ORDERS ISSUED UNDER BANK HOLDING COMPANY ACT.

Orders Issued Under Section 3 of the Bank Holding Company Act

Brookline Bancorp, MHC Brookline, Massachusetts

Brookline Bancorp, Inc. Brookline, Massachusetts

Order Approving Acquisition of Shares of a Bank Holding Company

Brookline Bancorp, MHC and its subsidiary, Brookline Bancorp, Inc., both of Brookline, Massachusetts (collectively "Brookline"), bank holding companies within the meaning of the Bank Holding Company Act ("BHC Act"), have requested the Board's approval under section 3 of the BHC Act (12 U.S.C. [sections] 1842) to acquire up to 9.9 percent of the voting shares of Medford Bancorp, Inc. ("Medford") and thereby acquire an interest in Medford's wholly owned subsidiary bank, Medford Savings Bank, both of Medford, Massachusetts.(1)

Notice of this proposal, affording interested persons an opportunity to submit comments, has been published (64 Federal Register 55,290 (1999)). The time for filing comments has expired, and the Board has considered this proposal and all comments received in light of the factors set forth in section 3 of the BHC Act. Brookline is the 33rd largest depository institution in Massachusetts, controlling total deposits of $509.3 million, representing less than 1 percent of total deposits in depository institutions in the state.(2) Medford is the 15th largest depository institution in Massachusetts, controlling $902.6 million in deposits, representing less than 1 percent of total deposits in depository institutions in the state. Brookline has stated that it proposes to acquire the shares of Medford as a passive investment and that Brookline would not control Medford after this investment.

In connection with this proposal, the Board received comments from Medford objecting to the proposal on the grounds that the investment would have an adverse effect on the managerial resources and financial condition of Brookline and Medford, and would harm the communities that Medford serves. The Board has considered carefully Medford's comments in light of the factors that the Board must consider under section 3(c) of the BHC Act.(3)

The Board previously has stated that the acquisition of less than a controlling interest in a bank or bank holding company is not a normal acquisition for a bank holding company.(4) However, the requirement in section 3(a)(3) of the BHC Act for Board approval before a bank holding company acquires more than 5 percent of the voting shares of a bank suggests that Congress contemplated the acquisition by bank holding companies of between 5 and 25 percent of the voting shares of banks.(5) On this basis, the Board previously has approved the acquisition by a bank holding company of less than a controlling interest in a bank or bank holding company where the proposal meets the factors set forth in the BHC Act.(6)

Medford contends that the proposed investment would constitute a controlling investment in Medford, and would enable Brookline to exercise a coercive influence on Medford's corporate affairs. Brookline has agreed to abide by certain commitments that the Board has relied on in other cases to determine that an investing bank holding company would not be able to exercise a controlling influence over another bank holding company or bank for purposes of the BHC Act.(7) For example, Brookline has committed not to exercise or attempt to exercise a controlling influence over the management or policies of Medford or any of its subsidiaries; not to seek or accept representation on the board of directors of Medford or any of its subsidiaries; and not to have any director, officer, employee, or agent interlocks with Medford. Brookline also has committed not to attempt to influence the dividend policies, loan decisions, or operations of Medford or any of its subsidiaries. Moreover, Brookline, which proposes to acquire less than 10 percent of the voting shares of Medford, may not acquire any additional shares of Medford without prior Board approval under the BHC Act.

Medford contends that these commitments by Brookline are insufficient to prevent Brookline from exercising a controlling influence on Medford. The Board notes, however, that it has adequate supervisory authority to monitor Brookline's compliance with its commitments, and expressly retains authority to initiate a control proceeding against Brookline if facts presented later indicate that Brookline or any of its subsidiaries or affiliates, in fact, controls Medford for purposes of the BHC Act. Based on these commitments and all other facts of record, it is the Board's judgment that Brookline would not acquire control of Medford for purposes of the BHC Act through consummation of this proposal.

Competitive Considerations

In considering an application under section 3 of the BHC Act, the Board is required to evaluate a number of factors, including the competitive effects of the proposal. The Board previously has noted that one company need not acquire control of another company in order to substantially lessen competition between them.(8) The Board has found that noncontrolling interests in directly competing depository institutions may raise serious questions under the BHC Act, and has concluded that the specific facts of each case will determine whether the minority investment in a company would be anticompetitive.(9)

Brookline and Medford compete directly in the Boston banking market.(10) If Brookline and Medford are considered as a combined organization, Brookline would be the 12th largest depository institution organization in the Boston banking market, controlling $1.3 billion in deposits, representing less than 1 percent of total deposits in depository institutions in the market.(11) The Herfindahl-Hirschman Index ("HHI") for the Boston banking market would remain unchanged at 1899.12.(12) Accordingly, based on all the facts of record, the Board concludes that consummation of this proposal would not have a significantly adverse effect on competition or on the concentration of resources in any relevant market in which Brookline and Medford compete.(13)

Other Factors

The Board also is required under section 3(c) of the BHC Act to consider the financial and managerial resources and future prospects of the companies and banks concerned. Medford contends that Brookline's investment could distract the attention of Medford's management from the operation of Medford, restrict Medford's ability to effect a merger, and adversely affect Medford's employees and its ability to retain customers. The Board believes that the commitments made by Brookline to maintain its investment as a passive investment and not to exercise a controlling influence over Medford reduce the potential adverse effects of the proposal. Moreover, the Board notes that Brookline currently is well capitalized and would remain well capitalized on consummation of the proposal. Based on all the facts of record, the Board has concluded that the financial and managerial resources and the future prospects of Brookline, Medford, and their subsidiaries are consistent with approval of this application, as are the other supervisory factors the Board must consider under section 3 of the BHC Act. In addition, considerations relating to the convenience and needs of the communities to be served, including the record of performance of the institutions involved under the Community Reinvestment Act (12 U.S.C. [sections] 2901 et seq.), are consistent with approval of the application.

Conclusion

Based on the foregoing, and on all other facts of record, the Board has determined that this application should be, and hereby is, approved. The Board's approval is specifically conditioned on compliance by Brookline with all commitments made in connection with this application, including the commitments discussed in this order. The commitments and conditions relied on by the Board in reaching this decision are deemed to be conditions imposed in writing by the Board in connection with its findings and decision, and, as such, may be enforced in proceedings under applicable law.

The transaction shall not be consummated before the fifteenth calendar day following the effective date of this order, or 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 Boston, acting pursuant to delegated authority.

By order of the Board of Governors, effective November 29, 1999.

Voting for this action: Chairman Greenspan, Vice Chairman Ferguson, and Governors Kelley, Meyer, and Gramlich.

ROBERT DEV. FRIERSON Associate Secretary of the Board

(1.) The proposed acquisition would be made by Brookline Securities Corp., a wholly owned subsidiary of Brookline Bancorp, Inc.

(2.) Asset and deposit data are as of June 30, 1999. In this context, depository institutions include commercial banks, savings banks, and savings associations.

(3.) The Board may not approve an application that would violate state law. Whitney Nat'l Bank in Jefferson Parish v. Bank of New Orleans & Trust Co., 379 U.S. 411, 419 (1965). Medford contends that Massachusetts law requires Brookline to file an application with the Massachusetts Board of Bank Incorporation ("State Bank Board"). The Massachusetts Commissioner of Banks ("Commissioner") has been provided with notice of the application filed with Board, as required under section 3 of the BHC Act, 12 U.S.C. [sections] 1842(b)(1), and is reviewing whether Brookline also is required to file an application with the State Bank Board. The Commissioner has not filed any comments with the Board about this proposal. In addition, Massachusetts law appears to require Brookline to file such an application only if Brookline owns or controls 25 percent or more of the voting stock of each of two or more banking institutions. Mass. Gen. Laws ch. 167A, [sections] 2(2)(b). At this time, Brookline owns or controls 25 percent or more of the voting stock of only one banking institution. Accordingly, it does not appear at this time that the Board is precluded from approving this proposal. The Board's approval of the application is conditioned on Brookline obtaining any approval that is required by Massachusetts law.

