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Federal R eserve Bank
OF DALLAS
ROBERT
D. M c T E E R , J R .
PR ESID EN T
AND CH IEF EX EC U TIV E O F F IC E R
May 17, 1991
DALLAS, TEXAS 75222
Notice 91-36
TO:
The Chief Executive Officer of each
member bank and others concerned in
the Eleventh Federal Reserve District
SUBJECT
Amendments to Regulation K
(International Banking Operations)
DETAILS
The Federal Reserve Board has announced amendments to Regulation K
(International Banking Operations). On August 1, 1990, the Board of Governors
of the Federal Reserve System requested public comment on proposed revisions
to Regulation K. (See 55 Federal Register 32424). Comments were received
through January 17, 1991. Based on the comments, the Board has revised
Regulation K in several areas, including
• expanding the existing authority of U.S. banking organizations
to engage in underwriting and dealing in equity securities
outside the United States;
• increasing the current dollar limits under which U.S. banking organi
zations may make investments abroad without prior notice to the
Board;
• clarifying the portfolio investment authority under which U.S.
banking organizations may make limited equity investments in
foreign companies without regard to the nature of non-U.S.
activities of foreign companies;
• authorizing Edge corporations to provide domestic banking services,
including loans, to foreign persons and governments;
• expanding the range of permissible activities for U.S. banking
organizations abroad to include futures commissions merchant activi
ties and life insurance underwriting;
• modifying the authority for debt-for-equity investments, including
authorizing a cash component to such investments without prior notice
to the Board and providing for retention of such investments in
companies that engage in a small level of business activities in the
United States;
For additional copies, bankers and others are encouraged to use one of the following toll-free numbers in contacting the Federal Reserve Bank of Dallas:
Dallas Office (800) 333-4460; El Paso Branch Intrastate (800) 592-1631, Interstate (800) 351-1012; Houston Branch Intrastate (800) 392-4162,
Interstate (800) 221-0363; San Antonio Branch Intrastate (800) 292-5810,
This publication was digitized and made available by the Federal Reserve Bank of Dallas' Historical Library (FedHistory@dal.frb.org)
- 2 -
• providing case-by-case exemptions from the standard for qualifying
foreign banking organizations; and
• requiring Edge corporations to maintain a minimum risk-based capital
level of 10 percent.
Most of these amendments will be effective May 24, 1991.
In the
case of Section 211.5, however, paragraphs (b)(1)(iii), (c)(1), and (f)(5) are
effective immediately.
ATTACHMENT
Attached is a copy of the Board’s notice as it appears on pages
19549-77, Vol. 56, No. 82, of the Federal Register dated April 29, 1991.
MORE INFORMATION
For more information, please contact Linda Myers at (214) 744-7435.
For additional copies of this Bank’s notice, please contact the Public Affairs
Department at (214) 651-6289.
Sincerely yours,
Federal Register / Vol. 56. No. 82 / Monday, April 29, 1991 / Rules and Regulations
19549
12 CFR Parts 211 and 265
rDocket No. R-0703]
Regulation K—International Banking
Operations; Rules Regarding
Delegation of Authority
Board of Governors of the
Federal Reserve System.
a c t i o n : Final rule.
AGENCY:
SUMMARY: The International Banking
Act of 1978 (Pub. L. 95-369) requires the
Board to review and revise its regulation
governing the operation of Edge
corporations every five years. In
connection with this review, the Board
has examined all of the provisions of
Regulation K, 12 CFR part 211, which
governs international banking
operations, and has revised provisions
of the regulation governing permissible
activities of U.S. banking organizations
abroad, including underwriting and
dealing in equity securities; investments
by U.S. banking organizations under the
general consent procedures; portfolio
investments; domestic powers of Edge
corporations; capitalization and
supervision of Edge corporations; debtfor-equity investments; qualifying
foreign banking organizations; powers of
foreign branches of member banks; and
export trading companies. In addition,
there are other and technical
amendments to Regulation K and certain
amendments to the Board’s Rules
Regarding Delegation of Authority, 12
CFR part 265.
EFFECTIVE DATE: Effective May 24,1991,
except in the case of § 211.5 (b)(l)(iii),
(c)(1) and (f)(5), which are effective
immediately.
FOR FURTHER INFORMATION CONTACT:
Ricki Rhodarmer Tigert, Associate
General Counsel (202/452-3428),
Kathleen M. O’Day, Assistant General
Counsel (202/452-3786), Kimberly A.
