Frequently Asked Questions about Regulation H

Membership of State Banking Institutions in the Federal Reserve System

Staff of the Board of Governors of the Federal Reserve System has developed the following frequently asked questions (FAQs) to assist entities in complying with the Board's Regulation H. Except as noted below, these FAQs are staff interpretations and have not been approved by the Board of Governors. Staff may supplement or revise these FAQs as necessary or appropriate in the future. Any questions regarding these FAQs, or requests for modification, rescission, or waiver, should be submitted through the Board's Contact Us form.

12 CFR 208.3 (Application and conditions for membership in the Federal Reserve System)

Q1: What constitutes a change in the general character of a state member bank's business for purposes of section 208.3(d)(2) of Regulation H?

12 CFR 208.5 (Dividends and other distributions)

Q1: What requirements must be satisfied before a state member bank may declare and pay a dividend of property other than cash?

12 CFR 208.6 (Establishment and maintenance of branches)

Q1: What kinds of banking facilities are not considered “branches” for purposes of section 42 of the Federal Deposit Insurance Act (12 U.S.C. § 1831r-1), and thus do not require agency notice if they are closed?

Q2: If a state member bank acquires a savings association through merger or other form of business combination, may the state member bank continue to operate branches at the locations of the branches of the acquired savings association?

12 CFR 208.21 (Investments in premises and securities)

Q1: Under what conditions may a state member bank invest in a company that engages solely in activities permissible for the parent bank to engage in directly?

Q2: May a state member bank make a noncontrolling equity investment in a company that engages solely in activities permissible for the investing bank to engage in directly?

Q3: Does section 9(20) of the Federal Reserve Act prohibit a state member bank from acquiring equity securities solely for the purpose of hedging exposures arising from equity derivative transactions that the bank lawfully enters into with third parties?

12 CFR 208.22 (Community development and public welfare investments)

Q1: May a state member bank make a public welfare investment without prior approval in a project that is eligible to receive tax credits under the Department of Treasury's New Markets Tax Credit (NMTC) program?

Q2: May a state member bank make a public welfare investment without prior approval in a project that is not located in a low- and moderate-income area (LMI area), but that is located in an elevated poverty rate area?


12 CFR 208.3 (Application and conditions for membership in the Federal Reserve System)

Q1: What constitutes a change in the general character of a state member bank's business for purposes of section 208.3(d)(2) of Regulation H?

A1: Under Regulation H, a member bank must "at all times conduct its business and exercise its powers with due regard to safety and soundness" and "may not, without the permission of the Board, cause or permit any change in the general character of its business or in the scope of the corporate powers it exercises at the time of admission to membership." 12 CFR 208.3(d)(1) and (2). Changes in the general character of a bank's business are ones that fundamentally or materially change a bank's core business plan. Examples include becoming a primarily internet-focused or an internet-only operation, or concentrating solely on subprime lending or leasing activities. A change to primarily or exclusively focus on such activities would generally constitute a change in the general character of a bank's business because: (i) such activities may present novel risks for the bank, depending on how they are conducted and managed, and may present risks to the deposit insurance fund; and (ii) such activities may involve aggressive growth plans that may give rise to significant financial, managerial, and other supervisory issues.

Source: SR 02-9, "Guidance Regarding Significant Changes in the General Character of a State Member Bank's Business and Compliance with Regulation H" (March 20, 2002), available here.

Posted: 3/31/2021

 

12 CFR 208.5 (Dividends and other distributions)

Q1: What requirements must be satisfied before a state member bank may declare and pay a dividend of property other than cash?

A1: Pursuant to section 9(6) of the Federal Reserve Act, a state member bank must obtain the prior approval of the Board before it may declare a dividend of property other than cash. 12 U.S.C. § 324. The Board has delegated to the Federal Reserve Banks the authority to approve a request by a state member bank to declare a dividend of property other than cash if the request does not raise significant legal, supervisory, or policy issues.