(4.) See, e.g., First Mariner Bancorp, 84 Federal Reserve Bulletin 956, 957 (1998); Sun Banks, Inc., 71 Federal Reserve Bulletin 243 (1985) ("Sun Banks"); State Street Boston Corp., 67 Federal Reserve Bulletin 862, 863 (1981).

(5.) See 12 U.S.C. [sections] 1842(a)(3).

(6.) See, e.g., GB Bancorporation, 83 Federal Reserve Bulletin 115 (1997) (acquisition of up to 24.9 percent of the voting shares of a bank); Mansura Bancshares, Inc., 79 Federal Reserve Bulletin 37 (1993) (acquisition of 9.7 percent of the voting shares of a bank holding company).

(7.) See, e.g., National Bancshares Corp. of Texas, 82 Federal Reserve Bulletin 565 (1996); First Southern Bancorp, Inc., 82 Federal Reserve Bulletin 424 (1996). These commitments are set forth in the Appendix.

(8.) See, e.g. First State Corp., 76 Federal Reserve Bulletin 376, 379 (1990); Sun Banks at 243.

(9.) See, e.g. Sun Banks at 244.

(10.) The Boston banking market is defined as the Boston Ranally Metropolitan Area and the town of Lyndeboro in New Hampshire.

(11.) Market deposit data are as of June 30, 1998, and reflect acquisitions through October 15, 1999.

(12.) Market share data are based on calculations that include the deposits of thrift institutions at 50 percent. The Board previously has indicated that thrift institutions have become, or have the potential to become, significant competitors of commercial banks. See, e.g., Midwest Financial Group, 75 Federal Reserve Bulletin 386, 387 (1989); National City Corporation, 70 Federal Reserve Bulletin 743, 744 (1984). Thus, the Board regularly has included thrift deposits in the calculation of market share on a 50-percent weighted basis. See, e.g., First Hawaiian, Inc., 77 Federal Reserve Bulletin 52, 55 (1991).

(13.) Under the DOJ Guidelines, 49 Federal Register 26,823 (June 29, 1984), a market in which the post-merger HHI is above 1800 is considered to be highly concentrated. The Department of Justice has informed the Board that a bank merger or acquisition generally will not be challenged (in the absence of other factors indicating anticompetitive effects) unless the post-merger HHI is at least 1800 and the merger increases the HHI by more than 200 points. The Department of Justice has stated that the higher than normal thresholds for an increase in the HHI when screening bank mergers and acquisitions for anticompetitive effects implicitly recognize the competitive effects of limited-purpose and other nondepository financial entities.

Appendix

As part of this proposal, Brookline Bancorp, MHC ("MHC"), Brookline Bancorp, Inc. ("SHC"), and Brookline Securities Corp. ("Securities Corp"), each of Brookline, Massachusetts, commit that they will not, without the prior approval of the Federal Reserve Board, directly or indirectly:

(1) Exercise or attempt to exercise a controlling influence over the management or policies of Medford Bancorp, Inc. ("Medford") or any of its subsidiaries;

(2) Seek or accept representation on the board of directors of Medford or any of its subsidiaries;

(3) Have or seek to have any employee or representative serve as an officer, agent, or employee of Medford or any of its subsidiaries; (4) Take any action that would cause Medford or any of

its subsidiaries to become a subsidiary of MHC, SHC, Securities Corp, or any of their subsidiaries;

(5) Acquire or retain shares that would cause the combined interests of MHC, SHC, Securities Corp, and any of their subsidiaries and their officers, directors, and affiliates to equal or exceed 25 percent of the outstanding voting shares of Medford or any of its subsidiaries;

(6) Propose a director or slate of directors in opposition to a nominee or slate of nominees proposed by the management or the board of directors of Medford or any of its subsidiaries;

(7) Solicit or participate in soliciting proxies with respect to any matter presented to the shareholders of Medford or any of its subsidiaries;

(8) Attempt to influence the dividend policies or practices; the investment loan, or credit decisions or policies; the pricing of services; personnel decisions; operations activities (including the location of any offices or branches or their hours of operation, etc.); or any similar activities or decisions of Medford or any of its subsidiaries;

(9) Dispose or threaten to dispose of shares of Medford or any of its subsidiaries as a condition of specific action or nonaction by Medford or any of its subsidiaries; or

(10) Enter into any other banking or nonbanking transactions with Medford or any of its subsidiaries, except that MHC or SHC may establish and maintain deposit accounts with Medford's subsidiary depository institution, provided that the aggregate balance of all such deposit accounts does not exceed $500,000 and that the accounts are maintained on substantially the same terms as those prevailing for comparable accounts of persons unaffiliated with Medford or any of its subsidiaries.

The Sanwa Bank, Limited Osaka, Japan

Order Approving the Acquisition of a Bank Holding Company

The Sanwa Bank, Limited ("Sanwa"), a bank holding company within the meaning of the Bank Holding Company Act ("BHC Act"), has requested the Board's approval under section 3 of the BHC Act (12 U.S.C. [sections] 1842) to retain up to 32 percent of the voting shares of The Toyo Trust and Banking Company, Limited, Tokyo, Japan ("Toyo"), and thereby retain control of Toyo's wholly owned U.S. subsidiary bank, Toyo Trust Company of New York, New York, New York ("Toyo Bank").(1)

Notice of the proposal, affording interested persons an opportunity to submit comments, has been published (64 Federal Register 25,041 (1999)). The time for filing comments has expired, and the Board has considered the proposal and all comments received in light of the factors set forth in section 3 of the BHC Act.

Sanwa, with total consolidated assets of approximately $418 billion, is the fourth largest banking organization in Japan.(2) In the United States, Sanwa owns Sanwa Bank California, San Francisco, California ("Sanwa Bank"), a state-chartered commercial bank. In addition, Sanwa operates branches in New York, New York, Chicago, Illinois, and San Francisco and Los Angeles, California; and representative offices in Houston, Texas, and New York, New York. Sanwa also engages in a broad range of permissible nonbanking activities in the United States through subsidiaries, including underwriting and dealing in debt and equity securities to a limited extent.

Toyo, with total consolidated assets of approximately $66 billion, is the 19th largest banking organization in Japan. Toyo controls Toyo Bank and operates a branch in New York, New York.

Interstate Analysis

Section 3(d) of the BHC Act allows the Board to approve an application by a bank holding company to acquire control of a bank located in a state other than the home state of the bank holding company if certain conditions are met. For purposes of the BHC Act, the home state of Sanwa is California,(3) and Toyo Bank is located in New York. All the conditions for an interstate acquisition enumerated in section 3(d) are met in this case.(4) In light of all the facts of record, the Board is permitted to approve the proposal under section 3(d) of the BHC Act.

Competitive Considerations

Sanwa and Toyo compete directly in the New York/New Jersey Metropolitan banking market ("New York banking market")(5) Sanwa's New York branch controls deposits representing less than 1 percent of the deposits in the market. Toyo, through its New York branch and Toyo Bank, also controls deposits representing less than 1 percent of the deposits in the market.(6) On consummation of the proposal, numerous competitors would remain in the market, and the market would remain unconcentrated. Based on these and all other facts of record, the Board concludes that consummation of the proposal would not result in any significantly adverse effects on competition or on the concentration of banking resources in the New York banking market or any other relevant banking market.

Certain Supervisory Considerations

Under section 3 of the BHC Act, the Board may not approve an application involving a foreign bank unless the bank is "subject to comprehensive supervision or regulation on a consolidated basis by the appropriate authorities in the bank's home country."(7) The Board previously has determined, in applications under the International Banking Act (12 U.S.C. [sections] 3101 et seq.) ("IBA") and the BHC Act, that certain Japanese commercial banks were subject to comprehensive consolidated supervision by their home country supervisor.(8) In this case, the Board has determined that Sanwa is supervised on substantially the same terms and conditions as the other Japanese banks. Based on all the facts of record, the Board has concluded that Sanwa is subject to comprehensive supervision and regulation on a consolidated basis by its home country supervisor.

