80 FR 76374 - Regulatory Capital Rules: Regulatory Capital, Final Rule Demonstrating Application of Common Equity Tier 1 Capital Eligibility Criteria and Excluding Certain Holding Companies From Regulation Q
FEDERAL RESERVE SYSTEM Federal Register Volume 80, Issue 236 (December 9, 2015)
Federal Register Volume 80, Issue 236 (December 9, 2015)
| Page Range | 76374-76379 | |
| FR Document | 2015-31013 |
[Federal Register Volume 80, Number 236 (Wednesday, December 9, 2015)] [Rules and Regulations] [Pages 76374-76379] From the Federal Register Online [www.thefederalregister.org] [FR Doc No: 2015-31013] ======================================================================= ----------------------------------------------------------------------- FEDERAL RESERVE SYSTEM 12 CFR Part 217 [Docket No. R-1506] RIN 7100-AE 27 Regulatory Capital Rules: Regulatory Capital, Final Rule Demonstrating Application of Common Equity Tier 1 Capital Eligibility Criteria and Excluding Certain Holding Companies From Regulation Q AGENCY: Board of Governors of the Federal Reserve System. ACTION: Final rule. ----------------------------------------------------------------------- SUMMARY: The Board of Governors of the Federal Reserve System (Board) is adopting amendments to the Board's regulatory capital framework (Regulation Q) to clarify how the definition of common equity tier 1 capital, a key capital component, applies to ownership interests issued by depository institution holding companies that are structured as partnerships or limited liability companies. In addition, the final rule amends Regulation Q to exclude temporarily from Regulation Q savings and loan holding companies that are trusts and depository institution holding companies that are employee stock ownership plans. DATES: The final rule is effective January 1, 2016. Any company subject to the final rule may elect to adopt it before this date. FOR FURTHER INFORMATION CONTACT: Juan Climent, Manager, (202) 872-7526, Page Conkling, Senior Supervisory Financial Analyst, (202) 912-4647, Noah Cuttler, Senior Financial Analyst, (202) 912-4678, Division of Banking Supervision and Regulation, Board of Governors of the Federal Reserve System; or Benjamin McDonough, Special Counsel, (202) 452-2036, or Mark Buresh, Senior Attorney, (202) 452-5270, Legal Division, 20th Street and Constitution Avenue NW., Washington, DC 20551. Users of Telecommunication Device for Deaf (TDD) only, call (202) 263-4869. SUPPLEMENTARY INFORMATION: I. Background In July 2013, the Board adopted Regulation Q, a revised capital framework that strengthened the capital requirements applicable to state member banks and bank holding companies (BHCs) and implemented capital requirements for certain savings and loan holding companies (SLHCs).\1\ [[Page 76375]] Among other changes, Regulation Q introduced a common equity tier 1 capital (CET1) requirement. --------------------------------------------------------------------------- \1\ See 12 CFR part 217. Savings and loan holding companies that are substantially engaged in insurance underwriting or commercial activities are exempt temporarily from the revised capital framework. See 12 CFR 217.2, ``Covered savings and loan holding company.'' In addition, earlier this year, the Board issued a final rule that raised the asset threshold for applicability of the Board's Small Bank Holding Company Policy Statement (12 CFR part 225, Appendix C) from less than $500 million to less than $1 billion and made corresponding revisions to the applicability provisions of Regulation Q to exempt small SLHCs from Regulation Q to the same extent as small BHCs. See 12 CFR 217.1(c)(1)(ii) and (iii); 80 FR 20153 (April 15, 2015). --------------------------------------------------------------------------- Following issuance of Regulation Q, several depository institution holding companies sought clarification as to how the CET1 requirement would apply in light of their capital structures. These holding companies included BHCs and SLHCs organized in non-stock form (non- stock holding companies) (such as partnerships or limited liability corporations (LLCs)), estate trusts that are SLHCs (estate trust SLHCs), and employee stock ownership plans that are BHCs or SLHCs (ESOP holding companies). On December 12, 2014, the Board invited comment on a proposed rule that described how the CET1 requirement would apply to holding companies organized as partnerships or LLCs and that would have temporarily excluded estate trust SLHCs and ESOP holding companies from Regulation Q.\2\ --------------------------------------------------------------------------- \2\ 79 FR 75759 (December 19, 2014). --------------------------------------------------------------------------- The Board received two comments on the proposal--one from a financial services trade association and another from a savings and loan holding company--both of which expressed support for the proposal. After reviewing these comments, the Board is adopting the proposal largely as proposed, with certain clarifying edits and non-substantive changes to order and formatting. II. Description of the Proposed and Final Rules 1. Application of the Eligibility Criteria for Common Equity Tier 1 Instruments to LLC and Partnership Interests Regulation Q includes a CET1 requirement of 4.5 percent of risk- weighted assets. The purpose of the requirement is to ensure that banking organizations subject to Regulation Q hold sufficient high- quality regulatory capital that is available to absorb losses on a going concern basis.\3\ In particular, CET1 must be the most subordinated form of capital in an institution's capital structure and thus available to absorb losses first.\4\ CET1 is composed of common stock and instruments issued by mutual banking organizations that meet certain eligibility criteria.\5\ --------------------------------------------------------------------------- \3\ 12 CFR 217.20(b); 78 FR 62018, 62029. \4\ 78 FR 62018, 62044. \5\ The qualifying criteria under Regulation Q for a CET1 instrument are at 12 CFR 217.20(b)(1). --------------------------------------------------------------------------- In a stock company, common stock generally is the most subordinated element of its capital structure. While a non-stock holding company does not issue common stock, it generally should also have the ability to issue capital instruments that have loss absorbency features similar to those of common stock. In addition, a stock company may issue capital instruments that are not the most subordinated elements of its capital structure, such as preferred stock with a liquidation preference and cumulative dividend rights. Similarly, non-stock holding companies may issue capital instruments that are not the most subordinated elements of their capital structure. Regardless of whether the issuer is a stock company or a non-stock company, a capital instrument that is not the most subordinated element of a company's capital structure would not qualify as CET1 under Regulation Q.