For immediate release

The Federal Reserve Board today announced its approval of the notice filed by KeyCorp to engage, through its wholly owned subsidiary, Key Capital Markets, Inc., both of Cleveland, Ohio, in a variety of securities-related activities, including engaging to a limited extent in underwriting and dealing in all types of debt and equity securities. Attached is the Board's Order relating to this action.

KeyCorp Cleveland, Ohio Order Approving Notice to Engage in Underwriting and Dealing in All Types of Debt and Equity Securities on a Limited Basis and Certain Other Nonbanking Activities

KeyCorp, Cleveland, Ohio ("KeyCorp"), a bank holding company within the meaning of the Bank Holding Company Act ("BHC Act"), has requested the Board's approval under section 4(c)(8) of the BHC Act (12 U.S.C. § 1843(c)(8)) and section 225.24 of the Board's Regulation Y (12 C.F.R. 225.24) to engage in the following nonbanking activities through its wholly owned subsidiary, Key Capital Markets, Inc., Cleveland, Ohio ("KCMI"): Underwriting and dealing in, to a limited extent, all types of debt and equity securities except ownership interests in open-end investment companies; Providing investment and financial advice, as described in section 225.28(b)(6) of Regulation Y (12 C.F.R. 225.28(b)(6)); Conducting securities brokerage activities, buying and selling all types of securities on the order of customers as a "riskless principal," acting as agent in the private placement of all types of securities, acting as a futures commission merchant in the execution, clearance, and execution and clearance of futures contracts and options on futures contracts, and providing other transactional services, all as described in section 225.28(b)(7) of Regulation Y (12 C.F.R. 225.28(b)(7)); and Underwriting and dealing in government obligations and money market instruments, engaging in investing and trading activities, and buying and selling bullion and related activities, all as described in section 225.28(b)(8) of Regulation Y (12 C.F.R. 225.28(b)(8)). KeyCorp seeks approval for KCMI to conduct the activities listed above worldwide. Notice of the proposal, affording interested persons an opportunity to submit comments, has been published (62 Federal Register 38,308 and 40,088 (1997)). The time for filing comments has expired, and the Board has considered the notice and all comments received in light of the factors set forth in section 4(c)(8) of the BHC Act. KeyCorp, with total consolidated assets of approximately $68 billion, is the 14th largest commercial banking organization in the United States.1 KeyCorp operates subsidiary banks in 14 states, and engages in a broad range of permissible nonbanking activities through its subsidiaries. KCMI currently engages in limited underwriting and dealing in bank-ineligible securities2 as permitted under section 20 of the Glass-Steagall Act (12 U.S.C. § 377).3 KCMI is, and will continue to be, registered as a broker-dealer with the Securities and Exchange Commission ("SEC") under the Securities Exchange Act of 1934 (15 U.S.C. § 78a et seq.) and is a member of the National Association of Securities Dealers, Inc. ("NASD"). KCMI, therefore, is subject to the recordkeeping and reporting obligations, fiduciary standards, and other requirements of the Securities Exchange Act of 1934, the SEC, and the NASD. Underwriting and Dealing in Bank-Ineligible Securities The Board has determined that, subject to the prudential framework of limitations established in previous decisions to address the potential for unsound banking practices or other adverse effects, the proposed activities of underwriting and dealing in bank-ineligible securities are so closely related to banking as to be proper incidents thereto within the meaning of section 4(c)(8) of the BHC Act.4 The Board also has determined that the conduct of the proposed activities is consistent with section 20 of the Glass-Steagall Act, provided that the company engaged in the underwriting and dealing activities derives no more than 25 percent of its gross revenues from underwriting and dealing in bank-ineligible securities over a two-year period.5 KeyCorp has committed that KCMI will conduct its underwriting and dealing activities in bank-ineligible securities subject to this revenue limit.6 Other Activities Approved by Regulation As noted above, KeyCorp proposes to engage in providing investment and financial advice, agency transactional services for customer investments, and investment and trading services. The Board previously has determined by regulation that each of the proposed activities is closely related to banking for purposes of section 4(c)(8) of the BHC Act.7 Proper Incident to Banking Standard To approve this notice, the Board also must consider whether performance of the proposed activities is a proper incident to banking, that is, whether the proposed activities "can reasonably be expected to produce benefits to the public . . . that outweigh possible adverse effects, such as undue concentration of resources, decreased or unfair competition, conflicts of interests, or unsound banking practices."8 KeyCorp has proposed to