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Federal Register / Vol. 86, No. 34 / Tuesday, February 23, 2021 / Rules and Regulations
bank proposals. These profiles have included potential owners that would not be subject to Federal consolidated supervision,8 affiliations with organizations whose activities are primarily commercial in nature, and non-community bank business models.9
Given the continuing interest in the industrial bank charter and the evolving business models, the FDIC proposed a rule in March 2020 to codify existing practices utilized by the FDIC to supervise industrial banks and their parent companies, to mitigate undue risk to the DIF that may otherwise be presented in the absence of Federal consolidated supervision of an industrial bank and its parent company, and to ensure that the parent company that owns or controls an industrial bank serves as a source of financial strength for the industrial bank, consistent with section 38A of the FDI Act.10 The proposed rule described certain commitments that would be required as a condition of the FDICs approval of, or non-objection to, each deposit insurance application, change in control notice, or merger application resulting in an industrial bank becoming a subsidiary of a company not subject to consolidated supervision by the Federal Reserve Board FRB; each such parent company a Covered Company. The proposed rule required such a company and the subsidiary industrial bank to enter into one or more written agreements with the FDIC that contain certain commitments to be undertaken by the company to ensure the safe and sound operation of such industrial bank.
The required commitments include capital and liquidity support from the parent to the industrial bank that have been incorporated in some form in the FDICs prior actions to create an appropriate supervisory structure for 8 In the context of the proposed rule, Federal consolidated supervision referred to the supervision of a parent company and its subsidiaries by the Federal Reserve Board FRB.
Consolidated supervision of a bank holding company by the FRB encompasses the parent company and its subsidiaries, and allows the FRB
to understand the organizations structure, activities, resources, and risks, as well as to address financial, managerial, operational, or other deficiencies before they pose a danger to the BHCs subsidiary depository institutions. See SR Letter 089, Consolidated Supervision of Bank Holding Companies and the Combined U.S. Operations of Foreign Banking Organizations Oct. 16, 2008.
9 See FDIC Deposit Insurance Applications, Procedures Manual Supplement, Applications from Non-Bank and Non-Community Bank Applicants, FIL82020 Feb. 10, 2020.
10 Parent Companies of Industrial Banks and Industrial Loan Companies, 85 FR 17771, 1777273
Mar. 31, 2020. See also 12 U.S.C. 1831o1b.

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industrial banks and their parent companies.11
The FDIC is now issuing a final rule, which is largely consistent with the proposed rule. The final rule makes four substantive changes to the proposed rule. First, the final rule requires compliance from covered entities on or after the effective date of the rule rather than simply after, as proposed. Second, the final rule requires additional reporting by Covered Companies regarding systems for protecting the security, confidentiality, and integrity of consumer and nonpublic personal information. Third, the threshold regarding the limitation of a Covered Companys representation on the board of a subsidiary industrial bank has been raised in the final rule from 25 percent, as proposed, to less than 50 percent.
Lastly, the final rule modifies the restrictions on industrial bank subsidiaries concerning the appointment of directors and senior executive officers to apply to the industrial bank only during the first three years after becoming a subsidiary of a Covered Company. These changes are discussed in sections IV.B.1., IV.B.4., and IV.B.5. of this Supplementary Information section below. In addition to providing this comprehensive framework for supervision, the final rule also provides interested parties with certainty and transparency regarding the FDICs practices when making determinations on filings involving industrial banks.
II. Background A. History Industrial banks began as small Statechartered loan companies in the early 1900s to provide small loans to industrial workers. Initially, many industrial banks did not accept any deposits and funded themselves instead by issuing investment certificates.
However, the Garn-St. Germain Depository Institutions Act of 1982,12
among other effects, made all industrial banks eligible for Federal deposit insurance. This expanded eligibility for Federal deposit insurance brought industrial banks under the supervision 11 In March of 2020, the FDIC approved two deposit insurance applications for industrial banks owned by firms whose businesses are predominantly financial in nature, Square Financial Services, Inc., Salt Lake City, Utah Square Financial, and Nelnet Bank, Salt Lake City, Utah Nelnet. As part of both approvals, the FDIC
required the industrial banks and their parent companies to enter into written agreements with the FDIC that are consistent with the requirements of the proposed and this final rule.
12 96 Stat. 1469.

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of both a State authority and the FDIC.13
The chartering States gradually expanded the powers of their industrial banks so that today industrial banks generally have the same commercial and consumer lending powers as commercial banks.
Under the FDI Act, industrial banks are State banks 14 and all of the existing FDIC-insured industrial banks are State nonmember banks. 15 As a result, the FDIC is the appropriate Federal banking agency for industrial banks.16 Each industrial bank is also regulated by its respective State chartering authority. The FDIC generally exercises the same supervisory and regulatory authority over industrial banks as it does over other State nonmember banks.
B. Industrial Bank Exclusion Under the BHCA
In 1987, Congress enacted the CEBA, which exempted industrial banks from the definition of bank in the BHCA.
As a result, parent companies that control industrial banks are not BHCs under the BHCA and are not subject to the BHCAs activities restrictions or FRB
supervision and regulation. The industrial bank exception in the BHCA
therefore allows for commercial firms to own or control a bank. By contrast, BHCs and savings and loan holding companies SLHCs are subject to Federal consolidated supervision by the FRB and are generally prohibited from engaging in commercial activities.17
More specifically, the CEBA redefined the term bank in the BHCA to include: 1 Any FDIC-insured institution, and 2 any other institution that accepts demand or checkable deposit accounts and is engaged in the 13 Prior to 1982, the FDIC had allowed some industrial banks to become federally insured, but FDIC insurance was typically limited to those industrial banks chartered by States where the relevant States law allowed them to receive deposits or to use bank in their name. For additional historical context regarding industrial bank supervision, see The FDICs Supervision of Industrial Loan Companies: A Historical Perspective, Supervisory Insights 2004.
14 12 U.S.C. 1813a2.
15 12 U.S.C. 1813e2.
16 12 U.S.C. 1813q2.
17 Section 4 of the BHCA generally prohibits a BHC from acquiring ownership or control of any company which is not a bank or engaging in any activity other than those of banking or of managing or controlling banks and other subsidiaries authorized under the BHCA. See 12 U.S.C.
1843a1 and 2. The Home Owners Loan Act HOLA governs the activities of SLHCs, as amended by the Dodd-Frank Act, which generally subjects these companies to the permissible financial holding company activities under section 4k of the BHCA 12 U.S.C. 1843k, activities that are financial in nature or incidental to a financial activity. See 12 U.S.C. 1467ac2H.

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