\6\ --------------------------------------------------------------------------- \6\ See 12 CFR 217.20(b)(1)(i). --------------------------------------------------------------------------- Features that cast doubt on whether a particular class of capital instruments is the most subordinated and therefore available to absorb losses first include unlimited liability for the general partner in a partnership, allocation of losses among classes that is disproportionate to amounts invested, mandatory distributions, minimum rates of return, and/or reallocations of earlier distributions. If such features limit or could limit the ability of capital instruments to bear first losses or effectively absorb losses then such features are inconsistent with Regulation Q's eligibility criteria for CET1 instruments and therefore may not qualify as such under Regulation Q.\7\ --------------------------------------------------------------------------- \7\ To the extent that the economic rights of one class of ownership interests differ from those of another class, each class should be evaluated separately to determine qualification as common equity tier 1 capital. --------------------------------------------------------------------------- The proposed rule would have clarified, through examples, how the definition of CET1 would apply to ownership interests issued by non- stock holding companies.\8\ In general, the examples showed that an LLC or partnership could issue capital that would qualify as CET1 provided that all ownership classes shared equally in losses, even if all ownership classes do not share equally in profits. The examples also showed that other features of capital instruments, such as a mandatory capital distribution upon the occurrence of an event or a date, different liquidation preferences among ownership classes, or unequal sharing of losses, could prevent a capital instrument from qualifying as CET1. --------------------------------------------------------------------------- \8\ See 79 FR 75759, 75761-2. --------------------------------------------------------------------------- As noted, the Board received two comments on the proposal. One comment related to the application of the eligibility criteria for CET1 instruments to LLC and partnership interests. The commenter expressed concern that Regulation Q did not adequately address the special characteristics of non-stock holding companies and observed that the proposal facilitated the application of Regulation Q to such holding companies. The final rule follows the same basic structure of the proposal, and adds some clarifications. The Board reordered the examples in the final rule to group together those examples discussing similar structures. In addition, the Board revised examples related to loss sharing to clarify that each distribution must be reviewed separately and to clarify that losses must be borne equally by all holders of CET1 instruments when investment proceeds are distributed. In particular, Example (3) in the proposal related to an LLC with two classes of membership interests that share proportionately in losses, return of contributed capital, and profits up to a set rate of return. However, the classes of membership interests share disproportionately in profits above a particular level. This example provided that both classes of membership interest could qualify as CET1 so long as the classes always share any losses proportionately among the classes or among the instruments in each class, even if there is disproportionate allocation of profits. In the final rule, this example, renumbered as Example (4), clarifies that disproportionate sharing of profits does not prevent qualification as CET1, so long as the classes bear the losses pro rata. Despite the potential for disproportionate allocations of profits from a distribution, the classes of capital instruments would bear losses pro rata, placing them at the same level of seniority in bankruptcy or liquidation. In the proposal, Example (7) related to an LLC with two classes of membership interests where one class could be required, under certain circumstances, to return previously received distributions that would then be allocated to the other class. The example provided that a class of capital instruments advantaged by an arrangement such that the advantaged [[Page 76376]] class might not bear losses pro rata with the other class, would not qualify as CET1. The example also offered general suggestions for revising such arrangements so that such class of capital instrument could count as CET1. In the final rule, the Board revised Example (7) to emphasize the concern that a reallocation of distributions may affect the analysis of whether a class of capital instruments is in a first-loss position. In addition, the Board revised Example (7) to state that reallocations that were limited to reversing prior disproportionate allocations of profits would not raise this concern. Finally, the Board removed general suggestions in Example (7) regarding potential alternative structures to avoid confusion for the reader. Section 217.501 of the final rule does not differ fundamentally from the existing CET1 eligibility criteria in Regulation Q. Instead, it expands on and clarifies the application of these criteria in particular circumstances in substantially the same manner as the proposal. In addition, the proposed rule would have allowed an LLC or partnership with outstanding capital instruments that would not have qualified under the proposed rule as CET1 to continue to treat these instruments as CET1 until January 1, 2016. The Board proposed this extension to provide time for depository institution holding companies organized as LLCs or partnership to assess whether their capital instruments comply with the Regulation Q eligibility criteria and to make any needed modifications. The final rule extends this compliance date to July 1, 2016. The Board expects that all holding companies that are subject to Regulation Q and that have issued capital instruments that do not qualify as CET1 under sections 217.20 and 217.501 to be in full compliance with Regulation Q by July 1, 2016. A non-stock holding company subject to Regulation Q, such as a company organized as an LLC or partnership, that has capital instruments that do not meet the applicable eligibility criteria under Regulation Q may need to take steps to ensure compliance with Regulation Q, including modifying its capital structure or the governing documents of specific capital instruments or issuing additional qualifying capital. The Board may consider the appropriate treatment under Regulation Q for specific capital instruments on a case-by-case basis. Further, the Board reserves the authority to determine that a particular capital instrument may or may not qualify as any form of regulatory capital based on its ability to absorb losses or other considerations, or whether the capital instrument qualifies as an element of a particular regulatory capital component under Regulation Q.