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F ed er a l Reser ve Ba n k o f D allas DALLAS, TEXAS 75222 C i r c u l a r No. 76-30 M a rc h 2, 1976 A m e ric a n R e v o lu tio n B ic en ten n ia l INTERPRETATION OF REGULATIONS K, M, AND Y S ta t e m e n t of P o lic y on S to c k I n t e r e s t s in F o r e i g n J o i n t V e n t u r e s TO ALL BANKS, BANK HOLDING COMPANIES, AND OTHERS CONCERNED IN THE ELEVENTH FEDERAL RESERVE DISTRICT: On F e b r u a r y 12, 1976, t h e B o a r d of G o v e r n o r s of t h e F e d e r a l R e s e r v e S y s te m i s s u e d a n i n t e r p r e t a t i o n to its R e g u l a ti o n K, " C o r p o r a t i o n s E n g a g e d in F o r e i g n B a n k i n g a n d F i n a n c i n g U n d e r th e F e d e r a l R e s e r v e A c t , " R e g u l a ti o n M, " F o r e i g n A c t i v i t i e s of N ational B a n k s , " a n d R e g u l a ti o n Y, " B a n k H old in g C o m p a n i e s , " s t a t i n g its p o li c y o n t h e a c q u i s i t i o n of s to c k i n t e r e s t s in f o r e i g n jo i n t v e n t u r e s b y U . S . b a n k i n g o r g a n i z a t i o n s . T h e p o l icy is d e s i g n e d to d e a l w ith p o s s i b l e f u t u r e r i s k s e n t a i l e d in b e c o m in g a s h a r e h o l d e r in a f o r e i g n j o i n t v e n t u r e . A s a m a t t e r o f p o l i c y , t h e B o a r d w ill t a k e t h e fo llo w in g f a c t o r s , am ong o t h e r s , into a c c o u n t in c o n s i d e r i n g w h e t h e r to a p p r o v e a n a p p l i c a t i o n to i n v e s t in a f o r e i g n jo i n t v e n t u r e : (1) T h e p o s s i b i l i t y t h a t t h e v e n t u r e m ig h t n e e d a d d i t i o n a l f i n a n cial s u p p o r t , a n d (2) T h e p o s s i b i l i t y t h a t t h e a d d i t i o n a l s u p p o r t m i g h t b e s i g n i f i c a n t l y l a r g e r t h a n t h e o r i g i n a l e q u i t y i n v e s t m e n t in t h e jo i n t v e n t u r e . T h e p o l i c y s t a t e m e n t is n o t i n t e n d e d to p r o h i b i t o r d i s c o u r a g e jo in t v e n t u r e s a b r o a d . Its o b j e c t i v e is to c l a r i f y f o r all p a r t i e s th e p r o b a b l e d i m e n s i o n s of t h e r i s k s in v o l v e d in s u c h v e n t u r e s . E n c lo s e d is a c o p y o f t h e i n t e r p r e t a t i o n . I n q u i r i e s r e g a r d i n g t h e m a t t e r s h o u l d b e d i r e c t e d to o u r R e g u l a t i o n s D e p a r t m e n t a t (214) 651-6325. A d d itio n a l c o p i e s o f t h i s i n t e r p r e t a t i o n w ill b e f u r n i s h e d u p o n r e q u e s t to t h e S e c r e t a r y ' s Office of t h i s B a n k . S in ce rely y o u rs , T . W. P la n t F i r s t V ice P r e s i d e n t E n closure This publication was digitized and made available by the Federal Reserve Bank of Dallas' Historical Library (FedHistory@dal.frb.org) BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM CORPORATIONS ENGAGED IN FOREIGN BANKING AND FINANCING UNDER THE FEDERAL RESERVE ACT FOREIGN ACTIVITIES OF NATIONAL BANKS BANK HOLDING COMPANIES INTERPRETATION OF REGULATIONS K, M, AND Y SE C T IO N 2 1 1 .5 2 — S T A T E M E N T OF P O L IC Y O N ST O C K IN T E R E S T S IN F O R E IG N JO IN T V E N T U R E S * In g e n e r a l , w h e n a m e m b e r b a n k o r a corporation organized under § 2 5 ( a ) o f the F ed eral R eserve A ct (a n “ E dge” corp oration ), or operating pursuant to an agreem ent w ith the Board under § 25 thereof (an “A greem ent” cor p oration ), or a bank holding com pany requests the Board’s specific consent to acquire the stock or other certificates o f ow nership o f a foreign corporation that w ill be jointly-ow ned by the U .S. banking organization and other foreign or d o m estic participants (hereinafter referred to as a “foreign joint venture”1) , the Board considers, am ong other factors, the degree o f legal and prac tical business responsibility the U .S . banking organ ization w ill bear for the financial condition and operations o f the foreign joint venture in foreign and international financial markets. In the Board’s judgment, this factor, am ong others, is relevant in assessing w hat effects the proposed investm ent m ay have on the financial and m anagerial re sources o f the applying U .S. banking organization. Based o n the recent experience o f certain for eign joint ventures in foreign and international financial markets, the Board has fou n d that a U.S. banking organization m ay, in certain circum stances, feel im pelled fo r business reasons to pro vide financial support® to a foreign joint venture in w hich it has an equity interest in the event the venture has liquidity or other financial needs. This support m ay be substantially in excess o f the U .S. banking organization’s original equity invest m ent and m ay, in som e situations, be w ell in excess o f its pro rata share. This has seem ed m ost likely to occur in situations w here ( 1 ) the foreign joint venture has included in its nam e a reference to the U .S. banking organization, ( 2 ) the U .S . banking organization or its affiliates have co n sistently provided financial support to th e foreign corporation in am ounts significantly beyond usual com m ercial lim its or significantly disproportionate to its pro rata stock interest, or (3 ) as the result o f substantial managerial support furnished by the U .S . banking organization under a contract or other arrangement, the foreign corporation has b een publicly identified as or considered to be, som etim es with the active encouragem ent o f the U .S . banking organization, an integral part o f the U .S . banking organization’s international op erations. A ccordingly, the Board, in considering applica tions by U .S. banking organizations to invest in foreign joint ventures, w ill, as a m atter o f policy, take in to account the possibility that the applicant m ay feel im pelled for business reasons to provide *This interpretation is also indexed as sections 213.52 and 225.51. 