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Table of Contents I. REGULATORY STATUS a. Topics i. Bank Definition ii. Bank Holding Company Definition iii. Insurance Definition iv. Broker-Dealer Definitions v. Investment Company Definition b. Statutes i. 12 USC § 1841(c) (Defines “bank”) ii. 12 USC § 1841(a) (Defines “bank holding company”) iii. 15 USC § 1011-1015 (McCarran-Ferguson) iv. 15 USC § 78c(a)(4) (Defines “broker”) v. 15 USC § 78c(a)(5) (Defines “dealer”) vi. ICA § 3(a)(1)(A) (“Primarily Engaged Test” for Investment Company) 1. ICA § 2(a)(22) (“Issuer”) 2. ICA § 2(a)(28) (“Person”) 3. ICA § 2(a)(8) (“Company”) 4. ICA § 2(a)(36) (“Security”) vii. ICA § 3(a)(1)(C) (“Inadvertant Investment Company”) 1. ICA § 2(a)(16) (“Government Security”) viii. ICA § 3(a)(2) (“Investment Security”) ix. ICA § 3(b)(1) (Primary Purpose Exception-wholly owned subsidiary) 1. ICA § 2(a)(43) (“Wholly-owned subsidiary”) x. ICA § 3(b)(2) (Primary Purpose Exception-Majority Subsidiary or Controlled) 1. ICA § 2(a)(24) (“Wholly-owned Subsidiary”) 2. ICA § 2(a)(9) (“Control”) xi. ICA § 3(c)(1) (“100-person exception”) xii. ICA § 3(c)(7) (“Qualified Purchaser” Exception) xiii. Rule 3a-3 (“Standardized Brokerage Program”) c. Cases i. Dimension Financial (literal definition of “bank”) ii. Texas Opinion (functional equivalent of deposit) iii. Life Partners (McCarran-Ferguson applies to Viatical settlements) iv. Dehuff (Distinguishes finder from broker) v. Oregon Opinion (Merrill Lynch’s “free credit balances” are not deposits) vi. 5th Avenue (primarily engaged in business of investing) vii. ICOS (Research Company carve-out) viii. National Presto (primarily engaged in another business looking at gross revenue) PREEMPTION a. Topics i. Express ii. Field 1. Dominant Interest 2. Pervasive Scheme iii. Conflict 1. Irreconcilible conflict 2. Significant Interference 3. General Application iv. Reverse Preemption b. Statutes i. US Const. Art. IV, § 2 (Supremacy Clause) ii. 10th Amendment (Powers reserved for the states) iii. 12 USC § 92 (Insurance) iv. 12 USC § 1843 (Bank Holding Company Activities) v. 12 USC § 484(a) (Visitorial Rights) 1. 12 CFR 7.4000 (Defines “visitorial”)
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vi. vii. Cases i. ii. iii. iv. v.
2. 12 CFR 7.4006 (Applies visitorial to subsidiaires) 12 USC § 1842(a) (Prior approval by FRB prior to BHC undertaking certain tasks) 12 USC § 1841(g) (“Shares owned by any subsidiary deemed owned by BHC”) Barnett Bank (Florida statute not applicable to national banks) Watters v. Wachovia (No visitation upon a state subsidiary of national bank) Cuomo (Visitation does not include enforcement of generally applicable state law) Merchants II (BHCA does not apply to bank subsidiaries of BHC) CitiCorp (BHCA does not apply to nonbank subsidiaries of bank subsidiaries)
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INSTRUMENTS a. Topics i. Deposits ii. Loans iii. Securities 1. Debt 2. Equity iv. Insurance 1. Life Insurance a. Fixed b. Variable 2. Annuities a. Fixed b. Variable b. Statutes i. 12 USC § 1813(l)(1) (defines “deposit”) ii. 15 USC § 77b(a)(1) (defines “security, with a latter exclusion for commercial paper) iii. 15 USC § 77b(a)(1) (“Unless context otherwise requires . . . a note”) iv. 15 USC § 77c(a)(7) (Commercial paper exemption) v. 15 USC § 77c(a)(8) (Insurance and annuity subject to supervision of state) c. Cases i. Philadelphia Gear (SLOC is not a deposit) ii. Marine Bank (CD is not a security) iii. Reves v. E&Y (Demand note is a security; family resemblance test) iv. Banco National (Loan participation is not a security; Mishkin test) v. SEC v. VALIC (Variable annuity is a security; majority v. concurring opinions) BANK POWERS a. Topics i. Incidental to Business of Banking ii. Real Estate iii. Securities 1. Brokerage 2. Underwriting iv. Insurance v. State Bank Activities b. Statutes i. § 24 (Seventh) (“Incidental” to banking) 1. § 16/21 of Glass Steagall Act 2. 