March 14, 1988
Superintendent of Banking Interpretive Bulletin #2
TO THE CHIEF EXECUTIVE OFFICER OF THE STATE CHARTERED BANK ADDRESSED:
RE: Adopted Rules
Enclosed you will find a copy of the three rules adopted by the Superintendent of Banking to implement House File 658, which was enacted into law on May 29, 1987. The rules become effective on March 16, 1988. The following is a brief synopsis of the three rules and their applicability.
Section 13 of the Act permits the establishment of a subsidiary (bank service corporation) by a state bank to engage in activities authorized by Iowa Code Chapter 524 and those activities bank service corporations are authorized to engage in pursuant to the "Bank Service Corporation Act." The "Bank Service Corporation Act" states a bank service corporation may perform any service, other than deposit taking, that the Federal Reserve Board has determined to be permissible for a bank holding company under section 4(c)(8) of the Bank Holding Company Act. Regulation Y of the Board of Governors of the Federal Reserve System at section 225.25(b) lists the following permissible nonbanking activities:
1) Making and servicing loans
2) Industrial banking
3) Trust company functions
4) Investment or financial advice
5) Leasing personal or real property
6) Community development
7) Data processing
8) Insurance agency and underwriting
9) Courier services
10) Management consulting to depository institutions
11) Money orders, savings bonds, and travelers checks
12) Real estate and personal property appraising
13) Arranging commercial real estate equity financing
14) Securities brokerage
15) Underwriting and dealing in government obligations and money market instruments
16) Foreign exchange advisory and transactional services
17) Futures commission merchant
18) Investment advice on financial futures and options on futures
19) Consumer financial counseling
20) Tax planning and preparation
21) Check guaranty services
22) Operating collection agency
23) Operating credit bureau
Since section 13 required the approval of the Superintendent prior to establishing a subsidiary to engage in any authorized activities, it became necessary to develop a uniform application process. Therefore, rule 187-2.14(524) Establishment of subsidiary of state bank was promulgated. The rule requires a state bank to make application to the Superintendent in letter form to establish a completely separate subsidiary for purposes of engaging in any authorized activities. All authorized activities must be approved by the Superintendent, including insurance brokerage, real estate brokerage, and discount securities brokerage, even though these three specific activities may be performed by the state bank without the need of establishing a subsidiary. If the state bank, however, makes the decision to perform insurance brokerage, real estate brokerage, or discount securities brokerage activities through a subsidiary, the bank must comply with the five provisions of rule 187-2.14(1) (c), which at a minimum, define a completely separate subsidiary. With respect to establishing a subsidiary, a state bank will be prohibited from investing more than 20 percent of its capital and surplus in any one subsidiary and 5 percent of its assets in all subsidiaries. Likewise, the subsidiary's cost, or in the case of the state bank's direct engagement in the three specific activities mentioned above, the bank's cost of initially acquiring an existing entity engaged in the activities will be limited to 20 percent of capital and surplus. The remaining provisions of rule 187-2.14 relate to other application requirements and procedures. Any state bank presently engaged in any of the authorized activities which has not received the approval of the Superintendent for the activity is required to file an application for subsequent approval.
The accounting treatment given each subsidiary established by a state bank will naturally depend upon the degree of ownership held by the state bank; however, we would anticipate that a large majority of the subsidiaries stablished would be wholly-owned subsidiaries. In a November 15, 1983, letter from this office addressed to all chief executive officers, we established a method of accounting which allowed state banks or their subsidiaries to capitalize on the books an amount of intangibles equivalent to the gross annual commissions earned by the acquired entity with the requirement that the capitalized portion of the purchase price be written off over a five-year period. Due to the confusion this method of accounting has caused because it failed to follow generally accepted accounting principles, we have now determined that acquisition costs should be allocated to each identifiable asset or liability purchased or assumed with any intangibles (goodwill, expiration lists, covenants not to compete, etc.) amortized over their estimated useful life, not to exceed 15 years. However, the intangibles purchased will not be considered part of the primary capital of the state bank for regulatory capital adequacy purposes.