\9\ --------------------------------------------------------------------------- \9\ 12 CFR 217.1(d)(2). --------------------------------------------------------------------------- 2. Estate Trust SLHCs Estate trust SLHCs with total consolidated assets of more than $1 billion became subject to Regulation Q on January 1, 2015.\10\ Many estate trusts, however, do not issue capital instruments that would qualify as regulatory capital under Regulation Q or prepare financial statements under U.S. Generally Applicable Accounting Principles (GAAP). Such estate trust SLHCs, therefore, may not be able to meet the minimum regulatory capital ratios under Regulation Q, and requiring these institutions to develop and implement the management information systems necessary to prepare financial statements to demonstrate compliance with Regulation Q could impose significant burden and expense. In addition, a temporary exemption from Regulation Q for estate trust SLHCs does not appear to raise significant supervisory concerns because the estate planning purpose of these entities generally results in limited operations and leverage.\11\ To address these issues, the proposed rule would have excluded estate trust SLHCs from Regulation Q, pending development by the Board of an alternative capital regime for these institutions. --------------------------------------------------------------------------- \10\ While the Home Owners' Loan Act contains a narrow exemption for testamentary trusts from the definition of savings and loan holding company, there are approximately 107 family and personal trusts that do not qualify for this exemption and thus, are savings and loan holding companies. As of January 1, 2015, some of these entities became subject to Regulation Q. The Bank Holding Company Act exempts certain testamentary and inter vivos trusts from the definition of ``company.'' \11\ A review of estate trust SLHCs found that these institutions generally hold high levels of capital, with an estimated median leverage ratio of approximately 99 percent and an estimated mean leverage ratio of approximately 94 percent. Leverage was measured as the ratio of assets minus liabilities over assets. However, estate trust SLHCs do not file regular financial reports with the Board, and estimated median and mean leverage ratios are based on data collected from a significant number of estate trust SLHCs in 2014. --------------------------------------------------------------------------- The Board received one comment on this aspect of the proposal. This commenter noted that it was a closely held SLHC with an ownership structure that included estate trusts and a limited partnership. This commenter expressed concern over the application of Regulation Q and other prudential regulations to family estate planning vehicles and expressed support for the Board's proposed temporary exclusion of estate trust SLHCs from Regulation Q. The final rule adopts the exclusion for SLHCs that are estate trusts without modification. For these entities, the Board intends to develop alternative capital adequacy standards.\12\ --------------------------------------------------------------------------- \12\ Any alternative capital standard must be consistent section 171 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act). Section 171 of the Dodd-Frank Act generally requires that the Board impose minimum leverage and risk-based capital requirements on depository institution holding companies, including estate trust SLHCs. --------------------------------------------------------------------------- 3. ESOPs ESOPs are entities created as part of employee benefits arrangements that hold shares of the sponsoring entities' stock. An ESOP may be a holding company due to its ownership interest in the banking organization that sponsors the ESOP. Under U.S. GAAP, the assets and liabilities of ESOP holding companies are consolidated onto the balance sheet of the banking organization that sponsors the ESOP (either a depository institution or a holding company that may be subject to Regulation Q). Thus, an ESOP holding company may be considered the top-tier holding company in a banking organization for ownership purposes but not considered the top-tier holding company for accounting purposes. This distinction has created confusion regarding the application of Regulation Q to ESOP holding companies, which generally do not issue capital instruments. The proposed rule would have excluded ESOPs from Regulation Q until the Board clarifies the regulatory capital treatment for these entities. The Board did not receive any comments on the aspects of the proposal related to ESOPs and is adopting the proposed temporary exclusion for ESOPs without modification. For a banking organization that has an ESOP holding company within its structure, the Board will evaluate compliance with Regulation Q by assessing the regulatory capital of an ESOP holding company's sponsor banking organization. 4. Early Compliance The final rule will be effective January 1, 2016. As noted above, the final rule includes an extended compliance date of July 1, 2016, to allow time for non-stock holding companies to assess whether their capital instruments comply with Regulation Q and to make any necessary modifications. However, any banking organization subject to Regulation Q may elect to treat the final rule as effective before the effective date. Accordingly, the Board will not [[Page 76377]] object if an institution wishes to apply the provisions of the final rule beginning with the date it is published in the Federal Register. III. Regulatory Analysis A. Paperwork Reduction Act (PRA) In accordance with the Paperwork Reduction Act of 1995 (44 U.S.C. 3506; 5 CFR 1320, Appendix A.1), the Board reviewed the final rule under the authority delegated to the Board by the Office of Management and Budget. The final rule contains no requirements subject to the PRA. B. Regulatory Flexibility Act Analysis The Board is providing a final regulatory flexibility analysis with respect to this final rule. As discussed previously, the final rule provides examples of how the Board will apply the eligibility criteria for CET1 under Regulation Q to instruments issued by non-stock holding companies and provides certain exclusions from Regulation Q. The Regulatory Flexibility Act, 5 U.S.C. 601 et seq. (RFA), generally requires that an agency provide a final regulatory flexibility analysis in connection with a final rule. Under regulations issued by the Small Business Administration, a small entity includes a BHC, bank, or SLHC with assets of $550 million or less (small banking organization).