1 The term “foreign joint venture” is used to describe a situation in w hich a U .S. banking organization w ith a m inority share interest participates, directly or indirectly, in the overall m anagem ent o f the corporation and thus has an active operating interest. A purely passive m inority investm ent in a foreign corporation will n o t be deem ed a “joint venture” investm ent for purposes o f this statement o f policy. This “joint venture” determination will be made on the basis o f the facts and circumstances o f each case. 2 A s used herein, the term “support” includes, without lim itation, contributions to capital, purchase (or causing the purchase) from the foreign corporation o f loans or securities, m aking (or causing the m aking) o f loans to the foreign corporation, and the m aking (or causing the m aking) o f deposits in the foreign corporation. financial support for such foreign joint venture in the event the venture has liquidity or other financial needs, and that such support could be significantly greater than the amount of its pro posed equity investment. The Board will, there fore, consider such application in light of the relative ability of the applicant to meet the de mands that such potential support could place on its financial and managerial resources. In doing so, the Board will take into consideration the risks associated with the total assets and liabilities of the foreign venture and its projected expansion, and not merely the size of the proposed equity investment by the applicant. In particular, the Board will give great weight to these potential risks and their implications for the applicant in cases where the applicant proposes (1) to include a reference to its name in that of the foreign joint venture, (2) to provide general funding support to the foreign joint venture in amounts dispro portionate to its pro rata stock interest, or (3) to provide virtually all of the management for such foreign joint venture. If, however, in the case of any such proposed joint venture investment, the U.S. banking organ ization can establish in the record of its applica tion that it has reached an agreement or arrange ment whereby its support of the proposed joint venture in the event of liquidity or other financial needs will be limited to its initial equity investment or to some fixed amount, or will be shared pro rata or otherwise with the other shareholders, or will otherwise be limited, the Board will consider the application and the risks associated therewith on the basis of this additional information. In this regard, the Board will also consider the identity and financial strength of other partners and investors in the venture and their respective ability to provide support to the venture, if needed. This statement of policy is not intended to prohibit or discourage investments by U.S. bank ing organizations in foreign joint ventures, which can be a useful form of corporate organization in appropriate circumstances; rather, due to the dif ficulty of ascertaining the precise risks undertaken in joint venture investments, its primary purpose is to clarify for all parties concerned the probable dimensions of risks assumed in any particular investment. Thus, even if an applicant proposes to assume a disproportionate share of the risks in any joint venture, e.g., agrees to stand behind more than its pro rata share of the joint venture’s obligations, the Board might be willing to approve the investment if the applicant’s financial and managerial resources could bear this additional risk and if other factors indicated that approval would be consistent with the public interest. The Board further notes that any action that it might take on an application should not be viewed or relied upon by the applying U.S. bank ing organization, other participants in the venture, or any third party as constituting approval or dis approval, or ratification or rejection of any agree ment or arrangement that may have been entered into by the shareholders of a foreign joint venture; specifically, any Board action should not be viewed as constituting any expression of judgment as to the validity or enforceability of any such agree ment or arrangement. Any agreement or arrange ment will, rather, be merely one among many factors considered by the Board in deciding on an application. This statement is intended to apply primarily to proposed investments by U.S. banking organi zations in the stock of foreign corporations in which they do not already have an equity invest ment. Applications involving an additional invest ment in an ongoing foreign joint venture will continue to be considered by the Board on the basis of outstanding facts and circumstances. In the case of any ongoing foreign joint venture the Board will, of course, continue to consider care fully the amount of support, if any, that is being provided by the applicant to the venture and any agreement or arrangement among the joint ven turers for the provision of any future support.
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