OF THE NUMBER OF SHARES VOTED FOR THE ELECTION OF THE DIRECTORS OF A MEMBER BANK AT THE PRECEDING ELECTION, OR CONTROLS IN ANY MANNER THE ELECTION OF A MAJORITY OF THE DIRECTORS OF A MEMBER BANK, OR FOR THE BENEFIT OF WHOSE SHAREHOLDERS OR MEMBERS ALL OR SUBSTANTIALLY ALL THE CAPITAL STOCK OF A MEMBER BANK IS HELD BY TRUSTEES."

FN3 SECTION 407.1 OF THE COMPTROLLER'S HANDBOOK FOR NATIONAL BANKS, DATED FEBRUARY, 1980, STATES ON PAGE 4 THAT:

"UNDER 12 U.S.C. SEC. 481, THE OCC HAS AUTHORITY TO EXAMINE BANK HOLDING COMPANIES AND MOST OF THEIR NON-BANKING SUBSIDIARIES, WHICH ARE AFFILIATED WITH NATIONAL BANKS. EXAMINATIONS OF PARENT HOLDING COMPANIES AND NON-BANK AFFILIATES ARE CONDUCTED IN CONJUNCTION WITH THE EXAMINATION OF THE BANK WHEN THE OCC DEEMS IT NECESSARY TO DETERMINE THE NATURE AND EXTENT OF INTERACTION BETWEEN A BANK AND ITS NON-BANK AFFILIATES AND PARENT HOLDING COMPANY."

FN4 THIS RESULTS FROM THE INTERACTION OF THE FOLLOWING STATUTORY PROVISIONS: 12 U.S.C. SEC. 1820(D), 12 U.S.C. SEC. 1828(J)(1), AND, FINALLY, 12 U.S.C. SEC. 221AB).