At the time the Equity Hedge Memorandum was finalized, OCC had not decided how to publicly communicate its decision. The Chief Counsel's Office and the Deputy Comptrollers for Large Bank Supervision met to determine how to let all national banks know about the OCC decision without making it public. After much deliberation, OCC decided that the Securities and Corporate Practices Division attorneys would prepare a communication strategy for the Deputy Comptrollers for Large Bank Supervision to give to EICs. The EICS would not promote the proposal or provide copies of the Equity Hedge Memorandum to banks. Instead, they would encourage banks interested in equity hedging to contact OCC's Securities and Corporate Practices Division in order to determine whether their proposals for equity hedging were permissible under OCC's legal determination. The EICS would also be responsible for determining whether the banks had the appropriate risk management systems in place prior to engaging in the activity of equity hedging in order to prevent equity hedging in the bank from being used for speculation. On July 25, 2000, a cover distribution memorandum was finalized and sent from the Chief Counsel's Office to the Deputy Comptrollers for Large Bank Supervision and large bank EICs, District Deputy Comptrollers, and Assistant Deputy Comptrollers for mid-sized banks stating that OCC supervisory staff may discuss OCC's position with national banks other than the requesting banks. The memorandum stated that because the Equity Hedge Memorandum was an internal document, it was not to be distributed outside of OCC. The memorandum also stated that each bank was to be directed to obtain its EIC's approval prior to hedging equity derivative transactions with equities and that EICs were to make sure that banks had adequate procedures in place to ensure that the bank's equity holdings were not for speculative purposes. The EICs of the three requesting banks had already notified their banks of OCC's approval prior to the distribution of the Equity Hedge Memorandum to all the EICs of large banks. 16 The EICS of the three requesting banks spoke to their banks' legal departments to say that OCC had determined that hedging equity derivative transactions is a permissible activity, subject to supervisory approval of the banks' risk management systems. The banks were told that the legal determination was effective immediately and were encouraged to contact the Securities and Corporate Practices Division to determine whether their equity derivative activity was, in fact, 16 The fourth bank also received EIC notification on July 26, 2000. OCC Decision Not to permissible under OCC's legal determination. Finally, the EICs informed their banks that equities would be held for hedging purposes only and not for speculation, as represented by the banks. The EICs said that an additional meeting would need to be set up with the banks' risk management staff to discuss expectations regarding the safety and soundness practices and policies that would have to be implemented. The banks were to formalize their policies and procedures and risk management systems so that the EICS could review them either during targeted examinations, the current supervisory cycle, or as the bank implemented policies and procedures.1 We interviewed the EICS of the four banks that OCC had given approval to equity hedge within the bank to get a better understanding of the process used to approve the banks' policies and procedures. The EICs told us that they asked the banks to put together individual risk management programs that would monitor the risks arising from equity derivative transactions, in-house equity hedges, and any speculation resulting from hedging within the bank. In some cases, the EICs made recommendations that banks implemented before undertaking equity hedges. The EICs said that they also discussed with banking officials the types of reporting requirements that would be put in place to mitigate speculation. The way in which OCC approved this activity caused you and certain regulatory officials to question OCC's process for determining whether to publish a decision and to ask whether OCC circumvented its "normal" process in communicating this decision. Because OCC has discretion in determining how it conveys its decisions to national banks, it does not have one set process for doing so. Thus, it is unclear what criteria OCC uses to determine when and whether to publish its decisions. OCC officials said, however, that there are several ways to convey decisions to national banks. For example, OCC can publish an interpretive letter when a bank requests its interpretation of the law. By using this method, OCC is letting all national banks know its interpretation of the law or the permissibility of an activity. Also, examiners for large banks reside in the 17 According to OCC examination manuals, in large banks most examination-related work is conducted during the 12-month supervisory cycle through various ongoing supervisory activities or targeted examinations. Targeted examinations are often conducted as integrated risk reviews by business or product line. Since a product may have implications for several risk categories, the targeted reviews evaluate risk controls and processes for each applicable risk category. banks and frequently talk informally with bank staff. In some cases, an examiner will attempt to obtain the views of OCC's legal staff about a specific activity