This office has also recently reconsidered its position relating to the geographic location where a subsidiary may perform these authorized activities. In our November 15, 1983 letter, we stated that authorized activities could only be performed at the main bank and any of its authorized offices or integral facilities without deference to whether the activities would be performed by the state bank directly or through a completely separate subsidiary. Since the date of that letter, the U.S. Supreme Court has ruled that state laws restricting the location of bank offices relate only to places of business where deposits are received, checks paid, or money lent (core banking functions) and do not reach all of the authorized activities commercial banks may perform. Therefore, the Superintendent, subject to prior notification, has determined that any subsidiary of a state bank engaging in an authorized activity may perform the activity at any geographic location in the state as long as no core banking functions are performed at that location. However, in the case where the state bank performs insurance brokerage, real estate brokerage, or discount securities brokerage activities without a completely separate subsidiary, the activities must be performed at the main bank, an authorized bank office, or integral facility. Since this position is a significant departure from our previous policy, there may be a number of state banks which may now be interested in restructuring the manner in which the authorized activity is performed. This restructuring may permit the termination of a particular bank office certificate and thus make available an additional bank office location possibility in a municipal corporation or urban complex.
Section 14 of the Act permits state banks to engage in any aspect of securities activities either directly or through a subsidiary with the prior approval of the Superintendent. Rule 187-2.15(524) Securities activities was promulgated to establish a uniform application process. Securities services may be provided to bank customers in three basic alternatives by state banks. In the first option available, a state bank may directly conduct discount securities activities in which no investment advice or recommendations are given. Secondly, through the establishment of a "bona fide subsidiary," a state bank may engage in all aspects of the securities business pursuant to the rule promulgated. Any securities activities in which investment advice is given to customers, issuing or underwriting any type of permissible securities or operating mutual funds are undertaken will necessitate the establishment of a "bona fide subsidiary." The "bona fide subsidiary" provisions are designed to limit liability to the state bank and are similar to Federal Deposit Insurance Corporation regulations. In the third alternative available, a state bank may contract with an unaffiliated securities firm to provide securities services to its customers. Again, the provisions of the rule dealing with the unaffiliated securities firm were modeled after the Federal Deposit Insurance Corporation regulations.
All three methods of engaging in securities activities will require the prior approval of the Superintendent. Any state bank who has engaged in any securities activities without the prior approval of the Superintendent should make application for subsequent approval. The provisions of rule 187-2.15 appear self-explanatory and deal with the application process as it relates to the various methods of providing securities services to state bank customers.
The third rule adopted was rule 187-2.16(524) Contracts-authorization. This rule was promulgated to implement section 15 of the Act, which authorizes state banks to enter into futures, forward, and standby contracts on instruments eligible for state banks with the prior approval of the Superintendent. The rule requires state banks to make application to the Superintendent to use futures, forward, or standby contracts to reduce the interest rate risk associated with the bank's overall investment portfolio and its undesired mismatches in interest-sensitive assets and liabilities. The most important aspect of the application process will be the demonstration of expertise by the state bank to engage in these types of contracts. Another important condition of the application process will be the establishment of a comprehensive policy relating to futures, forward, and standby contracting. Again, the provisions of the rule basically clarify the application procedures.
These three rules have been adopted to standardize our application process for state banks. We would anticipate that state banks will also be required to obtain the approval, or at least provide prior notification, to their appropriate federal regulator to engage in these authorized activities or to establish a subsidiary to engage in these activities. This office will continue to review its policy with respect to all authorized activities, as well as the present application process and may revise its position as deemed appropriate. In that case, all state banks will be notified of such revisions. If there are any questions concerning the recently adopted rules or our position on any of the matters in this letter, do not hesitate to contact this office.
Sincerely,
Edward L. Tubbs
Superintendent of Banking
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Enclosure