TO THE OFFICER IN CHARGE OF SUPERVISION AT EACH FEDERAL RESERVE BANK
Enclosed is a copy of inspection procedures for the use and guidance of Federal Reserve Bank staff in performing inspections of nonbank subsidiaries that have approval to engage in limited underwriting and dealing in bank "ineligible" debt or equity securities. Those companies have come to be known as "Section 20 subsidiaries." The procedures are all-inclusive and can be used for the inspection of any Section 20 subsidiary -- regardless of the subsidiary's scope of securities activities or whether it is part of a domestic or foreign banking organization. The primary focus of inspections will be to verify that policies and procedures are in place to ensure compliance with Board "firewall" conditions; verify adherence to the Board's revenue limitation on ineligible securities activities; and evaluate the subsidiary's financial condition and its impact on the consolidated organization. The inspection procedures include separate instructions for both initial and subsequent inspections, as well as supplemental procedures to be used for conducting random or targeted tests where necessary. It is intended that inspections avoid, to the extent possible, duplicating efforts of the Section 20 subsidiary's securities self-regulatory organization. The Board has either modified or clarified its firewall conditions on several occasions. Also, staff has reviewed and evaluated certain operating procedures and practices for compliance with the Board's Orders. As a result, the enclosed materials include several appendices containing the various sets of Board conditions and modifications thereto, as well as explanatory comments. As experience is gained with these new securities activities by both bank holding companies and examiners, it is likely that additional modifications of these procedures and/or appendices will be necessary. Accordingly, it is expected that these inspection procedures will be updated periodically, and ultimately, be included in the Bank Holding Company Supervision Manual. Should you have any questions or comments, please contact Robert S. Plotkin, Assistant Director (202/452-2782) or Mike Schoenfeld, Senior Securities Regulation Analyst (202/452- 2781).
Associate Director
Enclosure
CROSS REFERENCE: None SUPERSEDES: None
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