12 CFR 1.2(e) (Investment Security = investment grade) ii. § 24 (Tenth) (Lease-financing) iii. § 24 (Eleventh) (Low-income investing) iv. § 29 (Holding RE property) v. § 371 (Mortgage activity) vi. § 371(d) (Prior approval if bank premises > capital stock) vii. § 91 (Insurance agency in small populations) viii. § 91a ix. § 6712 (Insurance underwriting activity) x. § 85 (legal rate of interest) xi. Dodd-Frank § 619(a) (Volcker Rule restrictions)
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Arnold Tours (Travel Agency not incidental to banking)) M&M Leasing (Leasing functional equivalent to secured loan) NationsBank (Variable Annuity “functional equivalent” to a deposit) Office of Comptroller of Currency (technology) SIA v. Comptroller (Discount brokerage is incidental pursuant to 24 (seventh)) ICI v. Camp (Pooled trust activities and issuance of certificates is underwriting securities) Bankers Trust (Commercial paper is a security within meaning of 24 (Seventh)) Bankers Trust II (Underwriting is okay if it is a private placement) NationsBank (selling variable annuities as agent is permitted as incidental to banking) Ludwig (Sales of bank in community of 5000 outside of community permitted) Hawke (No insurance agency activity under 24 (Seventh) because expresio unius) Blackstreet (Underwriting Retirement CD impermissible under 24 (Seventh) as insurance) National Republic (SLOC, with contingent promissory note is not a guaranty) AUTHORIZED ACTIVITIES OF INVESTMENT COMPANIES a. Statutes i. § 2(a)(3) (defines “Affiliates”) ii. § 2(a)(9) (defines “Control”) iii. § 5(b) (diversified company rules) iv. § 8(b)(1) (diversified/non-diversified; concentrated; open-end/closed-end policies) v. Guide 19 (concentration if > 25% in industry or type of investment) vi. § 8(b)(2) (fundamental policies) vii. § 12(d)(2) (restricts holding insurance company securities to 10% of outstanding securities) viii. § 12(d)(3) (restricts broker dealer securities, if more than 15% of activities are brokering, to 5%) ix. § 13(a)(3) (restriction from deviating from § 8(b)(1)/(2)) x. § 17(a) (Affiliated transactions) xi. § 35(d) (Misleading names) 1. Rule 35d-1 (US-backed; 80% rules; geographic regions; tax-exempt; misleading standard) b. Cases i. First Australia Fund (§ 8(b)(1) Specificity for concentration policy) ii. Charles Schwab Investment (28% private-MBS exceeds concentration limitation) Safety and Soundness a. Bank Capital Adequacy i. Leverage Ratio: Tier 1/Total Assets 1. Tier 1: common stock; non-cumulative perpetual preferred 2. Tier 2: All other equity, including term-subordinated debt ii. Tier 1 Risk Based: Tier 1/Risk-Adjusted Assets iii. Total Risk Based: (Tier 1 + Tier 2)/Risk-Adjusted Assets iv. Capital Adequacy Requirements 1. Well Capitalized: 10% (Total Risk-adjusted); 6% (Tier-1 risk-based); 5% (Leverage) 2. Adequately Capitalized: 8%; 4%; 4% 3. Under-capitalized: < 8%; <4%; <4% 4. Significantly Undercapitalized: < 6%; <3%; < 3% b. Investment Companies: i. Method 1. (1) Determine amount of fund’s total assets LESS all liabilities/indebtedness 2. (2) Add amount of loan to (total assets LESS liabilities/indebtedness) 3. (3) Net Assets must be at least 300% of the loan ii. Repos 1. § 2(a)(23) (lend purchase coupled with agreement to repurchase)
xii. xiii. xiv. xv. xvi. xvii. xviii. xix. Cases i. ii. iii. iv. v. vi. vii. viii. ix. x. xi. xii. xiii.
