Circular
Section 20 Subsidiaries of Bank Holding Companies
August 13, 1996
Circular No. 10865

Three Proposals to Modify Conditions for Underwriting/Dealing in Securities

Comments Due September 3 and September 30

To All Bank Holding Companies, and Others Concerned, in the Second Federal Reserve District:

Following is the text of a statement issued by the Board of Governors of the Federal Reserve System:

The Federal Reserve Board has requested comment on three proposals to modify the conditions under which section 20 subsidiaries of bank holding companies may underwrite and deal in securities.

The first proposal would increase the amount of revenue that a section 20 subsidiary may derive from underwriting and dealing in securities from 10 percent to 25 percent of its total revenue.

Comment on this proposal is requested by September 30, 1996.

The second proposal would amend or eliminate three of the prudential limitations, or firewalls, imposed on the operations of the section 20 subsidiaries:

the prohibition on director, officer and employee interlocks between a section 20 subsidiary and its affiliated banks or thrifts (the interlocks restriction);

the restriction on a bank or thrift acting as an agent for, or engaging in marketing activities on behalf of, an affiliated section 20 subsidiary (the cross-marketing restriction); and

the restriction on the purchase and sale of financial assets between a section 20 subsidiary and its affiliated bank or thrift (the financial assets restriction).

The third proposal would clarify, in an accounting change to the revenue limit, that the Board will not consider interest income earned on securities that a member bank could hold for its own account toward a section 20 subsidiary's revenue limit.

Comment on the second and third proposals is requested by September 3, 1996.

The text of the Board's proposals as printed in the Federal Register of August 5 are available. Comments thereon should be submitted by the dates indicated, and should be sent to the Board, as specified in the notices.