Federal Register, Volume 85 Issue 130 (Tuesday, July 7, 2020)

[Federal Register Volume 85, Number 130 (Tuesday, July 7, 2020)]
[Proposed Rules]
[Pages 40794-40827]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-12435]

[[Page 40793]]

Vol. 85

Tuesday,

No. 130

July 7, 2020

Part III

Department of the Treasury

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Office of the Comptroller of the Currency

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12 CFR Parts 7, 145, 155, et al.

Activities and Operations of National Banks and Federal Savings
Associations; National Bank and Federal Savings Association Digital
Activities; Proposed Rule

Federal Register / Vol. 85, No. 130 / Tuesday, July 7, 2020 /
Proposed Rules

[[Page 40794]]

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DEPARTMENT OF THE TREASURY

Office of the Comptroller of the Currency

12 CFR Parts 7, 145 and 160

[Docket ID OCC-2020-0003]
RIN 1557-AE74

Activities and Operations of National Banks and Federal Savings
Associations

AGENCY: Office of the Comptroller of the Currency, Treasury.

ACTION: Notice of proposed rulemaking.

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SUMMARY: The Office of the Comptroller of the Currency is issuing a
notice of proposed rulemaking to revise and reorganize its regulations
relating to the activities and operations of national banks and Federal
savings associations. This proposal would clarify and codify recent OCC
interpretations, integrate certain regulations for national banks and
Federal savings associations, and update or eliminate outdated
regulatory requirements that no longer reflect the modern financial
system.

DATES: Comments must be received on or before August 3, 2020.

ADDRESSES: Commenters are encouraged to submit comments through the
Federal eRulemaking Portal or email, if possible. Please use the title
``Activities and Operations of National Banks and Federal Savings
Associations'' to facilitate the organization and distribution of the
comments. You may submit comments by any of the following methods:
Federal eRulemaking Portal--Regulations.gov Classic or
Regulations.gov Beta Regulations.gov Classic: Go to https://www.regulations.gov/. Enter ``Docket ID OCC 2020-0003'' in the Search
Box and click ``Search.'' Click on ``Comment Now'' to submit public
comments. For help with submitting effective comments please click on
``View Commenter's Checklist.'' Click on the ``Help'' tab on the
Regulations.gov home page to get information on using Regulations.gov,
including instructions for submitting public comments.
Regulations.gov Beta: Go to https://beta.regulations.gov/ or click
``Visit New Regulations.gov Site'' from the Regulations.gov classic
homepage. Enter ``Docket ID OCC-2020-0003'' in the Search Box and click
``Search.'' Public comments can be submitted via the ``Comment'' box
below the displayed document information or click on the document title
and click the ``Comment'' box on the top-left side of the screen. For
help with submitting effective comments please click on ``Commenter's
Checklist.'' For assistance with the Regulations.gov Beta site please
call (877)-378-5457 (toll free) or (703) 454-9859 Monday-Friday, 9
a.m.-5 p.m. ET or email to regulations@erulemakinghelpdesk.com.
Email: regs.comments@occ.treas.gov.
Mail: Chief Counsel's Office, Attention: Comment
Processing, Office of the Comptroller of the Currency, 400 7th Street
SW, Suite 3E-218, Washington, DC 20219.
Hand Delivery/Courier: 400 7th Street SW, Suite 3E-218,
Washington, DC 20219.
Fax: (571) 465-4326.
Instructions: You must include ``OCC'' as the agency name and
``Docket ID OCC-2020-0003'' in your comment. In general, the OCC will
enter all comments received into the docket and publish the comments on
the Regulations.gov website without change, including any business or
personal information provided such as name and address information,
email addresses, or phone numbers. Comments received, including
attachments and other supporting materials, are part of the public
record and subject to public disclosure. Do not include any information
in your comment or supporting materials that you consider confidential
or inappropriate for public disclosure.
You may review comments and other related materials that pertain to
this rulemaking action by any of the following methods:
Viewing Comments Electronically--Regulations.gov Classic
or Regulations.gov Beta:Regulations.gov Classic: Go to https://www.regulations.gov/. Enter ``Docket ID OCC-2020-0003'' in the Search
box and click ``Search.'' Click on ``Open Docket Folder'' on the right
side of the screen. Comments and supporting materials can be viewed and
filtered by clicking on ``View all documents and comments in this
docket'' and then using the filtering tools on the left side of the
screen. Click on the ``Help'' tab on the Regulations.gov home page to
get information on using Regulations.gov. The docket may be viewed
after the close of the comment period in the same manner as during the
comment period.
Regulations.gov Beta: Go to https://beta.regulations.gov/ or click
``Visit New Regulations.gov Site'' from the Regulations.gov classic
homepage. Enter ``Docket ID OCC-2020-0003'' in the Search Box and click
``Search.'' Click on the ``Comments'' tab. Comments can be viewed and
filtered by clicking on the ``Sort By'' drop-down on the right side of
the screen or the ``Refine Results'' options on the left side of the
screen. Supporting Materials can be viewed by clicking on the
``Documents'' tab and filtered by clicking on the ``Sort By'' drop-down
on the right side of the screen or the ``Refine Results'' options on
the left side of the screen.'' For assistance with the Regulations.gov
Beta site please call (877)-378-5457 (toll free) or (703) 454-9859
Monday-Friday, 9 a.m.-5 p.m. ET or email to
regulations@erulemakinghelpdesk.com.
The docket may be viewed after the close of the comment period in
the same manner as during the comment period.

FOR FURTHER INFORMATION CONTACT: Beth Kirby, Assistant Director,
Valerie Song, Assistant Director, Heidi Thomas, Special Counsel, or
Chris Rafferty, Attorney, Chief Counsel's Office, (202) 649-5490,
Office of the Comptroller of the Currency, 400 7th Street SW,
Washington, DC 20219. For persons who are deaf or hearing impaired,
TTY, (202) 649-5597.

SUPPLEMENTARY INFORMATION:

I. Background

The Office of the Comptroller of the Currency (OCC) periodically
reviews its regulations to eliminate outdated or otherwise unnecessary
regulatory provisions and, where possible, to clarify or revise
requirements imposed on national banks and Federal savings
associations. These reviews are in addition to the OCC's decennial
review of its regulations as required by the Economic Growth and
Regulatory Paperwork Reduction Act (EGRPRA).\1\ These reviews also
consider, where appropriate, opportunities to integrate rules that
apply to national banks with similar rules that apply to Federal
savings associations in light of the transfer to the OCC of all
functions of the former Office of Thrift Supervision (OTS) relating to
Federal savings association by Title III of the Dodd-

[[Page 40795]]

Frank Wall Street Reform and Consumer Protection Act.\2\
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\1\ Public Law 104-208 (1996), codified at 12 U.S.C. 3311(b).
Section 2222 of EGRPRA requires that, at least once every 10 years,
the OCC along with the other Federal banking agencies and the
Federal Financial Institutions Examination Council (FFIEC) conduct a
review of their regulations to identify outdated or otherwise
unnecessary regulatory requirements imposed on insured depository
institutions. Specifically, EGRPRA requires the agencies to
categorize and publish their regulations for comment, eliminate
unnecessary regulations to the extent that such action is
appropriate, and submit a report to Congress summarizing their
review. The agencies completed their second EGRPRA review on March
2017 and published their report in the Federal Register. 82 FR 15900
(March 30, 2017).
\2\ Public Law 111-203, 124 Stat. 1376 (2010) (transferring to
the OCC all functions of the former OTS relating to Federal savings
associations).
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As part of this process, the OCC is proposing to revise and
reorganize subparts A through D of 12 CFR part 7, Activities and
Operations. Specifically, the OCC is proposing new regulations or
updates to existing regulations to address developing issues and
industry practices and to clarify OCC interpretive positions. For
example, proposed revisions to subpart A include new regulations
covering tax equity finance transactions, derivatives activities, and
payment system memberships. Proposed revisions to subpart B address
corporate governance issues, such as expanding the ability of national
banks to choose corporate governance provisions under State or other
law, clarifying permissible anti-takeover provisions, and adding
provisions relating to capital stock-related activities of national
banks. The OCC also is proposing to update and integrate rules relating
to bank hours and closings in subpart C and to update rules relating to
loan production and deposit production offices and remote service units
in subpart D and move these sections to subpart A to improve the
organization of part 7.\3\ As a companion to this proposed rule, the
OCC is separately issuing an Advance Notice of Proposed Rulemaking
(ANPR), published elsewhere in this issue of the Federal Register as a
separate document, that requests comment on subpart E of 12 CFR part 7
and 12 CFR part 155, the OCC's rules on electronic banking activities.
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\3\ The OCC has separately proposed a rule that would amend 12
CFR 7.4001. See 84 FR 64229 (Nov. 21, 2019) (Permissible Interest on
Loans That Are Sold, Assigned, or Otherwise Transferred). The OCC
also has issued an interim final rule that amends 12 CFR 7.1001 and
7.1003. See 85 FR 31943 (May 28, 2020) (Director, Shareholder, and
Member Meetings).
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The OCC also is proposing more general changes throughout part 7
including removing outdated or superfluous regulations; consolidating
related regulations into one section; and making various technical
changes throughout part 7. In addition, the OCC is proposing to
integrate a number of rules in part 7 to include Federal savings
associations.
This proposed rule accompanies other OCC efforts to modernize OCC
rules, remove unnecessary burden, and clarify requirements, including
the proposed rule published in the Federal Register on April 2, 2020,
which would amend requirements in 12 CFR part 5 for national banks and
Federal savings associations that seek to engage in certain corporate
transactions or activities.\4\
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\4\ 85 FR 18728.
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II. Description of the Proposed Rule

Subpart A--National Banks and Federal Savings Association Powers

Activities That are Part of, or Incidental to, the Business of Banking
(New Sec. 7.1000)
Section 7.5001 identifies the criteria that the OCC uses to
determine whether an electronic activity is authorized for national
banks as part of, or incidental to, the business of banking under 12
U.S.C. 24(Seventh) or other statutory authority. While this section
details those criteria in the context of electronic activities, the OCC
uses these same criteria to determine whether any activity is part of,
or incidental to, the business of banking. To confirm the broader
applicability of the criteria listed in Sec. 7.5001, the OCC is
proposing to remove the word ``electronic'' from this section and move
Sec. 7.5001 to subpart A of part 7 as new Sec. 7.1000. As part of
this move, the proposal would redesignate current Sec. 7.1000 as Sec.
7.1024. These proposed changes would better organize OCC rules and
clarify that the criteria of this new Sec. 7.1000 may apply to any
potential national bank activity and not just those that are electronic
in nature. The OCC believes that new Sec. 7.1000 belongs at the
beginning of part 7 because it provides the framework for all national
bank powers that follow in subpart A.
The OCC also proposes a technical change to Sec. 7.1000(c)(1).
Specifically, the proposed rule would amend this provision to clarify
that the four-factor test set forth in this section to determine
activities authorized as part of the business of banking applies to
activities not specifically included in 12 U.S.C. 24(Seventh) or other
statutory authority. Activities that are specifically included in 12
U.S.C. 24(Seventh) or other statutory authority are by express
statutory language within the business of banking. This clarification
reflects the OCC's long-standing use of the four-factor test to
determine whether an activity not expressly included in a statute is
within the business of banking.\5\
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\5\ The Supreme Court has held that the business of banking is
not limited to the enumerated powers listed in 12 U.S.C. 24(Seventh)
but encompasses more broadly activities that are part of or
incidental to the business of banking. NationsBank of N.C., N.A. v.
Variable Annuity Life Ins. Co., 513 U.S. 251, 258-60 (1995).
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National Bank Acting as Finder (Sec. 7.1002)
The OCC is proposing a technical change to its finder regulation at
Sec. 7.1002 and invites comment on the inclusion of Federal savings
association finder activities in part 7. The OCC has long permitted a
national bank to act as a finder to bring together buyers and sellers
of financial and nonfinancial products and services.\6\ The OCC's
regulations include two separate rules relating to permissible national
bank finder activities. Section 7.1002, which codifies OCC interpretive
letters, provides that finder activities are part of the business of
banking.\7\ This section also describes permissible finder activities;
provides an illustrative, non-exclusive list of permissible finder
activities; clarifies that a national bank's finder authority does not
allow it to engage in brokerage activities that have not been found to
be permissible for national banks; and authorizes a national bank to
advertise and accept fees for finder services unless otherwise
prohibited by Federal law. Section 7.5002 provides that a national bank
generally may perform, provide, or deliver through electronic means and
facilities any activity, function, product, or service that is
otherwise permissible. Section 7.5002(a)(1) clarifies that a national
bank may act as electronic finders and includes a list of permissible
electronic finder activities.\8\
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\6\ See, e.g., OCC Interpretive Letter No. 607 (Aug. 24, 1992).
\7\ See, e.g., OCC Interpretive Letter No. 824 (Feb. 27, 1998).
\8\ The OCC's ANPR on National Bank and Federal Savings
Association Use of Digital Technology, published elsewhere in this
issue of the Federal Register as a separate document, also requests
comment on whether to add more examples to the electronic finder
activities list in 12 CFR 7.5002(a)(1).
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The OCC is proposing to amend its regulations by adding a new
paragraph (8) to Sec. 7.1002(b) that would cross-reference the
permissible electronic finder activities listed in Sec. 7.5002(a)(1).
This change would reference all examples of permissible finder
activities for national banks in one rule.
While finder activities are part of the business of banking for a
national bank, a Federal savings association may engage in a finder
activity only to the extent that the activity is incidental to Federal
savings association powers authorized under the Home Owners' Loan Act
(HOLA) (12 U.S.C. 1461 et seq).\9\ The former OTS determined that,

[[Page 40796]]

if certain factors are met, a Federal savings association may collect
fees for referring customers to third parties \10\ and may provide
services and products to customers through a third-party discount
program \11\ as activities incidental to their statutorily enumerated
powers. The OCC also has recognized Federal savings association finder
authority in its Retail Nondeposit Investment Products Booklet of the
Comptroller's Handbook.\12\
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\9\ The OCC and the predecessor agencies previously responsible
for the supervision of Federal savings associations ``have long
recognized that federal savings associations possess `incidental'
powers, i.e., powers that are incident to the express powers of
federal savings associations as set forth in the Home Owners' Loan
Act.'' OTS Op. Acting Ch. Couns. at 3 (Mar. 25, 1994).
\10\ OTS Op. Ch. Couns. (May 5, 2000).
\11\ OTS Op. Ch. Couns. (Aug. 5, 2008).
\12\ OCC, Comptroller's Handbook: Retail Nondeposit Investment
Products Booklet at 9 (Jan. 2015).
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The OCC invites comment on whether it should add a separate
provision to Sec. 7.1002 to set forth Federal savings association
finder authority. This provision could provide that a Federal savings
association may engage in finder activities to the extent that those
activities are incidental to Federal savings association powers
expressly authorized under the HOLA. The OCC also could include in this
provision a list of Federal savings association finder activities that
the former OTS or the OCC have determined are permissible. This list
could codify prior interpretations and include collecting fees for
referring customers to third parties and providing services and
products to customers through a third-party discount program. The OCC
specifically requests comment on what other Federal savings association
finder activities the OCC could add to this list.

Money Lent by a National Bank at Banking Offices or at Facilities Other
Than Banking Offices (Sec. 7.1003)

Twelve U.S.C. 81 provides that a national bank must transact
business in the place specified in its organization certificate and in
any branches established or maintained in accordance with 12 U.S.C. 36.
The OCC interprets 12 U.S.C. 81 to mean that money is deemed to be lent
at a bank's main office unless there is a sufficient nexus tying the
transaction to another location, in which case that location must be
licensed as a branch office.
Twelve U.S.C. 36 and 12 CFR 5.30 define ``branch'' as a place of
business established by the national bank where ``deposits are
received, or checks paid, or money lent.'' Section 7.1003 provides that
for purposes of what constitutes a branch within the meaning of 12
U.S.C. 36 and 12 CFR 5.30, ``money'' is deemed to be ``lent'' only at
the place, if any, where the borrower in-person receives loan proceeds
directly from bank funds either: (1) From the lending bank or its
operating subsidiary or (2) at a facility that is established by the
lending bank or its operating subsidiary. Section 7.1003(b) further
provides that a borrower may receive loan proceeds directly from bank
funds in person at a place that is not the bank's main office and is
not licensed as a branch without violating 12 U.S.C. 36, 12 U.S.C. 81,
and 12 CFR 5.30, provided that a third party is used to deliver the
funds and the place is not established by the lending bank or its
operating subsidiary. This paragraph defines a third party to include a
person who satisfies the requirements of Sec. 7.1012(c)(2) or one who
customarily delivers loan proceeds directly from bank funds under
accepted industry practice, such as an attorney or escrow agent at a
real estate closing.
The OCC is proposing to amend Sec. 7.1003 to incorporate an OCC
interpretation that further clarifies when the OCC considers money to
be lent at a location other than the main office. Specifically,
proposed paragraph (c) would provide that a national bank operating
subsidiary may distribute loan proceeds from its own funds or bank
funds directly to the borrower in person at offices the operating
subsidiary established without violating 12 U.S.C. 36, 12 U.S.C. 81,
and 12 CFR 5.30 if the operating subsidiary provides similar services
on substantially similar terms and conditions to customers of
unaffiliated entities, including unaffiliated banks.\13\ Based on
Supreme Court precedent,\14\ OCC interpretations have recognized that a
facility must provide a convenience to bank customers that gives the
bank a competitive advantage in obtaining customers for the facility to
be considered a branch for purposes of 12 U.S.C. 36 and 12 CFR
5.30.\15\ The OCC has found that a facility where members of the
public, customers, and noncustomers alike receive substantially similar
services on substantially similar terms is not a facility created to
attract bank customers and thus the establishment of this type of
facility offers no competitive advantage to the national bank.\16\
Proposed paragraph (c) reflects this OCC precedent.
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\13\ See Interpretive Letter No. 814 (Nov. 3, 1997).
\14\ In First National Bank in Plant City v. Dickinson, the
Supreme Court explained that because the purpose of 12 U.S.C. 36 is
to maintain competitive equality, it is relevant in construing the
term ``branch'' to consider whether the facility gives the bank an
advantage in its competition for customers. First National Bank in
Plant City v. Dickinson, 396 U.S. 122, 136-137 (1969).
\15\ See OCC Interpretive Letter No. 635 (July 23, 1993). See
also 61 FR 60342, 60347 (Nov. 27, 1996).
\16\ See OCC Interpretive Letter No. 814 (Nov. 3, 1997).
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Establishment of a Loan Production Office by a National Bank (Sec.
7.1004)
Credit Decisions at Other Than Banking Offices of a National Bank
(Sec. 7.1005)
Section 7.1004 provides that a national bank may use the services
of persons not employed by the bank for originating loans. It also
provides that an employee or agent of a national bank or its subsidiary
may originate a loan at a site other than the main office or a branch
office of the bank without violating the branching and place of
business requirements of 12 U.S.C. 36 and 12 U.S.C. 81 if the loan is
approved and made at the main office or a branch office of the bank or
at an office of an operating subsidiary located on the premises of, or
contiguous to, the main office or branch office of the bank. Section
7.1005 provides that a national bank and its operating subsidiary may
make a credit decision regarding a loan application at a site other
than the main office or a branch office of the bank provided that
``money'' is not ``lent'' at those other sites within the meaning of
Sec. 7.1003.
OCC precedent has explained that the purpose of Sec. 7.1004 is not
to prescribe where certain activities must be performed but rather to
help avoid violations of the branching laws by defining a ``safe
harbor'' of loan origination activities that will not constitute
branching.\17\ Further, the OCC has stated that this section does not
purport to address the outer limits of what is permissible nor
establish any affirmative requirement for where loan production office
(LPO)-originated loans must be approved or made.\18\ The OCC has found
that Sec. 7.1004 should not be read to require loans originated at
LPOs to be approved and made at a main or branch office, and that it is
permissible for loans originated at an LPO to be approved at separate
back office facilities not located on the premises of, or contiguous
to, a main or branch office of the bank.\19\ These OCC interpretations
were codified in Sec. 7.1005. When the OCC adopted Sec. 7.1005, the
agency noted that it was retaining Sec. 7.1004 despite the potential
tension between the two sections because Sec. 7.1004 is a judicially
recognized safe harbor permitting national banks to undertake certain

[[Page 40797]]

lending related activities without violating branching statutes, and
that it did not view a lending related activity that falls outside the
scope of Sec. 7.1004, as with Sec. 7.1005 regarding the making of
credit decisions, as necessarily violating branching statutes.\20\
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\17\ OCC Interpretive Letter No. 634 (July 23, 1993).
\18\ Id.; OCC Interpretive Letter No. 667 (Oct. 12, 1994).
\19\ OCC Interpretive Letter No. 667 (Oct. 12, 1994).
\20\ 61 FR 4849, 4851 (Feb. 9, 1996).
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The OCC is proposing to amend Sec. 7.1004 so that it reflects the
broader permissibility provided by current Sec. 7.1005, to describe
the permitted activities as ``loan production activities,'' and to
remove Sec. 7.1005 to simplify and streamline its rules. As proposed,
paragraph (a) of Sec. 7.1004 would provide that a national bank or its
operating subsidiary may engage in loan production activities at a site
other than the main office or a branch office of the bank. The proposal
would permit a national bank or its operating subsidiary to solicit
loan customers, market loan products, assist persons in completing
application forms and related documents to obtain a loan, originate and
approve loans, make credit decisions regarding a loan application, and
offer other lending-related services such as loan information and
applications at a loan production office without violating 12 U.S.C. 36
and 12 U.S.C. 81, provided that ``money'' is not deemed to be ``lent''
at that site within the meaning of Sec. 7.1003 and the site does not
accept deposits or pay withdrawals. This description of activities is
not intended to alter the description of ``money lent'' in Sec. 7.1003
nor affect the scope of activities that are permissible for a national
bank to perform at a non-branch location. Rather, the OCC is proposing
this description to provide greater clarity to what activities a
national bank may conduct at a loan production office. As a technical
change, the OCC would redesignate former paragraph (a) as paragraph (b)
and amend it to reference loan production activities instead of
originating loans.
Loan Agreement Providing for a National Bank Share In Profits, Income,
or Earnings or for Stock Warrants (Sec. 7.1006)
The OCC is proposing to amend Sec. 7.1006 to include Federal
savings associations. Section 7.1006 permits a national bank to take as
consideration for a loan: (1) A share in the profit, income, or
earnings from a business enterprise of a borrower or (2) a stock
warrant issued by the business enterprise of a borrower provided the
bank does not exercise the warrant. This arrangement is known as an
``equity kicker.'' Section 7.1006 further provides that the national
bank may take the share or stock warrant in addition to, or in lieu of,
interest. However, the national bank may not condition the borrower's
ability to repay principal on the value of the profit, income, earnings
of the business enterprise or upon the value of the warrant received.
The former OTS and its predecessor, the Federal Home Loan Bank
Board, permitted a Federal savings association to take a share of
profit, income, or earnings as consideration for a loan as not
inconsistent with Federal savings association lending authority under
HOLA \21\ to maintain parity with the commercial lending practices of
national banks.\22\ In addition, the former OTS permitted a Federal
savings association to acquire warrants as an incidental power of its
authority to make secured loans for commercial, corporate, or business
purposes under HOLA and applied the same restrictions on exercising
those warrants as applied to national banks.\23\ By amending Sec.
7.1006 to include Federal savings associations, the proposed rule would
codify these interpretations to clarify this authority and to better
provide parity with national banks.
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\21\ 12 U.S.C. 1464(c)(2).
\22\ Unpublished letter from Jordan Luke, Gen. Couns., Federal
Home Loan Bank Board (Dec. 19, 1988), available on Westlaw: 1988 WL
1022319 (O.T.S.).
\23\ Id.
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National Bank Holding Collateral Stock as Nominee (Sec. 7.1009)
Current Sec. 7.1009 permits a national bank to transfer stock it
has received as collateral for a loan into the bank's name as
nominee.\24\ The OCC believes this provision is unnecessary and is
proposing to delete it. The OCC permits a bank to perfect its security
interests in collateral under applicable State laws consistent with the
Uniform Commercial Code.\25\ In situations where a bank holds stock as
collateral, typically one method to perfect that interest under State
law is to list the bank as nominee on the stock certificate. However,
recent versions of the Uniform Commercial Code \26\ provide other
potentially less burdensome methods to perfect an interest in
securities collateral, for example, by obtaining control over a
brokerage account holding the stock. Therefore, the OCC believes that
Sec. 7.1009 is not necessary. Removing this provision would streamline
OCC regulations while not substantively changing the methods national
banks may use to perfect their interests in stock or other securities
obtained as collateral for loans, which continue to include being
listed as nominee if permitted under State law.
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\24\ See 12 U.S.C. 24(Seventh).
\25\ See OCC, Comptroller's Handbook: Asset-Based Lending at 21-
22 (2017).
\26\ Primarily Articles 8 and 9, which have been substantively
adopted by all U.S. jurisdictions. See https://www.uniformlaws.org/acts/ucc.
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Postal Services by National Banks and Federal Savings Associations
(Sec. 7.1010)
Section 7.1010 provides that a national bank may operate a postal
substation on banking premises and receive income from it. It describes
the types of services permitted and states that a bank may advertise
them to attract customers to the bank. It also requires the bank to
operate the substation in accordance with the rules and regulations of
the United States Postal Service (USPS) and to keep books and records
on it, which are subject to inspection by the USPS, separate from those
of other banking operations.
The OCC is proposing to amend Sec. 7.1010 to also apply to Federal
savings associations, consistent with the position taken in agency
guidance.\27\ The OCC also proposes to replace the words ``operate a
postal substation'' with ``provide postal services'' because the term
``Postal substation'' is no longer used in USPS regulations. This
change in terminology would clarify that national banks and Federal
savings associations may offer a limited menu of postal services and
are not required to operate full-service post offices.
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\27\ The former OTS previously concluded that Federal savings
associations are authorized to operate a postal substation on
premises. See OTS Op. Acting Ch. Couns., Mar. 25, 1994.
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National Bank Receipt of Stock From a Small Business Investment Company
(Sec. 7.1015)
Fifteen U.S.C. 682(b)(1) permits a national bank to invest in one
or more small business investment companies (SBICs) or in any entity
established solely to invest in SBICs, provided that the total amount
of all SBIC investments does not exceed five percent of the bank's
capital and surplus.\28\ Section 7.1015 provides that a national bank
may purchase stock of a SBIC and receive benefits of such stock
ownership. This section further provides that the receipt and retention
of a dividend from a SBIC in the form of stock of a corporate borrower
of the SBIC is not a purchase of stock within the meaning of 12 U.S.C.
24(Seventh).
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\28\ National banks also may invest in SBICs pursuant to their
community development investment authority See 12 U.S.C.
24(Eleventh) and 12 CFR part 24.
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The OCC is proposing to amend Sec. 7.1015 to provide that a
national bank

