equity security of a bank and without the payment of consideration, to receive another security of the bank "when issued" or, "when distributed," the security to be acquired shall be exempt from the operation of section 16(c) if

(1) The sale is made subject to the same conditions as those attaching to the right of acquisition;

(2) Such person exercises reasonable diligence to deliver such security to the purchaser promptly after his right of acquisition matures; and

(3) Such person reports the sale on the appropriate form for reporting transactions by persons subject to section 16(a).

(b) This § 12.10 shall not be construed as exempting transactions involving both a sale of a security "when issued" or "when distributed" and a sale of the security by virtue of which the seller expects to receive the "when issued" or "when distributed" security, if the two transactions combined result in a sale of more units than the aggregate of

those owned by the seller plus those to be received by him pursuant to his right of acquisition.

§ 12.11 Arbitrage transactions under section 16 of the Securities Exchange Act.

It shall be unlawful for any director or principal officer of a bank to effect any foreign or domestic arbitrage transaction in any equity security of the bank unless he shall include such transaction in the statements required by section 16(a) of the Securities Exchange Act and § 12.1 and shall account to such bank for the profits arising from such transaction, as provided in section 16(b). The provisions of section 16(c) shall not apply to such arbitrage transactions. The provisions of § 12.1 and of section 16 shall not apply to any bona fide foreign or domestic arbitrage transaction insofar as it is effected by any person other than such director or principal officer of the bank issuing such security.

Sec.

13.1

Scope and application.

13.2 Source of shares.

13.3 Terms and procedure.

AUTHORITY: The provisions of this Part 13 issued under R.S. 324 et seq., as amended; 12 U.S.C. 1, et seq.

§ 13.1 Scope and application.

Any national bank may grant options to purchase, sell, or enter into agreements to sell, shares of its capital stock to its employees, whether or not such transactions qualify for special tax treatment under the Internal Revenue Code of 1954, as amended, and regulations promulgated thereunder, provided that the following conditions are met:

(a) Application for approval shall be made to the Comptroller of the Currency, Washington, D.C., 20220, in the form of a letter accompanied by the following information:

(1) Description of all material provisions of the plan.

(2) Proposed notice of shareholders' meeting, proxy and proxy statement.

(3) Number of shares of authorized but unissued stock to be allocated to the plan.

(4) Proposed amendments to articles of association creating authorized but unissued stock and eliminating preemptive rights as to the shares reserved under the plan;

(b) The plan is administered by a committee, none of whose members may participate in the plan;

(c) The number of shares allocable to any person under the plan is reasonable in relation to the purpose of the plan and the needs of the bank; and

(d) In the case of a stock option plan, the number of shares subject to the plan is not unreasonable in relation to the bank's capital structure and anticipated growth.

§ 13.2 Source of shares.

Shares issued to employees pursuant to this Part 13 may be authorized but unissued stock which has been authorized by stockholders in accordance with the procedures outlined in Part 14 of this chapter.

§ 13.3 Terms and procedures.

(a) Employee stock option and stock purchase plans or agreements may provide that options may be exercisable or that shares may be purchased on any business day. Stock certificates representing the shares purchased pursuant to the exercise of options may be validly issued to such purchasers upon receipt of the purchase price.

(b) The increase in capital represented by stock certificates issued pursuant to this section will not be applicable, however, for the purposes of permitted investment in banking premises, 12 U.S.C. 371d, permitted indebtedness, 12 U.S.C. 82, lending limits, 12 U.S.C. 84, branches, 12 U.S.C. 36 and other like purposes, until a notarized notice specifying the amount paid into the bank therefor, shall be executed by the president, vice president or cashier of the bank and filed with the Regional Administrator of National Banks, and until the Comptroller's Certificate has been obtained specifying the amount of such increase of capital stock, and his approval thereof, and that it has been duly paid in as part of the capital of such association.

14.6

Other increases of capital.

14.7 Application for approval. 14.8 Effectiveness of increase.

AUTHORITY: The provisions of this Part 14 issued under R.S. 324 et seq., as amended; 12 U.S.C. 1 et seq.

§ 14.1 Capital adequacy.

The Comptroller of the Currency will not hereafter rely on the ratios of capital to risk assets and to total deposits in assessing the adequacy of capital of national banking associations. These formulae, although of some value in assessing capital adequacy, do not take into account other factors of equal or greater importance. Henceforth, the capital position of the bank will be analyzed and appraised in relation to the character of its management and its asset and deposit position as a going institution under normal conditions, with due allowance for a reasonable margin of safety, and with due regard to the bank's capacity to furnish the broadest service to the public. These factors, which are necessarily imprecise, cannot be directly interpolated into any specific formula. The following factors will be considered by the Comptroller in assessing the adequacy of capital:

(a) The quality of management;
(b) The liquidity of assets;

(c) The history of earnings and of the retention thereof;

(d) The quality and character of ownership;

(e) The burden of meeting occupancy ex

penses;

(f) The potential volatility of deposit structure;

(g) The quality of operating procedures; and

(h) The bank's capacity to meet present

and future financial needs of its trade area, considering the competition it faces.

