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Federal Register / Vol. 86, No. 34 / Tuesday, February 23, 2021 / Rules and Regulations
requirements in the final rule are consistent with section 38Ad of the FDI Act, which provides explicit statutory authority for the FDIC to require reports from a controlling company of an industrial bank to assess the ability of the company to comply with the source of strength requirement, and to enforce compliance by such company.113 The final rule adopts these commitments as proposed, other than as described below. Implementation of the rule positions the FDIC to better protect the industrial bank from activities of a parent organization that present heightened risk to the organization and the bank and to ensure that the parent company is a continuing source of financial strength.114
In response to the concerns expressed by commenters that a Covered Company that is not engaged in financial services would not be covered by the GLBA, the FDIC is revising the commitment in the final rule that a Covered Company submit an annual report to the FDIC
commitment 3 to include a requirement for a Covered Company to inform the FDIC about its systems for protecting the security, confidentiality, and integrity of consumer and nonpublic personal information. This reporting will provide the FDIC
appropriate information across all of a Covered Companys financial and nonfinancial activities to monitor for potential consumer protection risks.
The FDIC also sought comment on whether the commitment and requirements of the rule are appropriately tailored in light of the GLBAs restrictions on the extent to which a Federal banking agency may regulate and supervise a functionally regulated affiliate of an insured depository institution.
Most commenters supported the reporting 115 and examination requirements that enable the FDIC to monitor and evaluate financial and other conditions in the parent 113 See
12 U.S.C. 1831o1d.
12 U.S.C. 1820b and 1820b4A.
115 If the Covered Company is required to submit reports to the Securities and Exchange Commission SEC, the requirement to submit an annual report may be satisfied through submission of SEC Form 10K or equivalent, along with the companys annual audit report and management letter with management responses, provided that the combination of reports addresses each requirement as stated in the rule. In some cases, it may be necessary or appropriate to also submit evaluations of the Covered Companys internal operations, along with management responses, satisfying the Statement on Standards for Attestation Engagements SSAE Number 18, Report on Controls at a Service Organization Relevant to User Entities Internal Control over Financial Reporting, as issued or amended by the Auditing Standards Board, or similar reports or evaluations.
114 See
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organization that are relevant to the industrial bank. One commenter supported carving out functionally regulated entities from the scope of the required commitments in 354.4 to be consistent with jurisdictional boundaries contemplated by the GLBA.
While functionally regulated financial firms do not raise the types of concerns that commercial firms do with respect to industrial banks, different regulatory supervisors will have different supervisory approaches and will be focused, by design, on the aspects of a business that concern that regulator.116
The FDIC serves as the regulator for the industrial bank and exercises oversight of the parent company to the extent necessary to ensure the safety and soundness of the industrial bank subsidiary and to protect the DIF.
Through examination and reporting, the FDIC will be able to gauge and monitor the operational risks an industrial bank affiliate, whether functionally regulated or unregulated, presents to the industrial bank. The FDIC may take action to prevent or redress an unsafe or unsound practice if action to address that risk when limited to the industrial bank would not effectively protect against the risk.
The FDIC sought comment on whether a Covered Company should be required to disclose to the FDIC certain additional affiliates or portfolio companies of the Covered Company because these affiliates could engage in transactions with, or otherwise impact, the subsidiary industrial bank. One trade association commenter opposed any further extension of the reporting requirement as being burdensome. A
number of commenters acknowledged the FDICs authority to understand affiliate relationships and their impact on the industrial bank, but suggested that the reporting be tailored by including a materiality threshold.
Otherwise, these commenters believed the reporting would be burdensome while potentially providing information with no real relevance to the industrial bank.
Other commenters argued that the final rule should require a Covered Company to disclose its affiliates and portfolio companies that could engage in transactions with, or otherwise impact, the subsidiary industrial bank in order to provide the FDIC a complete and transparent picture of the business model. These commenters observed that related entities may impact the financial 116 For example, in a situation where a parent company issues securities, the SECs role and expertise lies in supervising the parent company as an issuer of securities, not in the role of a parent company of an industrial bank.

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condition and results of operations of the Covered Company, which may negatively impact its ability to serve as a source of strength for the industrial bank.
The FDIC believes that the relationship of a bank with its affiliated organizations is important to the analysis of the condition of the bank itself. Because of commonality of ownership or management that may exist, transactions with affiliates may not be subject to the same sort of objective analysis that exists in transactions between independent parties. Also, affiliates offer an opportunity to engage in types of business activities that are prohibited to the bank itself yet those activities may affect the condition of the bank. In recognition of the importance of these relationships, the FDIC has been granted authority, under certain conditions to examine affiliates in connection with its examination of a bank to disclose the relationship between the bank and a given affiliate, as well as the effect of that relationship on the bank.117 The FDIC also has been granted authority to bring enforcement actions against insured State nonmember banks and their institution-affiliated parties.118 As discussed above in section IV.A.2., industrial banks are subject to these same examination and enforcement authorities as other banks, as well as sections 23A and 23B of the Federal Reserve Act and Regulation W, which govern transactions with affiliates. In addition, section 38A of the FDI Act provides authority for the FDIC to require reports from a company that controls an industrial bank to assess the ability of the company to comply with the source of strength requirement, and to enforce compliance by such company.119 Section 38A of the FDI Act therefore provides an additional supervisory tool to the FDIC in regulating Covered Companies, including their subsidiaries.
In supervising industrial banks, the FDIC considers each industrial banks purpose and placement within the organizational structure and tailors reporting and other requirements accordingly. Requiring the disclosure of the Covered Companies subsidiaries along with the other reporting tools available to the FDIC as discussed above are sufficient and will appropriately cover those affiliates of the industrial bank of most concern to the FDIC.
Accordingly, the FDIC is adopting 354.4a1 as proposed.
117 12

U.S.C. 1820b4.
U.S.C. 1813u and 1818.
119 See 12 U.S.C. 1831o1d.
118 12

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