conduct its underwriting and dealing activities in accordance with the framework of prudential limitations established by the Board in the Section 20 Orders to address potential adverse effects. The Board recently modified several of the prudential limitations established in the Section 20 Orders ("Section 20 firewalls") after concluding that a narrower set of restrictions is fully consistent with safety and soundness, should improve the operating efficiencies of section 20 subsidiaries, and increases options for customers of section 20 subsidiaries.9 The Board's action in this case is based on compliance by KeyCorp and its subsidiaries, including KCMI, with the prudential limitations established by the Board in the Section 20 Orders, as recently revised by the Board.10 KeyCorp and KCMI also will conduct the proposed activities in accordance with the limitations set forth in Regulation Y and the Board's orders and interpretations relating to each of the activities. As part of its evaluation of these factors, the Board also considers the financial condition and managerial resources of the notificant and its subsidiaries and the effect the transaction would have on such resources.11 The Board has reviewed the capitalization of KeyCorp and KCMI in accordance with the standards set forth in the Section 20 Orders and finds the capitalization of each to be consistent with approval. With respect to KCMI, this determination is based on all the facts of record, including KeyCorp's projections of the volume of KCMI's underwriting and dealing activities in bank-ineligible securities. On the basis of all the facts of record, including the foregoing, the Board concludes that financial considerations are consistent with approval of the notice. The Board also has considered the managerial resources of KeyCorp and its subsidiaries in light of all the facts of record, including comments from Inner City Press/Community on the Move ("ICP") contending that KCMI should not be permitted to expand its section 20 activities until it has gained additional experience in operating under its current section 20 powers and further demonstrated its operational and compliance capabilities.12 The facts also include KCMI's record of satisfactory operations to date as reflected in supervisory reports of examination and the results of a recent infrastructure review of KCMI performed by the Federal Reserve Bank of Cleveland ("Reserve Bank") in connection with the notice. The infrastructure review considered the operational and managerial infrastructure of KeyCorp and KCMI for underwriting and dealing in all types of debt securities, including computer, audit, and accounting systems and internal risk management controls. The Board has determined on the basis of the infrastructure review that KeyCorp and KCMI have established policies and procedures to ensure compliance with the Section 20 firewalls and other requirements of this order and the Section 20 Orders for underwriting and dealing in debt securities. As discussed below, a satisfactory infrastructure review of KeyCorp and KCMI related to underwriting and dealing in all types of equity securities must be completed before KCMI may engage in these activities. Based on all the facts of record, including ICP's comments, and for the reasons discussed above, and subject to the completion of a satisfactory infrastructure review of KeyCorp and KCMI related to underwriting and dealing in all types of equity securities, the Board concludes that considerations relating to the managerial resources of KeyCorp and its subsidiaries, including KCMI, are consistent with approval of the proposal.13 The Board expects that the expansion of the underwriting and dealing services to be provided by KCMI under the proposal would provide added convenience to KeyCorp's customers, lead to improved methods of meeting customers' financing needs, and increase the level of competition among existing providers of these services. In addition, there are public benefits to be derived from permitting bank holding companies to engage in potentially profitable activities when those activities are consistent, as in this case, with the relevant considerations under the BHC Act. As noted above, KeyCorp has committed that KCMI will conduct its bank-ineligible securities underwriting and dealing activities in accordance with the prudential framework established by the Board's Section 20 Orders. Under the framework and conditions established in this order and the Section 20 Orders, the Board concludes that KCMI's proposed limited conduct of underwriting and dealing in bank-ineligible securities is not likely to result in significantly adverse effects, such as undue concentration of resources, decreased or unfair competition, conflicts of interests, or unsound banking practices that would outweigh the public benefits. Similarly, the Board finds no evidence that KCMI's proposal to provide investment and financial advice, agency transactional services for customer investments, and investment and trading services would likely result in any significantly adverse effects that would outweigh the public benefits of the