Lynch, Attorney (202/452-3584), Deborah
K. Burand, Attorney (202/452-3427),
Legal Division; Michael G. Martinson,
Assistant Director (202/452-3640), or
Michael D. O’Connor, Senior Financial
Analyst (202/452-3808), Division of
Banking Supervision and Regulation,
Board of Governors of the Federal
Reserve System. For the hearing
impaired only , Telecommunication
Device for the Deaf (TDD), Dorothea
Thompson (202/452-3544), Board of
Governors of the Federal Reserve
System, 20th and C Streets, NW„
Washington, DC 20551.
SUPPLEMENTARY INFORMATION: The
International Banking Act of 1978
("IBA”) requires the Board to review
and revise its rules issued under section
13558
Federal Register / VoL 56, No. 82 / Monday, April 29. 1991 / Rules and Regulations
25(a) of the Federal Reserve Act ("Edge
Act”) at least once every five years to
ensure that the purposes o f the Edge Act
are being served in light of prevailing
economic conditkms and banking
practices.
On August 1,1990, following a
comprehensive review o f the regulation,
the Board requested public comment on
proposed revisions to Regulation K (55
FR 32424). The comment period,
originally scheduled to expire
September 30,1990, was extended to
October 1 4 ,19a), with comments being
received through January 17,1991. The
Board received 38 comments from
outside the Federal Reserve System.
Comments were received from 15 U.S.
banks or bank holding companies; 4
Edge Act corporations; 5 foreign banking
organizations; 5 law firms; and 7 trade
associations. The Board also received
comments from the United States
Department of Commerce and the
Commission of the European
Communities.
The Board has considered the
comments and, as a result of this further
review, some of the revisions adopted
differ from the amendments proposed.
The Board has revised Regulation K in a
number of areas, including: Equity
securities activities abroad; the portfolio
investment authority; the general
consent provisions of the investment
procedures; debt-for-equity investments;
provisions related to Edge corporations,
including domestic powers,
capitalization, and the Board’s
supervisory authority; additions to the
list of permissible activities abroad,
including the authority to engage in
certain swap transactions, to underwrite
life and related insurance products, and
to engage in futures commission
merchant activities; qualifying foreign
banking organizations; and standards
for bank-affiliated export trading
companies. Certain other amendments,
including technical amendments, were
also made to Regulation K.
lesse r o f $60 m illion or 25 percent o f the
investor's T ier 1 capital, a n d elim inate th e
per subsidiary lim itation of $2 million.
2. Perm it banking o rganizations to
underw rite 100 percent o f th e equity of any
one issuer.
3. Perm it banking organizations, on a n
organization-by-organization b asis, to
underw rite equity securities in e x cess o f the
$60 m illion lim it w here the banking
organization w ould rem ain strongly
capitalized a fte r the authorized excess
am ount is perm anently deducted from its
capital.
4. R equire banking organizations not
currently engaged in equity underw riting or
dealing activities to obtain the B oard's
specific consent before com m encem ent of
equity underw riting activities.
Under the proposal, any shares held
by the investor or its affiliates 30 days
after the close of the underwriting
period would be considered to be held
in the dealing account and would be
required to conform to the permissible
limits for dealing in equity securities. In
addition, with respect to the proposal to
permit underwriting in excess of the $60
million limit on an organization-byorganization basis, the Board requested
comment on whether a parent bank
holding company should be required to
guarantee any losses that a bank may
incur in connection with overline
underwriting.
The Board also proposed the
following revisions to the authority in
Regulation K for dealing in equity
securities abroad:
1. Raise the lim it relating to equity
securities of any one issuer h eld in trading or
dealing accounts to the lesse r o f $30 million
or 10 p ercent of the investor's T ier 1 capital.
2. For b an k holding com panies, low er the
aggregate dollar am ount of equity securities
of com panies engaged in im perm issible
activities th at can b e held in trading or
investm ent accounts to 25 percent o f T ie r 1
capital. The aggregate lim it for Edge
corporations w ould rem ain 100 percent,
although the relevant m easure of capital
w ould be T ier 1 capital in stea d of capital and
surplus. U nderw riting com m itm ents w ould
continue to be included in the aggregate lim it
for both b a n k holding com panies a n d Edge
Equity Securities Activities
corporations.
3. A pply both of the above lim itations on a
The Board proposed the following
net b a sis b y perm itting som e level of offset
revisions to the authority o f U.S.
for hedged positions.
banking organizations to underwrite
4. Expressly lim it the dealing authority to
equity securities abroad under
equity securities ”o f foreign issuers."