The BHC Act also requires the Board to determine that the foreign bank has provided adequate assurances that it will make available to the Board such information on its operations and activities and those of its affiliates that the Board deems appropriate to determine and enforce compliance with the BHC Act. The Board has reviewed the restrictions on disclosure in jurisdictions where Sanwa has material operations and has communicated with relevant government authorities concerning access to information. Sanwa has committed that, to the extent not prohibited by applicable law, it will make available to the Board such information on the operations of Sanwa and any of its affiliates that the Board deems necessary to determine and enforce compliance with the BHC Act, the IBA, and other applicable federal law. Sanwa also has committed to cooperate with the Board to obtain any waivers or exemptions that may be necessary in order to enable Sanwa to make any such information available to the Board. In light of these commitments and other facts of record, the Board has concluded that Sanwa has provided adequate assurances of access to any appropriate information the Board may request. For these reasons, and based on all the facts of record, the Board has concluded that the supervisory factors it is required to consider under section 3(c)(3) of the BHC Act are consistent with approval.

Financial, Managerial, and Convenience and Needs Considerations

The Board also has carefully considered the financial and managerial resources and future prospects of Sanwa, Toyo, and their respective subsidiaries, and the effect the proposal would have on such resources. The Board notes that the proposal is incidental to a corporate restructuring of Japanese banking organizations that is intended to enhance the overall financial strength and future prospects of both organizations. Sanwa's reported capital levels exceed the minimum levels that would be required under the Basle Capital Accord, and its capital levels are considered equivalent to the capital levels that would be required of a U.S. banking organization under similar circumstances. The Board notes, moreover, that the proposal does not involve any expansion of the banking or nonbanking activities of Toyo, and that Sanwa's investment in Toyo has strengthened Toyo's capital position and made additional financial resources available to Toyo Bank.

In addition, the Board has reviewed supervisory information from the home country authorities responsible for supervising Sanwa and Toyo concerning the proposal and the condition of the parties, confidential financial information from Sanwa and Toyo, and reports of examination from the appropriate federal and state supervisors of the affected organizations assessing the financial and managerial resources of the organizations. Based on all the facts of record, the Board has concluded that the financial and managerial resources and future prospects of the organizations involved in the proposal are consistent with approval.

Sanwa Bank received an "outstanding" performance rating at its most recent examination under the Community Reinvestment Act (12 U.S.C. [sections] 2901 et seq.) ("CRA") by the Federal Deposit Insurance Corporation ("FDIC"), as of August 24, 1998. Toyo Bank also received an "outstanding" CRA performance rating from the FDIC at its most recent examination, as of June 8, 1998. In light of all the facts of record, the Board has concluded that considerations relating to the convenience and needs of the communities to be served, including the records of performance of the relevant depository institutions under the CRA, are consistent with approval.

Conclusion

Based on the foregoing and all the facts of record, the Board has determined that the application should be, and hereby is, approved. The Board's approval is specifically conditioned on compliance by Sanwa with all the commitments made in connection with the application and on the Board receiving access to information on the operations or activities of Sanwa and any of its affiliates that the Board determines to be appropriate to determine and enforce compliance by Sanwa and its affiliates with applicable federal statutes. The commitments and conditions relied on by the Board in reaching its decision are deemed to be conditions imposed in writing by the Board in connection with its findings and decision, and, as such, may be enforced in proceedings under applicable law.

By order of the Board of Governors, effective November 24, 1999.

Voting for this action: Chairman Greenspan, Vice Chairman Ferguson, and Governors Kelley, Meyer, and Gramlich.

ROBERT DEV. FRIERSON
Associate Secretary of the Board

(1.) On March 30, 1999, Sanwa acquired newly issued shares of Toyo that, when aggregated with the 4.9 percent of Toyo's voting shares previously held by Sanwa, represented approximately 32 percent of Toyo's voting shares. This investment was part of a plan to increase Toyo's capital, which was approved by the Japanese government. On consummation of the investment, Sanwa placed the newly acquired Toyo voting shares in a voting trust that does not permit Sanwa to vote such shares until U.S. regulators act on Sanwa's proposed acquisition of control of Toyo. Under the terms of the trust agreement, the voting trust terminates if the Board and the New York State Banking Department ("Department") approve Sanwa's retention of its ownership interest in Toyo. The Department approved Sanwa's application to acquire control of Toyo on April 8, 1999.

(2.) Asset data are as of March 31, 1999, and are based on exchange rates then applicable. Ranking data are as of December 31, 1998.

3. A bank holding company's home state is that state in which file total deposits of all banking subsidiaries of such company were the largest on July 1, 1966, or the date on which the company became a bank holding company, whichever is later. 12 U.S.C. [sections] 1841(o)(4)(C).

(4.) Sanwa is adequately capitalized and adequately managed, as defined by applicable law. 12 U.S.C. [sections] 1842(d)(1)(A). Toyo Bank has been in existence and operated continuously for at least the period of time required by New York state banking law. See 12 U.S.C. [sections] 1842 (d) (1) (B); N.Y. Banking Law 142-a (1998). On consummation of the proposal, Sanwa and its affiliates would control less than 10 percent of the total amount of deposits of insured depository institutions in the United States. 12 U.S.C. 1842(d)(2). All other requirements of section 3(d) of the BHC Act would be met on consummation of the proposal.

(5.) The New York banking market includes New York City; Nassau, Orange, Putnam, Rockland, Suffolk, Sullivan, and Westchester Counties in New York; Bergen, Essex, Hudson, Hunterdon, Middlesex, Monmouth, Morris, Ocean, Passaic, Somerset, Sussex, Union, Warren, and a portion of Mercer Counties in New Jersey; Pike County in Pennsylvania; and portions of Fairfield and Litchfield Counties in Connecticut.

(6.) Deposit data are as of June 30, 1998.

(7.) 12 U.S.C. [sections] 1842(c)(3)(B). As provided in Regulation Y, the Board determines whether a foreign bank is subject to consolidated home country supervision under the standards set forth in Regulation K. 12 C.F.R. 225.13(a)(4). Regulation K provides that a foreign bank may be considered subject to consolidated supervision if the Board determines that the bank is supervised or regulated in such a manner that its home country supervisor receives sufficient information on the worldwide operations of the foreign bank, including the relationships of the bank to its affiliates, to assess the foreign bank's overall financial condition and compliance with law and regulation. 12 C.F.R. 211.24(c)(1)(ii).

(8.) See The Fuji Bank , Limited, 85 Federal Reserve Bulletin 338 (1999); and The Mitsubishi Bank, Limited, 82 Federal Reserve Bulletin 436 (1996).

Orders Issued Under Section 4 of the Bank Holding Company Act

Bayerische Hypo- und Vereinsbank AG
Munich, Germany

Deutsche Bank AG
Deutsche Bank AG
Frankfurt, Germany

Stichting Prioriteit ABN AMRO Holding
Stichting Administratiekantoor ABN AMRO Holding
ABN AMRO Holding N.V.
ABN AMRO Bank N. V.
All of Amsterdam, The Netherlands

Order Approving Notices to Engage in Nonbanking Activities

Bayerische Hypo- und Vereinsbank AG ("BHV"), a foreign banking organization subject to the Bank Holding Company Act ("BHC Act"), and Deutsche Bank AG ("Deutsche Bank") and Stichting Prioriteit ABN AMRO Holding ("ABN AMRO"), Stichting Administratiekantoor ABN AMRO Holding, ABN AMRO Holding N.V., and ABN AMRO Bank N.V., bank holding companies within the meaning of the BHC Act, have requested the Board's approval under section 4(c)(8) of the BHC Act (12 U.S.C. [sections] 1843 (c) (8)), and section 225.24 of the Board's Regulation Y (12 C.F.R. 225.24) to retain up to 12.5 percent of the voting interests in Identrus, LLC, New York, New York ("Identrus"), and to engage through Identrus and other nonbank subsidiaries in acting as a certification authority ("CA") in the United States in connection with financial and nonfinancial transactions and other related activities.(1)

Notice of the proposal, affording interested persons an opportunity to submit comments, has been published (64 Federal Register 22,866 (1999)). The time for filing comments has expired, and the Board has considered the proposal and all comments received in light of the factors set forth in section 4(c)(8) of the BHC Act. BHV, with total consolidated assets of $575 billion,(2) is the second largest commercial banking organization in Germany, and operates branches in New York, New York, and Chicago, Illinois, and an agency in Los Angeles, California.

