RULES AND REGULATIONS

Interest rate regulations (Part 329). The Corporation amended its deposit interest rate regulations to broaden the exemption from interest rate ceilings for capital notes issued by insured nonmember banks. Under the amendments of June 16, 1976, such notes may have an average (rather than absolute) maturity as short as 7 years, although no note in a serial issue can have an original maturity of less than 5 years. The amendments also established a procedure for permitting such banks to issue capital notes of less than $500 to satisfy the preemptive rights of shareholders.

The Corporation further amended its interest rate regulations on November 12, 1976, to permit the penalty-free withdrawal before maturity of funds deposited in insured nonmember banks by self-employed persons under so-called Keogh or H.R. 10 retirement plans. Such withdrawals can be made after the depositor reaches age 591⁄2, or earlier if he or she is disabled. Moreover, the $1,000 minimum amount requirement for longer term time deposits no longer applies to such funds. These amendments are similar to those adopted in December 1975 for Individual Retirement Accounts and are designed to prevent conflicts with Federal tax law upon distribution of retirement funds.

Finally, the Corporation temporarily suspended premature withdrawal penalties on time deposits for victims of the Teton Dam disaster in Idaho. The suspension, which was initiated on June 6, 1976, and expired on December 31, 1976, gave victims of that disaster ready access to their time deposit funds for reconstruction and similar purposes. Each insured nonmember bank had the discretion to decide whether or not to allow such penalty-free withdrawals.

Two new proposals about regulations on deposits were advanced by the Corporation during 1976. On March 15,

1976, the Corporation proposed an amendment to its regulations that would permit transfers from savings accounts to checking accounts to cover overdrafts. This proposal would require that the transfers be in minimum increments of $100, with at least 30 days' interest on the amount transferred to be forfeited. On November 15, 1976, the Corporation proposed a rule which would generally require notice to depositors of the maturity of their time deposits. The notice would have to be printed on or affixed to the deposit instrument. The purpose of this proposal is to reduce the possibility that depositors will forget when their deposits mature, resulting in the loss of interest or, if the deposit has been automatically renewed, payment of a penalty for early withdrawal.

Insider transactions. On February 25, 1976, the Corporation adopted a regulation aimed at curbing abuses which may occur in transactions between an insured State nonmember commercial bank and "insiders" of the bank. On April 27, 1976, this regulation was extended to cover insured State nonmember mutual savings banks as well. The regulation became effective on May 1, 1976.

Under this regulation, the board of directors of each insured State nonmember bank is required to review and approve every insider transaction involving assets or services having a fair market value greater than a specified amount, that amount varying with the size of the bank. In addition, certain recordkeeping requirements are imposed in order to foster effective internal controls over such transactions by the bank itself and to facilitate examiner review.

In adopting this regulation, the Corporation did not intend to suggest that all transactions with insiders or their interests are detrimental to the bank or that such transactions should be automatically rejected. The regulation neither prohibits nor significantly restricts a bank's ability to enter into such transactions. On the

other hand, the regulation makes clear that formal compliance with its review and approval requirements does not relieve a bank of its duty to conduct its operations in a safe and sound manner, nor does it prevent the Corporation from taking appropriate supervisory action with respect to any insider transaction.

By year-end 1976, the regulation had been in effect 8 months. Reaction to it was generally viewed as favorable, with many banks finding that implementation of its requirements did not result in undue burden or expense. Compliance with the regulation generally appeared satisfactory, but it was still too early to assess adequately whether the regulation is achieving its intended purpose of curbing abusive insider transactions.

Deposit insurance coverage. Under the Corporation's insurance regulations, the deposit accounts of a corporation are insured up to $40,000 in any one insured bank. On November 3, 1976, the Corporation proposed amendments to its insurance regulations designed to apply this same rule to deposit accounts of any registered investment company, even if that company is organized in some noncorporate form. Specifically, for deposit insurance purposes, the Corporation would treat as a corporation any trust or

other business arrangement registered, or required to be registered, with the Securities and Exchange Commission as an investment company under the Investment Company Act of 1940. The proposal would not cover trusts that are not subject to registration under that act, such as employees' pension and profit-sharing trusts, charitable trusts, and common trust funds maintained by bank trust departments.

The proposed amendments are intended to clarify the extent of insurance coverage on deposits of certain business trusts and other entities which may be viewed as de facto corporations because of their public ownership and business objectives. Some confusion has existed as to whether such deposits are insured according to each individual investor's beneficial interest in the trust, or alternatively, according to the aggregate deposits held by the trust in each insured bank. The Corporation asked for comment on these proposed amendments by January 14, 1977.

FEDERAL LEGISLATION

The three most significant pieces of banking legislation enacted in 1976 involve consumer credit and so-called

deposits held in out-of-State banks)

November 27, 1974