[[Page 40798]]

may invest in a SBIC or in any entity established solely to invest in
SBICs, and that purchasing stock in a SBIC is one example of this type
of investment. This amendment would more closely align Sec. 7.1015 to
15 U.S.C. 682(b). In addition, the OCC is proposing to amend Sec.
7.1015 to provide that a national bank's SBIC investments are subject
to appropriate capital limitations.
Fifteen U.S.C. 682(b)(2) provides a Federal savings association
with similar authority to invest in SBICs.\29\ This authority is
codified in OCC regulations at 12 CFR 160.30. To clarify this
authority, the OCC is proposing to add a reference to Federal savings
association SBIC authority in Sec. 7.1015 and cross-reference to 12
CFR 160.30.
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\29\ As with national banks, Federal savings associations also
may invest in SBICs pursuant to their community development
investment authority. See 12 U.S.C. 1464(c)(4)(B) and 12 CFR 5.59
(Service corporations of Federal savings associations).
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The OCC also is proposing to amend Sec. 7.1015 to clarify that a
national bank or Federal savings association may invest in a SBIC that
is either (1) already organized and has obtained a license from the
Small Business Administration, or (2) in the process of being
organized. The OCC has previously interpreted this authority to permit
a national bank to invest in a SBIC that is in the process of being
organized.\30\
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\30\ See OCC Interpretive Letter No. 832 (June 18, 1998).
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Letters of Credit and Independent Undertakings (Sec. 7.1016)
The OCC proposes to amend 12 CFR 7.1016, which provides that a
national bank may issue letters of credit and other independent
undertakings to customers, to include Federal savings associations.
Section 7.1016 provides that a national bank entering into an
independent undertaking should not expose itself to undue risk and also
outlines certain safety and soundness considerations for these
activities. Specifically, Sec. 7.1016 provides that a national bank
should consider at a minimum: (1) Whether the terms make clear the
independence of the undertaking; (2) whether the amount of the
undertaking is limited; (3) whether the undertaking is limited in
duration or, if not, whether the bank has an ability to end the
undertaking or demand cash collateral from the applicant; and (4)
whether the undertaking will be collateralized or include a
reimbursement right. Section 7.1016 also provides that certain
undertakings require particular protections against credit,
operational, and market risk and outlines the protections a bank should
or must take in specific circumstances.\31\ Section 7.1016 further
provides that the national bank should possess operational expertise
that is commensurate with the sophistication of its independent
undertaking activities. Finally, Sec. 7.1016 requires a bank to
accurately reflect its undertakings in its records.
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\31\ Specifically, Sec. 7.1016(b)(2) provides that: (1) If the
undertaking is to honor by delivery of an item of value other than
money, the bank should ensure that market fluctuations affecting the
value of the item will not cause the bank to assume undue market
risk; (2) if the undertaking provides for automatic renewal, the
terms for renewal should be consistent with the bank's ability to
make any necessary credit assessments prior to renewal; and (3) if a
bank issues an undertaking for its own account, the underlying
transaction for which it is issued must be within the bank's
authority and must comply with any safety and soundness requirements
applicable to that transaction.
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Pursuant to Sec. 160.50, a Federal savings association may issue
letters of credit and may issue other independent undertakings as are
approved by the OCC, subject to the restrictions in Sec. 160.120.
Section 160.120 contains provisions that are largely similar to the
provisions applicable to national banks in Sec. 7.1016.\32\ However,
Sec. Sec. 160.50 and 160.120 provide that, unless it is a letter of
credit, a Federal savings association only may issue independent
undertakings that have been approved by the OCC. The OTS explained when
it updated its regulation that Federal savings associations were not
traditionally involved in international banking transactions, which
utilized these independent undertakings, as were national banks.\33\
The OTS stated that the approval requirement provided ``the appropriate
balance between giving thrifts greater flexibility to potentially
engage in new types of transactions while at the same time ensuring
that thrifts have properly evaluated the risks posed by a particular
transaction consistent with prudent banking practice.'' \34\
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\32\ See 61 FR 50951, 50958 (Sept. 30, 1996).
\33\ Id.
\34\ Id.
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The OCC is proposing to amend Sec. 7.1016 to apply it to Federal
savings associations, and to remove Sec. Sec. 160.50 and 160.120,
because of the similarities between the national bank and Federal
savings association independent undertaking regulations. As a result, a
Federal savings association would no longer be limited to issuing non-
letter of credit independent undertakings approved by the OCC. The
industry's rules of practice have improved since the former OTS
promulgated the regulation in 1996. In addition, the operations of
Federal savings associations have evolved over the past two decades and
those Federal savings associations that issue independent undertakings
are familiar with non-letters of credit independent undertakings and
related supervisory expectations. Furthermore, the OCC expects national
banks and Federal savings associations to have operational expertise
commensurate with the sophistication of its letters of credit or
independent undertaking activities.\35\ The OCC believes that this
expectation is sufficient to ensure that all OCC-supervised
institutions properly evaluate the risks associated with these
activities. For these reasons, the OCC finds that the OCC approval
requirement for non-letter of credit independent undertakings issued by
Federal savings associations is no longer necessary.
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\35\ 12 CFR 7.1016(b)(3) and 12 CFR 160.120(b)(3).
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The OCC also is proposing to clarify that Federal branches and
agencies of foreign banks may issue letters of credit and other
independent undertakings, consistent with the conditions outlined in
Sec. 7.1016.\36\ Finally, the OCC is proposing technical changes to
the footnote to reflect updates to the laws and rules of practice
cited.
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\36\ Section 4(b) of the International Banking Act, 12 U.S.C.
3102(b) (Pub. L. 95-369) provides that the operations of a foreign
bank at a Federal branch or agency shall be conducted with the same
rights and privileges as a national bank at the same location and
shall be subject to all the same duties, restrictions, penalties,
liabilities, conditions, and limitations that would apply under the
National Bank Act to a national bank doing business at the same
location. See also 12 CFR 28.13.
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National Bank Participation in Financial Literacy Programs (Sec.
7.1021)
Twelve CFR 7.1021 provides that a national bank may participate in
a financial literacy program on the premises of, or at a facility used
by, a school. Section 7.1021 also provides that the school premises or
facility will not be considered a branch of the bank if: (1) The bank
does not establish and operate the school premises or facility on which
the financial literacy program is conducted; and (2) the principal
purposes of the program is educational.
The OCC is proposing to amend Sec. 7.1021 to clarify that the
purpose of this section is whether the facilities or premises used for
such a program would be considered a branch of the national bank under
12 U.S.C. 36. Facilities or premises are only considered to be branches
of a national bank if they are established and operated by the national
bank. The proposal also would provide that the OCC considers the
establishment and operation in this

[[Page 40799]]

context on a case by case basis, considering the facts and
circumstances. However, the OCC has previously determined \37\ that
whether a financial literacy program is a branch under section 36 may
be evaluated under the safe harbor test for messenger services
established by third parties set forth in Sec. 7.1012(c)(2) and that a
premises or facility used for a school savings program is clearly
established by a third party if it meets this safe harbor test. The
proposal would codify this interpretation by providing that a premises
is not a branch of the national bank if the safe harbor test in Sec.
7.1012(c)(2) applicable to messenger services established by third
parties is satisfied and that the factor discussed in Sec.
7.1012(c)(2)(i), regarding whether the bank employs the person who
provide the service, can be met if bank employee participation in the
financial literacy program consists of managing the program or
conducting or engaging in financial education activities provided the
school or other community organization retains control over the program
and over the premises or facilities at which the program is held. The
OCC believes that this should provide clarity with respect to the
meaning of ``establish and operate'' in Sec. 7.1021.
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\37\ See OCC Interpretive Letter No. 839 (August 3, 1998).
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Consistent with current practice, the OCC also is expanding the
scope of financial literacy programs beyond schools to encompass other
community-based organizations, such as non-profit organizations, that
provide financial literacy programs. In addition, the OCC is moving the
definition of financial literacy program to the beginning of the
section to clarify that, while a financial literacy program is a
program for which the primary purpose is educational, this is not a
factor in determining whether the premises or facility is a branch for
purposes of section 36.
The OCC is not adding Federal savings associations to this section
because they are not subject to the branching requirements in section
36. However, the OCC notes that participation in financial literacy
programs is a permissible activity for both national banks and Federal
savings associations.
National Banks' Authority To Buy and Sell Exchange, Coin, And Bullion
(Sec. 7.1022)
Federal Savings Associations, Prohibition on Industrial or Commercial
Metal Dealing or Investing (Sec. 7.1023)
The OCC also is proposing a technical change to Sec. Sec. 7.1022
and 7.1023. Section 7.1022 prohibits a national bank from acquiring or
selling industrial or commercial metal for purposes of dealing or
investing. Section 7.1022 excludes industrial and commercial metals
from the national bank authority to ``buy and sell exchange, coin, and
bullion.'' Section 7.1023 similarly prohibits a Federal savings
association from dealing or investing in industrial or commercial
metal. Both sections require a national bank and a Federal savings
association to dispose of any industrial or commercial metal held as a
result of dealing or investing in that metal as soon as practicable,
but not later than one year from the effective date of the regulation.
The OCC may grant up to four separate one-year extensions if the bank
makes a good faith effort to dispose of the metal and the retention of
the metal for an additional year is not inconsistent with the safe and
sound operation of the bank. The OCC is proposing a technical change to
both sections to replace the words ``one year from the effective date
of this regulation'' with the actual effective date of that final rule,
April 1, 2018.
Tax Equity Finance Transactions (New Sec. 7.1025)
The OCC and the courts have long held that a national bank may use
its 12 U.S.C. 24(Seventh) lending authority to engage in transactions
that do not take the form of a traditional loan to accommodate the
demands of the market, provided the transaction is the functional
equivalent of a loan.\38\ The OCC has interpreted this authority to
permit a national bank to engage in tax equity finance (TEF)
transactions.\39\ Although the OCC has not previously addressed the
permissibility of TEF transactions for a Federal savings association,
OCC regulations authorize a Federal savings association to engage in
loan equivalent transactions pursuant to 12 U.S.C. 1464,\40\ and the
former OTS permitted a Federal savings association to participate in
certain transactions in order to receive tax credits and other tax
benefits.\41\ The OCC is proposing to codify and clarify these
interpretations of 12 U.S.C. 24(Seventh) and 1464 in new Sec.
7.1025.\42\
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\38\ See M & M Leasing Corp. v. Seattle First Nat'l Bank, 563
F.2d 1377 (9th Cir. 1977), cert. denied, 436 U.S. 956 (1978). See
also OCC Interpretive Letter No. 1048 (Dec. 21, 2005); Corporate
Decision 99-07 (March 26, 1999); Corporate Decision 98-17 (March 27,
1998); Interpretive Letter No. 867 (June 1, 1999).
\39\ See OCC Interpretive Letter No. 1048 (Dec. 21, 2005), OCC
Interpretive Letter No. 1139 (Nov. 13, 2013), OCC Interpretive
Letter No. 1141 (Apr. 22, 2014). See also 26 U.S.C. 48 (energy ITC)
and 26 U.S.C. 45 (energy PTC). Internal Revenue Service (IRS) rules
govern tax credit availability.
\40\ 12 CFR 160.41 (Leasing).
\41\ See, e.g., OTS Op. Ch. Couns. (Feb. 9, 2004) (New Market
Tax Credit Program) and OTS Op. Ch. Couns. (Nov. 10, 1994) (low-
income housing tax credit partnership).
\42\ A national bank or Federal savings association may be able
to participate in TEF transactions under an alternative authority,
including community development and public welfare investment
authority under 12 U.S.C. 24(Eleventh) and 12 CFR 24.
---------------------------------------------------------------------------

Proposed Sec. 7.1025(a) would permit a national bank and Federal
savings association to engage in a TEF transaction pursuant to 12
U.S.C. 24(Seventh) and 1464 if the transaction is the functional
equivalent of a loan, as provided in proposed paragraph (c), and if a
TEF transaction satisfies the requirements of proposed paragraph (d).
Proposed Sec. 7.1025(b) would define a ``tax equity finance
transaction'' as a transaction in which a national bank or Federal
savings association provides equity financing to fund a project that
generates tax credits and other tax benefits and the use of an equity-
based structure allows the transfer of those credits to the bank or
savings association. Paragraph (b) also would define ``capital and
surplus'' by cross-referencing to its definition in the OCC's lending
limit rule, 12 CFR 32.\43\ As defined in the lending limit rule, for
qualifying community banking organizations that have elected to use the
community bank leverage ratio framework, as set forth under the OCC's
Capital Adequacy Standards at 12 CFR part 3, ``capital and surplus''
means a qualifying community banking organization's tier 1 capital, as
used under 12 CFR 3.12, plus a qualifying community banking
organization's allowance for loan and lease losses or adjusted
allowances for credit losses, as applicable, as reported in the
Consolidated Reports of Condition and Income (Call Report). For all
other national banks and Federal savings associations, ``capital and
surplus'' means a national bank's or savings association's tier 1 and
tier 2 capital, calculated under the risk-based capital standards
applicable to the institution as reported in the Call Report, plus the

[[Page 40800]]

balance of a national bank's or Federal savings association's allowance
for loan and lease losses or adjusted allowances for credit losses, as
applicable, not included in the bank's or savings association's tier 2
capital, for purposes of the calculation of risk-based capital, as
reported in the national bank's or savings association's Call Report.
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\43\ The OCC recently amended the definition of ``capital and
surplus'' in 12 CFR 32.2 in its recent community bank leverage ratio
rule. See 84 FR 61776 (November 13, 2019).
---------------------------------------------------------------------------

Under proposed paragraph (c), a TEF transaction would qualify as
the functional equivalent of a loan if it meets eight requirements that
derive from OCC interpretations. First, the TEF transaction structure
must be necessary for making the tax credits and other tax benefits
available to the national bank or Federal savings association. The OCC
requests comment on whether national banks or Federal savings
associations routinely obtain legal opinions regarding the availability
of tax credits in connection with these types of finance transactions.
Second, the TEF transaction must be of limited tenure and not
indefinite. Under this requirement, a national bank or Federal savings
association would need to be able to achieve its targeted return in a
reasonable time, and the TEF transaction would need to have a defined
termination point. A national bank or Federal savings association could
satisfy this requirement if the TEF transaction will terminate within a
reasonable time of the transaction's initiation or if a project sponsor
has an option to purchase a national bank's or Federal savings
association's interest at or near fair market value. The national bank
or Federal savings association cannot control whether it retains the
interest indefinitely. The proposed rule would permit a national bank
or Federal savings association to retain a limited investment interest
if that interest is required by law to obtain continuing tax benefits
from the TEF transaction.
Third, the tax benefits and other payments received by the national
bank or Federal savings association from the TEF transaction must repay
the investment and provide an implied rate of return. As a result of
this proposed requirement, the national bank's or Federal savings
association's underwriting could not place undue reliance on the value
of any residual stake in the project and the proceeds of disposition
following the expiration of the tax credits' compliance period.
Fourth, the national bank or Federal savings association must not
rely on appreciation of value in the project or property rights
underlying the project for repayment. As discussed in OCC Interpretive
Letter 1139, wind turbines, solar panels, and other ancillary equipment
are not considered real property under 12 U.S.C. 29, and acquisition of
interests in real estate incidental to the provision of financing is
not inconsistent with 12 U.S.C. 29.
Fifth, the national bank or Federal savings association must use
underwriting and credit approval criteria and standards that are
substantially equivalent to the underwriting and credit approval
criteria and standards used for a traditional commercial loan. To
comply with this requirement, the documents governing the TEF
transaction should contain terms and conditions equivalent to those
found in documents governing typical lending relationships and
transactions.
Sixth, the national bank or Federal savings association must be a
passive investor in the transaction and must be unable to direct the
affairs of the project company. This means that the national bank or
Federal savings association would not be able to direct day-to-day
operations of the project. However, the OCC would not consider
temporary management activities in the context of foreclosure or
similar proceedings as violating this requirement.
Seventh, the national bank or Federal savings association must
appropriately account for the transaction initially and on an ongoing
basis and document contemporaneously its accounting assessment and
conclusion. Although TEF transactions can be the functional equivalent
of loans pursuant to a national bank's or Federal savings association's
lending authority, the accounting treatment of tax equity investments
may differ from being a loan.
Proposed paragraph (d) would provide that a national bank or
Federal savings association only could engage in TEF transactions if it
meets the following four additional requirements. First, the national
bank or Federal savings association cannot control the sale of energy,
if any, from the project. To satisfy this requirement, a national bank
or Federal savings association could enter into a long-term contract
with creditworthy counterparties to sell energy from the project, as
articulated in OCC Interpretive Letter 1139, or have the project
sponsor bear responsibility for selling generated power into the energy
market so long as those sales are stabilized by a hedge contract that
provides reasonable price and cash flow certainty, as articulated in
OCC Interpretive Letter 1141.
Second, the national bank or Federal savings association must limit
the total dollar amount of TEF transactions to no more than five
percent of its capital and surplus unless the OCC determines, by
written approval of a written request by the national bank or Federal
savings association to exceed the five percent limit, that a higher
aggregate limit will not pose an unreasonable risk to the national bank
or Federal savings association and that the tax equity finance
transactions in the national bank's or Federal savings association's
portfolio will not be conducted in an unsafe or unsound manner. In no
case may a bank's or FSA's total dollar amount of TEF transactions
exceed fifteen percent of its capital and surplus. As provided for
public welfare investments under 12 U.S.C. 24(Eleventh) and 12 CFR 24,
a national bank is generally subject to a five percent aggregate
investment limit and this limit encourages a national bank to maintain
appropriate risk diversification.\44\ The OCC specifically requests
comment on whether the OCC should use an alternate measure when
calculating the aggregate investment limit and whether the proposed
five percent aggregate investment limit is appropriate.
---------------------------------------------------------------------------

\44\ 12 U.S.C. 24(Eleventh); 12 CFR 24.4(a).
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Third, the national bank or Federal savings association has
provided written notification to the OCC prior to engaging in each TEF
transaction that includes its evaluation of the risks posed by the
transaction.
Fourth, the national bank or Federal savings association can
identify, measure, monitor, and control the associated risks of its tax
equity finance transaction activities individually and as a whole on an
ongoing basis to ensure that it conducts such activities in a safe and
sound manner.
Proposed paragraph (e) would provide that the TEF transaction must
be subject to the substantive legal requirements of a loan, including
the lending limits prescribed by 12 U.S.C. 84, as implemented by 12 CFR
32, and, if the active investor or project sponsor of the transaction
is an affiliate of the national bank or Federal savings association,
the restrictions on transactions with affiliates prescribed by 12
U.S.C. 371c and 371c-1, as implemented by 12 CFR 223. If a national
bank or Federal savings association is relying on its lending authority
to participate in a TEF transaction, the TEF transaction would be
subject to regulatory requirements applicable to loans, including any
applicable legal lending limits and affiliate transaction restrictions
to the extent applicable. However, the regulatory capital treatment of
a national bank or Federal savings association's participation in a TEF
transaction would be determined

[[Page 40801]]

according to the regulatory capital rule (12 CFR part 3).
The OCC specifically requests comment on whether the final rule
should prohibit a national bank or Federal savings association from
entering into TEF transactions for projects involving residential
installation TEF transactions not involving utility-scale standalone
power-generation facilities. The OCC also requests comment on whether
the final rule should permit national banks or Federal savings
associations to invest in TEF transactions involving detached single-
family residences, multi-family residences, or non-utility commercial
buildings. Further, the OCC requests comment on whether national banks
and Federal savings associations should have other contractual remedies
available before entering into a TEF transaction. For example, should
the final rule require national banks or Federal savings associations
to have the option to replace the sponsor or manager of a project under
certain conditions or be required to have indemnifications for breaches
of tax representations or other legal risks? In the alternative, should
a final rule require a project sponsor or the sponsor's parent to make
or guarantee such an indemnification? The OCC also requests comment on
whether national banks and Federal savings associations are currently
participating in TEF transactions through fund-based structures, and,
if not, whether national banks and Federal savings associations want to
participate in TEF transactions through fund-based structures. Further,
the OCC requests comment on whether there are additional issues related
to fund-based structures and whether the final rule should include
additional safeguards related to fund-based structures.
Payment System Memberships (New Sec. 7.1026)
Section 7.1026 Payment System Memberships. The OCC has long
recognized the authority of national banks to become members of payment
systems.\45\ Similarly, OTS precedent permits Federal savings
associations to join payment systems.\46\ In 2014, the OCC published a
legal interpretive letter clarifying that national banks may join
payment systems with approval from the OCC even when the national bank
would be exposed to potentially open-ended liability as a member of the
payment system.\47\ This interpretive letter also outlined the approval
process for this membership. In a subsequent interpretive letter, the
OCC modified the process to remove the approval requirement.\48\ To
provide additional clarity to national banks, the OCC is proposing to
add a new Sec. 7.1026 to part 7 that would codify the current process
for joining a payment system. The OCC also is proposing to apply this
section to Federal savings associations to provide equal treatment to
Federal savings associations. The OCC continues to support national
banks and Federal savings associations performing their critical roles
in payment systems--including as members and architects. The proposal
reminds national banks and Federal savings associations of their
responsibility for ensuring that payment system membership is conducted
in a safe and sound manner.
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\45\ See, e.g., OCC Conditional Approval Letter No. 220 (Dec. 2,
1996); OCC Interpretive Letter No. 993 (May 16, 1997).
\46\ See, e.g., 12 CFR 145.17; OTS Op. Ch. Couns. (Sept. 15,
1995); OTS Op. Ch. Couns. (Dec. 22, 1995).
\47\ OCC Interpretive Letter No. 1140 (Jan. 13, 2014).
\48\ OCC Interpretive Letter No. 1157 (Nov. 12, 2017).
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Definitions. Proposed Sec. 7.1026(a) would provide definitions for
several terms used throughout the proposed new section. First, the
proposal would define ``appropriate OCC supervisory office'' as the OCC
office that is responsible for the supervision of a national bank or
Federal savings association, as described in subpart A of 12 CFR part
4.
Second, because different payment systems may use different
terminology, the OCC is proposing to define ``member'' to include a
national bank or Federal savings association designated as a
``member,'' a ``participant,'' or other similar role by a payment
system, including by a payment system that requires the national bank
or Federal savings association to share in operational losses or
maintain reserves with the payment system to offset potential liability
for operational losses. The OCC requests comment on whether the
definition of ``member'' should include national banks and Federal
savings associations who are indirect members of a payment system.
Third, the rules of some payment systems may not place a cap on the
operational liability of its members, but a member's operational
liability may be capped in some other way. For example, a jurisdiction
could have a law that does not permit open-ended liability. If that law
applies to the payment system, it could effectively cap a member's
operational liability. In other situations, a member may negotiate a
separate agreement with a payment system that allows the member to
limit its potential liability and, as a result, the risks of membership
in that payment system. To address these situations, the OCC is
proposing to define ``open-ended liability'' as liability for
operational losses that is not capped under the rules of the payment
system and includes indemnifications provided to third parties as a
condition of membership in the payment system. For example, national
banks and Federal savings associations may provide open-ended
indemnifications to Federal Reserve Banks as a condition of membership
in particular payment systems.\49\ This proposed definition is
consistent with the definition of open-ended liability in OCC
Interpretive Letter 1140.
---------------------------------------------------------------------------

\49\ Id.
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Fourth, although memberships in payment systems expose national
banks and Federal savings associations to a variety of risks, OCC legal
precedent only has addressed whether a national bank may assume open-
ended liability for operational losses at the payment system. Thus, the
OCC is proposing to define ``operational loss'' as a charge resulting
from sources other than defaults by other members of the payment
system. Examples of these operational losses would be losses that are
due to: Employee misconduct, fraud, misjudgment, or human error;
management failure; information systems failures; disruptions from
internal or external events that result in the degradation or failure
of services provided by the payment system; or payment or settlement
delays, constrained liquidity, contagious disruptions, and resulting
litigation. These examples are listed in OCC Interpretive Letter
1140.\50\ The OCC requests comment as to whether these examples should
be included in this definition. If these examples should be included,
the OCC also requests comment as to whether the examples listed are
appropriate and whether the list is sufficiently comprehensive or
whether other examples should be included.
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\50\ OCC Interpretive Letter No. 1140.
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Finally, the OCC recognizes that payment systems transfer funds for
a variety of purposes and in varying amounts. For example, wholesale
payment systems typically process large dollar transfers while retail
payment systems may process a higher volume of transactions at a lower
average dollar figure.\51\ The OCC proposes to define ``payment
system'' in Sec. 7.1026 to mean a ``financial market utility'' as
defined

