Orders Issued Under Section 4 of the Bank Holding Company Act.
Order Approving Notice to Engage in Underwriting and Dealing in All Types of Debt and Equity Securities on a Limited Basis
Wachovia Corporation ("Wachovia"), a bank holding company within the meaning of the Bank Holding Company Act ("BHC Act"), has requested the Board's approval under section 4(c)(8) of the BHC Act (12 U.S.C. [sections] 1843(c)(8)) and section 225.24 of the Board's Regulation Y (12 C.F.R. 225.24) to acquire Interstate/Johnson Lane, Inc. ("IJL"),(1) and thereby acquire control of its subsidiaries, including Interstate/Johnson Lane Corporation ("Company"), all in Charlotte, North Carolina.(2) Wachovia would thereby engage in the following nonbanking activities:
(1) extending credit and servicing loans, in accordance with section 225.28(b)(1) of Regulation Y (12 C.F.R. 225.28(b)(1)); (2) engaging in activities related to extending credit, in accordance with section 225.28(b)(2) of Regulation Y (12 C.F.R. 225.28(b)(2)); (3) providing leasing: services, in accordance with section 225.28(b)(3) of Regulation Y (12 C.F.R. 225.28(b)(3)); (4) performing trust company functions, in accordance with section 225.28(b)(5) of Regulation Y (12 C.F.R. 225.28(b)(5)); (5) providing financial and investment advisory services, in accordance with section 225.28(b)(6) of Regulation Y (12 C.F.R. 225.28(b)(6)); (6) providing securities brokerage, riskless principal, private placement, futures commission merchant, and other agency transactional services, in accordance with section 225.28(b)(7) of Regulation Y (12 C.F.R. 225.28(b)(7)); (7) underwriting and dealing in government obligations and money market instruments in which state member banks may underwrite and deal under 12 U.S.C. [subsections] 335 and 24(7) ("bank-eligible securities"), and engaging in investing and trading activities, in accordance with section 225.28(b)(8)(i) and (ii) of Regulation Y (12 C.F.R. 225.28(b)(8)(i) and (ii)); (8) providing management consulting advice, in accordance with section 225.28(b)(9)(i) of Regulation Y (12 C.F.R. 225.28(b)(9)(i)); (9) providing data processing and data transmission services, in accordance with section 225.28(b)(14) of Regulation Y (12 C.F.R. 225.28(b)(14)); (10) underwriting and dealing in, to a limited extent, all types of debt and equity securities other than interests in open-end investment companies ("bank-ineligible securities"); and (11) acting as the general partner of private investment limited partnerships that invest in assets in which a bank holding company is permitted to invest.
Notice of the proposal, affording interested persons an opportunity to submit comments, has been published (64 Federal Register 41107 (1999)). The time for filing comments has expired, and the Board has considered the notice and all comments received in light of the factors set forth in section 4(c)(8) of the BHC Act.
Wachovia, with total consolidated assets of approximately $65.6 billion, is the 17th largest banking organization in the United States.(3) Wachovia operates subsidiary banks with branches in North Carolina, South Carolina, Florida, Georgia, and Virginia and engages through other subsidiaries in a broad range of permissible nonbanking activities. IJL, with total consolidated assets of $652.3 million, engages directly and indirectly in a broad range of securities underwriting and dealing, securities brokerage, investment advisory, and other activities.(4)
Wachovia proposes to acquire IJL by merging IJL with and into Wachovia, with Wachovia as the surviving corporation. Wachovia anticipates merging its existing section 20 subsidiary, Wachovia Capital Markets, Inc., Winston-Salem, North Carolina ("WCMI"), with and into Company immediately on consummation of the merger between Wachovia and IJL, with Company surviving the merger.(5) After consummation of the proposal, Company would be renamed Wachovia Securities, Inc. Company is, and after consummation of the proposal will continue to be, registered as a broker-dealer with the Securities and Exchange Commission ("SEC") under the Securities Exchange Act of 1934 (15 U.S.C. [sections] 78a et seq.), a member of the National Association of Securities Dealers, Inc. ("NASD"), and registered as a futures commission merchant with the Commodity Futures Trading Commission ("CFTC") under the Commodity Exchange Act (7 U.S.C. [sections] 2 et seq.). Accordingly, Company is, and will continue to be, subject to the recordkeeping and reporting obligations, fiduciary standards, and other requirements of the Securities Exchange Act of 1934, the Commodity Exchange Act, the SEC, the CFTC, and the NASD.