Dodd-Frank § 619(d) (Permitted activities; limitations) Dodd-Frank § 619(h) (definitions; proprietary trading; trading account) § 1831a(a) (No activities as principal that NAs cant do, unless well-capped, FDIC approval) § 1831a(b) (No insurance activities, except to extent of national bank) § 1831a(c) (No equity securities) § 1831a(d) (Can hold subsidiaries engaged as principal that NAs cant, if well-capped, approval) § 1831a(f) (No common/preferred stock investments except to extent of NA) § 1831a(i) (State bank can make stricter rules if necessary)
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2. § 2(a)(36) (security evidence of indebtedness) 3. § 2(a)(18)(g) (Senior security evidence of indebtedness) BANK HOLDING COMPANY POWERS a. 12 USC § 1843(a)(1) (Ownership clause) b. 12 USC § 1843(a)(2) (Activities Clause) c. 12 USC § 1843(c)(1) (Essential banking subsidiaries) d. 12 USC § 1843(c)(6) (Holding < 5% of company shares) e. 12 USC § 1843(c)(7) (Holding < 5% of investment company shares) f. 12 USC § 1843(c)(8) (All activities closely related to banking) g. 12 USC § 1841(p) (Financial Holding Company) h. 12 USC § 1843(l)(1) (Well-capitalized; CRA; notice) i. 12 USC § 1843(k) (Activities “financial in nature”) j. 12 USC § 24a (National ban financial subsidiary activities) k. 12 USC § 24a(b) (Activities that are financial in nature; by reference to 1843(k)(4)) l. 12 USC § 24a(d) (Safeguards for banks with financial subsidiaires) m. 12 USC § 24a(g) (Definitions) AFFILIATED TRANSACTIONS a. 12 USC § 371c(a) (Quantitative restrictions; low quality assets; safety-soundness requirement) b. 12 USC § 371c(b) (Definitions—covered transaction; affiliate; control) c. 12 USC § 371c(c) (Qualitative restrictions) d. 12 USC § 371c(d) (Exceptions—sister bank and treasury securities) e. 12 USC § 371c(e) (Financial subsidiaries) Dodd-Frank a. § 111 (Establishes the Financial Stability Oversight Council) b. § 112 (Advisory powers of the FSOC) c. § 113 (Power to identify SIFIs) d. § 114 (SIFIs must register) e. § 115 (SIFIs must comply with heightened prudential standards; along with mega-BHCs) f. § 120: FSOC can make recommendations to primary fiancial regulator of non-SIFIs and mega-BHCs that would apply to particular financial activities) g. § 121 (Grave risk SIFIs and mega-BHCs may be subject to additional requirements, including breakups) h. § 165 (Segregates mandatory rules and discretionary rules for § 215) i. § 163 (Mega-banks and SIFIs must get approval prior to acquiring a bank worth > $10B) j. § 606 (well-capitalized/managed applies to BHCs to become a FHC) k. § 616 (BHC must be a source of financial strength to bank subsidiaries) l. § 619 (Volcker)
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vi. vii. Cases i. ii. iii. iv. v.