Source: Board Order Delegating Authority to Approve Requests to Make Dividends of Property Other Than Cash (April 27, 2018), available here.

Posted: 3/31/2021

 

12 CFR 208.6 (Establishment and maintenance of branches)

Q1: What kinds of banking facilities are not considered "branches" for purposes of section 42 of the Federal Deposit Insurance Act (12 U.S.C. § 1831r-1), and thus do not require agency notice if they are closed?

A1: Section 42 of the Federal Deposit Insurance Act requires that insured depository institutions follow a notice process for branch closings. A 1999 joint policy statement on branch closings issued by the federal banking agencies clarified that automated teller machines, remote service facilities, loan production offices, temporary branches, and insured branches of foreign banks are not branches for purposes of section 42 of the Federal Deposit Insurance Act. The policy statement also clarified that a bank's main office is not a branch for purposes of section 42.

This is an official interpretation of the Board.

Source: Joint Policy Statement Concerning Branch Closing Notices and Policies (June 29, 1999), available here.

Posted: 3/31/2021

 

Q2: If a state member bank acquires a savings association through merger or other form of business combination, may the state member bank continue to operate branches at the locations of the branches of the acquired savings association?

A2: Yes. Section 341 of the Dodd-Frank Wall Street Reform and Consumer Protection Act provides authority for savings associations that become banks (including by means of merger with a bank) to continue to operate the branches that they operated immediately before becoming banks. 12 U.S.C. § 5451.

Source: See, e.g., M&T Bank Corporation, FRB Order No. 2012-2 at fn. 74 (September 30, 2015).

Posted: 3/31/2021

 

12 CFR 208.21 (Investments in premises and securities)

Q1: Under what conditions may a state member bank invest in a company that engages solely in activities permissible for the parent bank to engage in directly?

A1: Under the Federal Reserve Act, state member banks are subject to the same limitations and conditions with respect to the purchasing, selling, underwriting, and holding of stock as apply to national banks. The Federal Reserve Act does not prohibit a state member bank from acquiring equity interests of a company that engages solely in activities permissible for the parent bank to engage in directly, provided that the bank "controls" the company. Such companies are called "operations subsidiaries." A state member bank controls a target company if the state member bank (i) directly or indirectly owns, controls, or holds with the power to vote 25 percent or more of the outstanding shares of any class of voting securities of the target company; (ii) exercises control in any manner over the election of a majority of the directors, trustees, or general partners of the company; or (iii) has the power to exercise, directly or indirectly, a controlling influence over the management or policies of the company. In determining control for these purposes, the Board considers the same factors it considers under the Bank Holding Company Act and Regulation Y.

A member bank may only organize and operate operations subsidiaries at locations in the United States. A member bank must use authority under Regulation K to acquire foreign subsidiaries. Ownership interests in operations subsidiaries must comply with all state and other federal law.

This is an official interpretation of the Board.

Source: Letter from Jennifer J. Johnson, Secretary of the Board, to Ronald C. Mayer, Esq. (August 16, 2000), available here; 12 CFR 250.143.

Posted: 3/31/2021

 

Q2: May a state member bank make a noncontrolling equity investment in a company that engages solely in activities permissible for the investing bank to engage in directly?

A2: In general, the Federal Reserve Act prohibits a state member bank from making a noncontrolling equity investment in a company, even if the company's activities are limited to those in which the investing bank could engage directly.

In limited circumstances, Board staff would not recommend that the Board take an enforcement action against a bank for violation of the Federal Reserve Act with respect to a noncontrolling equity investment in another company. These circumstances include where (i) the company's activities are limited to those that are permissible for the bank; (ii) the bank has the ability to withdraw from or terminate the investment at any time; and (iii) the structure of the investment limits the bank's exposure, as a legal and accounting matter, to liability resulting from the actions of the company's other investors.

State member banks may consult with Federal Reserve staff regarding whether a proposed noncontrolling equity investment would be prohibited under the Federal Reserve Act. Equity investments must comply with all state and other federal law.

