Publication of the June 2004 update to the Bank Holding Company Supervision Manual.

The June 2004 update to the Bank Holding Company Supervision Manual, Supplement No. 26, has been published and is now available. The Manual comprises the Federal Reserve System's regulatory, supervisory, and inspection guidance for bank holding companies (BHCs). The new supplement includes supervisory and BHC inspection guidance on the following subjects:

1. Filing a Required Change in Control Notice. The Control and Ownership (Change in Control) section is revised to emphasize that any person (acting directly or indirectly) seeking to acquire control of a state member bank (SMB) or BHC should understand the requirements for filing a notice under the Change in Bank Control Act. The complexity of an ownership position sometimes does not lend itself to easy interpretation of the requirements to file a notice. When it is unclear whether a notice is required, the potential filer (or filers) or the affected SMB or BHC is encouraged to contact staff at a Federal Reserve Bank or the Board for guidance.

Prior notice is required by any person (defined in the section) that seeks to acquire control of an SMB or BHC. Control of a banking organization occurs whenever a person acquires ownership, control, or the power to vote 25 percent or more of any class of voting securities of the institution. Section 225.41 of Regulation Y (12 CFR 225.41), details the specific types of transactions that require prior notice under the Change in Bank Control Act. Certain other "rebuttable" presumptions of control are outlined in section 225.41, which may also require the filing of a notice, including (under certain circumstances) a proposed acquisition that would result in the person owning or controlling the power to vote 10 percent or more of any class of voting securities. See SR letter 03-19.

2. Joint Rules on the Authority to take Disciplinary Actions against Independent Accountants' and Accounting Firms that Perform Audit and Attestation Services'. The federal banking agencies (the agencies) jointly issued rules, as implemented by 12 CFR 363, that govern the agencies' authority to take disciplinary actions against independent accountants and accounting firms that perform audit and attestation services that are required by section 36 of the Federal Deposit Insurance Act. See the Board's August 8, 2003, press release.

Attestation services address management's assertions concerning internal controls over financial reporting by an independent public accountant. A federally insured depository institution must include the accountant's audit and attestation reports in its annual report. The rules established, effective October 1, 2003, the practices and procedures under which the agencies can, for good cause, remove, suspend, or bar an accountant or firm from performing audit and attestation services for federally insured depository institutions that have total assets of $500 million or more.

3. Enhanced Framework for the Supervision of Consumer Compliance Risk. The section on the risk-focused supervisory framework for large complex banking organizations (LCBOs) has been revised to incorporate this new guidance that was developed by the Board's Division of Banking Supervision and Regulation and its Division of Consumer and Community Affairs. The guidance applies to LCBOs and large banking organizations (LBOs) that are subject to the Federal Reserve System's continuous supervision program. Under this guidance, consumer compliance examiners, working in conjunction with the safety and soundness examiners, are to incorporate the banking organization's consumer compliance risk assessment into its overall risk assessment and planned supervisory activities for LCBOs and LBOs. See SR letter 03-22.

4. Interagency Policy on Banks' and Thrift Institutions Providing Financial Support to Funds' Advised by the Banking Organization or its' Affiliates. The January 5, 2004, interagency policy alerts banking organizations, including their boards of directors and senior management, of the safety-and-soundness implications of, and the legal impediments to, a bank providing financial support to investment funds advised by the bank, its subsidiaries, or its affiliates (that is, an affiliated investment fund).

The interagency policy emphasizes three core principles: a bank should not (1) inappropriately place its resources and reputation at risk for the benefit of an affiliated investment fund's investors and creditors; (2) violate the limits and requirements contained in the Federal Reserve Act's sections 23A and 23B, Regulation W, other applicable legal requirements, or in any special supervisory condition imposed by the agencies; or (3) create an expectation that the bank will support the advised fund (or funds).

In addition, bank-affiliated investment advisers are encouraged to establish alternative sources of financial support to avoid seeking support from affiliated banks. A bank's investment advisory services can pose material risks to the bank's liquidity, earnings, capital, and reputation and can harm investors, if the risks are not effectively controlled. Bank management is expected to notify and consult with its appropriate federal banking agency before (or immediately after, in the event of an emergency) providing material financial support to an affiliated investment fund. The inspection objectives and inspection procedures have been developed to focus on a BHC's oversight responsibilities for its bank and nonbank subsidiaries that advise investment funds. See SR letter 04-1.

5. Interagency Statement on Independent Appraisal and Evaluation Functions. The section on real estate appraisals and evaluations has been updated to incorporate this October 27, 2003, interagency statement. The statement emphasizes that a banking institution's board of directors is responsible for reviewing and adopting policies and procedures that establish and maintain an effective, independent real estate appraisal and evaluation program for all of its lending functions. Concerns about the independence of appraisals and evaluations arise from the risk that improperly prepared appraisals may undermine the integrity of credit-underwriting processes. See SR letter 03-18.

6. Nonbanking Activities. The sections on engaging in EDP Servicing Company Activities and activities involving Electronic Benefit Transfer, Stored-Value Card, and Electronic Data Interchange Service have been revised. The changes incorporate the current revenue limit of 49 percent (previously 30 percent) that the Board approved on November 26, 2003 (effective January 8, 2004). These services may be provided to others (outside third parties) if the total annual revenues derived from those activities involving data processing, data storage, and data transmission services (that are not financial, banking, or economic related) do not exceed the revised limit. BHCs may request permission to administer the 49 percent revenue test on a business-line or multiple-entity basis. See section 225.28(b)(14) of Regulation Y (12 CFR 225.28(b)(14).

A more detailed summary of changes is included with the update package. The Manual and updates, including pricing information, are available from Publications Fulfillment, Mail Stop 127, Board of Governors of the Federal Reserve System, Washington, DC 20551 (or charge by facsimile: 202728-5886). The Manual is also available on the Board's public web site at www.federalreserve.gov/ boarddocs/supmanual/.