2. 12 CFR 7.4006 (Applies visitorial to subsidiaires) 12 USC § 1842(a) (Prior approval by FRB prior to BHC undertaking certain tasks) 12 USC § 1841(g) (“Shares owned by any subsidiary deemed owned by BHC”) Barnett Bank (Florida statute not applicable to national banks) Watters v. Wachovia (No visitation upon a state subsidiary of national bank) Cuomo (Visitation does not include enforcement of generally applicable state law) Merchants II (BHCA does not apply to bank subsidiaries of BHC) CitiCorp (BHCA does not apply to nonbank subsidiaries of bank subsidiaries)
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INSTRUMENTS a. Topics i. Deposits ii. Loans iii. Securities 1. Debt 2. Equity iv. Insurance 1. Life Insurance a. Fixed b. Variable 2. Annuities a. Fixed b. Variable b. Statutes i. 12 USC § 1813(l)(1) (defines “deposit”) ii. 15 USC § 77b(a)(1) (defines “security, with a latter exclusion for commercial paper) iii. 15 USC § 77b(a)(1) (“Unless context otherwise requires . . . a note”) iv. 15 USC § 77c(a)(7) (Commercial paper exemption) v. 15 USC § 77c(a)(8) (Insurance and annuity subject to supervision of state) c. Cases i. Philadelphia Gear (SLOC is not a deposit) ii. Marine Bank (CD is not a security) iii. Reves v. E&Y (Demand note is a security; family resemblance test) iv. Banco National (Loan participation is not a security; Mishkin test) v. SEC v. VALIC (Variable annuity is a security; majority v. concurring opinions) BANK POWERS a. Topics i. Incidental to Business of Banking ii. Real Estate iii. Securities 1. Brokerage 2. Underwriting iv. Insurance v. State Bank Activities b. Statutes i. § 24 (Seventh) (“Incidental” to banking) 1. § 16/21 of Glass Steagall Act 2. 12 CFR 1.2(e) (Investment Security = investment grade) ii. § 24 (Tenth) (Lease-financing) iii. § 24 (Eleventh) (Low-income investing) iv. § 29 (Holding RE property) v. § 371 (Mortgage activity) vi. § 371(d) (Prior approval if bank premises > capital stock) vii. § 91 (Insurance agency in small populations) viii. § 91a ix. § 6712 (Insurance underwriting activity) x. § 85 (legal rate of interest) xi. Dodd-Frank § 619(a) (Volcker Rule restrictions)
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Arnold Tours (Travel Agency not incidental to banking)) M&M Leasing (Leasing functional equivalent to secured loan) NationsBank (Variable Annuity “functional equivalent” to a deposit) Office of Comptroller of Currency (technology) SIA v. Comptroller (Discount brokerage is incidental pursuant to 24 (seventh)) ICI v. Camp (Pooled trust activities and issuance of certificates is underwriting securities) Bankers Trust (Commercial paper is a security within meaning of 24 (Seventh)) Bankers Trust II (Underwriting is okay if it is a private placement) NationsBank (selling variable annuities as agent is permitted as incidental to banking) Ludwig (Sales of bank in community of 5000 outside of community permitted) Hawke (No insurance agency activity under 24 (Seventh) because expresio unius) Blackstreet (Underwriting Retirement CD impermissible under 24 (Seventh) as insurance) National Republic (SLOC, with contingent promissory note is not a guaranty) AUTHORIZED ACTIVITIES OF INVESTMENT COMPANIES a. Statutes i. § 2(a)(3) (defines “Affiliates”) ii. § 2(a)(9) (defines “Control”) iii. § 5(b) (diversified company rules) iv. § 8(b)(1) (diversified/non-diversified; concentrated; open-end/closed-end policies) v. Guide 19 (concentration if > 25% in industry or type of investment) vi. § 8(b)(2) (fundamental policies) vii. § 12(d)(2) (restricts holding insurance company securities to 10% of outstanding securities) viii. § 12(d)(3) (restricts broker dealer securities, if more than 15% of activities are brokering, to 5%) ix. § 13(a)(3) (restriction from deviating from § 8(b)(1)/(2)) x. § 17(a) (Affiliated transactions) xi. § 35(d) (Misleading names) 1. Rule 35d-1 (US-backed; 80% rules; geographic regions; tax-exempt; misleading standard) b. Cases i. First Australia Fund (§ 8(b)(1) Specificity for concentration policy) ii. Charles Schwab Investment (28% private-MBS exceeds concentration limitation) Safety and Soundness a. Bank Capital Adequacy i. Leverage Ratio: Tier 1/Total Assets 1. Tier 1: common stock; non-cumulative perpetual preferred 2. Tier 2: All other equity, including term-subordinated debt ii. Tier 1 Risk Based: Tier 1/Risk-Adjusted Assets iii. Total Risk Based: (Tier 1 + Tier 2)/Risk-Adjusted Assets iv. Capital Adequacy Requirements 1. Well Capitalized: 10% (Total Risk-adjusted); 6% (Tier-1 risk-based); 5% (Leverage) 2. Adequately Capitalized: 8%; 4%; 4% 3. Under-capitalized: < 8%; <4%; <4% 4. Significantly Undercapitalized: < 6%; <3%; < 3% b. Investment Companies: i. Method 1. (1) Determine amount of fund’s total assets LESS all liabilities/indebtedness 2. (2) Add amount of loan to (total assets LESS liabilities/indebtedness) 3. (3) Net Assets must be at least 300% of the loan ii. Repos 1. § 2(a)(23) (lend purchase coupled with agreement to repurchase)
xii. xiii. xiv. xv. xvi. xvii. xviii. xix. Cases i. ii. iii. iv. v. vi. vii. viii. ix. x. xi. xii. xiii.