Underwriting and Dealing in Bank-Ineligible Securities
The Board has determined that, subject to the framework of prudential limitations established in previous decisions to address the potential for conflicts of interests, unsound banking practices, or other adverse effects, underwriting and dealing in bank-ineligible securities is so closely related to banking as to be a proper incident thereto within the meaning of section 4(c)(8) of the BHC Act.(6) The Board also has determined that underwriting and dealing in bank-ineligible securities is consistent with section 20 of the Glass-Steagall Act (12 U.S.C. [sections] 377), provided that the company engaged in the activity derives no more than 25 percent of its gross revenues from underwriting and dealing in bank-ineligible securities.(7)
Wachovia has committed that Company will conduct its underwriting and dealing activities using the methods and procedures and subject to the prudential limitations established by the Board in the Section 20 Orders. Wachovia also has committed that Company will conduct its bank-ineligible securities underwriting and dealing activities subject to the Board's revenue restriction.(8) As a condition of this order, Wachovia is required to conduct the bank-ineligible securities activities of Company subject to the revenue restriction and Operating Standards established for section 20 subsidiaries ("Operating Standards").(9)
Other Activities Approved by Regulation or Order
The Board previously has determined by regulation that credit and credit-related activities; leasing activities; trust company functions; financial and investment advisory activities; securities brokerage, riskless principal, private placement, futures commission merchant, and other agency transactional activities; bank-eligible securities underwriting and dealing; investing and trading activities; management consulting activities; and data processing and transmission activities are closely related to banking within the meaning of section 4(c)(8) of the BHC Act.(10) In addition, the Board previously has determined by order that private investment limited partnership activities are permissible for bank holding companies when conducted within certain limits.(11) Wachovia has committed that it will conduct the activities of IJL and its subsidiaries, including Company, in accordance with the limitations set forth in Regulation Y and the Board's orders and interpretations relating to each of the proposed activities.
In order to approve this notice, the Board also must determine that performance of the proposed activities is a proper incident to banking; that is, that the proposed activities "can reasonably be expected to produce benefits to the public, such as greater convenience, increased competition, or gains in efficiency, that outweigh possible adverse effects, such as undue concentration of resources, decreased or unfair competition, conflicts of interests, or unsound banking practices."(12) As part of its review of these factors, the Board considers the financial and managerial resources of the notificant and its subsidiaries and the effect the transaction would have on such resources.(13)
In considering the financial resources of the notificant, the Board has reviewed the capitalization of Wachovia and Company in accordance with the standards set forth in the Section 20 Orders and has found the capitalization of each to be consistent with approval. This determination is based on all the facts of record, including Wachovia's projections of the volume of the bank-ineligible underwriting and dealing activities of Company.
The Board also has reviewed the managerial resources of each of the entities involved in this proposal in light of examination reports and other supervisory information. In connection with the proposal, the Federal Reserve Bank of Richmond ("Reserve Bank") has reviewed the policies and procedures of Company to ensure compliance with this order and the Section 20 Orders, including Company's operational and managerial infrastructure, computer, audit, and accounting systems, and internal risk management procedures and controls. On the basis of the Reserve Bank's review and all other facts of record, including the commitments provided in this case and the proposed managerial and risk management systems of Company, the Board has concluded that financial and managerial considerations are consistent with approval of the notice.
In addition, the Board has carefully considered the competitive effects of the proposal. To the extent that IJL and its subsidiaries offer different types of products and services than Wachovia, the proposed acquisition would result in no loss of competition. In those markets where the product offerings of Wachovia's nonbanking subsidiaries overlap with the product offerings of IJL and its subsidiaries, such as securities brokerage, investment advisory activities, trust services, and insurance agency activities, there are numerous existing and potential competitors. Consummation of the proposal, therefore, would have a de minimis effect on competition in the market for these services, and the Board has concluded that the proposal would not have significantly adverse competitive effects in any relevant market.
The Board expects that consummation of the proposal would provide added convenience to the customers of Wachovia and IJL. Wachovia has indicated that consummation of the proposal would expand the range of products and services available to its customers and those of IJL. Wachovia also has stated that the proposal would assist Wachovia to diversify its operations and, accordingly, would make it less vulnerable to possible downturns in individual business lines. In addition, 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. Moreover, under the framework established in this order and the Section 20 Orders, consummation of the proposal is not likely to result in any significantly adverse effects, such as undue concentration of resources, decreased or unfair competition, conflicts of interests, or unsound banking practices.
Based on all the facts of record, the Board has determined that performance of the proposed activities by Wachovia can reasonably be expected to produce public benefits that outweigh any potential adverse effects of the proposal. Accordingly, the Board has determined that the performance of the proposed activities by Wachovia is a proper incident to banking for purposes of section 4(c)(8) of the BHC Act.
On the basis of all the facts of record, the Board has determined that the notice should be, and hereby is, approved, subject to all the terms and conditions described in this order and the Section 20 Orders, as modified by the Modification Orders. The Board's approval of the proposal extends only to activities conducted within the limitations of this order, including the Board's reservation of authority to establish additional limitations to ensure that the activities of Company are consistent with safety and soundness, avoidance of conflicts of interests, and other relevant considerations under the BHC Act. Underwriting and dealing in any manner other than as approved in this order is not within the scope of the Board's approval and is not authorized for Company.