[[Page 40802]]

in 12 U.S.C. 5462(6), wherever it operates. This definition would
therefore include payment systems that operate either in the U.S. or in
a foreign jurisdiction. Section 5462(6) provides that ``a financial
market utility'' means ``any person that manages or operates a
multilateral system for the purpose of transferring, clearing, or
settling payments, securities, or other financial transactions among
financial institutions or between financial institutions and the
person'' with certain exclusions.\52\ but would exclude derivatives
clearing organizations registered under the Commodity Exchange Act and
clearing agencies registered under the Securities Exchange Act of 1934,
and foreign organizations that would be considered a derivatives
clearing organization or clearing agency were it operating in the
United States. The OCC requests comment on whether to include a
definition of payment system and, if so, whether this definition and
the three exclusions listed are appropriate. The OCC also requests
comment on whether the definition appropriately encompasses both
foreign and domestic payment systems that national banks and Federal
savings associations may join, including whether the proposed language
properly excludes foreign equivalents of U.S.-registered derivatives
clearing organizations and U.S.-registered clearing agencies.
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\51\ FFIEC IT Examination Handbook, Retail Payment Systems at 2
(Apr. 2016).
\52\ Financial market utility ``does not include: designated
contract markets, registered futures associations, swap data
repositories, and swap execution facilities registered under the
Commodity Exchange Act (7 U.S.C. 1 et seq.), or national securities
exchanges, national securities associations, alternative trading
systems, security-based swap data repositories, and swap execution
facilities registered under the Securities Exchange Act of 1934 (15
U.S.C. 78a et seq.), solely by reason of their providing facilities
for comparison of data respecting the terms of settlement of
securities or futures transactions effected on such exchange or by
means of any electronic system operated or controlled by such
entities, provided that the exclusions in this clause apply only
with respect to the activities that require the entity to be so
registered'' nor ``any broker, dealer, transfer agent, or investment
company, or any futures commission merchant, introducing broker,
commodity trading advisor, or commodity pool operator, solely by
reason of functions performed by such institution as part of
brokerage, dealing, transfer agency, or investment company
activities, or solely by reason of acting on behalf of a financial
market utility or a participant therein in connection with the
furnishing by the financial market utility of services to its
participants or the use of services of the financial market utility
by its participants, provided that services performed by such
institution do not constitute critical risk management or processing
functions of the financial market utility.'' 12 U.S.C. 5462(6)(B).
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Notice requirements. Proposed Sec. 7.1026(c) would require a
national bank or Federal savings association to provide written notice
to the appropriate OCC supervisory office 30 days prior to joining a
payment system that would expose it to open-ended liability. If the
payment system does not expose the national bank or Federal savings
association to open-ended liability, the proposed rule would require
the national bank or Federal savings association instead to provide
after-the-fact written notice within 30 days of becoming a member of
the payment system. The OCC believes membership in a payment system
that exposes members to open-ended liability creates additional risks
for national banks and Federal savings associations. Thus, the OCC
believes prior notice to the OCC is appropriate in these
situations.\53\
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\53\ The proposed notice requirement would not apply to existing
payment system memberships. However, as explained below, the
proposed rule would require national banks and Federal savings
associations to continuously inform the OCC of changes to bank
operations that would affect the institution's risk profile. Thus,
the OCC would be made aware of any payment system membership at a
bank or savings association even though the specific timing and
information required by this proposed rule would not apply to
existing payment systems memberships.
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Content of notice. Proposed Sec. 7.1026(d) would provide that all
notices filed under Sec. 7.1026 must include representations that the
national bank or Federal savings association has complied with the
safety and soundness review required by proposed Sec. 7.1026(e)(1)
before joining the payment system and will comply with the safety and
soundness review and the notification requirements in proposed Sec.
7.1026(e)(2) and (e)(3) after joining the system. For after-the-fact
notices pursuant to paragraph (c)(2), the proposed rule would require a
national bank or Federal savings association to include a
representation that either the rules of the payment system do not
impose liability for operational losses on members or that the national
bank's or Federal savings association's liability for operational
losses is limited by the rules of the payment system to specific and
appropriate limits that do not exceed the legal lending limit specified
by 12 CFR part 32 or a lower limit established for the national bank or
Federal savings association by the OCC.
Safety and soundness procedures. The OCC relies upon a number of
resources to communicate in detail its safety and soundness guidance
for national bank and Federal savings association memberships in
payment systems.\54\ At a minimum, the OCC believes a national bank or
Federal savings association must be able to identify, evaluate, and
control its risks from membership in a particular payment system both
before joining the system and on an ongoing basis.\55\ Proposed Sec.
7.1026(e) would require as a prerequisite to joining a payment system
and on a continual basis after joining that the national bank or
Federal savings association: (1) Identify and evaluate the risks posed
by membership in the payment system, taking into account whether the
liability is limited, and (2) measure, monitor, and control those
risks. To assist with these requirements in paragraph (e), national
banks and Federal savings associations should review the standards
outlined in OCC Interpretive Letter 1140 and OCC Banking Circular 235.
The proposal also requires a national bank or Federal savings
association to notify the appropriate OCC supervisory office if its
ongoing risk management identifies a safety and soundness concern, such
as a material change to the bank's or savings association's liability
or indemnification responsibilities, as soon as that concern is
identified and to take appropriate actions to remediate the risk. The
OCC requests comment on whether to include any of the criteria outlined
in OCC Interpretive Letter 1140 and OCC Banking Circular 235 related to
the analysis of: (1) The payment system and its membership criteria and
(2) criteria for an effective risk management program to the safety and
soundness requirements in paragraph (e).
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\54\ See, e.g., FFIEC IT Examination Handbook on Retail Payment
Systems (Apr. 2016); FFIEC IT Examination Handbook on Wholesale
Payment Systems (July 2004); Comptroller's Handbook: Payment Systems
and Funds Transfer Activities (March 1990); OCC Banking Circular 235
(May 10, 1989).
\55\ For example, OCC Banking Circular 235 states ``Management
of each national bank is responsible for assessing risk in each
payment, clearing, and settlement system in which the bank
participates. Management must adopt adequate policies, procedures,
and controls with respect to these activities.'' The OCC applied
this Banking Circular to Federal savings associations on Oct. 1,
2014.
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The OCC recognizes that a national bank's or Federal savings
association's liability will vary from payment system to payment
system. For example, the rules of some payment systems may expose
members to open-ended liability for operational losses but, in reality,
the national bank's or Federal savings association's liability is
limited by separately negotiated agreements, controlling laws of the
jurisdiction, or some other means. Therefore, the proposal also would
permit a national bank or Federal savings association to consider its
open-ended liability to a particular payment system to be limited for
purposes of the review required by proposed Sec. 7.1026(e)(1) and (2)
if the

[[Page 40803]]

bank or savings association obtains an independent legal opinion prior
to joining the payment system. That legal opinion must describe how the
payment system allocates liability for operational losses and conclude
the potential liability for the national bank or Federal savings
association is limited to specific and appropriate limits that do not
exceed the legal lending limit specified by 12 CFR part 32 or a lower
limit established for the national bank or Federal savings association
by the OCC. This legal opinion would enable the OCC to verify that the
liability of the national bank or Federal savings association is
limited even though the rules of the payment system do not provide any
limits. If there are material changes to the liability or
indemnification requirements of the national bank or Federal savings
association after the bank or savings association joins the payment
system, it can no longer rely on that legal opinion to demonstrate that
its liability is limited and must notify the OCC and remediate its
risks as described in Sec. 7.1026(e)(3).
Establishment and Operation of a Remote Service Unit by a National Bank
(New Sec. 7.1027/Sec. 7.4003)
Section 7.4003 provides that a bank can establish and operate a
remote service unit (RSU) pursuant to 12 U.S.C. 24(Seventh). This
section further states that an RSU does not constitute a branch under
12 U.S.C. 36(j) and is not subject to State geographic or operational
restrictions or licensing laws. Section 7.4003 defines an RSU as an
automated facility, operated by a customer of a bank, that conducts
banking functions such as receiving deposits, paying withdrawals, or
lending money. This section provides examples of an RSU, specifically
listing an automated teller machine (ATMs), automated loan machine,
automated device for receiving deposits, personal computer, telephone,
and other similar electronic devices. Finally, this section notes that
an RSU may be equipped with a telephone or tele-video device that
allows contact with bank personnel.
The OCC has historically treated drop boxes as branches based on
the 1969 Supreme Court case First National Bank in Plant City, Florida
v. Dickinson, 396 U.S. 122 (1969) (Plant City). In Plant City, the
Supreme Court ruled that a drop box operated by a national bank
constituted a branch under 12 U.S.C. 36(j) because it was a place ``at
which deposits are received.'' \56\ However, in 1996, Congress amended
the definition of ``branch'' in 12 U.S.C. 36(j) to provide that ``[t]he
term `branch,' as used in this section, does not include an automated
teller machine or a remote service unit.'' \57\ Thus, the holding in
Plant City is legislatively overruled with respect to any banking
facility that is an ATM or an RSU.
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\56\ Plant City, 396 U.S. 122 at 137.
\57\ Economic Growth and Regulatory Paperwork Reduction Act of
1996 (EGRPRA), Public Law 104-208, 110 Stat. 3009, Section 2204
(1996).
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As noted, the current definition of ``RSU'' in Sec. 7.4003
requires an RSU to be automated.\58\ However, upon further
consideration, the OCC believes that interpreting both the terms ATM
and RSU to require automation leads to incongruous results whereby a
non-automated facility such as a drop box is considered a branch
whereas an automated facility such as an ATM is not, despite a drop box
functioning less like a full branch than an ATM. Furthermore, the OCC
finds that drop boxes have more in common with the types of devices
already considered RSUs than with full-service branches and therefore
are more appropriately classified as RSUs. Accordingly, the OCC is
proposing to amend Sec. 7.4003 to expand the definition of an RSU to
include either an automated or unstaffed facility and to add drop boxes
to the list of RSU examples. This would allow unstaffed facilities,
such as drop boxes, to receive the same branching treatment as ATMs and
other devices already classified as RSUs such as computers and
automated loan machines. This amendment would provide national banks
with a significant degree of flexibility and burden relief in the
establishment of drop boxes. We note that if the OCC finalizes this
amendment, it also will amend 12 CFR 5.30(d) to remove ``drop box''
from the definition of ``branch.'' Because the OCC is proposing changes
to this definition in another rulemaking,\59\ the OCC has not proposed
this technical amendment in this proposed rule.
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\58\ In 1997, the OCC issued an interpretive letter which
explained that the OCC did not view a drop box to be an RSU because
they are not automated. OCC Interpretive Letter No. 772 (March 6,
1997).
\59\ See Articles of Association, Charters, and Bylaw Amendments
(Forms), Comptroller's Licensing Manual (June 19, 2017).
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The OCC also is proposing to move Sec. 7.4003 to subpart A of part
7 as new Sec. 7.1027. This change would place it in the same subpart
as other interpretations regarding branching and non-branching
functions, thereby improving the organization of part 7.
Establishment and Operation of a Deposit Production Office by a
National Bank (New Sec. 7.1028/Sec. 7.4004)
Section 7.4004 provides that a national bank or its operating
subsidiary may engage in deposit production activities at a site other
than the main office or a branch of the bank, and further provides that
a deposit production office (DPO) may solicit deposits, provide
information about deposit products, and assist persons in completing
application forms and related documents to open a deposit account.
Section 7.4004 specifically states that a DPO is not a branch so long
as the site does not receive deposits, pay withdrawals, or make loans.
It further states that all deposit and withdrawal transactions of a
bank customer using a DPO must be performed by the customer, either in
person at the main office or a branch office of the bank or by mail,
electronic transfer, or a similar method of transfer. Finally, this
section states that a national bank may use the services of persons not
employed by the bank in its deposit production activities. As with
Sec. 7.4003, the OCC is proposing to move Sec. 7.4004 to subpart A of
part 7 as new Sec. 7.1028 to place it in the same subpart as other
interpretations regarding branching and non-branching functions. This
change would improve the organization of part 7. The OCC is proposing
no other changes to this section except for a non-substantive change to
its wording.
Combination of National Bank Loan Production Office, Deposit Production
Office, and Remote Service Unit (New Sec. 7.1029/Sec. 7.4005)
Section 7.4005 provides that a location at which a national bank
operates a loan production office (LPO), a DPO, and an RSU is not a
``branch'' within the meaning of 12 U.S.C. 36(j) by virtue of that
combination of operations because none of these locations individually
constitutes a branch.
The OCC is proposing to add language regarding the extent of the
permissible interaction between bank personnel and the RSU at a
facility that combines a loan production office or a deposit production
office with an RSU. The proposed addition provides that an RSU at a
combined location must be primarily operated by the customer with at
most delimited assistance from bank personnel. This language is based
on published OCC precedent.\60\
---------------------------------------------------------------------------

\60\ OCC Interpretive Letter No. 1165 (June 28, 2019).
---------------------------------------------------------------------------

As with Sec. Sec. 7.4003 and 7.4004, the OCC also is proposing to
move Sec. 7.4005 to subpart A of part 7, as new Sec. 7.1029.

[[Page 40804]]

This change would place this section in the same subpart as other
interpretations regarding branching and non-branching functions. This
change would improve the organization of part 7.
Permissible Derivatives Activities for National Banks (New Sec.
7.1030)
Certain derivatives activities are permissible for national banks
under 12 U.S.C. 24(Seventh). A national bank may engage in derivatives
activities that reference certain rates or assets that are permissible
for bank investment. In addition, a national bank may use derivatives
to hedge the risks of its permissible banking activities. Finally, with
prior notification to the bank's examiner-in-charge (EIC), a national
bank may engage as a financial intermediary in customer-driven
derivatives activities. Congress has recognized national banks'
authority to engage in derivatives activities in various statutes.\61\
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\61\ See, e.g., 12 U.S.C. 84 (incorporating credit exposure from
derivatives into the legal lending limit); Gramm-Leach-Bliley Act,
Pub. L. 106-102, 113 Stat. 1338, section 206(a)(6) (defining
``identified banking product'' to include any swap agreement except
an equity swap with a retail customer); 12 U.S.C. 371c (defining
``covered transaction'' between a bank and its affiliates to include
a derivative transaction); Dodd-Frank Wall Street Reform and
Consumer Protection Act, Pub. L. 111-203, 124 Stat. 1376, (Dodd-
Frank Act) section 716 (15 U.S.C. 8305); Dodd-Frank Act section 731
(7 U.S.C. 6s); Dodd-Frank Act section 764 (15 U.S.C. 78o-10).
---------------------------------------------------------------------------

The OCC is proposing to issue a new Sec. 7.1030 addressing
derivatives activities permissible for national banks. This new section
would incorporate and streamline the framework in OCC interpretive
letters discussing bank-permissible derivatives activities. The
proposed rule addresses five functional categories of permissible
derivatives activities: (1) Derivatives referencing underlyings a
national bank may purchase directly as an investment; (2) derivatives
with any underlying to hedge the risks arising from bank-permissible
activities; (3) derivatives with any underlying that are customer-
driven, cash-settled and either perfectly-matched or portfolio-hedged;
(4) derivatives with any underlying that are customer-driven and
physically-settled by transitory title transfer; and (5) derivatives
with any underlying that are customer-driven, physically-settled (other
than by transitory title transfer), and physically-hedged.
The proposed rule also would include a requirement that a national
bank provide written notice to its EIC prior to engaging in certain
derivatives activities. This requirement would be consistent with prior
OCC interpretations that have, in connection with affirming the
permissibility of a derivatives activity in which a bank has sought to
engage, directed the bank to notify its EIC of the details of the
bank's business and management practices for performing that particular
derivatives activity as a financial intermediary. As with all
permissible activities within the business of banking, derivative
activities are subject to all other applicable laws and regulations, as
well as prudential safety and soundness standards.
The proposal is intended to describe the derivatives activities
that are legally permissible for a national bank, including activities
that require a bank to provide notice to the OCC prior to engaging in
the activity. Providing this information in a regulation is expected to
promote clarity and transparency and, ultimately, reduce compliance
burden. These proposed changes also can help ensure consistent
practices across institutions when a national bank seeks to commence or
expand derivatives activities. OCC rules for Federal savings
associations are currently set forth at 12 CFR 163.172. This rule
provides that a Federal savings association may engage in a transaction
involving a financial derivative provided that the savings association
is authorized to invest in the assets underlying the derivative, the
transaction is safe and sound, and the association's board of directors
and management satisfy certain prudential requirements. It also states
that, in general, a Federal savings association should engage in a
financial derivative transaction only to reduce its risk exposure.
Because Federal savings associations have different statutory authority
for derivative activities, the OCC has not proposed to include Federal
savings associations in Sec. 7.1030. However, the OCC is considering
moving Sec. 163.172 to part 7 so that the derivative rules for both
charters are located in the same part. This move would better organize
OCC rules. The specifics of the proposal are discussed below.
Authority. Paragraph (a) of new Sec. 7.1030 would specify that the
section is issued pursuant to 12 U.S.C. 24 (Seventh). Paragraph (a)
would further specify that a national bank may only engage in
derivatives transactions in accordance with the requirements of this
section.
Definitions. In paragraph (b), the proposed rule incorporates
several terms that are commonly used in OCC derivatives interpretive
letters. The proposed rule also defines certain terms for the first
time to promote transparency and consistency among institutions.
Customer-driven. The proposed rule would define
``customer-driven'' to mean a transaction entered into for a customer's
valid and independent business purpose. This approach is consistent
with OCC interpretive letters.\62\ This focus on the customer
recognizes that a number of derivatives activities are permissible for
a national bank because the bank is acting as a financial intermediary
for the customer. A customer-driven transaction would not include a
transaction entered into for the purpose of speculating in derivative,
currency, commodity, or security prices.\63\ Similarly, a customer-
driven transaction would not include a transaction the principal
purpose of which is to deliver to a national bank assets that the
national bank could not invest in directly.
---------------------------------------------------------------------------

\62\ E.g., OCC Interpretive Letter No. 1160 (Aug. 22, 2018).
\63\ OCC interpretations have specified that customer-driven
derivatives transactions do not include transactions entered into
for the purpose of speculating in the underlying commodity or
security prices. See e.g., OCC Interpretive Letter No. 1033 (Jun.
14, 2015); OCC Interpretive Letter No. 892 (September 13, 2000); OCC
Interpretive Letter No. 684 (Aug. 4, 1995); OCC No-Objection Letter
90-1 (Feb. 16, 1990).
---------------------------------------------------------------------------

Perfectly-matched. OCC interpretive letters have permitted
national banks to engage in various customer-driven, cash settled
derivatives transactions if they are perfectly-matched. In determining
that national banks may engage in perfectly-matched derivatives, the
OCC found it material that the bank would be exposed only to credit
risk.\64\ OCC interpretive letters have typically used ``perfectly-
matched'' to describe two back-to-back transactions in which all
economic terms match and in which the bank's primary exposure is credit
risk because the matched transactions offset one another's market
risk.\65\ The OCC proposes to incorporate a substantially similar
definition into the rule, with certain clarifications. Specifically,
the OCC proposes to define perfectly-matched to mean two back-to-back
transactions that offset risk with respect to all economic terms (e.g.,
amount, maturity, duration, and underlying). Consistent with OCC
interpretive letters, this definition would allow transactions to be
considered ``perfectly-matched'' despite a difference in price between
two derivatives when that difference

[[Page 40805]]

reflects the bank's intermediation fee (in the form of a spread).\66\
---------------------------------------------------------------------------

\64\ See e.g., OCC No-Objection Letter No. 87-5 (Jul. 20, 1987).
\65\ See e.g., OCC Interpretive Letter No. 1039 (Sept. 13,
2005).
\66\ OCC Interpretive Letter No. 1110 (Jan. 30, 2009).
---------------------------------------------------------------------------

Portfolio-hedged. OCC interpretive letters have discussed
the permissibility of portfolio hedging with respect to specified types
of underlyings. These letters have typically used ``portfolio-hedged''
to describe the practice of hedging the net residual risk position in a
portfolio of positions.\67\ This method of hedging can reduce
transactional costs and operational risks because fewer transactions
need to be executed relative to perfectly-matched hedging (in which the
bank must offset each transaction on an individual basis).\68\ The OCC
proposes to incorporate into the rule a substantially similar
definition with certain clarifications. Specifically, the OCC proposes
to define ``portfolio-hedged'' to mean that a portfolio of transactions
is hedged based on net unmatched positions or exposures in the
portfolio. The proposed definition refers to unmatched ``positions or
exposures'' to clarify that hedging on a portfolio basis may involve
hedging based on various risk exposures with different instruments in
accordance with applicable policies and procedures and risk limits of
the bank.
---------------------------------------------------------------------------

\67\ See e.g., OCC Interpretive Letter No. 1073 (Oct. 19, 2006);
OCC Interpretive Letter No. 1060 (Apr. 26, 2006).
\68\ See e.g., OCC Interpretive Letter No. 1073; OCC
Interpretive Letter No. 1060.
---------------------------------------------------------------------------

Physical hedging or physically-hedged. The OCC has issued
guidance recognizing that it is permissible for national banks to
utilize physical positions, including physical positions in certain
commodities, to hedge their customer-driven derivatives activities
under certain conditions.\69\ The OCC proposes to define ``physical
hedging'' and ``physically-hedged'' to mean holding title to or
acquiring ownership of an asset (for example, by warehouse receipt or
book entry) to manage the risks arising out of permissible derivatives
transactions. This definition is intended to be consistent with the
description of commodities physical hedging activities that the OCC has
identified as permissible in prior interpretive letters and in OCC
Bulletin 2015-35. This definition would also apply to physical hedging
of customer-driven derivatives referencing securities. As described
further below, OCC interpretive letters have recognized the
permissibility of physical hedging of customer-driven derivatives with
securities (i.e., taking ownership of the relevant security to hedge
the customer-driven transaction), including securities that a national
bank could not purchase as an investment under 12 CFR part 1.\70\ In
this context, consistent with prior OCC interpretations,\71\ ``physical
hedging'' involving securities would include taking ownership of a
security, by book-entry or otherwise. Section 7.1030(e) of the proposed
rule includes additional requirements applicable to physical hedging
activities.\72\
---------------------------------------------------------------------------

\69\ OCC Bulletin 2015-35, Quantitative Limits on Physical
Commodity Transactions (Aug. 4, 2015); see also OCC Interpretive
Letter No. 1040 (Sept. 15, 2005); OCC Interpretive Letter No. 935
(May 14, 2002); OCC Interpretive Letter No. 684; OCC Interpretive
Letter No. 632 (Jun. 30, 1993).
\70\ See, e.g., OCC Interpretive Letter No. 1090 (Oct. 25,
2007); OCC Interpretive Letter No. 1064 (Jul. 13, 2006); OCC
Interpretive Letter No. 1018 (Feb. 10, 2005); OCC Interpretive
Letter No. 935; OCC Interpretive Letter No. 892.
\71\ See, e.g., OCC Interpretive Letter No. 1090; OCC
Interpretive Letter No. 1064; OCC Interpretive Letter No. 1018; OCC
Interpretive Letter No. 935; OCC Interpretive Letter No. 892.
\72\ See proposed rule Sec. 7.1030(e).
---------------------------------------------------------------------------

Physical settlement or physically-settled. OCC
interpretive letters recognize the permissibility of physical
settlement conducted as part of a national bank's derivatives financial
intermediation activities in limited circumstances. Under existing
interpretive letters and the proposed rule, engaging in physical
settlement with respect to an underlying would entail providing a
notice to the OCC.\73\ The OCC proposes to define ``physical
settlement'' and ``physically-settled'' to mean a transaction is
settled by accepting title to or acquiring ownership of the underlying
asset (whether a commodity, security, or emissions allowance). Physical
settlement stands in contrast to cash-settled transactions. In cash-
settled transactions, counterparties do not exchange the underlying
assets. Rather, they exchange cash payments based on the price of the
underlying. For purposes of the proposed rule, physical settlement
includes transitory title transfer, which is discussed below.
---------------------------------------------------------------------------

\73\ See, e.g., OCC Interpretive Letter No. 1040; OCC
Interpretive Letter No. 935; OCC Interpretive Letter No. 684; OCC
Interpretive Letter No. 632.
---------------------------------------------------------------------------

Transitory title transfer. OCC interpretive letters
recognize the permissibility of settling a derivatives transaction by
transitory title transfer of the underlying asset in limited
circumstances. Transitory title transfer is a means of physical
settlement in which a counterparty only briefly holds title to the
underlying asset. Consistent with prior OCC interpretive letters,\74\
the OCC proposes to define ``transitory title transfer'' to mean a
transaction is settled by accepting and immediately relinquishing title
to an asset. Transitory title transfer does not entail a bank taking
physical possession of a commodity.\75\
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\74\ See, e.g., OCC Interpretive Letter No. 962 (Apr. 21, 2003).
\75\ See, e.g., OCC Interpretive Letter No. 1073; OCC
Interpretive Letter No. 1060; OCC Interpretive Letter No. 1025 (Apr.
25, 2005); OCC Interpretive Letter No. 962; OCC Interpretive Letter
No. 684. See also 81 FR 96355 (Dec. 30, 2016) (explaining
``transitory title transfer typically does not entail physical
possession of a commodity; the ownership occurs solely to facilitate
the underlying transaction and lasts only for a moment in time.'').
---------------------------------------------------------------------------

Underlying. OCC interpretive letters have long analyzed
derivatives transactions based on the underlying reference asset, rate,
obligation, index, etc. The OCC proposes to define ``underlying'' as
the reference asset, rate, obligation, or index on which the payment
obligation(s) between counterparties to a derivatives transaction is
based.
The OCC specifically requests comment on whether the proposed
definitions accurately reflect the terms used in OCC interpretive
letters and whether any of these terms, in particular ``perfectly-
matched'' and ``portfolio-hedged,'' would benefit from further
clarification. Further, the OCC requests comment on whether national
banks would be able to determine effectively which activities meet
these definitions and, specifically, whether the OCC should elaborate
on the characteristics of transactions that will be considered
perfectly-matched or portfolio-hedged. The OCC requests comment on
whether it should include a definition of the term ``derivative'' in
the final rule and whether a definition of this term would be necessary
to appropriately scope the proposed provision and whether any
definition would be workable in practice. To the extent a definition of
``derivative'' is necessary, the OCC suggests that it be defined as
follows:
A contract, agreement, swap, warrant, note, or option that is
based, in whole or in part, on the value of, any interest in, or any
quantitative measure or the occurrence of any event relating to, one or
more commodities, securities, currencies, interest or other rates,
indexes, or other assets, except a derivative does not include a:
(1) Retail forex transaction, as defined in 12 CFR 48.2;
(2) Security;
(3) Loan or loan participation;
(4) Deposit;
(5) Banker's acceptance; or
(6) Letter of credit.
The OCC requests comment on this possible definition.
Permissible Derivatives Activities Generally. The proposed rule
would address five categories of permissible derivatives activities.
These categories are discussed below.