Dodd-Frank § 619(d) (Permitted activities; limitations) Dodd-Frank § 619(h) (definitions; proprietary trading; trading account) § 1831a(a) (No activities as principal that NAs cant do, unless well-capped, FDIC approval) § 1831a(b) (No insurance activities, except to extent of national bank) § 1831a(c) (No equity securities) § 1831a(d) (Can hold subsidiaries engaged as principal that NAs cant, if well-capped, approval) § 1831a(f) (No common/preferred stock investments except to extent of NA) § 1831a(i) (State bank can make stricter rules if necessary)
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2. § 2(a)(36) (security evidence of indebtedness) 3. § 2(a)(18)(g) (Senior security evidence of indebtedness) BANK HOLDING COMPANY POWERS a. 12 USC § 1843(a)(1) (Ownership clause) b. 12 USC § 1843(a)(2) (Activities Clause) c. 12 USC § 1843(c)(1) (Essential banking subsidiaries) d. 12 USC § 1843(c)(6) (Holding < 5% of company shares) e. 12 USC § 1843(c)(7) (Holding < 5% of investment company shares) f. 12 USC § 1843(c)(8) (All activities closely related to banking) g. 12 USC § 1841(p) (Financial Holding Company) h. 12 USC § 1843(l)(1) (Well-capitalized; CRA; notice) i. 12 USC § 1843(k) (Activities “financial in nature”) j. 12 USC § 24a (National ban financial subsidiary activities) k. 12 USC § 24a(b) (Activities that are financial in nature; by reference to 1843(k)(4)) l. 12 USC § 24a(d) (Safeguards for banks with financial subsidiaires) m. 12 USC § 24a(g) (Definitions) AFFILIATED TRANSACTIONS a. 12 USC § 371c(a) (Quantitative restrictions; low quality assets; safety-soundness requirement) b. 12 USC § 371c(b) (Definitions—covered transaction; affiliate; control) c. 12 USC § 371c(c) (Qualitative restrictions) d. 12 USC § 371c(d) (Exceptions—sister bank and treasury securities) e. 12 USC § 371c(e) (Financial subsidiaries) Dodd-Frank a. § 111 (Establishes the Financial Stability Oversight Council) b. § 112 (Advisory powers of the FSOC) c. § 113 (Power to identify SIFIs) d. § 114 (SIFIs must register) e. § 115 (SIFIs must comply with heightened prudential standards; along with mega-BHCs) f. § 120: FSOC can make recommendations to primary fiancial regulator of non-SIFIs and mega-BHCs that would apply to particular financial activities) g. § 121 (Grave risk SIFIs and mega-BHCs may be subject to additional requirements, including breakups) h. § 165 (Segregates mandatory rules and discretionary rules for § 215) i. § 163 (Mega-banks and SIFIs must get approval prior to acquiring a bank worth > $10B) j. § 606 (well-capitalized/managed applies to BHCs to become a FHC) k. § 616 (BHC must be a source of financial strength to bank subsidiaries) l. § 619 (Volcker)