Deutsche Bank, with total consolidated assets of $724 billion, is the largest commercial banking organization in Germany. Deutsche Bank controls three subsidiary banks in the United States, and operates a branch in New York, New York, and a representative office in San Francisco, California.

ABN AMRO, with total consolidated assets of $544 billion, is the largest commercial banking organization in The Netherlands. ABN AMRO controls seven depository institutions in Illinois and one commercial bank in New York. ABN AMRO Bank N.V. also operates branches in Boston, Massachusetts; Chicago, Illinois; New York, New York; Pittsburgh, Pennsylvania; and Seattle, Washington; and agencies in Atlanta, Georgia; Miami, Florida; Houston, Texas; and Los Angeles and San Francisco, California.

Each Notificant also engages in a number of nonbanking activities in the United States.

Proposed Activities

Identrus is a joint venture among Notificants and other commercial banks and foreign banking organizations.(3) Under the proposal, Identrus would act as the global rulemaking and coordinating body for a network of financial institutions that would act as CAs and thereby provide services designed to verify or authenticate the identity of customers conducting financial and nonfinancial transactions over the Internet and other "open" electronic networks. To provide these services, Identrus and its network of participating financial institutions (the "Identrus System") would utilize digital certificates and digital signatures created through the use of public key cryptography.

In a CA system using public key cryptography, a company generates (or is assigned) a public key/private key pair and registers as the unique "owner" of the key pair with a CA.(4) Private keys and public keys are a set of different but related mathematical functions that can be used to encrypt and decrypt electronic communications. A message encrypted by a particular private key can be decrypted only by its corresponding public key. Although a private key and its corresponding public key are related, a private key cannot feasibly be derived from its corresponding public key. Thus, while a private key must be kept confidential by the company that is the registered "owner" of the key pair, the company's public key can be made publicly available without jeopardizing the confidentiality of the company's private key. A company sending a business communication (e.g., a purchase order) over an open electronic network like the Internet to another entity uses its confidential private key to digitally sign the message being sent. A digital signature is a compressed and encrypted version of the message to which it is attached. The entity receiving the digitally signed message then uses the sender's public key to decrypt the digital signature.(5) If the receiver successfully decodes the signature with the sender's public key, the receiver can be assured that the message was created using the sender's private key.(6) To be assured that the message was actually sent by the purported sender, however, the receiver must confirm that the private key/public key pair used to sign and decode the message is uniquely "owned" by the purported sender. A CA provides this assurance by issuing "digital certificates" certifying that the relevant private key/public key pair is uniquely associated with the message sender and verifying upon request the validity of such digital certificates. Notificants and other financial institutions participating in the Identrus System ("Participants")(7) would create unique private key/ public key pairs for, and issue digital certificates on behalf of, eligible customers that contract with a Participant to receive Identrus identity authentication services.(8) Each Participant would act as a repository for the digital certificates that it has issued, i.e., it would maintain a database containing information on the status of the outstanding, expired, or revoked digital certificates that it has issued to customers. Participants also would verify for third parties the validity of digital certificates issued to their customers and, upon request of the third party, may provide an explicit warranty as to the validity of the customers' digital certificates.(9) Participants also may process and transmit verification and warranty requests received from customers concerning digital certificates issued by other Participants in the Identrus System. In addition, Participants may provide customers with a limited range of software and hardware required for customers to utilize the Identrus System.(10)

Identrus would provide the infrastructure framework within which Participants would act as CAs and provide related services. The primary function of Identrus would be to act as the "root certification authority" of the Identrus System, i.e., issuing digital certificates to Participants that establish the status of Participants as CAs in the Identrus System and authenticating for customers of, and Participants in, the Identrus System the identity of Participants.(11) Identrus also would (i) establish and maintain the operating rules governing the Identrus System, including the minimum technical requirements for digital certificates and other components of the System; (ii) monitor compliance by Participants with the System's operating rules and technical standards; and (iii) monitor collateral requirements and aggregate warranty exposure for Participants in the Identrus System.(12)

Permissibility of Proposed Activities

Section 4(c)(8) of the BHC Act provides that a bank holding company may, with the Board's approval, engage in any activity that the Board determines to be closely related to banking.(13) The Board previously has authorized bank holding companies under section 4(c)(8) of the BHC Act to act as CAs and provide identity authentication services in connection with payment-related and other financial transactions conducted over electronic networks.(14) The Board has not previously authorized bank holding companies under section 4(c)(8) to act as CAs or provide identity authentication services in connection with nonfinancial transactions.

In determining whether an activity is closely related to banking, the Board and the courts look to whether (1) banks generally provide the proposed services; (2) banks generally provide services that are operationally or functionally so similar to the proposed services as to equip them particularly well to provide the proposed services; or (3) banks generally provide services that are so integrally related to the proposed services as to require their provision in a specialized form.(15)

Banks and bank holding companies have long provided identity authentication services in connection with nonfinancial transactions conducted by third parties and their own traditional banking and lending activities. For example, banks and bank holding companies are authorized to provide notary services to customers.(16) The role of a notary is to authenticate signatures on financial or nonfinancial documents for the benefit of third parties.(17) In order to verify a signature on a paper-based document, a notary must verify the identity of the person signing the document. The role served by a CA with respect to electronic documents is functionally similar to the role served by a notary with respect to paper-based documents.(18)

Similarly, banks traditionally have identified their customers to third parties through the issuance of letters of introduction or letters of reference.(19) In addition, banks and bank holding companies routinely authenticate the identity of customers and noncustomers in connection with their authorized check cashing functions.(20)

Banks and bank holding companies also have long been authorized to issue signature guarantees to issuers of securities and their transfer agents in connection with the transfer of securities.(21) A bank issuing a signature guarantee warrants that the signature of the customer indorsing a certificated security or authorizing the transfer of an uncertificated security is authentic. The issuing bank also warrants that the signer was an appropriate person to indorse the security or authorization (or, if the signature is by an agent, that the agent had actual authority to act on behalf of the appropriate person) and the signer had legal capacity to sign.(22) In light of these warranties, a bank providing a signature guarantee must verify the identity of the customer providing the indorsement or signing the instruction.(23)

Furthermore, identity authentication services are an integral part of many traditional banking functions. Accordingly, banks and bank holding companies have developed sophisticated methods for authenticating the identity of customers and noncustomers that transact business or communicate with the bank or bank holding company through electronic means or otherwise. Many of these activities are operationally and functionally similar to the proposed activities and equip banks and bank holding companies particularly well to provide the proposed services. For example, banks and bank holding companies maintain systems to electronically authenticate the identity of persons engaged in credit and debit card, automated teller machine ("ATM"), home banking, and wire transfer transactions with the institution.(24) Banks and bank holding companies also electronically authenticate the identity of persons in connection with the check and credit card verification services they are authorized to provide to merchants and other businesses.(25)

The Board notes, moreover, that state banks and national banks recently have been authorized to act as CAs and provide identity authentication services in connection with financial and nonfinancial transactions conducted over electronic networks.(26) Based on the foregoing, the Board concludes that acting as a CA and, more generally, authenticating the identity of customers conducting financial and nonfinancial transactions are activities that are closely related to banking within the meaning of section 4(c)(8) of the BHC Act.

As discussed above, Identrus and Notificants also propose to engage in a number of activities as part of and in connection with their proposed CA activities. These activities include (i) processing, transmitting, and storing data necessary for the operation of the Identrus System, such as digital certificates, requests for verification of digital certificates, and warranty requests; (ii) developing and marketing software and hardware necessary for the operation of the Identrus System; and (iii) complying with, monitoring, and enforcing the collateral posting requirements associated with identity warranties. In addition, Identrus would establish operating policies, procedures, and guidelines for the Identrus System.