[[Page 40806]]

Derivatives Referencing Underlyings in which a National
Bank May Invest Directly. OCC interpretive letters have recognized that
national banks may engage in derivatives activities where the
derivative references assets that a national bank could purchase
directly as an investment.\76\ For example, to manage its investment
portfolio, a national bank may use derivatives tied to interest rates,
foreign exchange and currency, credit, precious metals, and investment
securities. Section 7.1030(c)(1) of the proposed rule would reflect
this authority by specifying that a national bank may engage in
derivatives transactions with payments based on underlyings that a
national bank is permitted to purchase directly as an investment.
Paragraph (c)(1) would address only derivatives on underlyings that a
national bank would be permitted to purchase directly as principal. For
example, an underlying that a national bank could hold only as a
nonconforming investment under 12 CFR part 1 or only in satisfaction of
debts previously contracted would not be a permissible underlying under
this paragraph.
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\76\ See, e.g., OCC Interpretive Letter No. 494 (Dec. 20, 1989);
OCC Interpretive Letter No. 422 (Apr. 11, 1988); OCC No Objection
Letter No. 86-13 (Aug. 8, 1986). See also, ``Report to Congress and
the Financial Stability Oversight Council Pursuant to Section 620 of
the Dodd-Frank Act'' at 86-90 (September 2016), available at https://www.occ.treas.gov/publications-and-resources/publications/banker-education/files/pub-report-to-congress-sec-620-dodd-frank.pdf
(Section 620 Report).
---------------------------------------------------------------------------

Hedging Bank-Permissible Activities with Derivatives.
Under 12 U.S.C. 24 (Seventh), a national bank may engage in
activities that are part of, or incidental to, the business of banking.
Risk management activities, such as hedging risks arising from bank
activities, are part of the business of banking.\77\ Entering into
deposit, loan, and other contracts with customers and engaging in other
bank-permissible activities involve risks that a bank must manage as
part of the business of banking. A bank must manage the risk of those
activities to operate profitably and in a safe and sound manner.\78\ A
bank may engage in hedging activities to manage these risks.\79\ The
OCC has long recognized that a national bank may hedge its risk using
derivatives on underlyings that a national bank would be permitted to
invest in directly. For example, a national bank may use futures
contracts on exchange, coin, or bullion to hedge activities conducted
pursuant to a national bank's statutory authority to buy and sell
exchange, coin, or bullion. Similarly, a national bank may use futures
to hedge against the risk of loss due to the interest rate fluctuations
inherent in bank loan operations, U.S. Treasury Bills, and certificates
of deposit.
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\77\ See Decision of the Office of the Comptroller of the
Currency on the Request by Chase Manhattan Bank, N.A. to Offer the
Chase Market Index Investment Deposit (1988) (MII Deposit);
Investment Company Institute v. Ludwig, 884 F. Supp. 4 (D.D.C. 1995)
(upholding Comptroller's decision that the hedged deposit in MII
Deposit is a bank-permissible product that did not violate the
Glass-Steagall Act).
\78\ See generally MII Deposit; OCC Interpretive Letter No. 892.
\79\ See OCC Interpretive Letter No. 896 (Aug. 21, 2000); OCC
Interpretive Letter No. 892.
---------------------------------------------------------------------------

Hedging with Derivatives Referencing Underlyings in which
a National Bank May Not Invest Directly.
The OCC also has recognized that a national bank may hedge the
risks of bank-permissible activities using derivatives on underlyings
in which a national bank may not invest directly. For example, in OCC
Interpretive Letter 896, the OCC recognized that a national bank may
purchase cash-settled options on commodity futures contracts to hedge
the risk of a commodity that served as collateral on an agricultural
loan.\80\ Similarly, the OCC has recognized that it is permissible for
a trust bank to hedge the market risk associated with the fees it
received from its investment advisory activities using equity
derivatives.\81\ Likewise, the OCC has determined that a national bank
may purchase certain equity derivatives to hedge the risks of a deposit
account that paid interest based, in part, upon changes in the Standard
& Poor's 500 Composite Stock Index.\82\ The OCC also has recognized
that it is permissible for a national bank to use commodity derivatives
to hedge commodity price risk associated with a production payment
loan.\83\
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\80\ See OCC Interpretive Letter No. 896.
\81\ See OCC Interpretive Letter No. 1037 (Aug. 9, 2005).
\82\ See MII Deposit.
\83\ See OCC Interpretive Letter No. 1117 (May 19, 2009).
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The proposed rule would recognize a national bank's authority to
hedge bank-permissible activities using derivatives on underlyings in
which a bank could not invest directly. Section 7.1030(c)(2) of the
proposed rule would provide that a national bank may engage in
derivatives transactions with any underlying to hedge the risks arising
from bank-permissible activities after providing notice to its EIC.\84\
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\84\ In contrast, if a national bank engaged in hedging using
derivatives on underlyings in which a national bank could invest
directly, the bank would not need to provide notice under the
proposed rule because this activity could be conducted under
proposed rule Sec. 7.1030(c)(1). See proposed rule Sec.
7.1030(c)(1), (d).
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Derivatives Financial Intermediation for Customers.
OCC interpretive letters have long recognized that a national bank
may act as a financial intermediary in customer-driven \85\ derivatives
transactions on a variety of reference assets as part of the business
of banking.\86\ These letters have recognized national banks' authority
to enter into cash-settled, customer-driven derivatives transactions
both on a perfectly-matched \87\ and portfolio-hedged basis.\88\ The
OCC has explained that these derivatives activities ``are, at their
essence, modern forms of financial intermediation'' because ``through
intermediated exchanges of payments, banks facilitate the flow of funds
within our economy and serve important financial risk management and
other financial needs of bank customers.'' \89\
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\85\ A ``customer-driven'' transaction is one entered into for a
customer's valid and independent business purposes. See, e.g., OCC
Interpretive Letter No. 1160; OCC Interpretive Letter No. 892. This
definition is addressed in Sec. 7.1030(b) of the proposed rule.
\86\ See, e.g., OCC Interpretive Letter No. 937 (Jun. 27, 2002);
OCC Interpretive Letter No. 892; No-Objection Letter 87-5.
\87\ See, e.g., OCC Interpretive Letter No. 1110 (longevity
indexes); OCC Interpretive Letter No. 1101 (Jul. 7, 2008) (certain
risk indexes); OCC Interpretive Letter No. 1089 (Oct. 15, 2007);
(specific property indexes); OCC Interpretive Letter No. 1081 (May
15, 2007) (specific property indexes); OCC Interpretive Letter No.
1079 (Apr. 19, 2007) (inflation indexes); OCC Interpretive Letter
No. 1065 (Jul. 24, 2006) (petroleum products, agricultural oils,
grains and grain derivatives, seeds, fibers, foodstuffs, livestock/
meat products, metals, wood products, plastics and fertilizer); OCC
Interpretive Letter No. 1063 (Jun. 1, 2006) (hogs, lean hogs, pork
bellies, lumber, corrugated cardboard, and polystyrene); OCC
Interpretive Letter No. 1059 (Apr. 13, 2006) (old corrugated
cardboard #11, polypropylene: injection molding (copoly),
polypropylene: all grades, Dow Jones AIG Commodity Index); OCC
Interpretive Letter No. 1056 (Mar. 29, 2006) (frozen concentrate
orange juice, polypropylene); OCC Interpretive Letter No. 1039
(crude oil, natural gas, heating oil, natural gasoline, gasoline,
unleaded gas, gasoil, diesel, jet fuel, jet-kerosene, residual fuel
oil, naphtha, ethane, propane, butane, isobutane, crack spreads,
lightends, liquefied petroleum gases, natural gas liquids,
distillates, oil products, coal, emissions allowances, benzene,
dairy, cattle, wheat, corn, soybeans, soybean meal, soybean oil,
cocoa, coffee, cotton, orange juice, sugar, paper, rubber, steel,
aluminum, zinc, lead, nickel, tin, cobalt, iridium, rhodium,
freight, high density polyethylene (plastic), ethanol, methanol,
newsprint, paper (linerboard), pulp (kraft), and recovered paper
(newsprint)).
\88\ See, e.g., OCC Interpretive Letter No. 1073 (aluminum,
nickel, lead, zinc, and tin); OCC Interpretive Letter No. 1060
(coal); OCC Interpretive Letter No. 1040 (emissions allowances); OCC
Interpretive Letter No. 937 (electricity).
\89\ OCC Interpretive Letter No. 1110; OCC Interpretive Letter
No. 1101; OCC Interpretive Letter No. 1079.

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[[Page 40807]]

The OCC has also recognized in this context the permissibility of
physical settlement by transitory title transfer.\90\ As described
above, transitory title transfer is a particular means of physical
settlement in which a counterparty only briefly holds title to the
underlying asset. Transitory title transfer does not entail a bank
taking physical possession of a commodity.\91\ Further, the OCC has
recognized that a national bank may engage in customer-driven financial
intermediation derivatives activities that are physically-settled
(other than by transitory title transfer) and to physically hedge those
derivatives in certain circumstances.\92\ OCC interpretive letters have
explained that physical delivery can help to reduce the risk in
customer-driven commodity derivatives transactions if the activity is
conducted in accordance with safe and sound banking practices and would
achieve a more accurate and precise hedge than a cash-settled
transaction.\93\ The OCC subsequently provided guidance on safe and
sound practices with respect to physical hedges of commodity-linked
financial transactions.\94\
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\90\ See OCC Interpretive Letter No. 1073 (aluminum, nickel,
lead, zinc, and tin); OCC Interpretive Letter No. 1060 (coal); OCC
Interpretive Letter No. 1025 (electricity); Interpretive Letter No.
962 (electricity). The term ``transitory title transfer'' means
accepting and instantaneously relinquishing title to the commodity,
as a party in a ``chain of title'' transfer. OCC Interpretive Letter
No. 1025.
\91\ See, e.g., OCC Interpretive Letter No. 1060; OCC
Interpretive Letter No. 684. See also 81 FR 96355 (Dec. 30, 2016)
(explaining ``transitory title transfer typically does not entail
physical possession of a commodity; the ownership occurs solely to
facilitate the underlying transaction and lasts only for a moment in
time.'').
\92\ See, e.g., OCC Interpretive Letter No. 1040; OCC
Interpretive Letter 892; OCC Interpretive Letter No. 684.
\93\ E.g., OCC Interpretive Letter No. 684.
\94\ See OCC Bulletin 2015-35.
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The OCC proposes to incorporate and streamline the framework
contained in its interpretive letters addressing derivatives financial
intermediation activities in Sec. 7.1030(c)(3) through (5).
First, under the proposed rule, a national bank may engage in
customer-driven, cash-settled derivatives transactions on any
underlying on a perfectly-matched or portfolio-hedged basis.
Second, the proposed rule would permit a national bank to engage in
customer-driven, perfectly-matched or portfolio-hedged derivatives
transactions on any underlying that is settled by transitory title
transfer.
Third, the proposed rule would permit physically settled and
physically hedged transactions that are either perfectly-matched or
portfolio-hedged, provided that the national bank does not take
physical delivery of any commodity by receipt of physical quantities of
the commodity on bank premises and the physical hedging activities meet
the requirements in paragraph (e) of the proposed rule. As discussed
below, a national bank would need to provide a written notice to its
EIC before engaging in financial intermediation activities with
derivatives on underlyings in which a national bank could not invest
directly.
Relative to prior OCC interpretations, the proposed rule would make
fewer distinctions based on the particular underlying or how the
national bank hedges its derivatives financial intermediation activity.
While prior interpretations typically analyzed both the underlying and
the bank's method for hedging the customer-driven derivative (i.e.,
perfectly matched versus portfolio hedged), the proposal would permit
customer-driven, cash-settled derivatives transactions on any
underlying, whether perfectly-matched or portfolio-hedged. The OCC
recognizes that financial intermediation in derivatives continues to
evolve and that the markets for derivatives on underlyings that the OCC
has not previously addressed may have sufficient liquidity and depth to
allow a bank to conduct the activity as a financial intermediary.
Similarly, the OCC recognizes that these same factors may allow a
national bank to hedge its customer-driven derivatives activities in
evolving ways--whether by portfolio hedging or physical hedging--
consistent with conducting the activity as a financial intermediary.
As with any bank-permissible activity, safety and soundness
standards apply to derivatives financial intermediation activities. The
proposal would include additional requirements for physical hedging
activities in Sec. 7.1020(e). The OCC requests comment on whether the
rule should reflect any additional standards regarding the underlyings
that are permissible for financial intermediation in derivatives and
how national banks may hedge these activities. For example, the OCC
requests comment on whether the regulation should include additional
language relating to the liquidity of the market for permissible
customer-driven derivatives activities.
Notice requirement. OCC interpretations have often included a
process in which the national bank provides notice to its EIC about the
business and management practices the bank will employ in performing
the derivatives activity as financial intermediation. Consistent with
prior interpretive letters addressing derivatives hedging or financial
intermediation activities, proposed Sec. 7.1020(d) would require a
national bank to provide written notice to its EIC prior to engaging in
activity using derivatives referencing assets that a national bank
could not invest in directly.
OCC Interpretive Letter 1160 contemplates that a bank would provide
written notification to its EIC prior to commencing a derivatives
financial intermediation business for a reference asset addressed in
prior OCC interpretive letters. This process replaced the no-objection
process that was typically included in prior OCC interpretive
letters.\95\ The proposal would require a national bank to provide a
notice to its EIC prior to commencing a financial intermediation
activity in derivatives on underlyings in which a national bank could
not invest directly or expanding its financial intermediation
activities to include a new category of underlyings.\96\
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\95\ See, e.g., OCC Interpretive Letter No. 1065.
\96\ National banks that have provided notice to or received
statements of no-objection from their EICs for particular
derivatives activities consistent with the process in OCC
interpretive letters would not be required to submit new notices for
those activities.
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In addition, OCC interpretive letters have contemplated that a
national bank would obtain a no-objection before engaging in hedging
activities using derivatives on underlyings in which a national bank
could not invest directly.\97\ The OCC is not proposing to incorporate
an EIC no-objection in connection with these hedging activities, and
the proposal would instead create a regulatory requirement to provide
notice to the national bank's EIC for these hedging activities
recognized in Sec. 7.1030(c)(2) through the proposed notice
requirement in Sec. Sec. 7.1030(d)(1)(i)-(ii). The OCC expects that
transitioning from the no-objection process for derivatives hedging
activities to the notice process will enhance prudential supervision of
bank derivatives activities by ensuring that banks evaluate the risks
of the activities both at inception and on an ongoing basis.
---------------------------------------------------------------------------

\97\ See OCC Interpretive Letter No. 896.
---------------------------------------------------------------------------

Under the proposed rule, the notice procedures and requirements in
proposed Sec. 7.1030(d)(2) would be the same for hedging activities
and financial intermediation activities. The proposed rule would
require the written notice to include information that is substantially
similar to the information that is discussed in Interpretive Letter
1160. Specifically, the written notice must

[[Page 40808]]

include a detailed description of the proposed activity, including the
relevant underlying(s); the anticipated start date of activity; and a
detailed description of the bank's risk management system (policies,
processes, personnel, and control systems) for identifying, measuring,
monitoring, and controlling the risks of the activity. The proposed
rule does not include the requirement from Interpretive Letter 1160
that the bank submitting the notice identify an OCC interpretive letter
confirming the permissibility of transactions involving the underlying
and hedging activity. If the proposed rule is finalized, derivatives
hedging and financial intermediation activities would be conducted
pursuant to the regulation, without reference to prior OCC
interpretations. Therefore, the OCC does not believe it would be
necessary for a national bank to identify a prior OCC interpretation.
The OCC believes that this framework could ultimately reduce the
compliance burden associated with national bank derivatives activities.
The proposed prior notice does not impose a prior approval
requirement. Rather, the notice is designed to make OCC supervisor
aware of a bank's derivatives activities so that such activities can be
appropriately scoped into OCC's ongoing supervision and oversight of
the bank's safety and soundness. In addition, having awareness of
bank's derivatives activities will enable the OCC to raise questions as
to whether the derivatives activity can be conducted in a safe and
sound manner, or whether the derivatives activity is within the scope
of those legally authorized for a national bank, before the bank
activities commence or at any time, as is the case with any other
permissible bank activities.
Section 7.1030(d)(1) of the proposed rule would require a national
bank to provide EIC notice prior to engaging in any of the derivatives
hedging or financial intermediation activities described in Sec.
7.1030(c)(2) through (5) for the first time. This notice requirement
would apply, for example, if a bank has previously engaged in cash-
settled derivatives with respect to a particular underlying as
described in Sec. 7.1030(c)(3) but seeks to begin physically settling
transactions as described in Sec. 7.1030(c)(4) or (5). Likewise, a
national bank would need to provide notice prior to first engaging in
derivatives hedging activities pursuant to Sec. 7.1030(c)(2) or
expanding the bank's derivatives hedging activities to include a new
category of underlying. Under proposed Sec. 7.1030(d)(2), the bank
must submit written notice at least 30 days before the national bank
commences the derivatives activity. The OCC specifically requests
comment on whether it is sufficiently clear when a notice would be
required and what would constitute a ``new category of underlying.''
Prior OCC interpretations have addressed several categories of
permissible underlyings for national bank derivatives transactions.\98\
The OCC requests comments on whether the regulation text should list
these categories. If the regulation were to list these categories, the
OCC requests comment on whether the regulation should specify that any
new derivatives activities not falling within one of the specified
categories also requires notice.
---------------------------------------------------------------------------

\98\ See e.g., supra, note 27.
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The OCC believes that the proposed notice process will provide an
efficient notice standard for national banks engaging in derivatives
activities. The notice requirement is expected to enhance supervision
by providing bank supervisors with comprehensive, up-to-date
information on the activities in which the bank is engaged. This
information will assist OCC supervisors by ensuring they have an
opportunity to assess a bank's ability to engage in derivatives
activities in a safe and sound manner prior to the bank commencing the
activity and provide them ongoing information as those activities
expand to new categories. The OCC believes this objective is
particularly important in the case of derivatives hedging and financial
intermediation activities because these activities continue to evolve.
The OCC specifically requests comment on whether the final rule
should provide additional specificity regarding the notice process and
whether any additional information should be included in the notice.
Additional requirements for physical hedging activities. The OCC
has elaborated in interpretive letters and guidance on practices with
respect to physical hedging with securities and commodities.\99\ The
OCC proposes to incorporate these practices into proposed Sec.
7.1030(e) with certain modifications to promote consistency in the
practices national banks employ with respect to physical hedging
activities. Specifically, the OCC proposes to apply the framework in
interpretive letters addressing physical hedging using securities to
all physical hedging activities involving underlyings in which a
national bank could not invest directly. Under the proposed rule, a
national bank could engage in physical hedging only if: (1) The
national bank holds the underlying solely to hedge risks arising from
derivatives transactions originated by customers for the customers'
valid and independent business purposes; (2) the physical hedging
activities offer a cost-effective means to hedge risks arising from
permissible banking activities; (3) the national bank does not take
anticipatory or maintain residual positions in the underlying except as
necessary for the orderly establishment or unwinding of a hedging
position; and (4) the national bank does not acquire equity securities
for hedging purposes that constitute more than five percent of a class
of voting securities of any issuer.\100\
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\99\ See OCC Bulletin 2015-35; OCC Interpretive Letter No. 935;
OCC Interpretive Letter No. 892; OCC Interpretive Letter No. 684.
\100\ Certain of the practices described in prior OCC
interpretive letters are not included in the proposed rule text
because they are generally-applicable safety and soundness standards
that can be evaluated and addressed under other existing sources of
law, including, as applicable, 12 U.S.C. 1818. For example, several
interpretive letters discuss that a national bank should have
appropriate risk management policies and procedures for its physical
hedging activities. In addition, several interpretive letters have
also specified that a bank may not engage in physical hedging
activities for the purpose of speculating in security or commodity
prices. As described above, customer-driven financial intermediation
as defined in the proposal would not include activities entered into
for the purpose of speculation.
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Consistent with OCC interpretive letters and guidance concerning
physical hedging with commodities in which a national bank could not
invest directly,\101\ the proposed rule would impose additional
requirements on physical hedging with commodities. Under the proposed
rule, a national bank may engage in physical hedging with commodities
only if the national bank's commodity position (including, as
applicable, delivery point, purity, grade, chemical composition,
weight, and size) is no more than five percent of the gross notional
value of the national bank's derivatives that: (1) Are in that same
particular commodity and (2) allow for physical settlement within 30
days. Title to commodities acquired and immediately sold in a
transitory title transaction would not count against this five percent
limit.\102\ Consistent with OCC interpretive letters,\103\ the proposed
rule would permit physical hedging involving commodities only if the
physical position more effectively reduces risk than a cash-settled
hedge

[[Page 40809]]

involving the same commodity. As discussed above, a national bank may
not take physical delivery of any commodity by receipt of physical
quantities of the commodity on bank premises. The proposed rule would
apply these requirements to physical hedging activities involving
commodities due to the unique risks of physical commodity
activities.\104\
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\101\ See OCC Bulletin 2015-35; OCC Interpretive Letter No. 684.
\102\ Consistent with OCC Interpretive Letter No. 1040, this 5
percent limit would not apply to physical hedging using emissions
allowances.
\103\ See OCC Interpretive Letter No. 684; OCC Interpretive
Letter No. 632.
\104\ See Section 620 Report (describing the price risks and
operational risks specific to physical commodities activities).
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Subpart B--National Bank Corporate Practices

Corporate Governance (Sec. 7.2000)
As noted, the OCC continually seeks to update its regulations to
stay current with industry changes and technological advances, subject
to Federal law and consistent with the safe and sound operation of the
banking system. As part of this process, the OCC is proposing to update
and modernize Sec. 7.2000, which provides a regulatory framework for
national bank corporate governance. As described by the OCC in various
conditional approvals,\105\ ``corporate governance procedures''
generally refer to requirements involving the operation and mechanics
of the internal organization of a national bank, including relations
among owners-investors, directors, and officers, and do not include
requirements that relate to the banking powers or activities of a
national bank or relationships between a national bank and customers or
third parties. Examples of corporate governance procedures include, but
are not limited to, share exchanges, anti-takeover provisions, and the
use of blank check procedures in issuing preferred stock. The OCC
issued Sec. 7.2000 in 1996 to provide national banks with increased
flexibility to structure their corporate governance procedures
consistent with the particular needs of the bank while providing
shareholders and others with adequate notice of the corporate standards
on which a bank will rely.\106\ The OCC has not substantively changed
Sec. 7.2000 since its adoption.\107\
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\105\ See e.g., OCC Conditional Approval No. 859 (June 13, 2008)
and OCC Conditional Approval No. 696 (June 9, 2005).
\106\ 61 FR 4849, 4854 (Feb. 9, 1996).
\107\ Non-substantive amendments to Sec. 7.2000 changed the
address and telephone number of the OCC Communications Office. See
79 FR 15641 (March 21, 2014) and 80 FR 28345 (May 18, 2015).
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Section 7.2000 currently provides that a national bank proposing to
engage in a corporate governance procedure must comply with applicable
Federal banking statutes and regulations and safe and sound banking
practices. In addition, Sec. 7.2000 provides that to the extent not
inconsistent with applicable Federal banking statutes or regulations,
or bank safety and soundness, a national bank may elect to follow the
corporate governance procedures of the law of the State in which the
main office of the bank is located, the law of the State in which the
holding company of the bank is incorporated, Delaware General
Corporation Law, or the Model Business Corporation Act. Further, Sec.
7.2000 requires that a national bank designate in its bylaws the body
of law selected for its corporate governance procedures. Finally, Sec.
7.2000 describes the process for obtaining OCC staff positions on the
ability of a national bank to engage in a particular corporate
governance procedure.
The OCC is proposing to amend Sec. 7.2000 to reduce burden,
provide greater clarity, and modernize the national bank charter with
respect to corporate governance provisions. These proposed amendments
also would address anomalous results that may arise when a national
bank eliminates its holding company. As a general matter, the OCC is
proposing to change the term ``corporate governance procedure'' used in
Sec. 7.2000 to ``corporate governance provisions'' and to revise
paragraph (a) of Sec. 7.2000 accordingly. The OCC believes that
``corporate governance procedure'' may be construed too narrowly than
intended and omit corporate governance practices that are not
procedural in nature. Revised paragraph (a) would provide that the
corporate governance provisions in a national bank's articles of
association and bylaws and the bank's conduct of its corporate
governance affairs must comply with applicable Federal banking statutes
and regulations and safe and sound banking practices. The OCC does not
intend this change to affect the application of prior OCC
interpretations of corporate governance procedures to Sec. 7.2000.
The proposal would preserve the current ability of a national bank
to use the corporate governance provisions of the State in which the
main office of the bank is located, the State in which the bank's
holding company is located, the Delaware General Corporation Law, or
the Model Business Corporation Act. The proposal, however, would
increase flexibility in three ways. First, the proposal would revise
paragraph (b) of Sec. 7.2000 to authorize a national bank to elect the
corporate governance provisions of the law of any State in which any
branch of the bank is located in addition to the law of the State in
which the bank's main office is located, to the extent not inconsistent
with applicable Federal banking statutes or regulations or safety and
soundness. Accordingly, a national bank would no longer be limited to
using the corporate governance provisions of the State where its main
office is located. For example, a national bank with its main office in
State A and branches in State B and State C could elect to use the
corporate governance provisions of the law of State A, State B, or
State C.
Second, the proposal would revise paragraph (b) to authorize the
national bank to use the law of the State where a holding company of
the bank is incorporated. The proposal would expressly recognize the
possibility that a national bank may be controlled by more than one
holding company and that those holding companies may be incorporated by
different States.
Third, the proposal would add a new paragraph (c) that would allow
a national bank to continue to use the corporate governance provisions
of the law of the State where its holding company is incorporated even
if the holding company is later eliminated or no longer controls the
bank, and the national bank is not located in that State. This change
would remove an impediment to a national bank that may choose to
eliminate its holding company or is no longer controlled by that
holding company but wishes to retain longstanding and familiar
corporate governance provisions.
The OCC seeks comment on whether a national bank also should be
able to adopt a combination of corporate governance provisions from the
laws of several different States where the national bank and any
holding companies are located, thus potentially resulting in a national
bank following corporate governance provisions that derive from a
combination of States' laws, or whether a national bank should be
limited to electing and using the corporate governance provisions of a
single State. If the OCC permits a national bank to follow the
corporate governance provisions from more than one State, the OCC seeks
comment on how to ensure that shareholders and others are made aware of
the provisions that the bank has chosen.
The OCC also requests comment on whether it should make, to the
extent appropriate, similar revisions to the regulations pertaining to
corporate governance provisions for Federal savings associations in 12
CFR 5.21 and 5.22, so that Federal savings associations may elect to
use the corporate governance provisions of: (1) Any State in which the
Federal savings association is located and (2) in the case of Federal
stock savings associations,