\13\ As of December 31, 2014, there were approximately 3,833 small BHCs and 271 small SLHCs. --------------------------------------------------------------------------- \13\ See 13 CFR 121.201. Effective July 14, 2014, the Small Business Administration revised the size standards for banking organizations to $550 million in assets from $500 million in assets. 79 FR 33647 (June 12, 2014). --------------------------------------------------------------------------- The Board received no comments from the public or from the Chief Counsel for Advocacy of the Small Business Administration in response to the initial regulatory flexibility analysis. Thus, no issues were raised in public comments related to the Board's initial Regulatory Flexibility Act analysis and no changes are being made in response to such comments. The final rule would apply to top-tier depository institution holding companies that are subject to Regulation Q. A substantial number of small depository institution holding companies are exempt from Regulation Q through the application of the Board's Small Bank Holding Company Policy Statement.\14\ In addition, the Board does not believe that the final rule would have a significant impact on small banking organizations because the Board considers the final rule as clarifying the CET1 eligibility criteria and providing specific guidance on the application of the eligibility criteria to entities subject to Regulation Q, rather than imposing significant new requirements. The temporary exemptions from Regulation Q provided for estate trust SLHCs and ESOP holding companies relieve burden on covered small banking organizations, rather than imposing burden. --------------------------------------------------------------------------- \14\ See 12 CFR 217.1; 12 CFR part 225, Appendix C; 80 FR 5666 (February 3, 2015). --------------------------------------------------------------------------- The Board is not aware of any other Federal rules that duplicate, overlap, or conflict with the final rule. The Board believes that the final rule will not have a significant economic impact on small banking organizations supervised by the Board and therefore believes that there are no significant alternatives to the final rule that would reduce the economic impact on small banking organizations supervised by the Board. C. Plain Language Section 722 of the Gramm-Leach-Bliley Act requires the Federal banking agencies to use plain language in all proposed and final rules published after January 1, 2000. The Board has sought to present the final rule in a simple and straightforward manner. The Board did not receive any comments on its use of plain language in the proposed rule. List of Subjects in 12 CFR Part 217 Administrative practice and procedure, Banks, Banking, Capital, Federal Reserve System, Holding companies, Reporting and recordkeeping requirements, Securities. Board of Governors of the Federal Reserve System 12 CFR CHAPTER II Authority and Issuance For the reasons set forth in the preamble, part 217 of chapter II of title 12 of the Code of Federal Regulations is amended as follows: PART 217--CAPITAL ADEQUACY OF BANK HOLDING COMPANIES, SAVINGS AND LOAN HOLDING COMPANIES AND STATE MEMBER BANKS (REGULATION Q) 0 1. The authority citation for part 217 continues to read as follows: Authority: 12 U.S.C. 248(a), 321-338a, 481-486, 1462a, 1467a, 1818, 1828, 1831n, 1831o, 1831p-l, 1831w, 1835, 1844(b), 1851, 3904, 3906-3909, 4808, 5365, 5368, 5371. 0 2. Add subpart I to read as follows: Subpart I--Application of Capital Rules Sec. 217.501 The Board's Regulatory Capital Framework for Depository Institution Holding Companies Organized as Non-Stock Companies. 217.502 Application of the Board's Regulatory Capital Framework to Employee Stock Ownership Plans that are Depository Institution Holding Companies and Certain Trusts that are Savings and Loan Holding Companies. Sec. 217.501 The Board's Regulatory Capital Framework for Depository Institution Holding Companies Organized as Non-Stock Companies. (a) Applicability. (1) This section applies to all depository institution holding companies that are organized as legal entities other than stock corporations and that are subject to this part (Regulation Q, 12 CFR part 217).\1\ --------------------------------------------------------------------------- \1\ See 12 CFR 217.1(c)(1) through (3). --------------------------------------------------------------------------- (2) Notwithstanding Sec. Sec. 217.2 and 217.10, a bank holding company or covered savings and loan holding company that is organized as a legal entity other than a stock corporation and has issued capital instruments that do not qualify as common equity tier 1 capital under Sec. 217.20 by virtue of the requirements set forth in this section may treat those capital instruments as common equity tier 1 capital until July 1, 2016. (b) Common equity tier 1 capital criteria applied to capital instruments issued by non-stock companies. (1) Subpart C of this part provides criteria for capital instruments to qualify as common equity tier 1 capital. This section describes how certain criteria apply to capital instruments issued by bank holding companies and covered savings and loan holding companies that are organized as legal entities other than stock corporations, such as limited liability companies (LLCs) and partnerships. (2) Holding companies are organized using a variety of legal structures, including corporate forms, LLCs, partnerships, and similar structures.\2\ In the Board's experience, some depository institution holding companies that are organized in non-stock form issue multiple classes of capital instruments that allocate profit and loss from a distribution differently among classes, which may affect the ability of those classes to qualify as common equity tier 1 capital.