Equity Hedging: OCC Needs to Establish Policy on Publishing Interpretive Decisions

GAO-01-945: Aug 16, 2001

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This report (1) provides information on the process the Office of the Comptroller of the Currency (OCC) used to make its decision to allow banks to acquire equities and (2) discusses whether the decision was consistent with the way in which OCC generally makes and communicates its decisions. The report also contains a legal decision on whether national banks are authorized to buy equity securities to hedge their equity derivative transactions under existing law. OCC has discretion to determine how it will convey its decisions, but the criteria it uses to determine when and whether to publish its decisions are unclear. For the equity hedging decision, OCC first determined that banks may hold equities to hedge equity derivative transactions under the National Bank Act. OCC then decided that the requesting banks would not be allowed to engage in equity hedging without first obtaining supervisory staff approval of their activities and risk management systems. This enabled OCC to ensure that each bank had the necessary risk management systems in place to monitor risks and prevent speculation. OCC did not publish its interpretation until a September 2000 congressional inquiry questioned its decision. In making decisions interpreting the National Bank Act, OCC has published written interpretive letters. OCC has been criticized for using supervisory approval to avoid public scrutiny of its decision and has left itself open to questions not only about the process used in this case but also about the criteria it uses to decide when to publish its interpretive decisions. Helping Congress and other banking regulators understand OCC's criteria could help mitigate these concerns. GAO agrees with OCC's conclusion that the four national banks have authority under the National Bank Act to own equities to hedge their equity derivative transactions. GAO also agrees with OCC's conclusion that those limitations do not prohibit the four banks from maintaining the stock hedges as an incidental activity.

Recommendation for Executive Action

  1. Status: Closed - Implemented

    Comments: Both recommendations have been implemented. On September 5, 2001, the Office of the Comptroller of the Currency included in its Policies and Procedures Manual, guidance describing its policy on the publication of OCC's significant interpretative opinions and corporate decisions in Interpretation and Actions (publication), and the procedures for implementing the policy. An OCC interpretative opinion will be published in "Interpretation and Actions" if it (1) expresses an opinion about a new issue, develops or applies a new theory or a new analysis of an existing law or regulatory requirement, or applies an established theory or analysis to a set of facts that differs materially from facts that the agency has previously considered; (2) contains a new interpretation of the relevant section of the National Banking Act; or (3) the issue, the analysis employed, or the factual context is believed to be of general interest to national banks or the public.

    Recommendation: Because of larger questions that the process of reaching and announcing this equity hedge decision raises about OCC's interpretive decisionmaking process, the Comptroller of the Currency should establish a policy that articulates the criteria OCC uses in deciding when to publish its interpretive decisions. Furthermore, because interpretations relating to the National Bank Act have implications for other banking regulators, the Comptroller of the Currency should publish all legal decisions that pertain to the law in order to keep other bank regulators and financial institutions informed of OCC's analysis.

    Agency Affected: Department of the Treasury: Office of the Comptroller of the Currency

 

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