The Board's Regulation Y permits bank holding companies to provide data processing and data transmission services and facilities (including software and hardware) for the processing and transmission of financial, banking, or economic data, and to engage in activities related to making, acquiring, brokering, or servicing extensions of credit, such as posting collateral and monitoring collateral requirements.(27) Regulation Y also permits bank holding companies to engage in incidental activities that are necessary to the conduct of an activity that is closely related to banking.(28) Identrus and Notificants have represented that they would engage in the additional activities only in connection with their CA activities and would not engage in such activities separate or apart from their CA activities. Notificants also have committed that the data processing and data transmission activities of Notificants and Identrus, including any proposed development or sale of hardware and software, will comply with the Board's regulations and interpretations. In light of the nature of these additional activities, the fact that they would be conducted only in connection with the CA activities of Identrus and Notificants, and all other facts of record, the Board concludes that these activities are encompassed within the activities previously approved by the Board by regulation or are incidental to the permissible CA activities of Identrus and Notificants and, therefore, are permissible under Regulation Y.(29)

Other Considerations

In order to approve the notices, the Board also must determine that the performance of the proposed activities by Notificants and Identrus "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.(30) As part of its evaluation of these factors, the Board considers the financial and managerial resources of Notificants and their subsidiaries, and the effect the transaction would have on such resources.(31) The Board notes that each Notificant maintains capital equivalent to the capital levels that would be required of a U.S. banking organization. Based on all the facts of record, including confidential examination reports and financial information submitted by Notificants, the Board has concluded that financial and managerial considerations are consistent with approval of the proposal.

The Board has carefully considered the possibility that Identrus, Notificants, and their customers could expose themselves to the risks of electronic interception, interference, and fraud by operating and participating in a system that provides digital certification services for transactions conducted over open electronic networks like the Internet. The Board has carefully considered the proposal in light of these risks and the policies and procedures that the Identrus System would use to mitigate such risks. The Board notes that an organization would be eligible to become a Participant in the Identrus System only if it provides financial services, is regulated and examined by a government authority in its home country, meets minimum capital standards, and has a minimum long-term debt rating. Identrus and Notificants also intend to use sophisticated cryptographic methods to seek to ensure the security of digital certificates and to adopt a highly secure root CA technology.

In addition, as noted above, Participants and customers would be required to enter into written contracts that carefully define the functions, responsibilities, and scope of liability of the relevant parties and require the Participant and customer to comply with the operating rules of Identrus before they are permitted to participate in the Identrus System.(32) Each digital certificate issued by a Participant would indicate that the recipient of the certificate may not rely on the certificate unless the recipient purchases a separate warranty from the Participant issuing the certificate. Furthermore, Identrus proposes to (i) establish limits on each Participant's per transaction and aggregate warranty exposure and monitor each Participant's compliance with these limits, (ii) require Participants to provide collateral to secure their warranty exposure and monitor compliance with such collateral requirements, and (iii) maintain a comprehensive auditing system that would monitor the adherence of Participants to the Identrus operating rules and technical standards.

The Board recognizes that neither the cryptographic methods employed by Identrus nor any other security system can provide absolute protection against the risks noted above. The nature of these risks is not different, however, from those to which more traditional banking operations are exposed in other forms. The Board expects banking organizations considering whether to act as CAs to analyze carefully the associated risks, and to evaluate carefully whether those risks are consistent with their policies relating to the security of customer information and other data.(33) The Board believes that such analyses and evaluations would mitigate the risk that acting as a CA would result in unsound banking practices.(34)

The Board also has carefully considered the competitive effects of the proposal. Notificants do not currently act as CAs in the United States, and consummation of the proposal would increase competition in the market for CA services. In addition, the Board notes that the Identrus System would permit Notificants and other Participants in the Identrus System to compete with each other to provide CA and related services to customers.

Notificants have stated that consummation of the proposal would facilitate the use of the Internet and other open electronic networks for business-to-business electronic commerce, and allow companies to reduce the transaction costs associated with doing business. The Board also believes that consummation of the proposal would enhance the ability of Notificants to meet the needs of their customers. In addition, as the Board previously has noted, there are public benefits to be derived from permitting capital markets to operate so that banking organizations can make potentially profitable investments in nonbanking companies and from permitting banking organizations to allocate their resources in the manner they consider to be most efficient when such investments and actions are consistent, as in this case, with the relevant considerations under the BHC Act.(35)

Based on the foregoing and all other facts of record, the Board has determined that consummation of the proposal can reasonably be expected to produce benefits to the public that outweigh any potential adverse effects of the proposal. Accordingly, based on all the facts of record, the Board has determined that the balance of public interest factors that the Board must consider under the proper incident to banking standard of section 4(c)(8) of the BHC Act is favorable and consistent with approval.

Conclusion

Based on the foregoing and all the facts of record, the Board has determined that the proposal should be, and hereby is, approved. The Board's approval is specifically conditioned on compliance by Notificants with all the commitments made in connection with the notices, including the commitments discussed in this order, and the conditions set forth in this order. The Board's determination also is subject to all the 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, or to prevent evasion of, the provisions of the BHC Act and the Board's regulations and orders issued thereunder. These commitments and conditions are deemed to be conditions imposed in writing by the Board in connection with its findings and decision, and, as such, may be enforced in proceedings under applicable law. This 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 appropriate Federal Reserve Bank, acting pursuant to delegated authority.

By order of the Board of Governors, effective November 10, 1999.

Voting for this action: Chairman Greenspan, Vice Chairman Ferguson, and Governors Kelley, Meyer, and Gramlich.

ROBERT DEV. FRIERSON
Associate Secretary of the Board

(1.) BHV, Deutsche Bank, and ABN AMRO and its subsidiaries listed above are hereafter collectively referred to as "Notificants". Foreign banks, such as Notificants, may engage in permissible banking activities in the United States directly through a U.S. branch or agency. A foreign bank must, however, receive the Board's prior approval under section 4(c)(8) to engage in the United States through a nonbank subsidiary in activities that are closely related to banking. In this case, Notificants have requested approval under section 4(c)(8) of the BHC Act to engage in the proposed activities in the United States through Identrus and other nonbank subsidiaries to provide themselves maximum flexibility in structuring their Identrus-related activities. For purposes of this order, references to activities conducted by Notificants are intended to refer to activities conducted through Identrus or other U.S. nonbanking companies.

(2.) Asset data are as of June 30, 1999, and ranking data are as of December 31, 1998.

(3.) Bank of America NT & SA, Charlotte, North Carolina, and Citibank, N.A., New York, New York, have applications pending before the Office of the Comptroller of the Currency to invest indirectly in Identrus. The Chase Manhattan Bank, New York, New York, received the approval of the New York State Banking Department to invest indirectly in Identrus. See Letter from P. Vincent Conlon, Deputy Superintendent of Banks, New York State Banking Department, to Ronald C. Mayer, The Chase Manhattan Bank, dated April 9, 1999 ("Chase Letter"). Identrus expects other U.S. commercial banks and foreign banking organizations to seek approval from appropriate regulatory authorities to invest in Identrus and engage in related activities.

(4.) A number of nonbanking companies currently operate CA systems that rely on public key cryptography and provide identity authentication services to senders and receivers of electronic communications.

(5.) The sender's public key may be attached to the digitally signed communication, or the receiver of the message may obtain the sender's public key from a publicly available database.

(6.) The receiver also can confirm that the message was not altered after it was signed by comparing the message received to the decrypted version of the message text embedded in the digital signature.

(7.) Participation in the Identrus System is available only to organizations that are engaged primarily in the business of providing financial services, are subject to regulation and examination by a government authority in their home country, and that meet certain eligibility criteria, such as minimum capital requirements and debt rating criteria. A Participant also must agree to be bound by the Identrus operating rules and execute certain participation agreements. Financial institutions would not be required to purchase an ownership interest in Identrus to become a Participant.

(8.) Participants may provide Identrus-related services only to customers that have agreed to be bound by applicable provisions of the Identrus operating rules and have signed the appropriate customer agreements. The Identrus operating rules allow Participants to provide Identrus-related services only to business entities, such as corporations, and governmental organizations, and not to natural persons. The Identrus operating rules and customer agreements would make each customer contractually responsible for ensuring that its private key is kept confidential.

(9.) The operating rules of the Identrus System would provide that a company relying on a digital certificate issued by a Participant would have recourse against the Participant only if the company purchased an explicit warranty from the Participant and then only up to amount of the purchased warranty. A Participant that issues a digital certificate could refuse to issue a warranty with respect to a digital certificate for any bona fide reason. The Identrus System would limit the aggregate amount of warranties that a Participant may have outstanding at any one time and would require each Participant to post collateral with Identrus to cover its warranty exposure.