[[Page 40810]]

the law of the State in which the association's former holding company
was incorporated. In addition, the OCC requests comment on whether the
final rule should change the term ``corporate governance procedures''
to ``corporate governance provisions'' in Sec. Sec. 5.21 and 5.22 to
be consistent with the change in terminology proposed for Sec. 7.2000.
The proposal also would revise current paragraph (c) of Sec.
7.2000 (proposed to be redesignated as Sec. 7.2000(d)). Current
paragraph (c) provides that the OCC considers requests for the OCC
staff's position on the ability of a national bank to engage in a
particular State corporate governance provision in accordance with the
no-objection procedures set forth in OCC Banking Circular 205 or any
subsequently published agency procedures, and that requests should
demonstrate how the proposed practice is not inconsistent with
applicable Federal statutes or regulations and is consistent with bank
safety and soundness. The OCC issued Banking Circular 205 on July 26,
1985 and has not modified it since. However, a national bank also may
request the views of the OCC on an interpretation of national banking
statutes and regulations through an interpretive letter, which has been
the more common approach since 1985. In order to update this paragraph,
the proposal would remove the requirement that requests for the OCC's
views on State corporate governance provisions use the no-objection
procedure. The proposal also lists the information that a request must
contain. This information, similar to what is set forth in OCC Banking
Circular 205, would include: (1) The name of the bank; (2) citations to
the State statutes or regulations involved; (3) a discussion whether a
similarly situated State bank is subject to or may adopt the corporate
governance provision; (4) identification of all Federal banking
statutes or regulations that are on the same subject as, or otherwise
have a bearing on, the subject of the proposed State corporate
governance provision; and (5) an analysis of how the proposed corporate
governance provision is not inconsistent with applicable Federal
statutes or regulations nor with bank safety and soundness. The OCC
notes that this provision would not preclude a national bank from
seeking informal consultation with OCC staff. However, if the bank
wants to receive a written response from OCC staff, it should follow
the procedure in this proposed paragraph (d).
Finally, the OCC requests comment on whether it should revise the
standard it uses to apply the requirement in Sec. 7.2000 that the
State corporate governance provision be ``not inconsistent with
applicable Federal banking statutes or regulations'' to be more
flexible. The OCC has historically viewed the standard as meaning that
State corporate governance provisions may be used unless Federal law
has a different standard than State law, in which case Federal law
controls. That is, if Federal law addresses a particular corporate
governance matter, then a national bank must follow Federal law on the
matter and cannot supplement it with State law. However, the ``not
inconsistent'' language could be interpreted in a more flexible manner.
One could view a State provision that imposed higher or more stringent
requirements as ``not inconsistent'' with Federal law because a bank
can comply with both if it meets the State's higher requirement. Thus,
the OCC could permit a bank to adopt a State corporate governance
provision under Sec. 7.2000 that imposed a higher or more stringent
standard than Federal law, as long as in complying with the State
provision the bank also would meet the requirements in Federal law. The
OCC requests comment on whether this change in the interpretation of
the ``not inconsistent'' standard would be helpful.
National Bank Adoption of Anti-Takeover Provisions (7.2001)
The OCC is proposing to add a new section Sec. 7.2001 that would
address the extent to which a national bank may include anti-takeover
provisions in its articles of association or bylaws.\108\ Anti-takeover
provisions are examples of corporate governance procedures \109\
covered by 12 CFR 7.2000. As discussed above, under current Sec.
7.2000(b) a national bank may elect to follow the corporate governance
procedures of specified State law to the extent it is (1) not
inconsistent with applicable Federal banking statutes or regulation and
(2) not inconsistent with bank safety and soundness.
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\108\ OCC regulations currently include provisions addressing
adoption of anti-takeover provisions by stock Federal savings
associations. See 12 CFR 5.22(g)(7), (h) and (j)(2)(i)(A). The OCC
is not proposing to amend those provisions.
\109\ The proposed rule would change this terminology in Sec.
7.2000 to ``corporate governance provisions.''
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The purpose of proposed Sec. 7.2001 is to provide the OCC's views
about the permissibility of several types of anti-takeover provisions.
Specifically, proposed paragraph (a) of Sec. 7.2001 would provide that
a national bank may, pursuant to 12 CFR 7.2000(b), adopt anti-takeover
provisions included in State corporate governance law if the provisions
are not inconsistent with Federal banking statutes or regulations and
not inconsistent with bank safety and soundness.
Proposed paragraph (b) would set forth the type of anti-takeover
provisions in State corporate governance provisions that the OCC
specifically has determined are not inconsistent with Federal banking
statutes or regulations.\110\ This list is not exclusive and the OCC
may find that other State anti-takeover laws are not inconsistent with
Federal banking statutes or regulations. A national bank could elect to
follow these provisions, subject to the bank safety and soundness
limitation discussed below.
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\110\ Permitting the use of staggered boards is another anti-
takeover provision. The proposed new section does not include
staggered boards because they are now expressly permitted under the
National Bank Act. 12 U.S.C. 71; 12 CFR 2024.
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Restrictions on business combinations with interested shareholders.
These State provisions prohibit, or permit the corporation to prohibit
in its certificate of incorporation or other governing document, the
corporation from engaging in a business combination with an interested
shareholder or any related entity for a specified period of time (e.g.,
three years) from the date on which the shareholder first becomes an
interested shareholder (subject to certain exceptions, such as board
approval). An interested shareholder is one that owns an amount of
stock specified in the State statute, e.g., at least fifteen percent.
Federal banking statutes and regulations do not address, directly or
indirectly, this type of restriction for national banks. Although
Federal banking statutes authorize national banks to engage in
specified consolidations and mergers,\111\ this authorization does not
preclude a bank's shareholders from adopting a provision that limits
the consolidations and mergers into which the bank would enter.
Therefore, State restrictions on business combinations with interested
shareholders are not inconsistent with Federal law.
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\111\ See 12 U.S.C 215, 215a, 215a-1, 215a-3, and 215c.
---------------------------------------------------------------------------

Poison pills. A ``poison pill'' is a State statutory provision that
provides, or that permits the corporation to provide in its certificate
of incorporation or other governing document, that all shareholders,
other than the hostile acquiror, have the right to purchase additional
stock at a substantial discount upon the occurrence of a triggering
event. Because no Federal banking statutes or regulations directly or
indirectly address these shareholder

[[Page 40811]]

purchase rights, State poison pill laws are not inconsistent with
Federal law.\112\
---------------------------------------------------------------------------

\112\ However, shareholders, including the hostile acquiror,
should consider the implications under the Change in Bank Control
Act or Bank Holding Company Act if a shareholder, or shareholders
acting in concert, acquire sufficient shares to constitute
``control.''
---------------------------------------------------------------------------

Requiring all shareholder actions to be taken at a meeting. These
State provisions provide, or permit the corporation to provide in its
certificate of incorporation or other governing document, that all
actions to be taken by shareholders must occur at a meeting and
prohibit shareholders from taking action by written consent. Certain
Federal banking statutes require shareholder approval to be taken at a
meeting \113\ while other sections require shareholder approval but do
not specify a meeting.\114\ There is no provision in Federal law
authorizing national bank shareholders to take action by written
consent in lieu of a meeting. Furthermore, nothing in Federal law
precludes a national bank's articles of association from requiring a
meeting for any action. Therefore, this type of State provision is not
inconsistent with Federal law.
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\113\ See 12 U.S.C. 71, 214a, 215, 215a, and 215a-2.
\114\ See 12 U.S.C. 30, 51a, 57, and 59. However, 12 U.S.C. 21a
provides that any action requiring approval of the stockholders be
obtained by approval by a majority vote of the voting shares at a
meeting, unless the statutory provision addressing the action
requires greater level of approval.
---------------------------------------------------------------------------

Limits on shareholders' authority to call special meetings. These
State provisions provide, or permit the corporation to provide in its
certificate of incorporation or other governing document, that only the
board of directors, and not shareholders, have the right to call
special meetings of the shareholders or, if shareholders have the
right, require a high percentage of shareholders to call the meeting.
Because Federal banking statutes or regulations do not address,
directly or indirectly, the right of shareholders of a national bank to
call special meetings, these type of State laws are not inconsistent
with Federal law.
Shareholder removal of a director only for cause. These State
provisions provide, or permit the corporation to provide in its
certificate of incorporation or other governing document, that
shareholders may remove a director only for cause, rather than both for
cause and without cause. The National Bank Act and OCC regulations do
not have a specific provision addressing director removal by
shareholders. Removal only for cause is consistent with the OCC's model
national bank Articles of Association, which provide for removal for
cause and for failure to meet statutory director qualifications.\115\
Therefore, State provisions requiring shareholder removal of a director
only for cause are not inconsistent with Federal law.
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\115\ See Articles of Association, Charters, and Bylaw
Amendments (Forms), Comptroller's Licensing Manual (June 19, 2017)
(Model Articles of Association, Article Fourth, last paragraph).
---------------------------------------------------------------------------

Proposed paragraph (c) would set forth the type of anti-takeover
provisions in State corporate governance provisions that the OCC has
determined are inconsistent with Federal banking statutes or
regulations. A national bank could not elect to follow these
provisions. These provisions are set forth below.
Supermajority voting requirements. These State statutory provisions
require, or permit the corporation to require in its certificate of
incorporation or other governing document, that a supermajority of the
shareholders approve specified matters. A requirement that a
supermajority vote of shareholders must approve some transactions is
inconsistent with Federal law when applied to transactions for which a
Federal statute or regulation includes an express specific shareholder
approval level. Certain provisions of the National Bank Act specify
shareholder approval by a two-thirds vote \116\ and other provisions
require majority shareholder approval.\117\ When a provision in the
National Bank Act specifies the level of shareholder vote required for
approval, it is inconsistent with Federal law to follow a State
corporate governance provision that permits or requires a different
level or an additional shareholder approval requirement for a subset of
shareholders.
---------------------------------------------------------------------------

\116\ See 12 U.S.C. 30, 57, 59, 181, 214a, 215, 215a, and 215a-
2.
\117\ See 12 U.S.C. 21a and 51a.
---------------------------------------------------------------------------

Restrictions on a shareholder's right to vote all the shares it
owns. These State statutory provisions prohibit, or permit the
corporation in its certificate of incorporation or other governing
document to prohibit, a person from voting shares acquired that
increase their percentage of ownership of the company's stock above a
certain level. This type of provision is inconsistent with the National
Bank Act, which expressly provides that each shareholder is entitled to
one vote on each share of stock held by the shareholder on all matters
other than elections for directors, where cumulative voting may be
allowed if so provided in the articles of association.\118\ A State
corporate governance provision that interferes with this express right
to vote is inconsistent with Federal law.
---------------------------------------------------------------------------

\118\ 12 U.S.C. 61.
---------------------------------------------------------------------------

As indicated above, Sec. 7.2000(b) permits a national bank to
elect to follow a State corporate governance provision only if it is
not inconsistent with Federal law and bank safety and soundness.
Proposed paragraph (d) of Sec. 7.2001 addresses the impact of bank
safety and soundness on adoption of anti-takeover provisions.
Anti-takeover provisions could make it harder for a bank to be
acquired by another bank or by investors or to raise capital by
discouraging share purchases by a potential acquiror. Thus, when a bank
is in a weak condition, anti-takeover provisions the OCC has determined
are not inconsistent with Federal law nevertheless would be
inconsistent with bank safety and soundness if they would impair the
possibility of restoring the bank to sound condition. These provisions
would then be impermissible.
Accordingly, proposed paragraph (d) would provide that any State
corporate governance provision, including anti-takeover provisions,
that would render more difficult or discourage an injection of capital
by purchase of bank stock, a merger, the acquisition of the bank, a
tender offer, a proxy contest, the assumption of control by a holder of
a large block of the bank's stock, or the removal of the incumbent
board of directors or management is inconsistent with bank safety and
soundness if: (1) The bank is less than adequately capitalized (as
defined in 12 CFR part 6); (2) the bank is in troubled condition (as
defined in 12 CFR 5.51(c)(7)); (3) grounds for the appointment of a
receiver under 12 U.S.C. 191 are present; or (4) the bank is otherwise
in less than satisfactory condition, as determined by the OCC.
However, proposed paragraph (d) also provides that an anti-takeover
provision is not inconsistent with bank safety and soundness if, at the
time it adopts the provision, the national bank: (1) Is not subject to
any of the foregoing conditions and (2) includes along with the
provision a limitation that the provision is not effective if one or
more of the foregoing conditions occur or if the OCC otherwise directs
the bank not to follow the provision for supervisory reasons.
Proposed paragraph (e) provides for OCC case-by-case review of
anti-takeover provisions. The OCC reviewed each type of State anti-
takeover provision described in proposed paragraph (b) for consistency
with Federal banking statutes and regulations only at a general level,
without

[[Page 40812]]

reviewing the specific terms of a proposed provision to be adopted by a
particular bank. While the OCC has concluded that the types of
provisions set out in paragraph (b) are not inconsistent with Federal
banking statutes and regulations in general, the specific provision a
particular bank adopts may contain features that could change the
result of the OCC's review. Similarly, some anti-takeover provisions
may be inconsistent with bank safety and soundness for a particular
national bank because of its individual circumstances, even if it is
not subject to the conditions listed in proposed paragraph (d).
In order to address the need for individual determinations when
appropriate, proposed paragraph (e) would provide that the OCC may
determine that a State anti-takeover provision, as proposed or adopted
by an individual national bank, is: (1) Inconsistent with Federal
banking statutes or regulations, even if it is of a type included in
paragraph (b) or (2) inconsistent with bank safety and soundness other
than as provided in paragraph (d). The OCC could begin a case-by-case
review on its own initiative. In addition, a bank that wishes the OCC
to review the permissibility of the specific State anti-takeover
provisions it has adopted or proposes to adopt may request the OCC's
review, under the procedures set forth at 12 CFR 7.2000(d).
Finally, proposed paragraph (f) addresses the method a national
bank, its shareholders, and its directors would use to adopt each anti-
takeover provision. In general, the bank would follow the requirements
for board of director and shareholder approval set out in the State
corporate governance statute it is electing to follow. However, if the
provision is included in the bank's articles of association, the bank's
shareholders would be required to approve the amendment of the articles
pursuant to 12 U.S.C. 21a, even if the State law does not require
approval by the shareholders. Further, if the State corporate
governance law requires the provision to be in the company's articles
of incorporation, certificate of incorporation, or similar document,
the national bank must include the provision in its articles of
association. If the State corporate governance law does not require the
provision to be in the company's articles of incorporation, certificate
of incorporation, or similar document but allows it to be in the
bylaws, then the national bank could include the provision in its
articles of association or in its bylaws. However, if the State
corporate governance law requires shareholder approval for changes to
the corporation's bylaws, then the national bank must include the
provision in its articles of association.
Director or Attorney as Proxy (Sec. 7.2002)
Twelve U.S.C. 61 prohibits an officer, clerk, teller, or bookkeeper
of the bank from acting as proxy for shareholder voting. Section 7.2002
codifies this prohibition in OCC regulations, and provides that any
person or group of persons, except the bank's officers, clerks,
tellers, or bookkeepers, may be designated to act as proxy. The OCC is
proposing to amend this section to clarify that the proxy referenced in
the section is for shareholder voting, as provided in the statute. The
OCC intends no substantive change with this amendment.
President as Director; Senior Executive Officer (Sec. 7.2012)
Twelve U.S.C. 76 provides that the president of the bank must be a
member of the board and be chairman thereof, but that the board may
designate a director in lieu of the president to be chairman, who must
perform duties as assigned by the board. Section 7.2012 codifies this
statutory requirement in the OCC's rules by providing that pursuant to
12 U.S.C. 76, the president of a national bank must be a member of the
board of directors, but a director other than the president may be
elected chairman of the board. This section further provides that a
person other than the president may serve as the chief executive
officer, and that this person is not required to be a director of the
bank. When first proposing this rule, the OCC acknowledged that it was
adding this second sentence to provide that a person other than the
president or a director may serve as chief executive officer of a
bank.\119\
---------------------------------------------------------------------------

\119\ 60 FR 11924 (March 3, 1995). This rule was finalized in
1996. 61 FR 4849 (Feb. 9, 1996).
---------------------------------------------------------------------------

The OCC is proposing two substantive changes to this section.
First, the OCC is proposing that the person serving as, or in the
function of, president of a national bank, regardless of title, must be
a member of the board of directors. This change would align the
regulation with the OCC's view that the bank officer positions in 12
U.S.C. 76 and other provisions of the National Bank Act refer to
functions rather than required titles. If a national bank does not have
an individual serving in the position of president but does have
another officer serving the function of president, the individual
serving in the function of president must be a member of the board of
directors. The person serving the function of president is generally
the individual appointed to oversee the national bank's day-to-day
activities.\120\ This change would provide national banks with
flexibility in employee titles and management organization. The OCC
notes that 12 U.S.C. 24(Fifth) provides national banks with the
authority to set the duties of their officers. National banks should
ensure that their employee titles do not create unnecessary confusion.
---------------------------------------------------------------------------

\120\ See OCC, ``The Director's Book: Role of Directors for
National Banks and Federal Savings Associations'' (July 2016),
available at www.OCC.gov (Director's Book).
---------------------------------------------------------------------------

Second, the OCC is proposing to remove the provision in Sec.
7.2012 that states that a person other than the president may serve as
chief executive officer, and this person is not required to be a
director of the bank. This provision is unnecessary. The position of
chief executive officer is not referenced in statute and, as indicated
above, national banks have discretion to set the duties of their
officers. Further, this provision would conflict with the first
proposed revision. Because function rather than title would govern
under the proposal, a chief executive officer that serves the function
of president would be required to be a member of the board.\121\
---------------------------------------------------------------------------

\121\ The Director's Book uses the terms ``president'' and
``chief executive officer'' interchangeably to refer to the
individual appointed by the board of directors to oversee the day-
to-day activities of a national bank.
---------------------------------------------------------------------------

The OCC requests comment on whether the proposed changes would
provide national banks with flexibility in their organization of
management or introduce complexity given the current practices at
national banks.
Indemnification of Institution-Affiliated Parties (Sec. Sec. 7.2014,
145.121)
The OCC is proposing to amend and reorganize Sec. 7.2014,
Indemnification of institution-affiliate parties (by national banks),
apply revised Sec. 7.2014 to Federal savings associations, and remove
Sec. 145.121, Indemnification of directors, officers and employees (by
Federal savings associations). Twelve CFR 7.2014 addresses
indemnification of institution-affiliated parties (IAPs) by national
banks in cases involving an administrative proceeding or civil action
initiated by a Federal banking agency, as well as cases that do not
involve a Federal banking agency. Under Sec. 7.2014(a), a national
bank only may make or agree to make indemnification payments to an IAP
with respect to an administrative proceeding or civil action initiated
by a Federal banking agency if those

[[Page 40813]]

payments are reasonable and consistent with the requirements of 12
U.S.C. 1828(k) and the implementing regulations thereunder. Pursuant to
section 1828(k), the Federal Deposit Insurance Corporation (FDIC) may
prohibit, by regulation or order, any indemnification payment made with
regard to an administrative proceeding or civil action instituted by
the appropriate Federal banking agency that results in a final order
under which the IAP: (1) Is assessed a civil money penalty; (2) is
removed or prohibited from participating in conduct of the affairs of
the insured depository institution; or (3) is required to take certain
affirmative actions in regards to an insured depository
institution.\122\ Section 1828(k) defines ``indemnification payment''
to mean any payment (or any agreement to make any payment) by any
insured depository institution to pay or reimburse an IAP for any
liability or legal expense with regard to any administrative proceeding
or civil action instituted by the appropriate Federal banking agency
that results in a final order under which the IAP: (1) Is assessed a
civil money penalty; (2) is removed or prohibited from participating in
conduct of the affairs of the insured depository institution; or (3) is
required to take certain affirmative actions in regards to an insured
depository institution.\123\ Section 7.2014(a) defines ``institution-
affiliated party'' by reference to 12 U.S.C. 1813(u).
---------------------------------------------------------------------------

\122\ In prohibiting such payments, the FDIC may take into
account several factors listed in the statute, such as whether there
is a reasonable basis to believe the IAP has committed fraud,
breached a fiduciary duty, or committed insider abuse; is
substantially responsible for the insolvency of the depository
institution; has violated any Federal or State banking law or
regulation that has had a material effect on the financial condition
of the institution; or was in a position of managerial or fiduciary
responsibility. See 12 U.S.C. 1828(k)(2). The FDIC has forbidden
certain indemnification payments by regulation. See 12 CFR
359.1(l)(1) (definition of ``prohibited indemnification payment'');
12 CFR 359.3 (forbidding prohibited indemnification payments, except
as provided in part 359).
\123\ See 12 U.S.C. 1828(k)(5)(A); see also 12 U.S.C. 1818(b)(6)
(defining affirmative actions that an IAP may be required to take in
regard to insured depository institutions for purposes of section
1828(k)(5)(A)).
---------------------------------------------------------------------------

Section 7.2014(b)(1) permits a national bank to indemnify IAPs for
damages and expenses, including the advancement of legal fees and
expenses, in cases involving an administrative proceeding or civil
action that is not initiated by a Federal banking agency in accordance
with the law of the State in which the main office of the bank is
located, the law of the State in which the bank's holding company is
incorporated, or the relevant provisions of the Model Business
Corporation Act or Delaware General Corporation Law, provided such
payments are consistent with safe and sound banking practices.
Additionally, pursuant to Sec. 7.2014(b)(2), a national bank may
provide for the payment of reasonable premiums for insurance covering
the expenses, legal fees, and liability of IAPs to the extent that
these costs could be indemnified under administrative proceedings or
civil actions not initiated by a Federal banking agency, as provided in
Sec. 7.2014(b)(1).
Twelve CFR 145.121 addresses indemnification of directors, officers
and employees by Federal savings associations. Section 145.121(b)
requires a Federal savings association to indemnify any person against
whom an action is brought or threatened because that person is or was a
director, officer, or employee of the association. This indemnification
is subject to the requirements of Sec. 145.121(c) and (g). Section
145.121(c) provides that indemnification only may be made available to
the IAP if there is a final judgment on the merits in the IAP's favor;
or, in the case of settlement, final judgment against the IAP, or final
judgment in the IAP's favor other than on the merits, if a majority of
the disinterested directors of the Federal savings association
determine that the IAP was acting in good faith. It also provides that
the association give the OCC at least 60 days' notice of its intention
to indemnify an IAP and provides that the association may not indemnify
the IAP if the OCC advises the savings association in writing that the
OCC objects. Section 145.121(g) makes the indemnification subject to 12
U.S.C. 1821(k).
Pursuant to Sec. 145.121(d), a Federal savings association may
obtain insurance to protect it and its directors, officers, and
employees from potential losses arising from claims for acts committed
in their capacity as directors, officers, or employees. However, a
Federal savings association may not obtain insurance that provides for
payment of losses incurred as a consequence of willful or criminal
misconduct.
Pursuant to Sec. 145.121(e), if a majority of the directors of a
Federal savings association conclude that, in connection with an
action, a person may become entitled to indemnification, the directors
may authorize payment of reasonable costs and expenses arising from the
defense or settlement of the action. Before making advance payment of
expenses, the savings association is required to obtain an agreement
that the savings association will be repaid if the person on whose
behalf payment is made is later determined not to be entitled to the
indemnification.
Pursuant to Sec. 145.121(f), an association that has a bylaw in
effect relating to indemnification of its personnel must be governed
solely by that bylaw, except that its authority to obtain insurance
must be governed by Sec. 145.121(d), which, as described above,
authorizes the purchase of indemnification insurance unless the
insurance pays for losses created by willful or criminal misconduct.
Section 145.121(g) states that the indemnification provided for in
Sec. 145.121 for Federal savings associations is subject to and
qualified by 12 U.S.C. 1821(k), which addresses personal liability for
directors and officers in certain civil actions.
The OCC is proposing to add Federal savings associations to Sec.
7.2014 so that both charters would be required to comply with Sec.
7.2014. Because Sec. 7.2014 applies to IAPs and not only officers,
directors, and employees as does Sec. 145.121, the scope of
indemnification rules for Federal savings associations would be
broader, applying also to certain Federal savings association
controlling shareholders, independent contractors, consultants, and
other persons identified in 12 U.S.C. 1813(u).
The OCC also is proposing changes to Sec. 7.2014. First, the
proposal would amend current Sec. 7.2014(b)(1), redesignated in this
proposal as Sec. 7.2014(a) and retitled, to provide that State law on
indemnification may apply to all administrative proceedings or civil
actions for which an IAP can be indemnified, not just actions that are
initiated by a person or entity not a Federal banking agency as under
the current rule. This would clarify the application of State law on
indemnification to actions initiated by Federal banking agencies.
However, current Sec. 7.2014(a), redesignated by this proposal as
Sec. 7.2014(b), would still apply. Specifically, under redesignated
Sec. 7.2014(b), with respect to proceedings or civil actions initiated
by a Federal banking agency, a national bank or Federal savings
association only may make or agree to make indemnification payments to
an IAP that are reasonable and consistent with the requirements of
section 1828(k) and implementing regulations thereunder.\124\
---------------------------------------------------------------------------

\124\ The OCC also proposes to move the cross-reference to the
definition of IAP in redesignated Sec. 7.2014(b) to redesignated
paragraph (a) and to make stylistic changes to the wording of
redesignated Sec. 7.2014(b).
---------------------------------------------------------------------------

The OCC also is proposing a technical change to redesignated Sec.
7.2014(a). As

[[Page 40814]]

indicated above, the current rule states that in cases involving an
administrative proceeding or civil action not initiated by a Federal
banking agency, a national bank may indemnify an IAP in accordance with
the law of the State in which the main office of the bank is located,
the law of the State in which the bank's holding company is
incorporated, or the relevant provisions of the Model Business
Corporation Act or Delaware General Corporation Law, provided such
payments are consistent with safe and sound banking practices. Because
these sources of law are identical to the law a national bank may elect
to follow pursuant to Sec. 7.2000(b) or the law a Federal savings
association may elect to follow pursuant to Sec. Sec. 5.21 or 5.22,
the OCC proposes to replace the language on sources of State law in
this provision with a statement that the bank or savings association
may indemnify an IAP for damages and expenses in accordance with the
law of the State the bank or savings association has designated for its
corporate governance under the provisions of Sec. Sec. 7.2000, 5.21,
or 5.22, as applicable.\125\
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\125\ As explained supra, the OCC is proposing to amend Sec.
7.2000 to also allow national banks to follow the corporate
governance provisions of the law of any State in which any branch of
the bank is located or where a holding company of the bank is
incorporated even if the holding company is later eliminated or no
longer controls the bank and the national bank is not located in
that State. The OCC is requesting comment on making the same change
to Sec. Sec. 5.21 and 5.22.
---------------------------------------------------------------------------

Second, the OCC is proposing to amend Sec. 7.2014(b)(2),
redesignated as Sec. 7.2014(d) in the proposal, to allow a national
bank or Federal savings association to provide for the payment of
reasonable insurance premiums in connection with all actions involving
an IAP that could be indemnified under Sec. 7.2014, whether or not
initiated by a Federal banking agency. The OCC believes this change
would resolve confusion regarding how current Sec. 7.2014(b)(2) is
applied. This proposed change also would better align OCC regulations
on the payment of insurance premiums with the FDIC's regulations and 12
U.S.C. 1828(k).\126\
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\126\ The FDIC's implementing regulations under section 1828(k),
12 CFR part 359, explicitly allow the payment of insurance premiums
in anticipation of actions brought by a Federal banking agency,
provided the insurance is not used to reimburse the cost of a
judgment or civil monetary penalty. See 12 CFR 359.1(l)(2).
---------------------------------------------------------------------------

Third, the OCC is proposing to add a new paragraph (c) that would
require a national bank or Federal savings association, before
advancing funds to an IAP under Sec. 7.2014, to obtain a written
agreement that the IAP will reimburse the bank for any portion of
indemnification that the IAP is ultimately found not to be entitled to
under 12 U.S.C. 1828(k) and implementing regulations, except to the
extent the bank's expenses have been reimbursed by an insurance policy
or fidelity bond.\127\ This requirement is similar to the requirement
in Sec. 145.121(e) currently applicable to Federal savings
associations and therefore would not impose any additional burdens on
Federal savings associations. Further, FDIC regulations,\128\ State
law,\129\ and the Model Business Corporation Act \130\ contain similar
requirements for IAPs to reimburse institutions for funds to which they
are later found not to be entitled. As most national banks are subject
to the FDIC's indemnification regulations or have elected under 12 CFR
7.2000(b) to follow State corporate law imposing reimbursement
requirements for advancement of funds, the OCC believes that this
proposed change would not impose any additional burden on national
banks and would merely codify existing practices. This proposed change
also will ensure that national banks, and Federal savings associations,
do not provide indemnification to IAPs that is ultimately in
contravention of the statutory limits of section 1828(k).
---------------------------------------------------------------------------

\127\ National banks are required to purchase fidelity coverage
by 12 CFR 7.2013.
\128\ See 12 CFR 359.5(a)(4).
\129\ See, e.g., 8 Del. C. Sec. 145(e); Utah Code Sec. 16-10a-
904; 805 Ill. Comp. Stat. 5/8.75(e); see also N.Y. Bus. Corp. Law
Sec. 725(a) (requiring repayment, but not explicitly requiring a
written agreement).
\130\ See Model Bus. Corp. Act Sec. 8.53(a).
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The OCC believes that proposed Sec. 7.2014 incorporates the
provisions of current Sec. 145.121 that should be applicable to both
national banks and Federal savings associations, while maintaining
appropriate flexibility for both types of institutions. Specifically,
the proposal would apply Sec. 7.2014 to actions brought by a Federal
banking agency and actions not brought by a Federal banking agency, as
in Sec. 145.121, while retaining the statutory limits of section
1828(k).\131\ The proposal also includes the reimbursement agreement
requirement, as in Sec. 145.121(e). However, the proposed rule does
not include the provision in Sec. 145.121 that requires Federal
savings associations to indemnify persons against whom an action is
brought under certain circumstances, such as if they are successful on
the merits of the action, nor \132\ the provision requiring a board
vote to authorize indemnification under certain circumstances.\133\ In
place of these requirements, proposed Sec. 7.2014 would permit Federal
savings associations to incorporate State law on indemnification.
Because State law governing indemnification generally incorporates
these aspects of current Sec. 145.121, the OCC expects that Federal
savings associations will continue to be subject to similar provisions
governing indemnification as before. For example, State law generally
requires mandatory indemnification if an employee is successful on the
merits,\134\ as well as a board vote authorizing indemnification in
almost all circumstances.\135\ Because national banks also may
incorporate State indemnification law, they would be subject to these
State indemnification provisions as well. The OCC specifically requests
comment on whether, instead of relying on State law, the final rule
should include the requirement from Sec. 145.121 that, in the case of
settlement, final judgment against the IAP, or final judgment in the
IAP's favor other than on the merits, a majority of the disinterested
directors determine that the IAP was acting in good faith before the
instruction may indemnify the IAP.
---------------------------------------------------------------------------

\131\ Section 145.121(g) subjects and qualifies the
indemnification provided for by current Sec. 145.121 to 12 U.S.C.
1821(k). In contrast, current Sec. 7.2014 explicitly subjects
national bank indemnification to the restrictions of 12 U.S.C.
1828(k). Section 1828(k) directly addresses indemnification and is
applicable to any insured depository institution. See 12 U.S.C.
1828(k)(5)(A). Section 1821(k) addresses personal liability for
directors and officers and is also applicable to any insured
depository institution. Both of these statutes apply, and will
continue to apply to national banks and Federal savings associations
but proposed Sec. 7.2014 retains the citation to section 1828(k) as
the more relevant citation for indemnification purposes.
\132\ See Sec. 145.121(b).
\133\ See Sec. 145.121(c)(1)(ii)(C)).
\134\ See, e.g., 8 Del. C. 145(c); New York BCL Sec. 723(a);
805 ILCS 5/8.75(c); Model Bus. Corp. Act, Sec. 8.52 (2016).
\135\ See, e.g., 8 Del. C. 145(d); New York BCL Sec. 723(b);
805 ILCS 5/8.75(d); Model Bus. Corp. Act, Sec. Sec. 8.53(c), 8.55
(2016).
---------------------------------------------------------------------------

The proposed rule also does not include the provision in Sec.
145.121 that requires a 60-day prior notice to the OCC before making an
indemnification.\136\ The OCC is not proposing to retain this provision
because it believes it is burdensome and unnecessary. However, the OCC
requests comment on whether the final rule should include this prior
notice requirement and, if so, what benefits prior approval would
provide that would outweigh any additional regulatory burden.
---------------------------------------------------------------------------

\136\ See Sec. 145.121(c)(2)).