§ 14.2 Authorized but unissued stock.

Any national banking association, with the approval of the Comptroller and by vote of stockholders owning two-thirds of the stock of the bank entitled to vote, may authorize an increase in the common stock of the bank in the category of authorized but unissued stock. Such authorized but unissued stock may be issued from time to time to employees of the bank pursuant to a stock option or stock purchase plan adopted in accordance with Part 13 of this chapter, or in exchange for convertible preferred stock or convertible capital debentures in accordance with the terms and provisions of such securities. Authorized but unissued stock may also be issued from time to time for such other purposes and considerations as may be approved by the board of directors of the bank, and by the Comptroller. Any request for approval of the Comptroller should be in writing and submitted to the appropriate Regional Administrator of National Banks.

(a) It is the policy of the Comptroller of the Currency not to discourage the retention of earnings by national banking associations in the form of stock dividends. However, recurring stock dividends will not be approved where the market or book value of the stock dividend being proposed, whichever is greater, exceeds 100% of the bank's retained profits since the declaration of the last stock dividend. For the purpose of this policy, the term "retained profits" shall mean the remainder of all earnings from current operations plus actual recovery on loans and investments and other assets, after deducting from the total thereof, all current operating expenses, actual losses, cash dividends, accrued dividends on preferred stock, if any, and all Federal and State taxes.

(b) As a general policy, stock dividends which are considered a realignment of capital accounts will not be subject to the above restrictions.

(c) Subject to the provisions of 12 U.S.C. 57, any national banking association may

increase its capital stock by the declaration of a stock dividend, with the approval of the Comptroller. For such approval, applications on Form 1904-C shall be filed with the appropriate Regional Administrator of National Banks. The Regional Administrator will communicate his written approval to the bank within 15 days after receipt of the application. Upon receipt of such approval, the bank may proceed to obtain the required approval of stockholders owning two-thirds of the stock of the bank entitled to vote if such approval has not been obtained previously. In cases where the Regional Administrator of National Banks disapproves the proposed stock dividend, he shall forward the application to the Office of the Comptroller in Washington for final disposition and shall advise the bank of such referral. See Ruling 6040 relating to treatment of fractional shares created by stock dividends.

§ 14.4 Preferred stock.

It is the policy of the Comptroller of the Currency to permit the issuance of preferred stock by national banking associations in accordance with normal business considerations. Subject to the provisions of 12 U.S.C. 51a, 51b, and 51b-1, the bank may, by vote of stockholders owning a majority of the stock of the bank, issue convertible or nonconvertible preferred stock of one or more classes, with such other provisions and in such amount and with such par value as shall be approved by the Comptroller, and make such amendments to its Articles of Association as may be necessary for this purpose.

§ 14.5 Capital debentures.

(a) It is the policy of the Comptroller of the Currency to permit the issuance of convertible or nonconvertible capital debentures by national banking associations in accordance with normal business considerations.

(b) Subject to the provisions of 12 U.S.C. 82, the bank may, with the approval of stockholders owning two-thirds of the stock of the bank, entitled to vote, or without such approval if authorized by its Articles of Association, issue convertible or nonconvertible capital debentures in such amounts and under such terms and conditions as shall be approved by the Comptroller: Provided, how

ever, That the principal amount of capital debentures outstanding at any time, when added to all other outstanding indebtedness of the bank, except those forms of indebtedness exempt from the provisions of 12 U.S.C. 82, shall not exceed an amount equal to 100 percent of the bank's unimpaired paid-in capital stock plus 50 percent of the amount of its unimpaired surplus fund.

§ 14.6 Other increases of capital.

(a) Applications by a national banking association on Form 1904-B for the Comptroller's preliminary approval of proposed sales of additional common capital stock, other than under an employee stock option or employee stock purchase plan which has previously been approved by the stockholders of the bank and by the Comptroller pursuant to Part 13 of this chapter, and other than pursuant to the preceding sections of this Part 14, shall be filed with the appropriate Regional Administrator of National Banks, whose approval shall be deemed to be the preliminary approval of the Comptroller. Upon such approval, the bank may proceed to obtain the approval of stockholders pursuant to the provisions of 12 U.S.C. 57, if such approval has not been obtained previously under the procedures set forth in § 14.2.

(b) The Regional Administrator will communicate his written approval to the bank within 30 days after his receipt of the application. In cases where the Regional Administrator disapproves the proposed increase of capital, he shall forward the application to the Office of the Comptroller in Washington for final disposition, and shall advise the bank of such referral.

§ 14.7 Applications for approval.

Applications by a national banking association for the Comptroller's preliminary approval of a change in capital structure shall be filed with the principal office of the Comptroller in Washington, except as provided in § § 14.2, 14.3, and 14.6.

§ 14.8 Effectiveness of increase.

Pursuant to the provisions of 12 U.S.C. 57, no increase in the capital of a national