Mr. Ronald C. Mayer
Senior Vice President and
    Associate General Counsel.
The Chase Manhattan Bank
270 Park Avenue, 39th Floor
New York, NY 10017-2070

Dear Mr. Mayer:

This is in response to your letter dated July 13, 2000, regarding a proposed transaction by The Chase Manhattan Bank, New York, New York ("CMB"). CMB is a state member bank and a wholly owned subsidiary of the Chase Manhattan Corporation, New York, New York ("Chase"), a bank holding company that has filed an effective election to be a financial holding company. CMB is proposing to acquire indirectly less than 100 percent, but more than 50 percent, of the voting shares of a company ("Company") that would engage in activities permissible for CMB under New York State and Federal law. Company would not engage in any activity that may only be conducted in a financial subsidiary of a bank as that term is defined in the Gramm-Leach-Bliley Act ("GLB Act").

You have asked for confirmation that this acquisition would be permissible for CMB under the Board's Regulations H and Y, that Company would be regarded as an operations subsidiary of CMB, and that it would be appropriate for CMC to give notice to the Board pursuant to section 225.87(a) of Regulation Y within 30 days after making the investment in Company.

In 1968 the Board determined that, consistent with the stock purchase prohibition of section 5136 of the Revised Statutes,¹ a state member bank may acquire the stock of an operations subsidiary, a company that engages only in activities in which the parent bank may engage directly, at locations at which the bank may engage in the activities, and subject to the same limitations as if the bank were engaging in the activities directly.²  The Board reasoned that such authority could reasonably be interpreted as within a bank's incidental powers to "organize its operations in the manner that it believes best facilitates the performance thereof," where the subsidiary essentially constitutes a separately incorporated division or department of the bank. The 1968 interpretation, therefore, only expressly authorized state member banks to establish wholly owned operations subsidiaries, since a wholly owned subsidiary is functionally indistinguishable from a division or department of the bank.

In enacting the GLB Act,³  Congress has recognized that national and state member banks have the authority to own and control operations subsidiaries. The GLB Act does this by distinguishing the newly authorized financial subsidiaries of banks, which may engage in activities that their parent banks are not permitted to conduct directly or that are conducted on terms or conditions different from those applied to the activity when conducted by the parent bank, from traditional operations subsidiaries.⁴

The language of the GLB Act does not appear to require that a state member bank own 100 percent of an operations subsidiary or a financial subsidiary. Section 121 of the GLB Act which, as noted above, recognizes the ability of state member banks to own an operations subsidiary, defines the term "subsidiary" by reference to the Bank Holding Company Act ("BHC Act"). Under the BHC Act, a company is a "subsidiary" of a bank holding company if the bank holding company (1) owns or controls 25 percent or more of the company's voting shares, or (2) controls the election of a majority of the company's directors.⁵

In light of the foregoing, the Board believes that as a result of the GLB Act, and consistent with section 5136 and the Board's 1968 interpretation, a state member bank may acquire shares of a company that (1) on consummation of the acquisition would be a subsidiary of the bank within the meaning of the BHC Act, and (2) engages only in activities in which the parent bank may engage, at locations at which the bank may engage in the activities, and subject to the same limitations as if the bank were engaging in the activities directly.

Concerning notification to the Board, section 4 of the BHC Act and Regulation Y generally require bank holding companies to receive the Board's approval prior to directly or indirectly engaging in any nonbanking activity or acquiring the shares of any nonbanking company.⁶  Regulation Y includes an exemption to this requirement that permits a state-chartered bank subsidiary of a bank holding company to acquire, without Board approval, all (but not less than all) of the voting shares of a nonbanking company that engages only in activities that the parent bank could conduct directly.⁷

CMB's proposed investment in Company would not fall within this exemption because CMB would acquire less than 100 percent of Company's voting shares. However, section 4(k) of the BHC Act permits a financial holding company such as Chase to directly or indirectly engage in, or acquire a company engaged in, any activity that has been determined to be financial in nature or incidental to a financial activity without the Board's prior approval.⁸  Instead, a financial holding company must only notify the Board within 30 days of commencing a new nonbanking activity or acquiring the shares of a nonbanking company.⁹

You have represented that Company engages only in activities that are financial in nature and permissible for financial holding companies, as provided in Regulation Y. Accordingly, it would be consistent with the requirements of the BHC Act and Regulation Y for Chase to notify the Board within 30 days after it has acquired an interest in Company through CMB, in accordance with section 225.87(a) of Regulation Y.

This opinion is based on the facts and representations you have provided, and any material change in these facts or representations could result in a different conclusion and should be reported to Board staff. If you have any questions about this matter, please contact Andrew Baer (202/452-2246) of the Board's Legal Division.

Sincerely,

(Signed) Jennifer J. Johnson

Jennifer J. Johnson

cc: Federal Reserve Bank of New York

1. 12 U.S.C � 24(Seventh). Return to text

2. 12 C.F.R. 250.141 ("1968 interpretation"). Return to text

3. Pub. L. No. 106-102, 113 Stat. 1338 (1999). Return to text

4. Id. at � 121, 113 Stat. at 1373, codified at 12 U.S.C. � 24a. A financial subsidiary, however, may engage only in activities that have been determined to be financial in nature, and is prohibited from engaging in certain activities, such as merchant banking and insurance underwriting. Return to text

5. See 12 U.S.C. � 1841(d). A company also is considered a "subsidiary" of a bank holding company if the Board determines, after notice and an opportunity for a hearing, that the bank holding company directly or indirectly exercises a controlling influence over the management or policies of the company. Id. Return to text

6. See 12 U.S.C. � 1843; 12 C.F.R 225.21. Return to text

7. 12 C.F.R. 225.22(e)(2)(ii). Return to text

8. 12 U.S.C. � 1843(k)(6). Return to text

9. 12 C.F.R. 225.87(a). Return to text