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[[Page 40815]]

Restricting Transfer of Stock and Record Dates; Stock Certificates
(Sec. 7.2016)
Facsimile Signatures on Bank Stock Certificates (Sec. 7.2017)
Lost Stock Certificates (Sec. 7.2018)
Sections 12 CFR 7.2016, 7.2017, and 7.2018 contain specific
requirements related to national bank stock transfers and stock
certificates. Many of these requirements are mandated by 12 U.S.C. 52.
However, some of these requirements are outdated because national banks
today rarely issue physical stock certificates.
Section 7.2016(a) states that, pursuant section 52, a national bank
may impose conditions on the transfer of its stock reasonably
calculated to simplify the work of the bank with respect to stock
transfers, voting at shareholders' meetings, and related matters and to
protect the bank against fraudulent transfers. Consistent with the
statute, Sec. 7.2016(b) allows a national bank to close its stock
records for a reasonable period to ascertain shareholders for voting
purposes. The board also may fix record dates, which should be
reasonable in proximity to the date notice is given to shareholders of
the meeting. Section 7.2017 states that the president and cashier of
the bank, or other officers authorized by the bank's bylaws, shall sign
each stock certificate. These signatures may be manual or facsimile and
may be electronic. Each certificate also must be sealed with the seal
of the bank.
To streamline OCC rules, the OCC is proposing to combine Sec. Sec.
7.2016 and 7.2017 into one section, Sec. 7.2016, that would apply to
both stock transfers and stock certificate requirements. The OCC also
is proposing to make OCC rules on stock certificates more flexible. As
noted above, section 12 U.S.C. 52 requires certain officers of the
association to sign every bank stock certificate and for it to be
sealed with the seal of the association. However, banks now generally
hold stock in ``book-entry'' form, which is not a format that supports
signatures or stamps. Although section 52 places requirements on
physical stock certificates, the OCC does not believe that the language
of that section requires banks to actually issue stock in certificated
form.
Notably, section 52 also states that ``[t]he capital stock of each
association shall be . . . transferable on the books of the association
in such manner as may be prescribed in the by-laws or articles of
association.'' \137\ This language allows banks to provide for book-
entry transfer in their by-laws or articles of association, even if
this type of transfer is incompatible with the use of signatures and
seals. Therefore, the OCC is proposing to state that a national bank
may prescribe the manner in which its stock shall be transferred in its
by-laws or articles of association. The OCC also is proposing to
specify that a national bank that does issue stock in certificate form
must comply with the requirements of section 52, including: (1) The
name and location of the bank; (2) name and holder of record of the
stock; (3) the number and class of shares which the certificate
represents; (4) if the bank issues more than one class of stock, the
respective rights, preferences, privileges, voting rights, powers,
restrictions, limitations, and qualifications of each class of stock
issued (unless incorporated by reference to the articles of
association); (5) signatures of the president and cashier of the bank,
or such other officers as the bylaws of the bank provide; and (6) the
seal of the bank. The OCC is proposing to continue allowing banks to
meet the signature requirements of section 52 through the use of
electronic means or by facsimiles, as is permitted by current Sec.
7.2017.
---------------------------------------------------------------------------

\137\ See 12 U.S.C. 52, first paragraph.
---------------------------------------------------------------------------

Finally, the OCC is proposing to remove Sec. 7.2018 as
unnecessary. Section 7.2018 states that if the bank's articles of
association or bylaws do not provide for replacing lost, stolen, or
destroyed stock certificates, the bank may adopt procedures under 12
CFR 7.2000. Section 7.2000 generally permits national banks to adopt
corporate governance procedures \138\ in accordance with State law, to
the extent not inconsistent with applicable Federal laws and
regulations or with bank safety and soundness. Therefore, this
provision is unnecessary.
---------------------------------------------------------------------------

\138\ The proposed rule would change this terminology in Sec.
7.2000 to ``corporate governance provisions.''
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Acquisition and Holding of Shares as Treasury Stock (Sec. 7.2020)
The OCC is proposing to remove 12 CFR 7.2020. Currently, Sec.
7.2020 provides that a national bank may repurchase its outstanding
shares and hold them as treasury stock as a capital reduction under 12
U.S.C. 59 if the repurchase and retention is for a ``legitimate
corporate purpose'' and not for speculative purposes. The OCC issued
Sec. 7.2020 in 1996 as an exception to the provision in 12 U.S.C. 83
that prohibited a national bank from being the ``purchaser or holder''
of its own shares. However, in 2000, Congress amended section 83 to
remove this prohibition.\139\ Therefore, Sec. 7.2020 is unnecessary.
The OCC notes that removing Sec. 7.2020 would not limit the OCC's
authority over share repurchases. Share repurchases are considered
reductions in capital and would continue to be subject to OCC and
shareholder approval under 12 U.S.C. 59 and 12 CFR 5.46.
---------------------------------------------------------------------------

\139\ Public Law 106-569, Title XII, section 1207(a), 114 Stat.
3034 (American Homeownership and Economic Opportunity Act of 2000).
---------------------------------------------------------------------------

Capital Stock-Related Activities of a National Bank (New Sec. 7.2025)
The OCC is proposing a new section, Sec. 7.2025, that would codify
various OCC interpretations of the National Bank Act involving capital
stock issuances and repurchases. Specifically, proposed Sec. 7.2025
would explain the shareholder approval requirements for the issuance of
authorized common stock; the issuance, repurchase, and redemption of
preferred stock pursuant to blank check procedures; and share
repurchase programs. Generally, an increase or decrease in the amount
of a national bank's common or preferred stock is a change in permanent
capital subject to the notice and approval requirements of 12 CFR 5.46
and applicable law.\140\ Proposed Sec. 7.2025(a) sets forth the
general requirements for changes in permanent capital. Paragraphs (b)
through (d) of proposed Sec. 7.2025 provide more specific requirements
for shareholder approval of various types of issuances and repurchases.
Section 7.2025(e) would identify certain permissible features for
preferred stock.
---------------------------------------------------------------------------

\140\ See generally 12 U.S.C. 51a, (preferred stock issuance),
57 (increase in capital), and 59 (reduction of capital).
---------------------------------------------------------------------------

Issuance of previously approved and authorized common stock. The
issuance of common stock is governed by 12 U.S.C. 57, which provides
that a national bank ``may, with the approval of the [OCC], and by a
vote of shareholders owning two-thirds of the stock of such [bank],
increase its capital stock to any sum.'' The OCC has interpreted 12
U.S.C. 57 to require a two-thirds shareholder vote to amend the
articles of association to increase the number of authorized
shares.\141\ The OCC also has long interpreted section 57 to permit a
national bank's board of directors to issue common stock without
obtaining additional shareholder approval at the time of the issuance
so long as the issuance does not exceed the amount of common stock
previously

[[Page 40816]]

approved and authorized by shareholders.\142\ Proposed 7.2025(b) would
codify this interpretation. Specifically, paragraph (b) would provide
that, in compliance with 12 U.S.C. 57, a national bank may issue common
stock up to an amount previously approved and authorized in the
national bank's articles of association by holders of two-thirds of the
national bank's shares without obtaining additional shareholder
approval for each subsequent issuance within the authorized amount.
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\141\ See, e.g., Articles of Association, Charter, and Bylaw
Amendments, Comptroller's Licensing Manual (June 2017), p. 3
(indicating that two-thirds of a national bank's shareholders must
vote to increase or decrease the authorized number of common shares
in the articles of association).
\142\ A previous version of Sec. 5.46 (1981) provided that
shareholder approval would not be required to increase common stock
through the issuance of a class of common up to an amount previously
approved by shareholders. Subsequent amendments to Sec. 5.46, which
the OCC intended to simplify 12 CFR part 5, omitted this language
but did not change this interpretation.
---------------------------------------------------------------------------

Issuance, repurchase, and redemption of preferred stock pursuant to
certain procedures. Twelve U.S.C. 51a requires a majority of
shareholders vote to approve a national bank's issuance of preferred
stock. However, the statute does not specify when in the process the
bank must obtain shareholder approval. In OCC Interpretive Letter 921,
the OCC determined that a national bank could adopt, subject to
required shareholder approval, a provision in its articles of
association or an amendment to its articles authorizing the bank's
board of directors to issue preferred stock using blank check
procedures (``blank check preferred stock'').\143\ Blank check
preferred stock refers to preferred stock for which the board is
empowered to issue and determine the terms of authorized and unissued
preferred stock. To be permissible, blank check preferred stock must be
permitted by the corporate governance procedures adopted by the bank
under Sec. 7.2000.\144\
---------------------------------------------------------------------------

\143\ OCC Interpretive Letter No. 921 (Dec. 13, 2001).
\144\ The proposed rule would change this terminology in Sec.
7.2000 to ``corporate governance provisions.''
---------------------------------------------------------------------------

The OCC also determined that shareholders' adoption or approval of
a blank check preferred stock article constitutes the shareholder
action required by 12 U.S.C. 51a and 51b to issue and establish the
terms of preferred stock. The subsequent issuance of the preferred
stock within the authorized limits would not require additional
shareholder approval. Interpretive Letter 921 did not specifically
address blank check preferred procedures that include the authority,
and the shareholder action required, to repurchase and redeem blank
check preferred stock.
The redemption or repurchase of preferred stock is a reduction in
capital. Twelve U.S.C. 59 requires the approval of two-thirds of
shareholders for a national bank to reduce capital, but it does not
specify when in the process the bank must obtain shareholder approval.
In Interpretive Letter 1162, the OCC determined that the holders of
two-thirds of a national bank's shares may approve in advance
redemptions of blank check preferred stock by voting to amend the
articles of association to authorize the issuance and redemption of
blank check preferred shares.\145\
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\145\ OCC Interpretive Letter No. 1162 (July 6, 2018).
---------------------------------------------------------------------------

Proposed Sec. 7.2025(c) would codify these interpretations and
permit blank check procedures, if approved in advance by the bank's
shareholders, that authorize the issuance, repurchase, and redemption
of preferred stock without additional shareholder approval at the time
of issuance, repurchase, or redemption, if certain conditions are met.
Proposed paragraph (c) would provide that, subject to the requirements
of 12 U.S.C. 51a, 51b, and 59, a national bank may adopt procedures to
authorize the board of directors to issue, determine the terms of,
repurchase, or redeem one or more series of preferred stock, if
permitted by the corporate governance provisions adopted by the bank
under 12 CFR 7.2000. This proposed provision further provides that, to
satisfy the shareholder approval requirements of 12 U.S.C. 51a and 59,
shareholders must approve the adoption of these procedures in advance
through an amendment to the national bank's articles of association,
and that any amendment that authorizes both the issuance and the
repurchase and redemption of shares must be approved by holders of two-
thirds of the national bank's shares.
Share repurchase programs. In Interpretive Letter 1162, the OCC
determined that the shareholder approval requirement in 12 U.S.C. 59
may be satisfied by a two-thirds shareholder vote approving an
amendment to the bank's articles of association authorizing the board
of directors to implement share repurchase programs. A share repurchase
program authorizes the board of directors to repurchase the national
bank's common or preferred stock from time to time under board-
determined parameters that can limit the frequency, type, aggregate
limit, or purchase price of repurchases, without obtaining additional
shareholder approval at the time the shares are repurchased. Proposed
Sec. 7.2025(d) would codify this interpretation by providing that,
subject to the requirements of 12 U.S.C. 59, a national bank may
establish a program for the repurchase, from time to time, of the
national bank's common or preferred stock, if permitted by the
corporate governance provisions adopted by the bank under 12 CFR
7.2000. Proposed paragraph (d) also provides that, to satisfy the
shareholder approval requirement of 12 U.S.C. 59, the repurchase
program must be approved in advance by the holders of two-thirds of the
national bank's shares, including through an amendment to the national
bank's articles of association that authorizes the board of directors
to implement share repurchase programs from time to time under board-
determined parameters that can limit the frequency, type, aggregate
limit, or purchase price of repurchases.
Preferred stock features. Proposed Sec. 7.2025(e) would clarify
that a national bank may issue and maintain noncumulative preferred
stock under 12 U.S.C. 51b. This provision would codify a longstanding
OCC interpretation that section 51b, by its terms, describes
limitations on the portion of the preferred stock dividend which may be
cumulative. It does not require that preferred stock dividends must
always be cumulative.\146\ Specifically, proposed Sec. 7.2025(e) would
provide that a national bank's preferred stock may be cumulative or
non-cumulative and may or may not have voting rights on one or more
series.
---------------------------------------------------------------------------

\146\ In part, section 51b provides that preferred shareholders
``shall be entitled to receive such cumulative dividends . . . as
may be provided in the articles of association . . . and no
dividends shall be declared or paid on common stock until cumulative
dividends on preferred stock have been paid in full. . . . '' The
OCC has previously interpreted section 51a as providing national
banks with broad authority to issue preferred stock, including
preferred stock bearing noncumulative dividends, notwithstanding the
language of section 51b. See OCC Letter from Martin Goodman, OCC
Assoc. Ch. Couns. (Oct. 3, 1977).
---------------------------------------------------------------------------

Subpart C-- National Bank and Federal Savings Association Operations

National Bank and Federal Savings Association Hours and Closings (Sec.
7.3000)
The OCC is proposing to amend Sec. 7.3000, National bank hours and
closings, to include Federal savings associations, to update it, and to
make technical and clarifying changes.
Twelve U.S.C. 95(b)(1) specifically authorizes the Comptroller to
designate a legal holiday because of emergency conditions occurring in
any State or part of a State for national banks located in that State
or affected area. Section 95(b)(1) also provides that when a State or
State official authorized by law designates any day as a legal holiday
for

[[Page 40817]]

ceremonial or emergency reasons, that day is a legal holiday and a
national bank located in that State or affected part of the State may
close or remain open unless the Comptroller directs otherwise by
written order.
The OCC has implemented this statutory provision in 12 CFR 7.3000.
Specifically, Sec. 7.3000(b) provides that when the Comptroller, a
State, or a legally authorized State official declares a day a legal
holiday due to emergency conditions, a national bank may temporarily
limit or suspend its operations at its affected offices. Alternatively,
the bank may continue its operations, unless the Comptroller directs
otherwise by written order. This rule provides that emergency
conditions include natural disasters and civil and municipal
emergencies, such as severe flooding or a power emergency declared by a
local power company or government requesting that businesses in the
affected area close. Section 7.3000(c) states that a State or a legally
authorized State official may declare a day a legal holiday for
ceremonial reasons and provides that when a State legal holiday is
declared for ceremonial reasons, a national bank may choose to remain
open or to close. Section 7.3000(d) provides that a national bank
should assure that all liabilities or other obligations under the
applicable law due to the bank's closing are satisfied, e.g., notice to
depositors about funds availability pursuant to 12 CFR 229.13(g)(4).
There is no equivalent statute or corresponding regulation for
Federal savings associations. However, a former OTS regulation at 12
CFR 510.2(b) permitted the OTS to waive or relax any limitations
pertaining to the operations of a Federal savings associations in any
area affected by a determination by the President of the United States
that a major disaster or emergency had occurred. Amending Sec. 7.300
to include Federal savings associations would clarify for these
institutions how a legal holiday is declared and the implications of a
legal holiday declaration, as well as provide consistency between
national bank and Federal savings association operations on legal
holidays. We note that the Comptroller is directed under section 4 of
the HOLA (12 U.S.C. 1463(a)(1)(A)) to provide for the ``safe and sound
operation'' of Federal savings associations.\147\ The OTS relied on
this HOLA authority when it issued Sec. 510.2(b) \148\ and this
proposed rule furthers that objective.
---------------------------------------------------------------------------

\147\ See also 12 U.S.C. 1(a) (charging the OCC with assuring
the safety and soundness of institutions subject to its
jurisdiction).
\148\ See 54 FR 49411, at 49456 (Nov. 30, 1989).
---------------------------------------------------------------------------

The OCC also is proposing a number of changes to clarify and update
the emergency closing provisions of Sec. 7.3000. First, the OCC is
proposing to clarify that Sec. 7.3000 also applies to Federal branches
and agencies of foreign banks. Although current Sec. 7.3000 applies to
Federal branches and agencies pursuant to section 4(b) of the
International Banking Act, 12 U.S.C. 3102(b), the OCC believes it is
appropriate to specify this application in the rule.\149\
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\149\ As indicated previously in this preamble, section 4(b) of
the International Banking Act, 12 U.S.C. 3102(b), provides that the
operations of a foreign bank at a Federal branch or agency shall be
conducted with the same rights and privileges as a national bank at
the same location and shall be subject to all the same duties,
restrictions, penalties, liabilities, conditions, and limitations
that would apply under the National Bank Act to a national bank
doing business at the same location. See also 12 CFR 28.13.
---------------------------------------------------------------------------

Second, the proposal would provide that the Comptroller may declare
``any day'' a legal holiday, instead of ``a day,'' to more accurately
reflect the statutory language and to clarify that the Comptroller may
declare more than one day due to the emergency condition as a legal
holiday.
Third, the proposed rule would amend Sec. 7.3000(b) to state that
emergency conditions could be ``caused by acts of nature or of man.''
This amendment mirrors the language in 12 U.S.C. 95(b)(1) and would
clarify the broad scope of possible emergency conditions that could
justify a legal holiday.
Fourth, the proposal updates the types of emergency conditions
listed in the rule to include disasters other than natural disasters,
public health or safety emergencies, and cyber threats or other
unauthorized intrusions, and updates the list of examples to include
pandemics, terrorist attacks, and cyber-attacks on bank systems.
Fifth, the proposal provides that the Comptroller may issue a
declaration of a legal holiday in anticipation of the emergency
condition, in addition to at the time of the emergency or soon
thereafter. This codifies the current practice of the Comptroller in
most cases, which permits national banks, Federal savings associations,
and Federal branches and agencies to better plan for the possible
closing.
Sixth, the proposal provides that in the absence of a Comptroller
declaration of a bank holiday, a national bank, Federal savings
associations, or Federal branch or agency may choose to temporarily
close offices in response to an emergency condition. The bank, savings
associations, or branch or agency would need to notify the OCC of such
temporary closure as soon as feasible. This provision would provide
additional flexibility to OCC-regulated institutions during emergency
conditions and would codify similar language currently included in the
OCC's Licensing Manual.\150\
---------------------------------------------------------------------------

\150\ See Comptroller's Licensing Manual, Branch Closings (June
2017).
---------------------------------------------------------------------------

Seventh, the proposal clarifies in Sec. 7.3000(c) that a State
legal holiday may be for the entire State or part of the State, as
indicated in 12 U.S.C. 95(b)(1).
Eighth, as provided in the statute, the proposal provides in Sec.
7.3000(c) that the Comptroller may by written order direct the affected
institution to close or remain open during a State legal holiday
declared for ceremonial reasons, as with a State legal holiday declared
due to an emergency.
Finally, the proposed rule adds a new paragraph, Sec. 7.3000(e),
to provide a definition of ``State'' that is consistent with the
definition in 12 U.S.C. 95(b)(2).
In addition, the OCC is proposing a number of technical changes to
Sec. 7.3000. The proposal would replace the word ``country'' with
``United States'' in the phrase describing affected geographic area to
make this phrase more precise; delete the superfluous citation to 12
U.S.C. 95 in Sec. 7.3000(b); and delete the superfluous first sentence
of current Sec. 7.3000(c), which states that a State or a legally
authorized State official may declare a day a legal holiday for
ceremonial reasons.
In proposing these changes, the OCC is reorganizing Sec. 7.3000(b)
and (c) so that all provisions relating to Comptroller declared legal
holidays for emergency conditions are in Sec. 7.3000(b) and all
provisions related to State declared legal holidays for emergency and
ceremonial reasons are in Sec. 7.3000(c). This reorganization more
clearly sets forth the standards for Comptroller and State declared
legal holidays and corresponds better with the statutory text.
Section 7.3000 also provides, in paragraph (a), that a national
bank's board of directors should review its banking hours and,
independently of any other bank, take appropriate actions to
establishing a schedule of its banking hours. The OCC is proposing to
update this provision by replacing ``banking hours'' with ``hours of
operations for customers.'' Furthermore, the OCC is proposing to
include Federal savings associations and Federal branches and agencies
in this provision. Because Federal branches and agencies typically

[[Page 40818]]

do not have a board of directors, proposed Sec. 7.3000(a) would
provide that an equivalent person or committee for a Federal branch or
agency should review that entity's operating hours and take appropriate
action to establish a schedule of operating hours for customers.
Sharing National Bank or Federal Savings Association Space and
Employees (Sec. 7.3001)
Section 7.3001 permits national banks and Federal savings
associations to lease excess space on bank or savings association
premises to other businesses, share space jointly held with other
businesses, offer its services in space owned by or leased to other
businesses, and share employees when sharing space. The OCC proposes to
add a cross-reference to redesignated Sec. 7.1024, National bank or
Federal savings association ownership of property, in Sec.
7.3001(a)(1) to clarify that the requirements of Sec. 7.1024 apply to
the sharing of office space and employees pursuant to Sec. 7.3001.
General Technical Changes
In addition to the technical changes discussed above, the OCC
proposes numerous technical changes throughout 12 CFR part 7.
Specifically, the proposed rule would:
Replace the word ``shall'' with ``must,'' ``will,'' or
other appropriate language, which is the more current rule writing
convention for imposing an obligation and is the recommended drafting
style of the Federal Register;
Uniformly capitalize the words ``State'' and ``Federal''
in conformance with Federal Register drafting style;
Replace the term ``bank'' and ``savings association'' with
``national bank'' or ``Federal savings association,'' respectively,
where appropriate;
Clarify punctuation and update or conform spelling of
various terms; and
Conform paragraph heading style.