The Board's determination also is subject to all the terms and conditions set forth in 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 connection with the notice, including the commitments discussed in this order and the conditions set forth in this order and the Board regulations and orders noted above. The 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 the Reserve Bank, acting pursuant to delegated authority.
By order of the Board of Governors, effective March 17, 1999.
Voting for this action: Chairman Greenspan, Vice Chair Rivlin, and Governors Kelley, Meyer, Ferguson, and Gramlich.
ROBERT DEV. FRIERSON Associate Secretary of the Board
(1.) Wachovia also has requested the Board's approval to hold and exercise an option to acquire up to 19.9 percent of IJL's outstanding voting shares, if certain events occur. The option would expire on consummation of the proposal described above.
(2.) IJL's other subsidiaries include Cap Trust Financial Advisors, LLC; IJL Capital Management, Inc.; and ISC Futures Corporation.
(3.) Asset and ranking data are as of September 30, 1998.
(4.) IJL currently engages in certain insurance activities and holds certain investments in real estate that are not permissible for bank holding companies. Wachovia has committed to conform, within two years of consummation of the proposal, all insurance activities of, and real estate investments held by, IJL and its subsidiaries to the requirements of section 4 of the BHC Act and the Board's regulations and interpretations thereunder. Wachovia also has committed not to engage in any new real estate investment or development activities during the two-year conformance period.
(5.) WCMI currently underwrites and deals in, to a limited extent, certain types of bank-ineligible securities. See Letter dated May 29, 1998, from Jennifer J. Johnson, Deputy Secretary of the Board, to John C. McLean, Jr.
(6.) 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 of the Federal Reserve System, 900 F. 2d 360 (D.C. Cir. 1990); Citicorp, 73 Federal Reserve Bulletin 473 (1987), aff'd sub nom. Securities Industry Ass'n v. Board of Governors of the Federal Reserve System, 839 F. 2d 47 (2d Cir.), cert. denied, 486 U.S. 1059 (1988), as modified by Review of Restrictions on Director, Officer and Employee Interlocks, Cross-Marketing Activities, and the Purchase and Sale of Financial Assets Between a Section 20 Subsidiary and an Affiliated Bank or Thrift, 61 Federal Register 57,679 (1996); Amendments to Restrictions in the Board's Section 20 Orders, 62 Federal Register 45,295 (1997); and Clarification to the Board's Section 20 Orders, 63 Federal Register 14,803 (1998) (collectively, "Section 20 Orders").
(7.) Compliance with the revenue limitation shall be calculated in accordance with the method stated in the Section 20 Orders, as modified by the Order Approving Modifications to the Section 20 Orders, 75 Federal Reserve Bulletin 751 (1989); 10 Percent Revenue Limit on Bank-Ineligible Activities of Subsidiaries of Bank Holding Companies Engaged in Underwriting and Dealing in Securities, 61 Federal Register 48,953 (1996); and Revenue Limit on Bank-Ineligible Activities of Subsidiaries of Bank Holding Companies Engaged in Underwriting and Dealing in Securities, 61 Federal Register 68,750 (1996) (collectively, "Modification Orders").
(8.) In light of the fact that Wachovia proposes to acquire Company as a going concern, the Board believes that allowing Company to calculate compliance with the revenue limitation on an annualized basis during the first year after consummation of the proposal and thereafter on a rolling quarterly average basis would be consistent with the Section 20 Orders and the Glass-Steagall Act. See US. Bancorp, 84 Federal Reserve Bulletin 483 (1998); Dauphin Deposit Corporation, 77 Federal Reserve Bulletin 672 (1991). Moreover, in view of the fact that Company is significantly larger than WCMI and will survive the merger with WCMI, the management structure of the proposed merged company, the activities of the merging companies and the proposed merged company, and the other aspects of this case, the Board believes the merger of WCMI and Company would not disqualify Company from calculating compliance with the revenue test in conformance with the annualized treatment described in this order. See KeyCorp, 84 Federal Reserve Bulletin 1075 (1998).
(9.) 12 C.F.R. 225.200. Company may provide services that are necessary incidents to the proposed underwriting and dealing activities. Unless Company receives specific approval under section 4(c)(8) of the BHC Act to conduct the activities independently, any revenues from the incidental activities must be treated as ineligible revenues subject to the Board's revenue limitation.
(10.) See 12 C.F.R. 225.28(b)(1), (2), (3), (5), (6), (7), (8)(i) and (ii), (9)(i), and (14).
(11.) See Dresdner Bank A G, 84 Federal Reserve Bulletin 361 (1998); Meridian Bancorp, Inc., 80 Federal Reserve Bulletin 736 (1994).
(12.) 12 U.S.C. [sections] 1843(c)(8).
(13.) See 12 C.F.R. 225.26.3
|Printer friendly Cite/link Email Feedback|
|Publication:||Federal Reserve Bulletin|
|Date:||May 1, 1999|
|Previous Article:||Order Approving the Formation and Acquisition of a Bank Holding Company.|
|Next Article:||ORDERS ISSUED UNDER BANK MERGER ACT.|