Source: 12 U.S.C. § 335; Letter from J. Virgil Mattingly, General Counsel of the Board, to Shane B. Hansen, Esq. (July 11, 1996), available here.

Posted: 3/31/2021

 

Q3: Does section 9(20) of the Federal Reserve Act prohibit a state member bank from acquiring equity securities solely for the purpose of hedging exposures arising from equity derivative transactions that the bank lawfully enters into with third parties?

A3: Section 9(20) of the Federal Reserve Act does not prohibit a state member bank from purchasing equity securities to hedge the risks arising from equity derivative transactions lawfully entered into by the bank with an unaffiliated third party, provided that (i) such purchases are made in accordance with the same conditions and restrictions applicable to national banks, and (ii) the state member bank receives the approval of the Director of the Division of Supervision and Regulation before acquiring any equity security for hedging purposes. 12 U.S.C. § 335.

In approving a state member bank to acquire equity securities for hedging purposes in 2007, the Board relied on commitments by the bank that it (i) would conduct its equity hedging activities in accordance with the conditions and restrictions applicable to the equity hedging activities of national banks, (ii) would not acquire equity securities for speculative or investment purposes, and (iii) would not acquire more than 5 percent of any class of equity securities of any issuer in connection with the bank's equity hedging activities. Consistent with the prohibition under federal law on a state member bank's engaging in underwriting and dealing in any equity security, the bank also committed not to hold itself out to the public as being willing to purchase or sell any equity security or act as a market-maker in any security by continuously quoting "bid" and "ask" prices for the security.

Source: Board Statement Concerning the Acquisition of Stock by State Member Banks to Hedge Equity Derivative Transactions (February 21, 2002), available here; Letter from Robert deV. Frierson, Deputy Secretary of the Board, to Stephen Johnson, Esq. (May 4, 2007), available here.

Posted: 3/31/2021

 

12 CFR 208.22 (Community development and public welfare investments)

Q1: May a state member bank make a public welfare investment without prior approval in a project that is eligible to receive tax credits under the Department of Treasury's New Markets Tax Credit (NMTC) program?

A1: A NMTC-eligible investment, directly or indirectly, in an entity that is a "qualified community development entity" as defined in section 45D(c)(l) of the Internal Revenue Code (26 U.S.C. § 45D(c)(1)) is "designed primarily to promote the public welfare" within the meaning of section 9(23) of the Federal Reserve Act (12 U.S.C. § 338a). Accordingly, state member banks are authorized to make investments qualifying for the NMTC program under section 9(23) of the Federal Reserve Act, and may also be eligible for the Regulation H post-notice procedure, as long as those investments comply with all other applicable statutory and regulatory criteria.

Source: CA Letter 19-1, "New Markets Tax Credits and Public Welfare Investments" (February 26, 2019), available here.

Posted: 3/31/2021

 

Q2: May a state member bank make a public welfare investment without prior approval in a project that is not located in a low- and moderate-income area (LMI area), but that is located in an elevated poverty rate area?

A2: State member banks may make certain investments in "elevated poverty areas" without prior Board approval when the investments are "designed primarily to promote the public welfare" within the meaning of section 9(23) of the Federal Reserve Act. 12 U.S.C. § 338a. "Elevated poverty areas" are areas within a census tract (or a group of contiguous census tracts) where 20 percent or more of the population lives below the federally defined poverty level. Thus, an investment in an entity that conducts activities in an elevated poverty area would be a permissible public welfare investment if an investment in an entity that conducts those same activities in an LMI area would be a permissible public welfare investment. As a result, state member banks are authorized to make investments in such entities under section 9(23) of the Federal Reserve Act, and may also be eligible for the Regulation H post-notice procedure, as long as those investments comply with all other applicable statutory and regulatory criteria.

Source: CA Letter 20-9, "Investments in Areas with Elevated Poverty and Public Welfare Investments" (May 21, 2020), available here.

Posted: 3/31/2021

Back to Top
Last Update: March 31, 2021