(10.) For example, Participants may provide smart cards containing digital certificates and smart card readers to their customers.

(11.) Digital certificates issued by a Participant to a customer are digitally signed by the Participant with the Participant's own private key and are accompanied by a digital certificate issued by Identrus. The digital certificates issued by Identrus would certify that the Participant is an authorized Participant in the Identrus System and that the private key used by a Participant to digitally sign its certificates is uniquely associated with the Participant, thereby authenticating the identity of the Participant.

(12.) The activities of Notificants and Identrus would be limited to providing the identity authentication and related services described above. Notificants and Identrus would not provide a general encryption or electronic message service, or any warranty of the underlying financial or nonfinancial transaction between customers whose identities are authenticated through the use of the Identrus System.

(13.) 12 U.S.C. [sections] 1843(c)(8).

(14.) See 12 C.F.R. 225.28(b)(14); Banc One Corporation, Inc., 83 Federal Reserve Bulletin 602, 606 (1997); Citicorp, 68 Federal Reserve Bulletin 505, 510 (1982).

(15.) See National Courier Association v. Board of Governors of the Federal Reserve System, 516 F. 2d 1229, 1237 (D.C. Cir. 1975). In addition, the Board may consider any other basis that demonstrates that the proposed activity has a reasonable or close connection or relationship to banking or managing or controlling banks. See Board Statement Regarding Regulation Y, 49 Federal Register 806 (1984); Securities Industry Association v. Board of Governors of the Federal Reserve System, 468 U.S. 207, 210-11 n.5 (1984).

(16.) See OCC Unpublished Interpretive Letter dated June 11, 1985; Popular, Inc., 84 Federal Reserve Bulletin 481 (1998).

(17.) 58 Am. Jur. 2d Notaries Public [sections] 31 (2d ed. 1989).

(18.) The American Bar Association, for example, has noted that the issuance of digital certificates by CAs is "analogous to traditional certification processes undertaken by notaries with respect to documents executed with pen and ink." See Digital Signature Guidelines, Information Security Committee, Electronic Commerce and Information Technology Division, Section of Science and Technology, American Bar Association, p. 54 (Aug. 1, 1996).

(19.) Banks have drafted letters of introduction or letters of reference on behalf of their customers that serve the purpose of introducing the customer to other banks or third parties with which the customer seeks to do business. See McLeod v. Fourth National Bank of St. Louis, 122 U.S. 528, 534 (1887); OCC Interpretive Letter No. 610, reprinted in [1992-1993 Transfer Binder] CCH Fed. Banking L. Rep. 83,448 (Oct. 8, 1992).

(20.) Under the Uniform Commercial Code, a bank that accepts a check for deposit warrants to the drawee bank that all indorsements on the check are genuine, and the bank is liable to the drawee bank for the amount of the check plus expenses and lost interest if an indorsement on the check was forged. See, e.g., N.Y. U.C.C. [sections] 4-207 (McKinney 1991).

(21.) See Letter from William B. Glidden, OCC Assistant Director, dated Dec. 5, 1985; see also Acceptance of Signature Guarantees from Eligible Guarantor Institutions, Exchange Act Rel. No. 29,663, [1983-1984 Transfer Binder] Fed. Sec. L. Rep. (CCH) 84,825, at 82,119 (Sept. 9, 1991); U.S. League of Savings Associations, SEC No-Action Letter, [1982-1983 Transfer Binder] Fed. Sec. L. Rep. (CCH) 77,412, at 78,500 (Apr. 29, 1983). Broker-dealer subsidiaries of bank holding companies also have provided signature guarantees.

(22.) See, e.g., N.Y. U.C.C. [sections] 8-306(a) and (b) (McKinney 1999).

(23.) A bank issuing a signature guarantee is liable to the issuer of the security or its transfer agent for any loss that results from a breach of any of these warranties by the bank. See, e.g., N.Y. U.C.C. [sections] 8-306(h) (McKinney 1999).

(24.) Article 4A of the Uniform Commercial Code, in fact, encourages banks to develop and maintain commercially reasonable security procedures, such as algorithms or other encryption devices, for authenticating the identity of customers that transmit wire transfer instructions to the bank. See, e.g., N.Y. U.C.C. [sections] 4-A-202 (McKinney 1999).

(25.) See 12 C.F.R. 225.28(b)(2)(iii); Barnett Banks of Florida, Inc., 71 Federal Reserve Bulletin 648 (1985); OCC Unpublished Interpretive Letter dated March 26, 1982.

(26.) See Chase Letter; OCC Conditional Approval No. 267 (Jan. 12, 1998).

(27.) See 12 C.F.R. 225.28(b)(2) and (14). Under Regulation Y, a bank holding company may develop and sell hardware and software that is designed and marketed for the processing and transmission of financial, banking, or economic data, and may develop and sell general purpose hardware so long as such general purpose hardware does not constitute more than 30 percent of the cost of any packaged offering. See 12 C.F.R. 225.28(b)(14).

(28.) 12 C.F.R. 225.21 (a)(2).

(29.) Notificants may engage in data processing and data transmission activities, including the development and sale of hardware and software, pursuant to this order only to the extent such activities are necessary to permit the proper operation of the Identrus System. Notificants and Identrus also must conduct their data processing and data transmission activities subject to the software and hardware limitations contained in Regulation Y.

(30.) 12 U.S.C. [sections] 1843(c)(8).

(31.) See 12 C.F.R. 225.26(b).

(32.) Notificants have indicated that the Identrus System is in the process of finalizing its operating rules, including the technical specifications for the system, and sample Participant and customer agreements. The Board has carefully reviewed the Identrus System's draft operating rules and agreements, and Notificants have committed to provide the Federal Reserve System with the final version of the operating rules (including the technical specifications) and sample Participant and customer agreements prior to commencing operations.

(33.) The Board notes that Identrus has engaged an independent public accounting firm to conduct a detailed risk analysis of the Identrus System. Moreover, Notificants have agreed to treat Identrus as a subsidiary for purposes of the BHC Act, and Identrus has committed to include a provision in any contract with a vendor that provides services covered by the Bank Service Company Act (12 U.S.C. [sections] 1861 et seq.) indicating that the Identrus-related operations of that vendor will be subject to the examination and regulatory authority of the Board.

(34.) Notificants have committed that neither Notificants nor Identrus will represent that the Board's approval of these notices constitutes an endorsement of Notificants' or Identrus's products or services by the Federal Reserve System, and neither Notificants nor Identrus will indicate in any of their marketing efforts or materials, either oral or written, that the Federal Reserve System assures or has approved or endorsed the security, functionality, or effectiveness of the products or services offered by Notificants or Identrus.

(35.) See, e.g., Banc One Corporation, 84 Federal Reserve Bulletin 553 (1998).

J.P. Morgan & Co. Incorporated
New York, New York

UBS AG
Zurich, Switzerland

Order Approving Notices to Engage in Nonbanking Activities

J.P. Morgan & Co. Incorporated ("JPM"), a bank holding company within the meaning of the Bank Holding Company Act ("BHC Act"), and UBS AG ("UBS"), a foreign banking organization subject to the BHC Act, have requested the Board's approval under section 4(c)(8) of the BHC Act (12 U.S.C. [sections] 1843(c)(8)) and section 225.24 of the Board's Regulation Y (12 C.F.R. 225.24) to acquire or retain more than 5 percent of the voting interests in TP Group LDC, Grand Cayman, Cayman Islands ("TP Group"), and its majority owned subsidiary, Tradepoint Financial Networks plc, London, United Kingdom ("Tradepoint"), and thereby engage in operating a securities exchange.

Notice of the proposals, affording interested persons an opportunity to submit comments, has been published (64 Federal Register 46,196, 48,397, and 48,643 (1999)). The time for filing comments has expired, and the Board has considered the notices and all comments received in light of the factors set forth in section 4(c)(8) of the BHC Act.