III. Request for Comments

The OCC requests comment on any aspect of this proposal, in
addition to those specific requests noted in the SUPLEMENTARY
INFORMATION. Further, the COVID 19 emergency has required banks in many
cases to consider changes to the way they do business and may
potentially result in longer term changes in industry practices. The
OCC requests comment on whether it should consider other amendments to
part 7 to address issues that may have arisen due to the COVID-19
pandemic. If so, please provide suggestions for specific amendments and
not general requests for changes.\151\
---------------------------------------------------------------------------

\151\ As indicated previously in this Supplementary Information
section, the OCC has issued an interim final rule that amends 12 CFR
7.1001 and 7.1003 to provide for remote participation at shareholder
and board of director meetings to allow national banks to hold these
meetings without violating social distancing restrictions imposed in
response to the COVID-19 emergency. See 85 FR 31943 (May 28, 2020).
---------------------------------------------------------------------------

IV. Regulatory Analyses

A. Paperwork Reduction Act

Certain provisions of the proposed rulemaking contain ``collection
of information'' requirements within the meaning of the Paperwork
Reduction Act (PRA) of 1995 (44 U.S.C. 3501-3521). In accordance with
the requirements of the PRA, the OCC may not conduct or sponsor, and a
respondent is not required to respond to, an information collection
unless it displays a currently valid Office of Management and Budget
(OMB) control number.
The OCC reviewed the proposed rulemaking and determined that it
revises certain information collection requirements previously cleared
by OMB under OMB Control No. 1557-0204. The OCC has submitted the
revised information collection to OMB for review under section 3507(d)
of the PRA (44 U.S.C. 3507(d)) and section 1320.11 of the OMB's
implementing regulations (5 CFR 1320).
Current Actions
The information collection requirements are as follows:
Tax Equity Finance Transactions--Written requests are
required to increase the aggregate limit on tax equity finance
transactions. Prior written notification to OCC is required for each
tax equity finance transaction. Sec. 7.1025.
Payment Systems--Thirty (30) days advance written notice
is required before joining a payment system that would expose the
institution to open-end liability. An after-the-fact written notice
must be filed within 30 days of becoming a member of a payment system
that does not expose the institution to open-end liabilities with
certain representations. Both notices must include safety and soundness
representations. Sec. 7.1026.
Derivatives Activities--Thirty (30) days prior written
notice is required before engaging in certain derivatives hedging
activities, expanding derivatives hedging activities to include a new
category of underlying, engaging in certain customer-driven financial
intermediation derivatives activities, and expanding customer-driven
financial intermediation derivatives activities to include a new
category of underlying. Sec. 7.1030.
State Corporate Governance--Requests for OCC's staff
position on the ability of national bank to engage in particular State
corporate governance provision must include name, citations, discussion
of similarly suited State banks, identification of Federal banking
statutes and regulations, and analysis of consistency with statutes,
regulations, and safety and soundness. Sec. 7.2000.
Indemnification of institution-affiliated parties--
Administrative proceeding or civil actions not initiated by a Federal
banking agency--A written agreement that an IAP will reimburse the
institution for any portion of non-reimbursed indemnification that the
IAP is found not entitled to is required before advancing funds to an
IAP. Federal savings associations no longer required to provide OCC
prior notice of indemnification. Sec. 7.2014.
Issuing Stock in Certificate Form--National banks must
include certain information, signatures and seal when issuing stock in
certificate form. Sec. 7.2016.
Title of Information Collection: Bank Activities and Operations.
Frequency: Event generated.
Affected Public: Businesses or other for-profit.
Estimated number of respondents: 213.
Total estimated annual burden: 586 hours.
Comments are invited on:
a. Whether the collections of information are necessary for the
proper performance of the agencies' functions, including whether the
information has practical utility;
b. The accuracy or the estimate of the burden of the information
collections, including the validity of the methodology and assumptions
used;
c. Ways to enhance the quality, utility, and clarity of the
information to be collected;
d. Ways to minimize the burden of the information collections on
respondents, including through the use of automated collection
techniques or other forms of information technology; and
e. Estimates of capital or startup costs and costs of operation,
maintenance, and purchase of services to provide information.
All comments will become a matter of public record. Comments on
aspects of this notice that may affect reporting, recordkeeping, or
disclosure requirements and burden estimates should be sent to the
addresses listed in the ADDRESSES section of this document. Written
comments and

[[Page 40819]]

recommendations for the information collection should be sent within 60
days of publication of this notice of proposed rulemaking to
www.reginfo.gov/public/do/PRAMain. Find this particular information
collection by selecting ``Currently under 30-day Review--Open for
Public Comments'' or by using the search function.

B. Regulatory Flexibility Act

In general, the Regulatory Flexibility Act (RFA) (5 U.S.C. 601 et
seq.) requires an agency, in connection with a proposed rule, to
prepare an Initial Regulatory Flexibility Analysis describing the
impact of the rule on small entities (defined by the Small Business
Administration for purposes of the RFA to include commercial banks and
savings institutions with total assets of $600 million or less and
trust companies with total assets of $41.5 million of less). However,
under section 605(b) of the RFA, this analysis is not required if an
agency certifies that the rule would not have a significant economic
impact on a substantial number of small entities and publishes its
certification and a short explanatory statement in the Federal Register
along with its rule.
The OCC currently supervises approximately 1,185 institutions
(commercial banks, trust companies, Federal savings associations, and
branches or agencies of foreign banks, collectively banks), of which
782 are small entities.\152\ Because the rule applies to all OCC-
supervised depository institutions, the proposed rule would affect all
small OCC-supervised entities and thus, a substantial number of them.
However, almost all of the provisions in the final rule clarify or
codify existing requirements, loosen existing requirements, increase
flexibility, or reduce burden. One provision in the proposed rule,
Sec. 7.2012, which would require a bank president to be a member of
the bank's board of directors, could impose a new requirement on banks
subject to the prior notice requirement for any change in directors
pursuant to 12 CFR 5.51. However, the number of banks that are subject
to this prior notice requirement that do not currently have a president
serving on the board of directors is limited. As a result, the proposed
rule, if implemented, would not impose new mandates on more than a
limited number of banks. Therefore, the OCC believes the costs
associated with the proposed rule, if any, would be minimal and thus
the proposed rule would not have a significant economic impact on any
small OCC-supervised entities. For these reasons, the OCC certifies
that, if adopted, the proposed rule would not have a significant
economic impact on a substantial number of small entities supervised by
the OCC. Accordingly, an Initial Regulatory Flexibility Analysis is not
required.
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\152\ Consistent with the General Principles of Affiliation 13
CFR 121.103(a), the OCC counts the assets of affiliated financial
institutions when determining if it should classify an institution
as a small entity. The OCC used December 31, 2018, to determine size
because a ``financial institution's assets are determined by
averaging the assets reported on its four quarterly financial
statements for the preceding year.'' See footnote 8 of the U.S.
Small Business Administration's Table of Size Standards.
---------------------------------------------------------------------------

C. Unfunded Mandates Reform Act of 1995

The OCC has analyzed the proposed rule under the factors in the
Unfunded Mandates Reform Act of 1995 (UMRA), 2 U.S.C. 1501 et seq.
Under this analysis the OCC considered whether the proposed rule
includes a Federal mandate that may result in the expenditure by State,
local, and tribal governments, in the aggregate, or by the private
sector, of $100 million or more in any one year ($154 million as
adjusted annually for inflation). The UMRA does not apply to
regulations that incorporate requirements specifically set forth in
law.
As discussed above, the proposed rule, if implemented, would not
impose new mandates on more than a limited number of banks. Therefore,
the OCC concludes that if implemented, the proposed rule would not
result in an expenditure of $154 million or more annually by State,
local, and tribal governments, or by the private sector. Therefore, the
OCC finds that the proposed rule does not trigger the UMRA cost
threshold. Accordingly, the OCC has not prepared the written statement
described in section 202 of the UMRA.

E. Riegle Community Development and Regulatory Improvement Act of 1994

Pursuant to section 302(a) of the Riegle Community Development and
Regulatory Improvement Act of 1994 (RCDRIA), 12 U.S.C. 4802(a), in
determining the effective date and administrative compliance
requirements for new regulations that impose additional reporting,
disclosure, or other requirements on insured depository institutions,
the OCC will consider, consistent with principles of safety and
soundness and the public interest: (1) Any administrative burdens that
the proposed rule would place on depository institutions, including
small depository institutions and customers of depository institutions;
and (2) the benefits of the proposed rule. The OCC requests comment on
any administrative burdens that the proposed rule would place on
depository institutions, including small depository institutions, and
their customers, and the benefits of the proposed rule that the OCC
should consider in determining the effective date and administrative
compliance requirements for a final rule.

List of Subjects

12 CFR Part 7

Computer technology, Credit, Derivatives, Federal savings
associations, Insurance, Investments, Metals, National banks, Reporting
and recordkeeping requirements, Securities, Security bonds

12 CFR Part 145

Electronic funds transfers, Public deposits, Federal savings
associations

12 CFR Part 160

Consumer protection, Investments, Manufactured homes, Mortgages,
Reporting and recordkeeping requirements, Savings associations,
Securities.

For the reasons set out in the preamble, the OCC proposes to amend
12 CFR chapter I as follows:

PART 7--ACTIVITIES AND OPERATIONS

0
1. The authority citation for part 7 is revised to read as follows:

Authority: 12 U.S.C. 1 et seq., 25b, 29, 71, 71a, 92, 92a, 93,
93a, 95(b)(1), 371, 371d, 481, 484, 1463, 1464, 1465, 1818, 1828(m),
3102(b), and 5412(b)(2)(B).

Sec. 7.1000 [Redesignated]

0
2. Redesignate Sec. 7.1000 as Sec. 7.1024.
0
3. Add Sec. 7.1000 to read as follows:

Sec. 7.1000 Activities that are part of, or incidental to, the
business of banking.

(a) Purpose. This section identifies the criteria that the Office
of the Comptroller of the Currency (OCC) uses to determine whether an
activity is authorized as part of, or incidental to, the business of
banking under 12 U.S.C. 24(Seventh) or other statutory authority.
(b) Restrictions and conditions on activities. The OCC may
determine that activities are permissible under 12 U.S.C. 24(Seventh)
or other statutory authority only if they are subject to standards or
conditions designed to provide that the activities function as intended
and are conducted safely and soundly, in accordance with other
applicable statutes, regulations, or supervisory policies.

[[Page 40820]]

(c) Activities that are part of the business of banking.
(1) An activity is permissible for national banks as part of the
business of banking if the activity is authorized under 12 U.S.C.
24(Seventh) or other statutory authority. In determining whether an
activity that is not specifically included in 12 U.S.C. 24(Seventh) or
other statutory authority is part of the business of banking, the OCC
considers the following factors:
(i) Whether the activity is the functional equivalent to, or a
logical outgrowth of, a recognized banking activity;
(ii) Whether the activity strengthens the bank by benefiting its
customers or its business;
(iii) Whether the activity involves risks similar in nature to
those already assumed by banks; and
(iv) Whether the activity is authorized for State-chartered banks.
(2) The weight accorded each factor set out in paragraph (c)(1) of
this section depends on the facts and circumstances of each case.
(d) Activities that are incidental to the business of banking.
(1) An activity is authorized for a national bank as incidental to
the business of banking if it is convenient or useful to an activity
that is specifically authorized for national banks or to an activity
that is otherwise part of the business of banking. In determining
whether an activity is convenient or useful to such activities, the OCC
considers the following factors:
(i) Whether the activity facilitates the production or delivery of
a bank's products or services, enhances the bank's ability to sell or
market its products or services, or improves the effectiveness or
efficiency of the bank's operations, in light of risks presented,
innovations, strategies, techniques and new technologies for producing
and delivering financial products and services; and
(ii) Whether the activity enables the bank to use capacity acquired
for its banking operations or otherwise avoid economic loss or waste.
(2) The weight accorded each factor set out in paragraph (d)(1) of
this section depends on the facts and circumstances of each case.
0
4. Amend Sec. 7.1002 by:
0
a. Revising the heading in paragraph (a);
0
b. In paragraph (b)(6), removing the word ``and'';
0
c. In paragraph (b)(7)(ii), removing the period after ``specific
transaction'' and adding in its place ``; and''; and
d. Adding paragraph (b)(8).
The revision and addition reads as follows:

Sec. 7.1002 National bank acting as finder.

(a) In general. * * *
* * * * *
(b) * * *
(8) Acting as an electronic finder pursuant to Sec. 7.5002(a)(1).
* * * * *
0
5. Amend Sec. 7.1003 by:
0
a. Revising the section heading;
0
b. Revising the paragraph heading in paragraph (a); and
0
c. Adding paragraph (c).
The revisions and addition read as follows:

Sec. 7.1003 Money lent at banking offices or at facilities other than
banking offices.

(a) In general. * * *
* * * * *
(c) Services on equivalent terms to those offered customers of
unrelated banks. An operating subsidiary owned by a national bank may
distribute loan proceeds from its own funds or bank funds directly to
the borrower in person at offices the operating subsidiary has
established without violating 12 U.S.C. 36, 12 U.S.C. 81 and 12 CFR
5.30, provided that the operating subsidiary provides similar services
on substantially similar terms and conditions to customers of
unaffiliated entities including unaffiliated banks.
0
6. Revise 7.1004 to read as follows:

Sec. 7.1004 Establishment of a loan production office by a national
bank.

(a) In general. A national bank or its operating subsidiary may
engage in loan production activities at a site other than the main
office or a branch of the bank. A national bank or its operating
subsidiary may solicit loan customers, market loan products, assist
persons in completing application forms and related documents to obtain
a loan, originate and approve loans, make credit decisions regarding a
loan application, and offer other lending-related services such as loan
information and applications at a loan production office without
violating 12 U.S.C. 36 and 12 U.S.C. 81, provided that ``money'' is not
deemed to be ``lent'' at that site within the meaning of Sec. 7.1003
and the site does not accept deposits or pay withdrawals.
(b) Services of other persons. A national bank may use the services
of, and compensate, persons not employed by the bank in its loan
production activities.

Sec. 7.1005 [Removed and Reserved]

0
7. Remove and reserve Sec. 7.1005.

Sec. 7.1006 [Amended]

0
8. Amend Sec. 7.1006 by:
0
a. Revising the section heading by removing the words ``national
bank'';
0
b. Adding the words ``or Federal savings association'' after the words
``national bank'' wherever it appears in the first and second
sentences; and
0
c. Adding the words ``or savings association'' after the words
``provided that the bank'' in the second sentence.

Sec. 7.1009 [Removed and Reserved]

0
9. Remove and reserve Sec. 7.1009.
0
10. Revise Sec. 7.1010 to read as follows:

Sec. 7.1010 Postal services by national banks and Federal savings
associations.

(a) In general. A national bank or Federal savings association may
provide postal services and receive income from those services. The
services performed are those permitted under applicable rules of the
United States Postal Service. These may include meter stamping of
letters and packages and the sale of related insurance. The national
bank or Federal savings association may advertise, develop, and extend
the services to attract customers to the institution.
(b) Postal regulations. A national bank or Federal savings
association providing postal services must do so in accordance with the
rules and regulations of the United States Postal Service. The national
bank or Federal savings association must keep the books and records of
the postal services separate from those of other banking operations.
Under 39 U.S.C. 404 and any regulations issued under that statute, the
United States Postal Service may inspect the books and records
pertaining to the postal services.

Sec. 7.1012 [Amended]

0
11. Amend Sec. 7.1012 by:
0
a. In paragraph (c)(1), removing the words ``pick up from, and
deliver'' and adding in its place the words ``pick up from and
deliver''; and
0
b. In paragraph (c)(2)(vi), removing the words ``back office'' and
adding in its place the words ``back-office''.
0
12. Revise Sec. 7.1015 to read as follows:

Sec. 7.1015 National bank and Federal savings association investments
in small business investment companies.

(a) National banks. A national bank may invest in a small business
investment company (SBIC) or in any entity established solely to invest
in SBICs, including purchasing the stock of a SBIC, subject to
appropriate capital limitations (see e.g., 15 U.S.C. 682(b)), and may
receive the benefits of such stock ownership (e.g., stock dividends).
The receipt and retention of a dividend by a national bank from a SBIC
in the form of stock of a corporate borrower of the SBIC is not a
purchase of stock

[[Page 40821]]

within the meaning of 12 U.S.C. 24(Seventh).
(b) Federal savings associations. Federal savings associations may
invest in a SBIC or in any entity established solely to invest in SBICs
as provided in 12 CFR 160.30.
(c) Qualifying SBIC. A national bank or Federal savings association
may invest in a SBIC that is either (1) already organized and has
obtained a license from the Small Business Administration, or (2) in
the process of being organized.
0
13. Amend Sec. 7.1016 by:
0
a. Revising the section heading;
0
b. Revising paragraph (a);
0
c. In paragraph (b)(1) introductory text, removing the word ``banks''
wherever it appears and adding in its place the words ``national banks
and Federal savings associations'';
0
d. Revising paragraph (b)(1)(iv);
0
e. In paragraph (b)(2)(ii), removing the word ``bank's'' and adding in
its place the words ``national bank's or Federal savings
association's'';
0
f. In paragraphs (b)(1)(iii)(B), (1)(iii)(C), (2)(i), (2)(iii), (3),
and (4), removing the word ``bank'' and adding in its place the words
``national bank or Federal savings association'';
0
g. In paragraphs (b)(1)(iii)(B), (2)(iii) and (4), adding the words
``or savings association's'' after the word ``bank's''; and
0
h. In paragraph(b)(2)(i), adding the words ``or savings association''
after the word ``bank'' wherever it appears.
The revisions read as follows:

Sec. 7.1016 Independent undertakings issued by a national bank or
Federal savings association to pay against documents.

(a) In general. A national bank or Federal savings association may
issue and commit to issue letters of credit and other independent
undertakings within the scope of applicable laws or rules of practice
recognized by law.\1\ Under such independent undertakings, the national
bank's or Federal savings association's obligation to honor depends
upon the presentation of specified documents and not upon
nondocumentary conditions or resolution of questions of fact or law at
issue between the applicant and the beneficiary. A national bank or
Federal savings association may also confirm or otherwise undertake to
honor or purchase specified documents upon their presentation under
another person's independent undertaking within the scope of such laws
or rules. As used in this section, the term national bank includes
Federal branches and agencies of a foreign bank.
---------------------------------------------------------------------------

\1\ Examples of such laws or rules of practice include: The
applicable version of Article 5 of the Uniform Commercial Code (UCC)
(1962, as amended 1990) or revised Article 5 of the UCC (as amended
1995); the Uniform Customs and Practice for Documentary Credits
(International Chamber of Commerce (ICC) Publication No. 600 or any
applicable prior version); the Supplements to UCP 500 & 600 for
Electronic Presentation (eUCP v. 1.0, 1.1, & 2.0) (Supplements to
the Uniform Customs and Practices for Documentary Credits for
Electronic Presentation); International Standby Practices (ISP98)
(ICC Publication No. 590); the United Nations Convention on
Independent Guarantees and Stand-by Letters of Credit (adopted by
the U.N. General Assembly in 1995 and signed by the U.S. in 1997);
and the Uniform Rules for Bank-to-Bank Reimbursements Under
Documentary Credits (ICC Publication No. 725).
---------------------------------------------------------------------------

(b) * * * (1) * * *
* * * * *
(iv) The national bank or Federal savings association either should
be fully collateralized or have a post-honor right of reimbursement
from the applicant or from another issuer of an independent
undertaking. Alternatively, if the national bank's or Federal savings
association's undertaking is to purchase documents of title,
securities, or other valuable documents, the bank or savings
association should obtain a first priority right to realize on the
documents if the bank or savings association is not otherwise to be
reimbursed.
* * * * *
0
14. Revise Sec. 7.1021 to read as follows:

Sec. 7.1021 Financial literacy programs not branches of national
banks

A financial literacy program is a program the principal purpose of
which is to be educational for members of the community. The premises
of, or a facility used by, a school or other organization at which a
national bank participates in a financial literacy program is not a
branch for purposes of 12 U.S.C. 36 provided the bank does not
establish and operate the premises or facility. The OCC considers
establishment and operation in this context on a case by case basis,
considering the facts and circumstances. However, the premises or
facility is not a branch of the national bank if the safe harbor test
in 12 CFR 7.1012(c)(2) applicable to messenger services established by
third parties is satisfied. The factor discussed in Sec.
7.1012(c)(2)(i) can be met if bank employee participation in the
financial literacy program consists of managing the program or
conducting or engaging in financial education activities provided the
school or other organization retains control over the program and over
the premises or facilities at which the program is held.

Sec. 7.1022 [Amended]

0
15. Amend Sec. 7.1022 by:
0
a. In paragraph (d), removing the word ``shall'' and adding in its
place the word ``may'' wherever it appears; and
0
b. In paragraph (e), removing the word ``shall'' and adding in its
place the word ``must'' and removing the words ``the effective date of
this regulation'' and adding in its place the words ``April 1, 2018''.

Sec. 7.1023 [Amended]

0
16. Amend Sec. 7.1023 by:
0
a. In paragraph (c), removing the word ``shall'' and adding in its
place the word ``may'' and removing the words ``federal savings
association'' and adding in its place the words ``Federal savings
association''; and
0
b. In paragraph (d):
0
i. Removing the word ``shall'' and adding in its place the word
``must'';
0
ii. Removing the words ``the effective date of this regulation'' and
adding in its place the words ``April 1, 2018''; and
0
iii. Removing the words ``federal savings association'' and adding in
its place the words ``Federal savings association''.

Sec. 7.1024 [Amended]

0
17. Amend redesignated Sec. 7.1024 by:
0
a. In paragraphs (c)(2)(i) and(ii), and (d), removing the word
``shall'' and adding in its place the word ``must'' wherever it
appears; and
0
b. In paragraph (e), removing the word ``shall'' and adding in its
place the word ``may''.
0
18. Add Sec. 7.1025 to read as follows:

Sec. 7.1025 Tax equity finance transactions.

(a) Tax equity finance transactions. A national bank or Federal
savings association may engage in a tax equity finance transaction
pursuant to 12 U.S.C. 24(Seventh) and 1464 only if the transaction is
the functional equivalent of a loan, as provided in paragraph (c) of
this section, and the transaction satisfies applicable conditions in
paragraph (d) of this section.
(b) Definitions. For purposes of this section:
(1) Tax equity finance transaction means a transaction in which a
national bank or Federal savings association provides equity financing
to fund a project that generates tax credits and other tax benefits and
the use of an equity-based structure allows the transfer of those
credits and other tax benefits to the national bank or Federal savings
association.
(2) Capital and surplus has the same meaning that this term has in
12 CFR 32.2.
(c) Functional equivalent of a loan. A tax equity finance
transaction is the functional equivalent of a loan if:

[[Page 40822]]

(1) The structure of the transaction is necessary for making the
tax credits and other tax benefits available to the national bank or
Federal savings association;
(2) The transaction is of limited tenure and is not indefinite,
such as a limited investment interest required by law to obtain
continuing tax benefits;
(3) The tax benefits and other payments received by the national
bank or Federal savings association from the transaction repay the
investment and provide the implied rate of return;
(4) Consistent with paragraph (c)(3) of this section, the national
bank or Federal savings association does not rely on appreciation of
value in the project or property rights underlying the project for
repayment;
(5) The national bank or Federal savings association uses
underwriting and credit approval criteria and standards that are
substantially equivalent to the underwriting and credit approval
criteria and standards used for a traditional commercial loan;
(6) The national bank or Federal savings association is a passive
investor in the transaction and is unable to direct the affairs of the
project company; and
(7) The national bank or Federal savings association appropriately
accounts for the transaction initially and on an ongoing basis and has
documented contemporaneously its accounting assessment and conclusion.
(d) Conditions on tax equity finance transactions. A national bank
or Federal savings association may engage in tax equity finance
transactions only if:
(1) The national bank or Federal savings association cannot control
the sale of energy, if any, from the project;
(2) The national bank or Federal savings association limits the
total dollar amount of tax equity finance transactions undertaken
pursuant to this section to no more than five percent of its capital
and surplus, unless the OCC determines, by written approval of a
written request by the national bank or Federal savings association to
exceed the five percent limit, that a higher aggregate limit will not
pose an unreasonable risk to the national bank or Federal savings
association and that the tax equity finance transactions in the
national bank's or Federal savings association's portfolio will not be
conducted in an unsafe or unsound manner; provided, however, that in no
case may a national bank or Federal savings association's total dollar
amount of tax equity finance transactions undertaken pursuant to this
section exceed 15 percent of its capital and surplus;
(3) The national bank or Federal savings association has provided
written notification to the OCC prior to engaging in each tax equity
finance transaction that includes its evaluation of the risks posed by
the transaction; and
(4) The national bank or Federal savings association can identify,
measure, monitor, and control the associated risks of its tax equity
finance transaction activities individually and as a whole on an
ongoing basis to ensure that such activities are conducted in a safe
and sound manner.
(e) Applicable legal requirements. The transaction is subject to
the substantive legal requirements of a loan, including the lending
limits prescribed by 12 U.S.C. 84 and 12 U.S.C. 1464(u), as
appropriate, as implemented by 12 CFR 32, and if the active investor or
project sponsor of the transaction is an affiliate of the bank, to the
restrictions on transactions with affiliates prescribed by 12 U.S.C.
371c and 371c-1, as implemented by 12 CFR 223.
0
19. Add Sec. 7.1026 to read as follows:

Sec. 7.1026 Payment systems memberships.

(a) In general. National banks and Federal savings associations may
become members of payment systems, subject to the requirements of this
section.
(b) Definitions. As used in this section:
(1) Appropriate OCC supervisory office means the OCC office that is
responsible for the supervision of a national bank or Federal savings
association, as described in subpart A of 12 CFR part 4;
(2) Member includes a national bank or Federal savings association
designated as a ``member,'' or ``participant,'' or other similar role
by a payment system, including by a payment system that requires the
national bank or Federal savings association to share in operational
losses or maintain a reserve with the payment system to offset
potential liability for operational losses;
(3) Open-ended liability refers to liability for operational losses
that is not capped under the rules of the payment system and includes
indemnifications provided to third parties as a condition of membership
in the payment system;
(4) Operational loss means a charge resulting from sources other
than defaults by other members of the payment system; and
(5) Payment system means ``financial market utility'' as defined in
12 U.S.C. 5462(6), wherever operating, and includes both retail and
wholesale payment systems. Payment system does not include a
derivatives clearing organization registered under the Commodity
Exchange Act, a clearing agency registered under the Securities
Exchange Act of 1934, or foreign organization that would be considered
a derivatives clearing organization or clearing agency were it
operating in the United States.
(c) Notice requirements.
(1) Prior notice required. A national bank or Federal savings
association must provide written notice to its appropriate OCC
supervisory office at least 30 days prior to joining a payment system
that exposes it to open-ended liability.
(2) After-the-fact notice. A national bank or Federal savings
association must provide written notice to its appropriate OCC
supervisory office within 30 days of joining a payment system that does
not expose it to open-ended liability.
(d) Content of notice.
(1) In general. A notice required by paragraph (c) of this section
must include representations that the national bank or Federal savings
association:
(i) Has complied with the safety and soundness review requirements
in paragraph (e)(1) of this section; and
(ii) Will comply with the safety and soundness review and
notification requirements in paragraphs (e)(2) and (3) of this section.
(2) Payment system limits on liability or no liability. A notice
filed under paragraph (c)(2) of this section also must include a
representation that either:
(i) The rules of the payment system do not impose liability for
operational losses on members; or
(ii) The national bank's or Federal savings association's liability
for operational losses is limited by the rules of the payment system to
specific and appropriate limits that do not exceed the lower of:
(A) the legal lending limit under 12 CFR 32; or
(B) the limit set for the bank or savings association by the OCC.
(e) Safety and soundness procedures.
(1) Prior to joining a payment system, a national bank or Federal
savings association must:
(i) Identify and evaluate the risks posed by membership in the
payment system, taking into account whether the liability of the bank
or savings association is limited; and
(ii) Ensure that it can measure, monitor, and control the risks
identified pursuant to paragraph (e)(1)(i) of this section.
(2) After joining a payment system, a national bank or Federal
savings association must manage the risks of the payment system on an
ongoing basis. This ongoing risk management must:

[[Page 40823]]

(i) Identify and evaluate the risks posed by membership in the
payment system, taking into account whether the liability of the bank
or savings association is limited; and
(ii) Measure, monitor, and control the risks identified pursuant to
paragraph (e)(2)(i) of this section.
(3) If the national bank or Federal savings association identifies
risks during the ongoing risk management required by paragraph (e)(2)
of this section that raise safety and soundness concerns, such as a
material change to the bank's liability or indemnification
responsibilities, the national bank or Federal savings association
must:
(i) Notify the appropriate OCC supervisory office as soon as the
safety and soundness concern is identified; and
(ii) Take appropriate actions to remediate the risk.
(4) A national bank or Federal savings association that believes
its open-ended liability is otherwise limited (e.g., by negotiated
agreements or laws of an appropriate jurisdiction) may consider its
liability to be limited for purposes of the reviews required by
paragraphs (e)(1) and (2) of this section so long as:
(i) Prior to joining the payment system, the bank or savings
association obtains an independent legal opinion that:
(A) Describes how the payment system allocates liability for
operational losses; and
(B) Concludes the potential liability for operational losses for
the national bank or Federal savings association is in fact limited to
specific and appropriate limits that do not exceed the lower of:
(1) The legal lending limit under 12 CFR 32; or
(2) The limit set for the bank or savings association by the OCC;
and
(ii) There are no material changes to the liability or
indemnification requirements of the bank or savings association since
the issuance of the independent legal opinion.
0
20. Add Sec. 7.1027 to read as follows:

Sec. 7.1027 Establishment and operation of a remote service unit by a
national bank.