proposal. Accordingly, the Board has determined that performance of the proposed activities by KeyCorp can reasonably be expected to produce public benefits that outweigh possible adverse effects under the proper incident to banking standard of section 4(c)(8) of the BHC Act. For the reasons set forth in this order, the Section 20 Orders, and the Modification Orders, the Board has concluded that KeyCorp's proposal to engage through KCMI in the proposed activities is consistent with the Glass-Steagall Act and that the proposed activities are so closely related to banking as to be proper incidents thereto within the meaning of section 4(c)(8) of the BHC Act, provided that KeyCorp limits KCMI's activities as specified in this order, the Section 20 Orders, and the Modification Orders. Based on the foregoing and all other facts of record, the Board has determined to, and hereby does, approve this notice subject to all terms and conditions discussed in this order, the Section 20 Orders and the Modification Orders. The Board's approval of the proposal extends only to activities conducted within the limitations of this order and those orders, including the Board's reservation of authority to establish additional limitations to ensure that KCMI's activities are consistent with safety and soundness, avoidance of conflicts of interests, and other relevant considerations under the BHC Act. Underwriting and dealing in any manner other than as approved in this order, the Section 20 Orders, and the Modification Orders is not authorized for KCMI. The Board's approval of the proposed underwriting and dealing in all types of equity securities is conditioned on a future determination by the Board that KeyCorp and KCMI have established policies and procedures for equity underwriting and dealing to ensure compliance with the requirements of this order, the Section 20 Orders, and the Modification Orders, including computer, audit, and accounting systems, internal risk management controls, and the necessary operational and managerial infrastructure. After notification by the Board that this condition has been satisfied, KCMI may commence the proposed equity underwriting and dealing activities, subject to the other conditions of this order, the Section 20 Orders, and the Modification Orders. The Board's determination is subject to all the terms and conditions set forth in Regulation Y, including those in sections 225.7 and 225.25(c) of Regulation Y (12 C.F.R. 225.7 and 225.25(c)), and to the Board's authority to require such modification or termination of the activities of a bank holding company or any of its subsidiaries as the Board finds necessary to ensure compliance with, and prevent evasion of, the provisions of the BHC Act and the Board's regulations and orders issued thereunder. In approving the proposal, the Board has relied on all the facts of record and all the representations and commitments made by KeyCorp in connection with the proposal, and the Board's determination is specifically conditioned thereon. These commitments and conditions are deemed to be conditions imposed in writing by the Board in connection with its findings and decisions, and, as such, may be enforced in proceedings under applicable law. The proposal shall not be consummated later than three months after the effective date of this order, unless such period is extended for good cause by the Board or by the Federal Reserve Bank of Cleveland, acting pursuant to delegated authority.

By order of the Board of Governors,14 effective September 8, 1997. (signed) Jennifer J. Johnson Jennifer J. Johnson Deputy Secretary of the Board

Footnotes 1 Asset and ranking data are as of March 31, 1997. 2 As used in this order, "bank-ineligible securities" refers to all types of debt and equity securities that a national bank may not underwrite or deal in directly under section 16 of the Glass-Steagall Act (12 U.S.C. § 24(7)). 3 KCMI has authority to underwrite and deal in, to a limited extent, certain municipal revenue bonds, 1-4 family mortgage-related securities, commercial paper, and consumer-receivable-related securities. See KeyCorp, 82 Federal Reserve Bulletin 359 (1996). 4 See Canadian Imperial Bank of Commerce, et al., 76 Federal Reserve Bulletin 158 (1990); J.P. Morgan & Co., Incorporated, et al., 75 Federal Reserve Bulletin 192 (1989), aff'd sub nom. Securities Industries Ass'n v. Board of Governors of the Federal Reserve System, 900 F.2d 360 (D.C. Cir. 1990); Citicorp, et al., 73 Federal Reserve Bulletin 473 (1987), aff'd sub nom. Securities Industry Ass'n v. Board of Governors of the Federal Reserve System, 839 F.2d 47 (2d Cir. 1988), cert. den., 486 U.S. 1059 (1988); as modified by Review of Restrictions on Director, Officer and Employee Interlocks, Cross-Marketing Activities, and the Purchase and Sale of Financial Assets Between a Section 20 Subsidiary and an Affiliated Bank or Thrift, 61 Federal Register 57,679 (1996), and Amendments to Restrictions in the Board's Section 20 Orders, 62 Federal Register 45,295 (1997) (collectively, the "Section 20 Orders"). 