\3\ --------------------------------------------------------------------------- \2\ A stock corporation's common stock should satisfy the CET1 criteria so long as the common stock does not have unusual features, such as a limited duration. \3\ Notably, voting powers or other means of exercising control are not relevant for purposes of satisfying the CET1 eligibility criteria. Thus, the fact that a particular partner or member controls a holding company, for instance, due to serving as general partner or managing member, is not material to qualification of particular interests as CET1. --------------------------------------------------------------------------- (3) Common equity tier 1 capital is defined in Sec. 217.20(b). To qualify as [[Page 76378]] common equity tier 1 capital, capital instruments must satisfy a number of criteria. This section provides examples of the application of certain common equity tier 1 capital criteria that relate to the economic interests in the company represented by particular capital instruments. (c) Examples. The following examples show how the criteria for common equity tier 1 capital apply to particular partnership or LLC structures.\4\ --------------------------------------------------------------------------- \4\ Although the examples refer to specific types of legal entities for purposes of illustration, the substance of the Regulation Q criteria reflected in the examples applies to all types of legal entities. --------------------------------------------------------------------------- (1) LLC with one class of membership interests. (i) An LLC issues one class of membership interests that provides that all holders of the interests bear losses and receive dividends proportionate to their levels of ownership. (ii) Provided that the other criteria in Sec. 217.20(b) are met, the membership interests would qualify as common equity tier 1 capital. (2) Partnership with limited and general partners. (i) A partnership has two classes of interests: General partnership interests and limited partnership interests. The general partners and the limited partners bear losses and receive distributions allocated proportionately to their capital contributions. In addition, the general partner has unlimited liability for the debts of the partnership. (ii) Provided that the other criteria in Sec. 217.20(b) are met, the general and limited partnership interests would qualify as common equity tier 1 capital. The fact of unlimited liability of the general partner is not relevant in the context of the eligibility criteria of common equity tier 1 capital instruments, provided that the general partner and limited partners share losses equally to the extent of the assets of the partnership, and the general partner is liable after the assets of the partnership are exhausted. In this regard, the general partner's unlimited liability is similar to a guarantee provided by the general partner, rather than a feature of the general partnership interest. (3) Senior and junior classes of capital instruments. (i) An LLC issues two types of membership interests, Class A and Class B. Holders of Class A and Class B interests participate equally in operating distributions and have equal voting rights. However, in liquidation, holders of Class B interests must receive the entire amount of their contributed capital in order for any distributions to be made to holders of Class A interests. (ii) Class B interests have a preference over Class A interests in liquidation and, therefore, would not qualify as common equity tier 1 capital as the Class B interests are not the most subordinated claim (criterion (i)) and do not share losses proportionately (criterion (viii) (Sec. 217.20(b)(1)(i) and (viii), respectively). (A) If all other criteria are satisfied, Class A interests would qualify as common equity tier 1 capital. (B) Class B interests may qualify as additional tier 1 capital, or tier 2 capital, if the Class B interests meet the applicable criteria (Sec. 217.20(c) and (d)). (4) LLC with two classes of membership interests. (i) An LLC issues two types of membership interests, Class A and Class B. To the extent that the LLC makes a distribution, holders of Class A and Class B interests share proportionately in any losses and receive proportionate shares of contributed capital. To the extent that a capital distribution includes an allocation of profits, holders of Class A and Class B interests share proportionately up to the point where all holders receive a specific annual rate of return on capital contributions, and, if the distribution exceeds that point, holders of Class B interests receive double their proportional share and holders of Class A interests receive the remainder of the distribution. (ii) Class A and Class B interests would both qualify as common equity tier 1 capital, provided that under all circumstances they share losses proportionately, as measured with respect to each distribution, and that they satisfy the common equity tier 1 capital criteria. The holders of Class A and Class B interests may receive different allocations of profits with respect to a distribution, provided that the distribution is made simultaneously to all members of Class A and Class B interests. Despite the potential for disproportionate profits, Class A and Class B interests have the same level of seniority with regard to potential losses and therefore they both satisfy all the criteria in Sec. 217.20(b), including criterion (ii) (Sec. 217.20(b)(1)(ii)). (5) Alternative LLC with two classes of membership interests. (i) An LLC issues two types of membership interests, Class A and Class B. In the event that the LLC makes a distribution, holders of Class A interests bear a disproportionately low level of any losses, such that the Class B interests bear a disproportionately high level of losses at the distribution. In contrast to the example in paragraph (c)(4) of this section, the different participation rights apply to distributions in situations where losses are allocated, including losses at liquidation. (ii) Because holders of the Class A interests do not bear a proportional interest in the losses (criterion (ii) (Sec. 217.20(b)(1)(ii)), the Class A interests would not qualify as common equity tier 1 capital. (A) Companies with such structures may revise their capital structures in order to provide for a sufficiently large class of capital instruments that proportionally bear first losses in liquidation (that is, the Class B interests in this example). (B) Alternatively, companies with such structures could revise their capital structure to ensure that all classes of capital instruments that are intended to qualify as common equity tier 1 capital share equally in losses in liquidation consistent with criteria (i), (ii), (vii), and (viii) in Sec. 217.20(b)(1)(i), (ii), (vii), respectively, even if each class of capital instruments