and will ask for an oral or written opinion. Additionally, legal staff from the banks often communicate informally with OCC's legal staff and may seek informal counsel on various issues. Furthermore, OCC can issue no-objection letters when national banks ask if the agency objects to a particular activity; however, such letters are usually not legal decisions. Finally, OCC said that it provides oral comments to banks whenever necessary. OCC officials said that the form of their response is dictated by the way the question is posed. In other words, if a bank requests a written opinion, OCC will respond with a written opinion. With the equity hedge decision, OCC did not initially issue either an interpretive letter or an opinion letter. OCC and national banking officials told us that the agency chose initially to provide a verbal opinion on the permissibility of equity hedging to the requesting banks because the banks requested an oral response. We asked OCC officials whether OCC's initial decision not to publish its interpretation was based on concern about a reaction from members of Congress or officials from other federal banking agencies. The Chief Counsel told us that OCC did not publish its interpretation because it was focused and narrow in terms of notifying the banks that had requested the approval. OCC also did not want to encourage other national banks that it believed should not be engaged in equity derivatives to pursue this activity because of the decision. The Chief Counsel also said that the circumstances in this decision were limited to a small number of national banks that were likely to present to OCC the issue of wanting to hedge their equity derivative transactions within the bank. Thus, OCC believed that only a handful of institutions would be affected by its legal determination. In light of the nonpublic way in which OCC initially conveyed its equity hedge decision, questions arose about OCC's overall process for determining whether to publish its decisions and the legal basis on which a decision was made. OCC has previously published numerous decisions regarding equities and hedging. For example, OCC has published decisions allowing banks to invest in warrants, 18 to maintain ownership of equity in 18 *A warrant is a financial instrument that usually entitles the holder to buy a proportionate amount of common stock at a specified price, usually higher than the market price at the time of issuance, for a period of years or to perpetuity. insurance companies, and to own otherwise impermissible investments to hedge employee compensation plans. Furthermore, OCC's 1994 decision authorizing national banks to engage in equity derivative transactions was a published decision. OCC's Chief Counsel said that OCC tries to publish its decisions, such as interpretive letters, on a regular basis and has an informal process whereby a law department committee reviews decisions and decides which to publish. However, the committee does not comment on and publish every decision. The equity hedge decision was not submitted to the committee initially because at the time OCC did not intend the decision to apply to all national banks. OCC officials told us that from the time they made their legal determination, they were considering how best to publicly treat their decision. However, congressional concern about the decision prompted them to issue Comptroller Hawke's response to your inquiry as an interpretive letter in September 2000. Other federal banking regulators also have an interest in OCC publishing its decisions, especially when OCC interprets the equity-related provisions contained in section 24(Seventh). The Federal Reserve Act provides that state member banks are subject to the same limitations and conditions with respect to investment securities and stock as those contained in section 24(Seventh)." The Federal Deposit Insurance Act prohibits insured state banks from engaging in any activity that is not permissible for a national bank unless the Federal Deposit Insurance Corporation (FDIC) determines that the activity would pose no significant risks to the deposit insurance fund and the bank complies with applicable federal capital standards.20 Federal Reserve officials told us that the Federal Reserve independently determines whether a particular equity-related activity is permissible under section 24(Seventh). FDIC told us that in deciding on the permissibility of a bank's securities activity, the agency typically relies on OCC's determination. By failing to inform other federal banking regulators of their analysis, OCC potentially affects how those regulators interpret the National Bank Act on behalf of the institutions they oversee. 1912 U.S.C.§ 335 (1994). 2012 U.S.C. § 1831a(a)(1) (Supp. 2000). We Concur With We agree with OCC's conclusion that the purchase of equity securities by a The Bank Powers National bank powers, as well as limitations on those powers, are contained in the National Bank Act. Specifically, the first sentence of Section 24(Seventh) (referred to as the "powers clause") provides that a national bank may engage in the business of banking, which includes but is not limited to the five types of activity enumerated in the sentence, and any activity incidental to the business of banking." The stock-and securities-related restrictions, which immediately follow the powers clause are in table 1. 21 "NationsBank of North Carolina v. Variable Annuity Life Insurance Co., 513 U.S. 251 |