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F ed er a l Reser ve Ba n k o f D allas
DALLAS, TEX A S

75222

C i r c u la r N o . 77-21
F e b r u a r y 3, 1977

IN T E R P R E T A T IO N OF R E G U LA TIO N S K , M , A N D Y
U tiliz a tio n of F o re ig n S u b s id ia r ie s T o S ell L o n g -T e r m
Debt O b lig atio n s in F o re ig n M a rke ts and To T r a n s f e r the Proceeds
To T h e i r U n ite d States P a r e n t(s ) fo r Domestic Purposes

TO A L L MEMBER BAN KS,
BANK HOLDING C O M P A N IE S ,
AND OTHERS CO NCERNED IN THE
ELE VE NTH F EDERAL RESERVE D IS T R IC T :
On Decem ber 2 7, 1976, the Board of G o v e rn o rs of the Fe d era l R e s e rv e
System issued an in te rp re ta tio n to its R e g ulation K , " C o rp o ra tio n s Engaged in
F o re ig n B a n k in g and F in a n c in g U n d e r the Fe dera l R e s e rv e A c t ; " Regulation M ,
"F o re ig n A c tiv itie s of National B a n k s ;" and R e gu lation Y , "B a n k H olding Com­
p a n ie s ," T h e in te r p r e ta tio n relates to the issuance b y a fo re ig n s u b s id ia r y of
lo n g -te r m debt obligations in fo re ig n m a rk e ts w ith tr a n s fe r of the proceeds to its
United States p a r e n t for domestic p u rp o s e s .
Enclosed is a copy of the in te r p r e ta tio n . A n y in q u ir ie s con ce rn in g the
m atter should be d ire c te d to G eorge H . M c E lro y of our R egulations D e p a rtm e n t at
(214) 6 51-6169. A d d itio n a l copies of the in te r p r e ta tio n w ill be fu r n is h e d upon
re q u es t to the S e c r e ta r y 's O ffice of this B ank (214) 651 -6 26 7 .
S in c e r e ly y o u r s ,
R o b e rt H . B o y k in
F ir s t V ic e P re s id e n t
Enclosure

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
IN TERPRETATIO N OF REG ULATIONS K, M, A N D Y
SECTION 211.112 — UTILIZATION OF
FOREIG N SUBSIDIARIES TO SELL LON G­
TERM DEBT OBLIGATIONS IN FOREIG N
MARKETS AND TO TRANSFER TH E
PROCEEDS TO TH EIR U N ITED STATES
PA REN T(S) FOR DOMESTIC PURPOSES*
(a) In a request for an interpretation filed with
the Board by a member bank and its parent bank
holding company, the issue arose whether it would
be a permissible activity for one of their existing
foreign subsidary corporations, subject to the
provisions of either Sections 25 or 25(a) of the
Federal Reserve Act or Section 4 (c )(1 3 ) of the
Bank Holding Company Act, to sell long-term
debt obligations in foreign markets and to transfer
the proceeds of these obligations to its United
States parent(s) for domestic purposes.
(b) Under the specific proposal put forward, a
foreign subsidiary of the parent bank holding
company would sell debt obligations in foreign
markets, which obligations would have initial
maturities in excess of seven years and may or
may not be supported by the guaranty of its
parent bank holding company. The foreign sub­
sidiary in question would have substantial other
international or foreign business and would be
performing an activity that its parent bank holding
company could perform directly, i.e., raising capi­
tal funds through the sale of long-term debt
obligations.
(c) Under the eighth paragraph of Section
25(a) of the Federal Reserve Act (12 U.S.C.
615), an Edge Corporation may, with the prior

