Section 20 Subsidiaries of Bank Holding Companies
April 27, 1998
Circular No. 11053

How Replacement of "Firewalls" with Operating Standards Affects Inspections

To All Section 20 Subsidiaries of Bank Holding Companies,
and Others Concerned, in the Second Federal Reserve District:

Our Circular No. 10979, dated September 4, 1997, contained an announcement by the Board of Governors of the Federal Reserve System of modifications to the prudential limits ("firewalls") that had applied to bank holding companies engaged in securities underwriting and dealing activities through section 20 subsidiaries. The Board eliminated those restrictions that had proven to be unduly burdensome or unnecessary in light of other laws or regulations, and consolidated the remaining restrictions in a series of eight operating standards. One of the standards was recently clarified, in our Circular No. 11049, dated April 17, 1998.

In response to questions raised by banking organizations concerning the ramifications of these changes and their effect on inspections of section 20 subsidiaries, the Federal Reserve has adopted guidelines on the impact of these modifications on inspections. The guidance was developed by a group consisting of staff from the Federal Reserve Bank of New York led by James Keogh, Examining Officer, and Board staff. The letter (SR 98-6) from the Board's Division of Banking Supervision and Regulation contains the guidance and discusses certain recurring issues that have been raised. Questions may be directed, at this Bank, to James Keogh.