A remote service unit (RSU) is an automated or unstaffed facility,
operated by a customer of a bank with at most delimited assistance from
bank personnel, that conducts banking functions such as receiving
deposits, paying withdrawals, or lending money. A national bank may
establish and operate an RSU pursuant to 12 U.S.C. 24(Seventh). An RSU
includes an automated teller machine, automated loan machine, automated
device for receiving deposits, personal computer, telephone, other
similar electronic devices, and drop boxes. An RSU may be equipped with
a telephone or tele-video device that allows contact with bank
personnel. An RSU is not a ``branch'' within the meaning of 12 U.S.C.
36(j), and is not subject to State geographic or operational
restrictions or licensing laws.
0
21. Add Sec. 7.1028 to read as follows:

Sec. 7.1028 Establishment and operation of a deposit production
office by a national bank.

(a) In general. A national bank or its operating subsidiary may
engage in deposit production activities at a site other than the main
office or a branch of the bank. A national bank or its operating
subsidiary may solicit deposits, provide information about deposit
products, and assist persons in completing application forms and
related documents to open a deposit account at a deposit production
office (DPO). A DPO is not a branch within the meaning of 12 U.S.C.
36(j) and 12 CFR 5.30(d)(1) so long as it does not receive deposits,
pay withdrawals, or make loans. All deposit and withdrawal transactions
of a bank customer using a DPO must be performed by the customer,
either in person at the main office or a branch office of the bank, or
by mail, electronic transfer, or a similar method of transfer.
(b) Services of other persons. A national bank may use the services
of, and compensate, persons not employed by the bank in its deposit
production activities.
0
22. Add Sec. 7.1029 to read as follows:

Sec. 7.1029 Combination of national bank loan production office,
deposit production office, and remote service unit.

A location at which a national bank operates a loan production
office (LPO), a deposit production office (DPO), and a remote service
unit (RSU) is not a ``branch'' within the meaning of 12 U.S.C. 36(j) by
virtue of that combination. Since an LPO, DPO, or RSU is not,
individually, a branch under 12 U.S.C. 36(j), any combination of these
facilities at one location does not create a branch. The RSU at such a
combined location must be primarily operated by the customer with at
most delimited assistance from bank personnel.
0
23. Add Sec. 7.1030 to read as follows:

Sec. 7.1030 Permissible derivatives activities for national banks.

(a) Authority. This section is issued pursuant to 12 U.S.C. 24
(Seventh). A national bank may only engage in derivatives transactions
in accordance with the requirements of this section.
(b) Definitions. For purposes of this section:
(1) Customer-driven means a transaction is entered into for a
customer's valid and independent business purpose (and a customer-
driven transaction does not include a transaction the principal purpose
of which is to deliver to a national bank assets that the national bank
could not invest in directly);
(2) Perfectly-matched means two back-to back derivatives
transactions that offset risk with respect to all economic terms (e.g.,
amount, maturity, duration, and underlying);
(3) Portfolio-hedged means a portfolio of derivatives transactions
that are hedged based on net unmatched positions or exposures in the
portfolio;
(4) Physical hedging or physically-hedged means holding title to or
acquiring ownership of an asset (for example, by warehouse receipt or
book-entry) solely to manage the risks arising out of permissible
customer-driven derivatives transactions;
(5) Physical settlement or physically-settled means accepting title
to or acquiring ownership of an asset;
(6) Transitory title transfer means accepting and immediately
relinquishing title to an asset; and
(7) Underlying means the reference asset, rate, obligation, or
index on which the payment obligation(s) between counterparties to a
derivative transaction is based.
(c) In general. A national bank may engage in the following
derivatives transactions after notice in accordance with paragraph (d)
of this section, as applicable:
(1) Derivatives transactions with payments based on underlyings a
national bank is permitted to purchase directly as an investment;
(2) Derivatives transactions with any underlying to hedge the risks
arising from bank-permissible activities;
(3) Derivatives transactions as a financial intermediary with any
underlying that are customer-driven, cash-settled, and either
perfectly-matched or portfolio-hedged;
(4) Derivatives transactions as a financial intermediary with any
underlying that are customer-driven, physically-settled by transitory
title transfer, and either perfectly-matched or portfolio-hedged; and
(5) Derivatives transactions as a financial intermediary with any
underlying that are customer-driven, physically-settled (other than by
transitory title transfer), physically-hedged, and either perfectly-
matched or portfolio-hedged, and provided that (i) the national bank
does not take physical

[[Page 40824]]

delivery of any commodity by receipt of physical quantities of the
commodity on bank premises and (ii) physical hedging activities meet
the requirements of paragraph (e) of this section.
(d) Notice procedure. (1) A national bank must provide notice to
its Examiner-in-Charge prior to engaging in any of the following with
respect to derivatives transactions with payments based on underlyings
that a national bank is not permitted to purchase directly as an
investment:
(i) Engaging in derivatives hedging activities pursuant to
paragraph (c)(2) of this section;
(ii) Expanding the bank's derivatives hedging activities pursuant
to paragraph (c)(2) of this section to include a new category of
underlying for derivatives transactions;
(iii) Engaging in customer-driven financial intermediation
derivatives activities pursuant to paragraphs (c)(3), (4) or (5) of
this section; and
(iv) Expanding the bank's customer-driven financial intermediation
derivatives activities pursuant to paragraphs (c)(3), (4) or (5) of
this section to include any new category of underlyings.
(2) The notice pursuant to paragraph (d)(1) of this section must be
submitted in writing at least 30 days before the national bank
commences the activity and include the following information:
(i) A detailed description of the proposed activity, including the
relevant underlyings;
(ii) The anticipated start date of the activity; and
(iii) A detailed description of the bank's risk management system
(policies, processes, personnel, and control systems) for identifying,
measuring, monitoring, and controlling the risks of the activity.
(e) Additional requirements for physical hedging activities. (1) A
national bank engaging in physical hedging activities pursuant to
paragraph (c)(5) of this section must hold the underlying solely to
hedge risks arising from derivatives transactions originated by
customers for the customers' valid and independent business purposes.
(2) The physical hedging activities must offer a cost-effective
means to hedge risks arising from permissible banking activities.
(3) The national bank must not take anticipatory or maintain
residual positions in the underlying except as necessary for the
orderly establishment or unwinding of a hedging position.
(4) The national bank must not acquire equity securities for
hedging purposes that constitute more than 5 percent of a class of
voting securities of any issuer.
(5) With respect to physical hedging involving commodities:
(i) A national bank's physical position in a particular physical
commodity (including, as applicable, delivery point, purity, grade,
chemical composition, weight, and size) must not be more that 5 percent
of the gross notional value of the bank's derivatives that are in that
particular physical commodity and allow for physical settlement within
30 days. Title to commodities acquired and immediately sold by a
transitory title transfer does not count against the 5 percent limit;
and
(ii) The physical position must more effectively reduce risk than a
cash-settled hedge referencing the same commodity.
0
24. Amend Sec. 7.2000 by:
0
a. Revising the section heading;
0
b. Revising paragraph (a);
0
c. In paragraph (b):
0
i. Removing the word ``procedures'' wherever it appears and adding in
its place the word ``provisions'';
0
ii. Removing the words ``the state in which the main office of the
bank'' and adding in its place the words ``any State in which the main
office or any branch of the bank'';
0
iii. Removing the words ``the state in which the holding company of the
bank'' and adding in its place the words ``the State in which a holding
company of the bank''; and
0
iv. Removing the word ``shall'' and adding in its place the word
``must'';
0
d. Redesignating paragraph (c) as paragraph (d) and revising it; and
0
e. Adding a new paragraph (c).
The addition and revisions are set forth below.

Sec. 7.2000 Corporate governance.

(a) In general. The corporate governance provisions in a national
bank's articles of association and bylaws and the bank's conduct of its
corporate governance affairs must comply with applicable Federal
banking statutes and regulations and safe and sound banking practices.
* * * * *
(c) Continued use of former holding company State. A national bank
that has elected to follow the corporate governance provisions of the
law of the State in which its holding company is incorporated may
continue to use those provisions even if the bank is no longer
controlled by that holding company.
(d) Request for OCC staff position. A national bank may request the
views of OCC staff on the permissibility of a national bank's adoption
of a particular State corporate governance provision. Requests must
include the following information:
(1) The name of the national bank;
(2) Citation to the State statutes or regulations involved;
(3) A discussion as to whether a similarly situated State bank is
subject to or may adopt the corporate governance provision;
(4) Identification of all Federal banking statutes or regulations
that are on the same subject as, or otherwise have a bearing on, the
subject of the proposed State corporate governance provision; and
(5) An analysis of how the proposed practice is not inconsistent
with applicable Federal statutes or regulations and is not inconsistent
with bank safety and soundness.
0
25. Add Sec. 7.2001 to read as follows:

Sec. 7.2001 National bank adoption of anti-takeover provisions.

(a) In general. Pursuant to 12 CFR 7.2000(b), a national bank may
adopt anti-takeover provisions included in State corporate governance
law if the provisions are not inconsistent with Federal banking
statutes or regulations and not inconsistent with bank safety and
soundness.
(b) State anti-takeover provisions that are not inconsistent with
Federal banking statutes or regulations. State anti-takeover provisions
that are not inconsistent with Federal banking statues or regulations
include the following:
(1) Restriction on business combinations with interested
shareholders. State provisions that prohibit, or that permit the
corporation to prohibit in its certificate of incorporation or other
governing document, the corporation from engaging in a business
combination with an interested shareholder or any related entity for a
specified period of time from the date on which the shareholder first
becomes an interested shareholder, subject to certain exceptions such
as board approval. An interested shareholder is one that owns an amount
of stock specified in the State provision.
(2) Poison pill. State provisions that provide, or that permit the
corporation to provide in its certificate of incorporation or other
governing document, that all the shareholders, other than the hostile
acquiror, have the right to purchase additional stock at a substantial
discount upon the occurrence of a triggering event.
(3) Requiring all shareholder action to be taken at a meeting.
State provisions that provide, or that permit the corporation to
provide in its certificate

[[Page 40825]]

of incorporation or other governing document, that all actions to be
taken by shareholders must occur at a meeting and that shareholders may
not take action by written consent.
(4) Limits on shareholders' authority to call special meetings.
State provisions that provide, or that permit the corporation to
provide in its certificate of incorporation or other governing
document, that:
(i) Only the board of directors, and not the shareholders, have the
right to call special meetings of the shareholders; or
(ii) If shareholders have the right to call special meetings, a
high percentage of shareholders is needed to call the meeting.
(5) Shareholder removal of a director only for cause. State
provisions that provide, or that permit the corporation to provide in
its certificate of incorporation or other governing document, that
shareholders may remove a director only for cause, and not both for
cause and without cause.
(c) State anti-takeover provisions that are inconsistent with
Federal banking statutes or regulations. The following State anti-
takeover provisions are inconsistent with Federal banking statutes or
regulations:
(1) Supermajority voting requirements. State provisions that
require, or that permit the corporation to require in its certificate
of incorporation or other governing document, a supermajority of the
shareholders to approve specified matters are inconsistent when applied
to matters for which Federal banking statutes or regulations specify
the required level of shareholder approval.
(2) Restrictions on a shareholder's right to vote all the shares it
owns. State provisions that prohibit, or that permit the corporation in
its certificate of incorporation or other governing document to
prohibit, a person from voting shares acquired that increase their
percentage of ownership of the company's stock above a certain level
are inconsistent when applied to shareholder votes governed by 12
U.S.C. 61.
(d) Bank safety and soundness. (1) In general. Except as provided
in paragraph (d)(2) of this section, any State corporate governance
provision, including anti-takeover provisions, that would render more
difficult or discourage an injection of capital by purchase of bank
stock, a merger, the acquisition of the bank, a tender offer, a proxy
contest, the assumption of control by a holder of a large block of the
bank's stock, or the removal of the incumbent board of directors or
management is inconsistent with bank safety and soundness if:
(i) The bank is less than adequately capitalized (as defined in 12
CFR part 6);
(ii) The bank is in troubled condition (as defined in 12 CFR
5.51(c)(7));
(iii) Grounds for the appointment of a receiver under 12 U.S.C. 191
are present; or
(iv) The bank is otherwise in less than satisfactory condition, as
determined by the OCC.
(2) Exception. Anti-takeover provisions are not inconsistent with
bank safety and soundness if, at the time the bank adopts the
provisions:
(i) The bank is not subject to any of the conditions in paragraph
(d)(1) of this section; and
(ii) The bank includes, in its articles of association or its
bylaws, as applicable pursuant to paragraph (f) of this section, a
limitation that would make the provisions ineffective if:
(A) The conditions in paragraph (d)(1) of this section exist; or
(B) The OCC otherwise directs the bank not to follow the provision
for supervisory reasons.
(e) Case-by-case review. (1) OCC Determination. Based on the
substance of the provision or the individual circumstances of a
national bank, the OCC may determine that a State anti-takeover
provision, as proposed or adopted by a bank, is:
(i) Inconsistent with Federal banking statutes or regulations,
notwithstanding paragraph (b) of this section; or
(ii) Inconsistent with bank safety and soundness other than as
provided in paragraph (d) of this section.
(2) Review. The OCC may initiate a review, or a bank may request
OCC review pursuant to 12 CFR 7.2000(d), of a State anti-takeover
provision.
(f) Method of adoption for anti-takeover provisions. (1) Board and
shareholder approval. A national bank must follow the provisions for
approval by the board of directors and approval of shareholders for the
adoption of an anti-takeover provision in the State corporate
governance law it has elected to follow. However, if the provision is
included in the bank's articles of association, the bank's shareholders
must approve the amendment of the articles pursuant to 12 U.S.C. 21a,
even if the State law does not require approval by the shareholders.
(2) Documentation. If the State corporate governance law requires
the anti-takeover provision to be in the company's articles of
incorporation, certificate of incorporation, or similar document, the
national bank must include the provision in its articles of
association. If the State corporate governance law does not require the
provision to be in the company's articles of incorporation, certificate
of incorporation, or similar document, but allows it to be in the
bylaws, then the national bank must include the provision in either its
articles of association or in its bylaws, provided, however, that if
the State corporate governance law requires shareholder approval for
changes to the corporation's bylaws, then the national bank must
include the provision in its articles of association.

Sec. 7.2002 [Amended]

0
26. Amend Sec. 7.2002 by adding the words ``for shareholder voting''
after the word ``proxy'' wherever it appears.
0
27. Amend Sec. 7.2005 by:
0
a. Revising the heading in paragraph (a); and
0
b. Removing in paragraph (c)(3)(ii), the word ``shall'' and adding in
its place the word ``must''.
The revision reads as follows:

Sec. 7.2005 Ownership of stock necessary to qualify as director.

(a) In general. * * *
* * * * *

Sec. 7.2006 [Amended]

0
28. Amend Sec. 7.2006 in the first sentence by removing the word
``shall'' and adding in its place the word ``must''.

Sec. 7.2008 [Amended]

0
29. Amend Sec. 7.2008 by:
0
a. In paragraph (a), removing the word ``state'' and adding in its
place the word ``State''; and
0
b. In paragraph (b), removing the word ``shall'' and adding in its
place the word ``must'' wherever it appears.

Sec. 7.2009 [Amended]

0
30. Amend Sec. 7.2009 by removing the word ``shall'' and adding in its
place the word ``must''.

Sec. 7.2010 [Amended]

0
31. Amend Sec. 7.2010 in the first sentence by removing the word
``shall'' and adding in its place the word ``must''.
0
32. Revise Sec. 7.2012 to read as follows:

Sec. 7.2012 President as director.

Pursuant to 12 U.S.C. 76, the person serving as, or in the function
of, president of a national bank, regardless of title, must be a member
of the board of directors. A director other than the person serving as,
or in the function of, president may be elected chairman of the board.
0
33. Revise Sec. 7.2014 to read as follows:

[[Page 40826]]

Sec. 7.2014 Indemnification of institution-affiliated parties.

(a) Indemnification under State law. Subject to the limitations of
paragraph (b) of this section, a national bank or Federal savings
association may indemnify an institution-affiliated party for damages
and expenses, including the advancement of expenses and legal fees, in
accordance with the law of the State the bank or savings association
has designated for its corporate governance pursuant to Sec. 7.2000(b)
(for national banks), 12 CFR 5.21(j)(3)(iii) (for Federal mutual
savings associations), or 12 CFR 5.22(j)(2)(iii) (for Federal Stock
savings associations), provided such payments are consistent with safe
and sound banking practices. The term ``institution-affiliated party''
has the same meaning as set forth at 12 U.S.C. 1813(u).
(b) Administrative proceedings or civil actions initiated by
Federal banking agencies. With respect to an administrative proceeding
or civil action initiated by any Federal banking agency, a national
bank or Federal savings association may only make or agree to make
indemnification payments to an institution-affiliated party that are
reasonable and consistent with the requirements of 12 U.S.C. 1828(k)
and the implementing regulations thereunder.
(c) Written agreement required for advancement. Before advancing
funds to an institutional-affiliated party under this section, a
national bank or Federal savings association must obtain a written
agreement that the institution-affiliated party will reimburse the bank
or savings association, as appropriate, for any portion of that
indemnification that the institution-affiliated party is ultimately
found not to be entitled to under 12 U.S.C. 1828(k) and the
implementing regulations thereunder, except to the extent that the
bank's or savings association's expenses have been reimbursed by an
insurance policy or fidelity bond.
(d) Insurance premiums. A national bank or Federal savings
association may provide for the payment of reasonable premiums for
insurance covering the expenses, legal fees, and liability of
institution-affiliated parties to the extent that the expenses, fees,
or liability could be indemnified under this section.
0
34. Amend Sec. 7.2016 by:
0
a. Revising the section heading;
0
b. Redesignating paragraph (a) as paragraph (a)(1) and adding a
paragraph heading to paragraph (a);
0
c. Redesignating paragraph (b) as paragraph (a)(2); and
0
d. Adding a new paragraph (b).
The revision and additions read as follows:

Sec. 7.2016 Restricting transfer of stock and record dates; stock
certificates.

(a) Restricting transfer of stock and record dates.
(b) Bank stock certificates. (1) A national bank may prescribe the
manner in which its stock must be transferred in its bylaws or articles
of association. A bank issuing stock in certificated form must comply
with the requirements of 12 U.S.C. 52, including as to:
(i) The name and location of the bank;
(ii) The name of the holder of record of the stock represented
thereby;
(iii) The number and class of shares which the certificate
represents;
(iv) If the bank issues more than one class of stock, the
respective rights, preferences, privileges, voting rights, powers,
restrictions, limitations, and qualifications of each class of stock
issued (unless incorporated by reference to the articles of
association);
(v) Signatures of the president and cashier of the bank, or such
other officers as the bylaws of the bank provide; and
(vi) The seal of the bank.
(2) The requirements of paragraph (b)(1)(v) of this section may be
met through the use of electronic means or by facsimile.

Sec. Sec. 7.2017 through 7.2018 [Removed]

0
35. Remove Sec. Sec. 7.2017 through 7.2018.

Sec. 7.2020 [Removed]

0
36. Remove Sec. 7.2020.

Sec. 7.2022 [Amended]

0
37. Amend Sec. 7.2022 by removing the word ``state'' and adding in its
place the word ``State''.

Sec. 7.2024 [Amended]

0
38. Amend Sec. 7.2024 paragraphs (a) and (c) by removing the word
``shall'' and adding in its place the word ``must'' wherever it
appears.
0
39. Add Sec. 7.2025 to read as follows:

Sec. 7.2025 Capital stock-related activities of a national bank.

(a) In general. A national bank must obtain the necessary
shareholder approval required by 12 U.S.C. 51a, 57, or 59 for any
change in its permanent capital. An increase or decrease in the amount
of a national bank's common or preferred stock is a change in permanent
capital subject to the notice and approval requirements of 12 CFR 5.46
and applicable law. A national bank may obtain the required shareholder
approval of changes in permanent capital, as provided in paragraphs
(b), (c), and (d) of this section.
(b) Issuance of previously approved and authorized common stock. In
compliance with 12 U.S.C. 57, a national bank may issue common stock up
to an amount previously approved and authorized in the national bank's
articles of association by holders of two-thirds of the national bank's
shares without obtaining additional shareholder approval for each
subsequent issuance within the authorized amount.
(c) Issuance, Repurchase, and Redemption of Preferred Stock
Pursuant to Certain Procedures. Subject to the requirements of 12
U.S.C. 51a and 59, a national bank may adopt procedures to authorize
the board of directors to issue, determine the terms of, repurchase,
and redeem one or more series of preferred stock, if permitted by the
corporate governance provisions adopted by the bank under 12 CFR
7.2000. To satisfy the shareholder approval requirements of 12 U.S.C.
51a and 59, the adoption of such procedures must be approved by
shareholders in advance through an amendment to the national bank's
articles of association. Any amendment to a national bank's articles of
association that authorizes both the issuance and the repurchase and
redemption of shares must be approved by holders of two-thirds of the
national bank's shares.
(d) Share repurchase programs. Subject to the requirements of 12
U.S.C. 59, a national bank may establish a program for the repurchase,
from time to time, of the national bank's common or preferred stock, if
permitted by the corporate governance provisions adopted by the bank
under 12 CFR 7.2000. To satisfy the shareholder approval requirement of
12 U.S.C. 59, the repurchase program must be approved in advance by the
holders of two-thirds of the national bank's shares, including through
an amendment to the national bank's articles of association that
authorizes the board of directors to repurchase the national bank's
common or preferred stock from time to time under board-determined
parameters that can limit the frequency, type, aggregate limit, or
purchase price of repurchases.
(e) Preferred Stock Features. A national bank's preferred stock may
be cumulative or non-cumulative and may or may not have voting rights
on one or more series.
0
40. Revise the heading for subpart C of this part to read as follows:

Subpart C--National Bank and Federal Savings Association Operations

0
41. Revise Sec. 7.3000 to read as follows:

[[Page 40827]]

Sec. 7.3000 National bank and Federal savings association banking
hours and closings.

(a) Banking hours. The board of directors of a national bank or
Federal savings association, or an equivalent person or committee of a
Federal branch or agency, should review its hours of operations for
customers and, independently of any other bank, savings association, or
Federal branch or agency, take appropriate action to establish a
schedule of operating hours for customers.
(b) Emergency closings declared by the Comptroller. Pursuant to 12
U.S.C. 95(b)(1) and 1463(a)(1)(A), the Comptroller of the Currency
(Comptroller), may declare any day a legal holiday if emergency
conditions exist. That day is a legal holiday for national banks,
Federal savings associations, and Federal branches or agencies in the
affected geographic area (i.e., throughout the United States, in a
State, or in part of a State), and national banks, Federal savings
associations, and Federal branches and agencies may temporarily limit
or suspend operations at their affected offices, unless the Comptroller
by written order directs otherwise. Emergency conditions may be caused
by acts of nature or of man and may include natural and other
disasters, public health or safety emergencies, civil and municipal
emergencies, and cyber threats or other unauthorized intrusions (e.g.,
severe flooding, a pandemic, terrorism, a cyber-attack on bank systems,
or a power emergency declared by a local power company or government
requesting that businesses in the affected area close). The Comptroller
may issue a proclamation authorizing the emergency closing in
anticipation of the emergency condition, at the time of the emergency
condition, or soon thereafter. In the absence of a Comptroller
declaration of a bank holiday, a national bank, Federal savings
associations, or Federal branch or agency may choose to temporarily
close offices in response to an emergency condition. The national bank,
Federal savings associations, or Federal branch or agency should notify
the OCC of such temporary closure as soon as feasible.
(c) Emergency and ceremonial closings declared by a State or State
official. In the event a State or a legally authorized State official
declares any day to be a legal holiday for emergency or ceremonial
reasons in that State or part of the State, that same day is a legal
holiday for national banks, Federal savings associations, and Federal
branches or agencies or their offices in the affected geographic area.
National banks, Federal savings associations, and Federal branches or
agencies or their affected offices may close their affected offices or
remain open on such a State-designated holiday, unless the Comptroller
by written order directs otherwise.
(d) Liability. A national bank, Federal savings association, or
Federal branch or agency should assure that all liabilities or other
obligations under the applicable law due to its closing are satisfied.
(e) Definition. For the purpose of this subpart, the term ``State''
means any of the several States, the District of Columbia, the
Commonwealth of Puerto Rico, the Northern Mariana Islands, Guam, the
Virgin Islands, American Samoa, the Trust Territory of the Pacific
Islands, or any other territory or possession of the United States.

Sec. 7.3001 [Amended]

0
42. Amend Sec. 7.3001 by:
0
a. In paragraph (a)(1), removing the words ``Lease excess space'' and
adding in its place the words ``Consistent with Sec. 7.1024 of this
title, lease excess space'';
0
b. In paragraph (c) introductory text, removing the word ``shall'' and
adding in its place the word ``must''; and
0
c. In paragraph (c)(3), removing the word ``state'' and adding in its
place the word ``State''.

Sec. Sec. 7.4003 through 7.4005 [Removed]

0
43. Remove Sec. Sec. 7.4003 through 7.4005.

Sec. 7.4010 [Amended]

0
44. Amend the section heading for Sec. 7.4010 by removing the word
``state'' and adding in its place the word ``State''.

Sec. 7.5001 [Removed]

0
45. Remove Sec. 7.5001.

PART 145--FEDERAL SAVINGS ASSOCIATIONS--OPERATIONS

0
46. The authority citation for part 145 continues to read as follows:

Authority: 12 U.S.C. 1462a, 1463, 1464, 1828, 5412(b)(2)(B).

Sec. 145.121 [Removed]

0
47. Remove Sec. 145.121.

PART 160--LENDING AND INVESTMENT

0
48. The authority citation for part 160 continues to read as follows:

Authority: 12 U.S.C. 1462a, 1463, 1464, 1467a, 1701j-3, 1828,
3803, 3806, 5412(b)(2)(B); 42 U.S.C. 4106.

Sec. 160.50 [Removed]

0
49. Remove Sec. 160.50.

Sec. 160.120 [Removed]

0
50. Remove Sec. 160.120.

Brian P. Brooks,
Acting Comptroller of the Currency.
[FR Doc. 2020-12435 Filed 7-6-20; 8:45 am]
BILLING CODE 4810-33-P