Memo RM1996-14
To: All State Chartered Banks
From: W. Newton Male, State Bank Commissioner
Date: December 18, 1996
RE: Special Order 1996-4
Enclosed please find Special Order 1996-4. The Order gives state banks the power to form operating subsidiaries to engage in any activities which are part of or incidental to the business of banking. This means the bank can form a subsidiary to engage in activities which are permissible for the bank itself.
It is important to note the difference between the activities which are authorized pursuant to this Special Order, and the activities which are authorized by the Comptroller of Currency's recent revision of regulations governing operating subsidiary activities, found at 12 C.F.R. Part 5. The OCC's new regulations, which will become effective December 31, 1996, provide the authority for formation of a bank subsidiary to engage in activities that are part of or incidental to banking, but may not be permissible for the parent bank to conduct directly. Special Order 1996-4 does not extend this more expansive power to state banks because of the widespread uncertainty surrounding the new OCC provisions. These expansive provisions in the OCC's revised regulations have generated substantial controversy among a number of industry leaders as well as on Capitol Hill. Chairman Leach has questioned whether courts would agree with the legality of such a broad regulatory change. Chairman D'Amato has called the new regulations "unwise", and stated the Comptroller's action "detracts from the emerging consensus in favor of comprehensive reform and can only lead to controversy and protracted litigation." Obviously, Comptroller Ludwig and others, including Treasury Secretary Robert Rubin, disagree. But it seems certain the debate will ultimately require judicial or legislative attention to reach settlement.
At this time, our office expresses no opinion regarding the advisability or legality of the new OCC regulations. However, it is our opinion that state banks should have additional power to form operating subsidiaries, based on the current well-settled national bank authority. Prior to the issuance of Special Order 1996-4 , state banks were allowed to form subsidiaries only to engage in certain limited activities, and make equity investments in only certain types of subsidiary corporations. The Special Order gives banks the authority to form operating subsidiaries or make equity investments in operating subsidiaries that engage in any activity the bank can engage in directly. We believe issuance of the Special Order will provide state banks with operating flexibility without jeopardizing safety and soundness.
The text of the Order indicates it is intended to be in addition to and not a limitation on, other statutes, regulations, rules and Special Orders that govern a bank's ability to establish and operate subsidiaries of any kind or to own an equity interest in a corporation or other business entity. Furthermore, in the case of any conflict with preexisting authority, the preexisting powers and procedures shall govern. Following are three examples of conflicts with preexisting authority, and the Order's effect:
A. Special Order 1988-3 allows a bank to operate a wholly-owned subsidiary corporation which holds and manages property acquired through debt previously contracted ("DPC"). Special Order 1996-4 states the bank must own at least 80% of the stock of an operating subsidiary. The ownership requirements of these Special Orders conflict. Special Order 1996-4 directs that when there is a conflict, the preexisting authority controls. Therefore, a subsidiary operated to hold and manage property acquired DPC must be wholly-owned.
B. K.S.A. 9-1101 (8) gives banks the power to subscribe to, buy and own stock in one or more small business investment companies ("SBICs") in Kansas, so long as the bank's aggregate investment in all SBICs does not exceed 5% of the bank's capital and surplus. Despite Special Order 1996-4's requirement that the bank must own 80% of the stock of operating subsidiaries, the bank may still buy and own stock in a SBIC which would constitute less than 80% ownership pursuant to the preexisting authority in K.S.A. 9-1101(8).
C. Subsidiaries specifically authorized by authority other than Special Order 1996-4, such as the ones described in A and B above, are subject to varying requirements for application or notification to this office prior to the bank establishing or acquiring an interest in the subsidiary. In those cases, the requirements set out in the specific authority will govern. Therefore, if the specific rule contains no notification or application requirement, the bank may establish or acquire an interest in the subsidiary without notice or application to this office, notwithstanding the notice requirement contained in Special Order 1996-4.
If you have questions regarding the Special Order or any other matter, please feel free to contact the office.