5 See the Section 20 Orders. Compliance with the revenue limitation shall be calculated in accordance with the method stated in the Section 20 Orders, as modified by Order Approving Modifications to the Section 20 Orders, 75 Federal Reserve Bulletin 751 (1989) and 10 Percent Revenue Limit on Bank-Ineligible Activities of Subsidiaries of Bank Holding Companies Engaged in Underwriting and Dealing in Securities, 61 Federal Register 48,953 (1996) and Revenue Limit on Bank-Ineligible Activities of Subsidiaries of Bank Holding Companies Engaged in Underwriting and Dealing in Securities, 61 Federal Register 68,750 (1996) (collectively, the "Modification Orders"). 6 KCMI may provide services that are necessary incidents to the proposed underwriting and dealing activities. Unless KCMI receives specific approval under section 4(c)(8) of the BHC Act to provide the activities independently, any revenues from the incidental activities must be treated as ineligible revenues that are subject to the revenue limit. 7 See 12 C.F.R. 225.28(b)(6), (7), and (8). 8 12 U.S.C. § 1843(c)(8). 9 See Amendments to Restrictions in the Board's Section 20 Orders, 62 Federal Register 45,295 (1997). 10 The Board's order authorizes KeyCorp to use the revised Section 20 firewalls on consummation of the proposal. 11 See 12 C.F.R. 225.24. See also The Fuji Bank, Limited, 75 Federal Reserve Bulletin 94 (1989); Bayerische Vereinsbank AG, 73 Federal Reserve Bulletin 155 (1987). 12 ICP also asserts that KeyCorp operates its nonbank lending subsidiaries pursuant to a strategy to illegally "steer" low- and moderate-income and minority borrowers to higher interest rate loans, which ICP alleges would reflect adversely on managerial considerations. ICP has provided no facts, however, to show violations of fair lending laws. The Board notes, moreover, that examiners found no evidence of illegal discrimination or other practices that discourage applications for credit on a prohibited basis at the most recent examinations that considered fair lending law compliance at KeyCorp's subsidiary banks. KeyCorp's subsidiary banks account for a substantial majority of the organization's total consolidated assets, total consolidated net income, and total consolidated loans. KeyCorp's nonbank lending subsidiaries, on the other hand, account for less than 1 percent of its total consolidated net income and consolidated loans, and less than 5 percent of its total consolidated assets. The Board has broad supervisory authority under the banking laws to require bank holding companies and their nonbank subsidiaries to comply with all applicable laws in the event that facts or an examination show that KeyCorp's nonbank lending subsidiaries are not in compliance with fair lending laws. ICP also maintains that KeyCorp's subsidiary banks have an inadequate record of complying with laws and regulations, including the reporting requirements of the Home Mortgage Disclosure Act (12 U.S.C. 2801 et seq.). The Board previously has considered these allegations. See KeyCorp, 82 Federal Reserve Bulletin 946 (1996) ("KeyCorp Order"), the relevant portions of which are incorporated herein by reference. 13 ICP also raises issues related to KeyCorp's record of performance under the Community Reinvestment Act (12 U.S.C. 2901 et seq.) ("CRA"). ICP cites the number of branches of KeyCorp's subsidiary banks that have been closed or are projected to be closed. The Board previously has determined, however, that the CRA by its terms does not apply in applications by bank holding companies to acquire nonbank subsidiaries like KCMI that are not insured depository institutions. See The Mitsui Bank, Limited, 76 Federal Reserve Bulletin 381 (1990). Contrary to ICP's contentions, CRA factors, including branch closings, will be considered only in applications to acquire an insured depository institution under sections 3 or 4 of the BHC Act, consistent with the Board's statement in the KeyCorp Order. ICP also maintains that the recent acquisition of Champion Mortgage Company ("Champion") by KeyBank USA, National Association ("KeyBank USA"), raises adverse CRA performance and consumer law compliance issues, and that KeyBank USA was improperly designated by the Office of the Comptroller of the Currency ("OCC") as a "limited purpose" institution for purposes of evaluating the bank's CRA compliance. ICP also contends that KeyCorp did not provide ICP with information on the approval process for the Champion acquisition or on branch closings by its lead subsidiary bank, KeyBank National Association. The Board has provided a copy of ICP's comments to the OCC for consideration. KeyBank USA's acquisition of Champion, which engages in lending activities that a national bank is authorized to engage in under the National Bank Act (12 U.S.C. § 24(7)), was consistent with the Board's Regulation Y and did not require prior Board approval. See 12 C.F.R. 225.22(e)(1). As previously discussed, furthermore, branch closings are not relevant to the proposal under consideration by the Board. 14 Voting for this action: Chairman Greenspan and Governors Kelley, Phillips, and Meyer. Absent and not voting: Vice Chair Rivlin.

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1997 Orders on banking applications