has different rights to allocations of profits, as in paragraph (c)(4) of this section. (6) Mandatory distributions. (i) A partnership agreement contains provisions that require distributions to holders of one or more classes of capital instruments on the occurrence of particular events, such as upon specific dates or following a significant sale of assets, but not including any final distributions in liquidation. (ii) Any class of capital instruments that provides holders with rights to mandatory distributions would not qualify as common equity tier 1 capital because a holding company must have full discretion at all times to refrain from paying any dividends and making any other distributions on the instrument without triggering an event of default, a requirement to make a payment-in-kind, or an imposition of any other restriction on the holding company (criterion (vi) in Sec. 217.20(b)(1)(vi)). Companies must ensure that they have a sufficient amount of capital instruments that do not have such rights and that meet the other criteria of common equity tier 1 capital, in order to meet the requirements of Regulation Q. (7) Features that Reallocate Prior Distributions. (i) An LLC issues two types of membership interests, Class A and Class B. The terms of the LLC's membership interests provide that, under certain circumstances, holders of Class A interests must return a portion of earlier distributions, which are then distributed to holders of Class B interests (sometimes called a ``clawback''). (ii) If the reallocation of prior distributions described in paragraph (c)(7)(i) of this section could result in holders of the Class B interests bearing [[Page 76379]] fewer losses on an aggregate basis than Class A interests, the Class B interests would not qualify as common equity tier 1 capital. However, where the membership interests provide for disproportionate allocation of profits, such as described in the example in paragraph (c)(4) of this section, and the reallocation of prior distributions would be limited to reversing the disproportionate portions of prior distributions, both the Class A and Class B interests could qualify as common equity tier 1 capital provided that they met all the other criteria in Sec. 217.20(b). Sec. 217.502 Application of the Board's Regulatory Capital Framework to Employee Stock Ownership Plans that are Depository Institution Holding Companies and Certain Trusts that are Savings and Loan Holding Companies. (a) Employee Stock Ownership Plans. Notwithstanding Sec. 217.1(c), a bank holding company or covered savings and loan holding company that is an employee stock ownership plan is exempt from this part until the Board adopts regulations that directly relate to the application of capital regulations to employee stock ownership plans. (b) Personal or Family Trusts. Notwithstanding Sec. 217.1(c), a covered savings and loan holding company is exempt from this part if it is a personal or family trust and not a business trust until the Board adopts regulations that apply capital regulations to such a covered savings and loan holding company. By order of the Board of Governors of the Federal Reserve System, December 4, 2015. Robert deV. Frierson, Secretary of the Board. [FR Doc. 2015-31013 Filed 12-8-15; 8:45 am] BILLING CODE P
![76374 Federal Register / Vol. 80, No. 236 / Wednesday, December 9, 2015 / Rules and Regulations
and Interference with Constitutionally its Final Information Quality Bulletin FEDERAL RESERVE SYSTEM
Protected Property Rights’’ 53 FR 8859 for Peer Review (the Bulletin). 70 FR
(Mar. 18, 1988) that this final 2664 (Jan. 14, 2005). The Bulletin 12 CFR Part 217
determination does not result in any establishes that certain scientific [Docket No. R–1506]
takings that might require compensation information shall be peer reviewed by
under the Fifth Amendment to the U.S. RIN 7100–AE 27
qualified specialists before it is
Constitution. disseminated by the Federal Regulatory Capital Rules: Regulatory
J. Review Under the Treasury and Government, including influential Capital, Final Rule Demonstrating
General Government Appropriations scientific information related to agency Application of Common Equity Tier 1
Act, 2001 regulatory actions. The purpose of the Capital Eligibility Criteria and
Section 515 of the Treasury and Bulletin is to enhance the quality and Excluding Certain Holding Companies
General Government Appropriations credibility of the Government’s From Regulation Q
Act, 2001 (44 U.S.C. 3516, note) scientific information. Under the
Bulletin, the energy conservation AGENCY: Board of Governors of the
provides for Federal agencies to review
standards rulemaking analyses are Federal Reserve System.
most disseminations of information to
the public under guidelines established ‘‘influential scientific information,’’ ACTION: Final rule.
by each agency pursuant to general which the Bulletin defines as scientific SUMMARY: The Board of Governors of the
guidelines issued by OMB. OMB’s information the agency reasonably can Federal Reserve System (Board) is
guidelines were published at 67 FR determine will have, or does have, a adopting amendments to the Board’s
8452 (Feb. 22, 2002), and DOE’s clear and substantial impact on regulatory capital framework
guidelines were published at 67 FR important public policies or private (Regulation Q) to clarify how the
62446 (Oct. 7, 2002). DOE has reviewed sector decisions. 70 FR 2667. definition of common equity tier 1
this final determination under the OMB capital, a key capital component,
In response to OMB’s Bulletin, DOE
and DOE guidelines and has concluded applies to ownership interests issued by
conducted formal in-progress peer
that it is consistent with applicable depository institution holding
policies in those guidelines. reviews of the energy conservation
standards development process and companies that are structured as
K. Review Under Executive Order 13211 analyses and has prepared a Peer partnerships or limited liability
Executive Order 13211, ‘‘Actions Review Report pertaining to the energy companies. In addition, the final rule
Concerning Regulations That conservation standards rulemaking amends Regulation Q to exclude
Significantly Affect Energy Supply, analyses. Generation of this report temporarily from Regulation Q savings
Distribution, or Use’’ 66 FR 28355 (May involved a rigorous, formal, and and loan holding companies that are
22, 2001), requires Federal agencies to trusts and depository institution holding
documented evaluation using objective
prepare and submit to OIRA at OMB, a companies that are employee stock
criteria and qualified and independent
Statement of Energy Effects for any ownership plans.