JPM, with total consolidated assets of $269 billion, is the fifth largest banking organization in the United States. UBS, with total consolidated assets of $583 billion, is the largest banking organization headquartered in Switzerland.(1) UBS operates branches in Los Angeles and San Francisco, California; Stamford, Connecticut; Chicago, Illinois; and New York, New York, and agencies in Miami, Florida; and Houston, Texas. JPM and UBS also engage through subsidiaries in a broad range of nonbanking activities in the United States and worldwide.

JPM proposes to control approximately 17 percent of the voting shares of TP Group, and UBS proposes to control approximately 11 percent of the voting shares of TP Group.(2) TP Group owns approximately 54.1 percent of the outstanding voting shares of Tradepoint, which operates the Tradepoint Stock Exchange ("Exchange"), an electronic securities exchange for the secondary trading of equity and equity-related securities listed on the London Stock Exchange. JPM and UBS also have stated that Tradepoint anticipates establishing an office or subsidiary in the United States. In light of these proposed actions, JPM and UBS have requested the Board's approval under section 4(c)(8) of the BHC Act to control their interests in TP Group.(3)

The Exchange is a screen-based electronic market that provides securities trade matching, execution, and related services to U.S. and foreign market-makers, broker-dealers, and institutional investors that become members of the Exchange.(4) Currently, members may access the Exchange and enter bid and ask quotes through electronic terminals linked to certain financial networks (e.g., a Bloomberg terminal) or through a personal computer linked directly to the Exchange. Terminals linked to the Exchange can be located anywhere in the world, though trading currently may occur only during U.K. business hours.(5) Orders entered into the Exchange's system are displayed on separate electronic order books for each security, which displays, in descending order, the best bid and ask quotations for the security. The Exchange automatically and continuously matches equal bid and ask offers for each listed security on a first-come, first-served basis.(6)

Tradepoint does not take a principal position in securities, clear or settle the securities transactions executed on the Exchange, or assume any principal risk for securities trades executed on the Exchange. Tradepoint and its shareholders also are under no obligation to guarantee a member's trades. Each member of the Exchange is required to be a member of the London Clearing House, or to appoint a member of the London Clearing House to clear the member's trades on the Exchange. Trades matched by the Exchange are registered at the end of each business day with the London Clearing House in the name of the appropriate clearing member. The London Clearing House then becomes the counterparty to each side of the trade until it is settled. Settlement occurs through the CREST system, which is operated by CRESTCo., a corporation established by the Bank of England for the settlement of uncertificated U.K. equities.(7) Tradepoint is not affiliated with the London Clearing House or CRESTCo.

The Exchange is a recognized investment exchange under Section 37(3) of the U.K. Financial Services Act 1986, and is regulated and supervised by the U.K. Financial Services Authority ("FSA") under the securities laws of the United Kingdom. Although Tradepoint makes its services available to customers in the United States, the Securities and Exchange Commission ("SEC") has granted Tradepoint a limited volume exemption from the registration requirements of section 5 of the Securities Exchange Act of 1934 ("1934 Act").(8) The SEC's exemptive order permits Tradepoint to operate in the United States without registering as a securities exchange so long as (i) the Exchange's average daily dollar value of trades involving U.S. members does not exceed $40 million, and (ii) the Exchange's worldwide average daily volume does not exceed 10 percent of the average daily trading volume on the London Stock Exchange. The SEC's exemptive order also requires that the Exchange comply with a number of other conditions designed to protect U.S. investors and to ensure fair and orderly markets.

Closely Related to Banking Standard

Section 4(c)(8) of the BHC Act provides that a bank holding company may, with Board approval, engage in any activity that the Board determines to be "so closely related to banking or managing or controlling banks as to be a proper incident thereto." In considering whether an activity is closely related to banking, the Board and the courts look to whether banks generally (1) conduct the proposed activity, (2) provide services that are operationally or functionally so similar to the proposed services as to equip them particularly well to provide the proposed services, or (3) provide services that are so integrally related to the proposed services as to require their provision in a specialized form.(9)

The Board has not previously determined by regulation or order that operating a securities exchange is closely related to banking within the meaning of section 4(c)(8) of the BHC Act. The principal function of a securities exchange is to provide a centralized facility for the execution, clearance, and settlement of securities transactions.(10)Banks and bank holding companies currently are authorized to provide securities brokerage services to their customers and, as part of these services, to execute and clear such transactions on a securities exchange.(11) Bank holding company subsidiaries authorized to act as a dealer in securities ("section 20 subsidiaries") also may provide securities execution, clearance, and settlement services in connection with their dealer operations.(12) In addition, subsidiaries of banks and bank holding companies that act as a broker or dealer frequently become members of securities exchange s and, in the case of mutually owned exchanges such as the New York Stock Exchange ("NYSE"), acquire small (less than 5 percent) ownership interests in the exchange. Through these relationships, banks and bank holding companies have gained extensive experience with and knowledge of the rules and operations of securities exchanges.

Banks and bank holding companies also provide services that are functionally and operationally similar to those provided by the Exchange. Subsidiaries of banks and bank holding companies acting as a securities broker may execute cross-trades for their customers and thereby match equal bid and offer orders received from their customers. In addition, section 20 subsidiaries of bank holding companies may act as a specialist or market-maker on a securities exchange, such as the NYSE or NASDAQ.(13) A specialist generally maintains a book of current buy and sell orders received from other brokers and matches equal bid and offer quotes for execution.(14) Market-makers for a security on the NASDAQ securities exchange also publish bid and offer prices at which they stand ready to execute transactions in the relevant security, either for their own account or for the account of customers. In addition, a market-maker receives customer orders and matches them, to the extent possible, against an order received from another customer or against an order for the market-maker's own account.

For these reasons, and based on all the facts of record, the Board concludes that operating a securities exchange :is an activity that is closely related to banking for purposes of section 4(c)(8) of the BHC Act.

Proper Incident to Banking Standard and Other Considerations

In order to approve the proposal, the Board also must determine that the proposed activities are a proper incident to banking, that is, that performance of 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."(15) As part of its evaluation of these factors, the Board considers the financial condition and managerial resources of the notificant and its subsidiaries and the effect the transaction would have on those resources.(16)

In considering the financial resources of the notificants, the Board has carefully reviewed the capitalization of JPM and UBS and has found the capitalization of each to be consistent with approval. In particular, the Board notes that JPM and its subsidiary bank, Morgan Guaranty Trust Company, New York, New York, are well capitalized and would remain so after consummation of the proposal, and that UBS's capital ratios satisfy applicable risk-based standards established under the Basle Accord, and are considered equivalent to the capital levels that would be required of a U.S. banking organization. The Board also has considered recent financial statements of JPM and UBS, including pro forma financial statements and other available information, and the condition of the U.S. operations of UBS.

Furthermore, as noted above, Tradepoint does not take a principal position in any security and does not assume any principal risk for the clearance or settlement of securities transactions executed on the Exchange. In addition, JPM and UBS would not guarantee any securities transactions executed on the Exchange. Based on these and other facts of record, including relevant supervisory information, the Board has determined that financial and managerial considerations are consistent with approval.

The Board also has carefully considered the competitive effects of the proposal. There are numerous existing and potential competitors for the proposed services. Accordingly, the Board concludes that consummation of the proposal would have a de minimis effect on competition.

In considering the potential for conflicts of interests and other adverse effects, the Board also has carefully reviewed the operational and supervisory framework within which the Exchange operates. As noted above, the Exchange is subject to regulation by the FSA under the securities laws of the United Kingdom, and its U.S. activities are subject to regulation by the SEC under the federal securities laws. U.K. law requires that recognized investment exchanges, such as the Exchange, promote and maintain high standards of integrity and fair dealing.(17) In furtherance of this requirement, the FSA has adopted a code of conduct governing recognized investment exchanges that is designed to ensure that the decisions of an exchange are not improperly influenced by conflicts of interest. Staff of the FSA has advised Board staff that the FSA could take supervisory action against a recognized investment exchange under U.K. law if the exchange sought to deny a person access to the exchange on the basis of an improper conflict of interest.

