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FED ER AL RESERVE BANK O F N EW YORK r Circular No. 7 5 8 8 "1 L March 17, 1975 J MISCELLANEOUS INTERPRETATIONS Establishment of Foreign Operations Subsidiaries To A ll M em ber B anks, and O thers Concerned, in the Second F ederal R eserve D istric t: The Board of Governors of the Federal Reserve System has issued an interpreta tion regarding the establishment of foreign operations subsidiaries by member banks. A convenient place for filing this interpretation would be with your copy of the B oard’s Regulation M, “Foreign Activities of National Banks.” Enclosed is a copy of that interpretation. Additional copies will be furnished upon request. A lfred H a y es , President. Board of Governors of the Federal Reserve System MISCELLANEOUS INTERPRETATIONS E S T A B L IS H M E N T O F F O R E IG N O P E R A T IO N S S U B S ID IA R IE S Title 12—Banks and Banking CHAPTER II—FEDERAL RESERVE SYSTEM Subchapter A—Board of Governors of the Federal Reserve System PART 250—MISCELLANEOUS INTERPRE TATIONS Foreign Operations Subsidiaries Part 250 is amended by adding the following new section: § 250.143—Member bank purchase of stock of foreign operations subsidiaries. (a) In a previous interpretation, the Board determined that a State member bank would not violate the “stock-purchase prohibition” of section 5136 of the Revised Statutes (12 U.S.C. 24 7) by purchasing and holding the shares of a corporation which performs “at locations at which the bank is authorized to engage in business, functions that the bank is empowered to perform directly” .1 (1968 Federal Reserve Bulletin 681, 12 CFR §250.141). The Board of Governors has been asked by a State mem ber bank whether, under that interpretation, the bank may establish such a so-called “opera tions subsidiary” outside the United States. (b) In the above interpretation the Board viewed the creation of a wholly-owned sub sidiary which engaged in activities that the bank itself could perform directly as an alternative 1 N ational banking associations are prohibited by sec tion 5136 of the R evised S tatu tes from p urchasing and holding shares of any c o rp o ratio n except those corpo rations whose shares are specifically m ade eligible by statute. T h is prohibition is made applicable to S tate m em ber banks by section 9 20 of the F ed eral R eserve A ct (12 U .S .C . 335). organizational arrangement that would be per missible for member banks unless “its use would be inconsistent with other Federal law, either statutory or judicial”. (c) In the Board’s judgment, the use by a member bank of operations subsidiaries outside the United States would be clearly inconsistent with the statutory scheme of the Federal Re serve Act governing the foreign investments and operations of member banks. It is clear that Congress has given member banks the authority to conduct operations and make in vestments outside the United States only through gradually adopting a series of specific statutory amendments to the Federal Reserve Act, each of which has been carefully drawn to give the Board approval, supervisory, and reg ulatory authority over those operations and in vestments. (d) As part of the original Federal Reserve Act, national banks were, with the Board’s per mission, given the power to establish foreign branches.2 In 1916, Congress amended the Fed eral Reserve Act to permit national banks to invest in international or foreign banking cor porations known as “Agreement” Corpora tions, because such corporations were required to enter into an agreement or understanding with the Board to restrict their operations. Sub ject to such limitations or restrictions as the 2 U n d e r section 9 of the F ederal R eserve A ct, State m em ber banks, subject, of course, to any necessary ap proval from th eir S tate banking authority, m ay e stab lish foreign branches on the same term s and subject to the same lim itations and restrictions as are applicable to the establishm ent of branches by national banks (12 U .S.C . 321). S tate m em ber banks m ay also purchase and hold shares of stock in E dge or A greem ent C orpo rations and foreign banks because national banks, as a result of specific sta tu to ry exceptions to the stock p u r chase prohibitions of section 5136, can purchase and hold stock in these C orporations o r banks. ( P R IN T E D IN N E W YORK over ) Board may prescribe, such Agreement Corpo rations may principally engage in international or foreign banking, or banking in a dependency or insular possession of the United States, either directly or through the agency, owner ship or control of local institutions in foreign countries, or in such dependencies or insular possessions of the United States. In 1919 the enactment of section 25(a) of the Federal Re serve Act (the “Edge Act” ) permitted national banks to invest in federally chartered interna tional or foreign banking corporations (socalled Edge Corporations) which may engage in international or foreign banking or other in ternational or foreign financial operations, or in banking or other financial operations in a dependency or insular possession of the United States, either directly or through the owner ship or control of local institutions in foreign countries, or in such dependencies or insular possessions. Edge Corporations may only pur chase and hold stock in certain foreign sub sidiaries with the consent of the Board. And in 1966, Congress amended section 25 of the Federal Reserve Act to allow national banks to invest directly in the shares of a foreign bank. In the Board’s judgment, the above statutory scheme of the Federal Reserve Act evidences a clear Congressional intent that member banks may only purchase and hold stock in subsidiaries located outside the United States through the prescribed statutory provi sions of sections 25 and 25(a) of the Federal Reserve Act. It is through these statutorily prescribed forms of organization that member banks must conduct their operations outside the United States. (e) To summarize, the Board has con cluded that a member bank may only organize and operate “operations subsidiaries” at loca tions in the United States. Investments by member banks in foreign subsidiaries must be made either with the Board’s permission under section 25 of the Federal Reserve Act or, with the Board’s consent, through an Edge Corpo ration subsidiary under section 25(a) of the Federal Reserve Act or through an Agree ment Corporation subsidiary under section 25 of the Federal Reserve Act. In addition, it should be noted that bank holding companies may acquire the shares of certain foreign sub sidiaries with the Board’s approval under sec tion 4(c) (13) of the Bank Holding Company Act. These statutory sections taken together already give member banks a great deal of or ganizational flexibility in conducting their operations abroad. (Interprets and applies 12 U.S.C. 24, 335) By order of the Board of Governors, Febru ary 26, 1975.
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