reviewers to make a judgment as to the
proposed significant energy action. A DATES: The final rule is effective January
technical/scientific/business merit, the
‘‘significant energy action’’ is defined as 1, 2016. Any company subject to the
actual or anticipated results, and the
any action by an agency that final rule may elect to adopt it before
productivity and management
promulgates or is expected to lead to this date.
effectiveness of programs and/or
promulgation of a final rule, and that: FOR FURTHER INFORMATION CONTACT: Juan
projects. The ‘‘Energy Conservation
(1) Is a significant regulatory action Standards Rulemaking Peer Review Climent, Manager, (202) 872–7526, Page
under Executive Order 12866, or any Conkling, Senior Supervisory Financial
Report’’ dated February 2007 has been
successor order; and (2) is likely to have Analyst, (202) 912–4647, Noah Cuttler,
disseminated and is available at the
a significant adverse effect on the Senior Financial Analyst, (202) 912–
following Web site: 4678, Division of Banking Supervision
supply, distribution, or use of energy, or
www1.eere.energy.gov/buildings/ and Regulation, Board of Governors of
(3) is designated by the Administrator of
OIRA as a significant energy action. For appliance_standards/peer_review.html. the Federal Reserve System; or
any proposed significant energy action, VIII. Approval of the Office of the Benjamin McDonough, Special Counsel,
the agency must give a detailed Secretary (202) 452–2036, or Mark Buresh, Senior
statement of any adverse effects on Attorney, (202) 452–5270, Legal
energy supply, distribution, or use The Secretary of Energy has approved Division, 20th Street and Constitution
should the proposal be implemented, publication of this final determination. Avenue NW., Washington, DC 20551.
and of reasonable alternatives to the Issued in Washington, DC, on December 2, Users of Telecommunication Device for
action and their expected benefits on 2015. Deaf (TDD) only, call (202) 263–4869.
energy supply, distribution, and use. SUPPLEMENTARY INFORMATION:
David Danielson,
Because the final determination finds
that standards for HID lamps are not Assistant Secretary, Energy Efficiency and I. Background
warranted, it is not a significant energy Renewable Energy.
In July 2013, the Board adopted
action, nor has it been designated as [FR Doc. 2015–30992 Filed 12–8–15; 8:45 am] Regulation Q, a revised capital
such by the Administrator at OIRA. BILLING CODE 6450–01–P framework that strengthened the capital
Accordingly, DOE has not prepared a requirements applicable to state member
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Statement of Energy Effects. banks and bank holding companies
L. Review Under the Information (BHCs) and implemented capital
Quality Bulletin for Peer Review requirements for certain savings and
loan holding companies (SLHCs).1
On December 16, 2004, OMB, in
consultation with the Office of Science 1 See 12 CFR part 217. Savings and loan holding
and Technology Policy (OSTP), issued companies that are substantially engaged in
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![Federal Register / Vol. 80, No. 236 / Wednesday, December 9, 2015 / Rules and Regulations 76379
fewer losses on an aggregate basis than The applicable airworthiness to exceed those established under part
Class A interests, the Class B interests regulations do not contain adequate or 33 for an electronic engine control.
would not qualify as common equity appropriate safety standards for this
Type Certification Basis
tier 1 capital. However, where the design feature. These special conditions
membership interests provide for contain the additional safety standards Under the provisions of 14 CFR 21.17,
disproportionate allocation of profits, that the Administrator considers Cirrus must show that the Model SF50
such as described in the example in necessary to establish a level of safety meets the applicable provisions of part
paragraph (c)(4) of this section, and the equivalent to that established by the 23, as amended by amendments 23–1
reallocation of prior distributions would existing airworthiness standards. through 23–62 thereto.
be limited to reversing the If the Administrator finds that the
DATES: The effective date of these
disproportionate portions of prior applicable airworthiness regulations
special conditions is December 9, 2015 (i.e., 14 CFR part 23) do not contain
distributions, both the Class A and Class and are applicable on December 2, 2015.
B interests could qualify as common adequate or appropriate safety standards
FOR FURTHER INFORMATION CONTACT: Jeff for the SF50 because of a novel or
equity tier 1 capital provided that they
met all the other criteria in § 217.20(b). Pretz, Regulations and Policy Branch, unusual design feature, special
ACE–111, Federal Aviation conditions are prescribed under the
§ 217.502 Application of the Board’s Administration, Small Airplane provisions of § 21.16.