The U.K. Financial Services Act of 1986 also requires that the Exchange have financial resources sufficient to support its activities, and maintain rules and procedures to ensure that trading is conducted in an orderly manner and consistent with the protection of investors.(18) Pursuant to these requirements, Tradepoint has established rules for the Exchange that govern the admission of members, establish standard terms for the execution of securities transactions on the Exchange, and provide sanctions for noncompliance with the Exchange's rules. The FSA has reviewed the Exchange's rules and determined that they are consistent with the requirements of U.K. law and must review any proposed amendments to such rules.(19)

Tradepoint's operations in the United States also would remain subject to the antifraud provisions of the federal securities laws.(20) Although the SEC has granted Tradepoint a limited volume exemption from the registration requirements of section 5 of the 1934 Act, the SEC's exemptive order requires that Tradepoint comply with a number of conditions designed to ensure the maintenance of fair and orderly markets in the United States and the protection of U.S. investors. For example, these conditions permit the SEC to monitor the Exchange for compliance with the antifraud and other applicable provisions of the federal securities laws; require the Exchange to adopt and implement procedures to ensure the nondisclosure of confidential, material information held by the Exchange; and allow the SEC to obtain access to the books, records (including copies of membership applications and standards for admission as a member), facilities, and personnel of the Exchange as necessary or appropriate. Based on these and other conditions, the SEC concluded that the limited volume exemption provided the Exchange was consistent with the public interest and the protection of investors.(21)

Notificants have stated that consummation of the proposal would increase competition for the execution of equity and equity-related securities listed on the London Stock Exchange and provide added convenience to market-makers, broker-dealers, and institutional investors that seek to execute trades in such securities. The SEC also has stated that the Exchange's services provide U.S. investors with a lower-cost method of investing in foreign securities. In addition, the Board has noted that there are public benefits to be derived from permitting capital markets to operate so that bank holding companies can make potentially profitable investments in nonbanking companies and from permitting banking organizations to allocate their resources in the manner they consider to be most efficient when such investments and actions are consistent, as in this case, with the relevant considerations under the BHC Act.

Based on all the facts of record, the Board has determined that consummation of the proposal can reasonably be expected to produce public benefits that outweigh any potential adverse effects of the proposal, and therefore that the performance of the proposed activity by JPM and UBS is a proper incident to banking for purposes of section 4(c)(8) of the BHC Act.(22)

Conclusion

Based on the foregoing and all the facts of record, including the commitments made by notificants in connection with the notices, and subject to the terms and conditions set forth in this order, the Board has determined that the notices should be, and hereby are, approved. The Board's determination is subject to all the conditions set forth in the Board's Regulation Y, including those in sections 225.7 and 225.25(c) (12 C.F.R. 225.7 and 225.25(c)), and to the Board's authority to require 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, or to prevent evasion of, the provisions and purposes of the BHC Act and the Board's regulations and orders issued thereunder. The Board's decision is specifically conditioned on compliance with all the commitments made in the notices, including the commitments and conditions discussed in this order. The commitments and conditions relied on in reaching this decision shall be deemed to be conditions imposed in writing by the Board in connection with its findings and decision and, as such, may be enforced in proceedings under applicable law.

By order of the Board of Governors, effective November 8, 1999.

This action was taken pursuant to the Board's Rules Regarding Delegation of Authority (12 C.F.R. 265.4(b)(1)) by a committee of Board members. Voting for this action: Vice Chairman Ferguson and

(1.) Asset data are as of June 30, 1999, and ranking data are as of December 31, 1998.

(2.) JPM currently owns directly and indirectly an approximately 16 percent nonvoting interest in TP Group and UBS currently owns a 10.79 percent voting interest in TP Group. JPM and UBS acquired these interests in July 1999 in reliance on section 4(c)(13) of the BHC Act and the Board's Regulation K (12 C.F.R. Part 211). On consummation of the proposal, JPM would convert its entire non-voting interest in TP Group into a voting interest in the organization. In connection with this conversion, JPM also would acquire an additional 1 percent of TP Group's shares from a third party. After the share conversion and purchase, JPM would control approximately 17 percent of the voting shares of TP Group.

(3.) A bank holding company must obtain the Board's approval under section 4(c)(8) of the BHC Act if a foreign company held by the bank holding company seeks to engage in business in the United States.

(4.) As of June 30, 1999, the Exchange had approximately 92 members. Unlike many U.S. securities exchanges, the Exchange is not owned by its members but rather by its shareholders, which may or may not be members of the exchange.

(5.) The Exchange's current trading hours are Monday to Friday, 7:30 A.M. to 5:30 P.M. London time, with a post-trade administration session from 5:30 P.M. to 6:00 P.M.

(6.) The Exchange also has the capacity to operate periodic auctions. In a periodic auction, bid and ask quotations would be allowed to accumulate and then filled, to the extent possible, at a single price calculated to match the largest possible number of accumulated buy and sell orders. The Exchange does not currently operate periodic auctions but may do so in the future for infrequently traded securities or the securities of smaller capitalization issuers.

(7.) Cross trades executed on the Exchange are not registered with the London Clearing House and are settled directly by the relevant member through CREST. Cross trades are trades where the buyer and seller are both customers of the same Exchange member.

(8.) 15 U.S.C. [sections] 78e; see Tradepoint Financial Networks plc, Exchange Act Release No. 41,199, 1999 SEC LEXIS 612 (March 22, 1999).

(9.) See National Courier Association v. Board of Governors of the Federal Reserve System, 516 F. 2d 1229, 1237 (D.C. Cir. 1975). The Board may also consider any other basis that may demonstrate that the proposed activity has a reasonable or close connection or relationship to banking or managing or controlling banks. See Board Statement Regarding Regulation Y, 49 Federal Register 806 (1984); Securities Industry Association v. Board of Governors of the Federal Reserve System, 468 U.S. 207, 210-211 n.5 (1984).

(10.) The operations of the Exchange are more limited than many securities exchanges in that the Exchange does not directly or indirectly clear or settle securities transactions executed on the Exchange. Rather, the Exchange maintains systems to route trades to the London Clearing House for clearance and settlement through CREST

(11.) See 12 C.F.R. 225.28(b)(7)(i); BankAmerica Corporation, 69 Federal Reserve Bulletin 105 (1983). See also 12 U.S.C. [sections] 24 (Seventh); OCC Interp. Letter No. 622 (April 9, 1993).

(12.) See J.P Morgan & Co., Inc. et al., 75 Federal Reserve Bulletin 192 (1989), aff'd sub nom. Securities Industry Ass'n v. Board of Governors, 900 F.2d 360 (D.C. Cir. 1990); First of America Corporation, 80 Federal Reserve Bulletin 1120 (1994).

(13.) See, e.g., Fleet Financial Group, 84 Federal Reserve Bulletin 227 (1998); Dresdner Bank AG, 82 Federal Reserve Bulletin 850 (1996).

(14.) See 5 L. Loss & J. Seligman, Securities Regulation 2513-14 (3d ed. 1990); New York Stock Exchange Rule 104.

(15.) See 12 U.S.C. [sections] 1843(c)(8).

(16.) See 12 C.F.R. 225.26.

(17.) See Financial Services Act of 1986, sch. 4, par. 5.

(18.) See Financial Services Act of 1986, sch. 4, pars. 1 and 2.

(19.) The FSA has the authority to conduct on-site inspections of the Exchange if necessary or appropriate.

(20.) See, e.g., 15 U.S.C. [sections] 78j(b).

(21.) JPM and UBS also have committed that Tradepoint will be considered a subsidiary for purposes of the BHC Act, and as an affiliate of any insured depository institution affiliate of the notificants for purposes of sections 23A and 23B of the Federal Reserve Act.

(22.) Regulation Y provides that a bank holding company must seek the Board's approval prior to altering in any material respect a nonbanking activity previously approved by the Board. See 12 C.F.R. 225.25(c)(3). As noted above, the Exchange does not currently clear or settle securities transactions executed on the Exchange. Because the clearance and settlement of securities transactions involves risks that are materially different from the risks associated with the execution of securities transactions, notificants must separately seek the Board's approval if the Exchange in the future proposes to clear or settle securities transactions to permit the Board to determine whether the performance of such additional activities by the Exchange would constitute a proper incident to banking under section 4(c)(8) of the BHC Act.

Governors Kelley and Gramlich. Absent and not voting: Chairman Greenspan and Governor Meyer.

ROBERT DEV. FRIERSON
Associate Secretary of the Board