consent of the Board, purchase and hold stock
of a corporation that is “not engaged in the
general business of buying or selling goods, wares,
m erchandise or com m odities in the U n ited
States, and not transacting any business in the
United States except such as in the judgment of
the Board . . . may be incidental to its interna­
tional or foreign business.” Similarly, under the
tenth paragraph of the same section, an Edge
Corporation shall not “carry on any part of its
business in the United States except such as in
the judgment of the Board . . . may be incidental
to its international or foreign business.” Pursuant
to the third paragraph of Section 25 of the Federal
Reserve Act, a national banking association1 may
acquire and hold, directly or indirectly, stock or
other evidences of ownership in a foreign bank
as long as such foreign bank is “not engaged,
directly or indirectly, in any activity in the United
States except as, in the judgment of the Board . . .
shall be incidental to the international or foreign
business of such foreign bank.” Finally, Section
4(c) (13) of the Bank Holding Company Act
exempts from the non-banking prohibitions of
Section 4 of the Act “shares of, or activities con­
ducted by, any company which does no business
in the United States except as an incident to its
international or foreign business.”
(d)
In the Board’s judgment, the slight wording
differences between the quoted portions of the
above statutes were not intended by Congress to
bear any meaningful significance. Accordingly,
the Board has interpreted these provisions in the
past as being synonymous2 and this interpretation
applies to each of the above statutory provisions.

*This interpretation is also indexed as sections 213.106 and 225.136.
1 Paragraph 20 of Section 9 of the Federal Reserve Act (12 U.S.C. 335) makes the provisions of Section 25
applicable to State member banks.
2 See section 225.4(f)(1) of Regulation Y, wherein the Board has by regulation applied to foreign subsidiaries
of domestic bank holding companies the Edge Act limitations on activities in the United States.
3 While such a foreign subsidiary may be viewed as providing a service to its parent bank holding company, the
Board nevertheless believes that any bank holding company that plans to acquire shares of a foreign
corporation to engage solely in the activities described herein will have to file an application under §4(c)(13)
of the Bank Holding Company Act and §225.4(f) of Regulation Y. (See in this regard the Board’s prior
ruling on foreign operations subsidiaries at 12 CFR 250.143)
1 2 -2 7 - 7 6

(e) To the extent that the foreign subsidiary in
question is involved in the issuance of long-term
debt obligations in foreign markets, there is no
legal issue raised since that subsidiary would
clearly be engaging in permissible foreign activ­
ities. However, an issue is raised whether the
transfer of the proceeds of those obligations to its
parent institution causes such foreign subsidiary to
be “doing” or “transacting” business within the
United States in violation of the statutory pro­
visions set forth above.
(f) The Board has determined that the foreign
subsidiary in question is not “transacting” or
“doing” business in the United States by the mere
transfer of proceeds of its long-term foreign debt
obligations to its parent corporation. In the
Board’s judgment, the foreign subsidiary is es­
sentially providing a service to its parent in that it
is serving as its parent’s alter ego for the limited
purpose of obtaining long-term funds that the
parent could otherwise obtain directly.3 The
transfer of borrowing proceeds between a United
States parent and its foreign subsidiary in this

situation can thus be viewed as not more than an
intra-organizational transaction for the parent’s
benefit. In the Board’s view, such a transaction
is distinguishable from a commercial loan to a
third-party United States resident by a foreign
subsidiary, which loan would bring a foreign
subsidiary into direct lending competition with
domestic banking organizations.
(g)
In the Board’s judgment, this interpretation
applies only to a situation where a foreign sub­
sidiary, acting strictly on behalf of its parent
organization, issues debt obligations abroad for the
sole and express purpose of supplying funds to its
parent organization. To meet this test, the Board
believes three conditions must be satisfied: (1) the
foreign subsidiary should be wholly-owned (ex­
cept for directors’ qualifying shares, if any) by its
United States parent organization(s); (2) the
proceeds repatriated should be no greater in
amount than the amount of debt issued abroad;
and (3) the proceeds should be repatriated on
approximately the same terms and conditions as
the obligations issued by the foreign subsidiary.


Federal Reserve Bank of St. Louis, One Federal Reserve Bank Plaza, St. Louis, MO 63102