Regulatory Capital Framework to Employee Directorate, Aircraft Certification Special conditions are initially
Stock Ownership Plans that are Depository Service, ACE–111, 901 Locust, Room applicable to the model for which they
Institution Holding Companies and Certain 301, Kansas City, MO 64106; telephone are issued. Should the type certificate
Trusts that are Savings and Loan Holding (816) 329–3239, facsimile (816) 329–
Companies.
for that model be amended later to
4090. include any other model that
(a) Employee Stock Ownership Plans. incorporates the same or similar novel
Notwithstanding § 217.1(c), a bank SUPPLEMENTARY INFORMATION:
or unusual design feature, the special
holding company or covered savings Background conditions would also apply to the other
and loan holding company that is an model under § 21.101.
employee stock ownership plan is On September 9, 2008, Cirrus Aircraft
In addition to the applicable
exempt from this part until the Board Corporation applied for a type
airworthiness regulations and special
adopts regulations that directly relate to certificate for their new Model SF50. On
conditions, the SF50 must comply with
the application of capital regulations to December 11, 2012 Cirrus elected to
the fuel vent and exhaust emission
employee stock ownership plans. adjust the certification basis of the SF50
requirements of 14 CFR part 34 and the
(b) Personal or Family Trusts. to include 14 CFR part 23 through
noise certification requirements of 14
Notwithstanding § 217.1(c), a covered amendment 62. The SF50 is a low-wing,
CFR part 36 and the FAA must issue a
savings and loan holding company is 7-seat (5 adults and 2 children),
finding of regulatory adequacy under
exempt from this part if it is a personal pressurized, retractable gear, carbon
section 611 of Public Law 92–574, the
or family trust and not a business trust composite airplane with one turbofan
Noise Control Act of 1972.
until the Board adopts regulations that engine mounted partially in the upper The FAA issues special conditions, as
apply capital regulations to such a aft fuselage. It is constructed largely of defined in 14 CFR 11.19, in accordance
covered savings and loan holding carbon and fiberglass composite with § 11.38, and they become part of
company. materials. Like other Cirrus products, the type-certification basis under
By order of the Board of Governors of the the SF50 includes a ballistically § 21.17(a)(2).
Federal Reserve System, December 4, 2015. deployed airframe parachute. The SF50
has a maximum operating altitude of Novel or Unusual Design Features
Robert deV. Frierson,
28,000 feet and the maximum takeoff The SF50 will incorporate the
Secretary of the Board.
weight will be at or below 6,000 pounds following novel or unusual design
[FR Doc. 2015–31013 Filed 12–8–15; 8:45 am]
with a range at economy cruise of features: An ATS as part of the
BILLING CODE P
roughly 1,000 nautical miles. automatic flight control system. The
Current part 23 airworthiness ATS utilizes a Garmin ‘‘smart’’ autopilot
regulations do not contain appropriate servo with a physical connection to the
DEPARTMENT OF TRANSPORTATION safety standards for an Auto Throttle throttle quadrant control linkage. The
System (ATS) installation; therefore, auto throttle may be controlled by the
Federal Aviation Administration
special conditions are required to pilot with an optional auto throttle
establish an acceptable level of safety. control panel adjacent to the throttle
14 CFR Part 23
Part 25 regulations contain appropriate lever. The auto throttle also provides an
[Docket No. FAA–2015–3464; Special safety standards for these systems, envelope protection function which
Conditions No. 23–272–SC] making the intent for this project to does not require installation of the
apply the language in § 25.1329 for the optional control panel.
Special Conditions: Cirrus Aircraft auto throttle, while substituting
Corporation, SF50; Auto Throttle § 23.1309 and § 23.143 in place of the Discussion
AGENCY: Federal Aviation similar part 25 regulations referenced in Part 23 currently does not sufficiently
Administration (FAA), DOT. § 25.1329. In addition, malfunction of address auto throttle (also referred to as
ACTION: Final special conditions. the ATS to perform its intended auto thrust) technology and safety
function shall be evaluated per the Loss concerns. Therefore, special conditions
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SUMMARY: These special conditions are of Thrust Control (LOTC) criteria must be developed and applied to this
issued for the Cirrus Aircraft established under part 33 for electronic project to ensure an acceptable level of
Corporation Model SF50 airplane. This engine controls. An analysis must show safety has been obtained. For approval
airplane will have a novel or unusual that no single failure or malfunction or to use the ATS during flight, the SF50
design feature(s) associated with probable combinations of failures of the must demonstrate compliance to the
installation of an Auto Throttle System. ATS will permit the LOTC probability intent of the requirements of § 25.1329,
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Document Created: 2015-12-14 13:32:51
Document Modified: 2015-12-14 13:32:51
| Category | Regulatory Information | |
| Collection | Federal Register | |
| sudoc Class | AE 2.7: GS 4.107: AE 2.106: | |
| Publisher | Office of the Federal Register, National Archives and Records Administration | |
| Section | Rules and Regulations | |
| Action | Final rule. | |
| Dates | The final rule is effective January 1, 2016. Any company subject to the final rule may elect to adopt it before this date. | |
| Contact | Juan Climent, Manager, (202) 872-7526, Page Conkling, Senior Supervisory Financial Analyst, (202) 912-4647, Noah Cuttler, Senior Financial Analyst, (202) 912-4678, Division of Banking Supervision and Regulation, Board of Governors of the Federal Reserve System; or Benjamin McDonough, Special Counsel, (202) 452-2036, or Mark Buresh, Senior Attorney, (202) 452-5270, Legal Division, 20th Street and Constitution Avenue NW., Washington, DC 20551. Users of Telecommunication Device for Deaf (TDD) only, call (202) 263-4869. | |
| FR Citation | 80 FR 76374 | |
| CFR Associated | Administrative Practice and Procedure; Banks; Banking; Capital; Federal Reserve System; Holding Companies; Reporting and Recordkeeping Requirements and Securities |
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