Regulation K:
5. Require banking organizations not
1. Raise the underwriting limit applicable to currently engaged in equity underw riting o r
U.S. banking organizations, cma consolidated dealing activities to o b tain the B oard’s
specific approval before com m encem ent of
basis (excluding underwriting commitments
equity dealing activities.
by affiliated section 20 companies’ ), to tiie
1 A "section 20 company" is a company owned by
a bank hoie&ng company that is authorized under
section 4(c)(^ of the Bank Holding Company Act (12
U.S.C. 1843(c)tB)) to engage in underwriting and
dealing in corporate and other non-governmenta!
securities.
The Board specifically solicited
comment on its proposal to apply the
dealing limit on a net basis, and
particularly on the amount of offset that
should be permitted for hedged
positions.
Fourteen of the seventeen comments
that addressed this topic supported
liberalization of foreign securities
powers. The liberalization was opposed
by three comments. The comments that
opposed liberalization stated that no
expansion of foreign powers should be
allowed because it would increase risk
to the federal safety net. After review of
all the comments the Board has adopted
the proposed revisions with Bome
modifications as described below.
D ollar Lim itations on Underwriting and
Dealing A uthority
Many o f the comments that favored
expanded underwriting and dealing
authority opposed the proposed dollar
limitations on the underwriting and
dealing authority. The comments
maintained that dollar limitations,
which were designed chiefly to regulate
the investments of banking
organizations in other companies,
should not be applied to dealing and
underwriting activities. Hie comments
opposing expansion rejected any
increase in current limits.
The comments supporting expansion
particularly objected to the $30 million
restriction on dealing in the shares of a
single issuer, noting that there is a
relationship between underwriting and
dealing activities, especially in the
extent to which dealing activities in the
secondary market are necessary to
support an underwriting. The comments
maintained that inflexible dollar limits
on dealing activities could interfere with
their ability to use the expanded
underwriting authority. A number of
comments favored a limitation based
solely upon a percentage of the
investor’s capital [e.g., the capital of the
Edge corporation or bank holding
company parent of the underwriting
subsidiary). The comments argued that
limitations based on a percentage of the
investor’s capital more accurately
represent the risk o f a single issuer to an
underwriter or dealer. Four comments
requested case-by-case authority to
exceed the dealing limits, similar to the
proposed underwriting authority.
Although the dollar limitations in
Regulation K were originally designed to
deal primarily with long-term
investments, they have also served the
function of placing some limitation on
total exposure arising from the securities
business conducted in subsidiaries of
U.S. banks. Moreover, because there are
not the same firewalls for foreign
securities affiliates of U.S. banks as
apply to domestic section 20 companies,
the dollar limitations operate as an
additional restriction on the risks
Federal Register / Vol. 56, No. 82 / Monday, April 29, 1991 / Rules and Regulations______19551
associated with the combination of
banking and securities operations in a
single organization, complementing
other supervisory and operational
safeguards.
In adopting its proposal, the Board
considered whether it would be
appropriate to liberalize the authority to
conduct securities activities abroad
through subsidiaries of banks or
whether to require any expanded
securities activities to be conducted in
the domestic structure through speciallyregulated subsidiaries of bank holding
companies. The Board’s proposal was a
compromise that involved some
expansion of current limits, in the
interests of furthering the international
competitiveness of U.S. banks, without
imposing a changing domestic structure
abroad. Under the Board’s proposal,
activities of a broader nature than those
permitted by Regulation K could still be
conducted through the section 20 format.
The quantitative limits proposed by
the Board represented a careful
balancing of the Board’s competing
interests—the overseas competitiveness
of U.S. banking organizations, concerns
for the safety net with respect to
activities conducted through a
subsidiary of a U.S. bank, and
recognition that decisions on the
appropriate structure for broader
powers for U.S. banking organizations
should properly be made in a wider
context. The expansion is relatively
modest and should not present material
risk to the safety net.
The Board has adopted the
quantitative limitations on underwriting
and dealing authority as proposed.
Subject to the requirement of
supervisory review that is discussed
below, U.S. banking organizations may
(1) underwrite, on a consolidated basis,
the lesser of $60 million or 25 percent of
the investor’s Tier 1 capital, and (2) hold
equity securities of any one issuer in
trading or dealing accounts equivalent
to the lesser of $30 million or 10 percent
of the investor’s Tier 1 capital.
Incidental to the authority to engage in
equity securities activities, foreign
subsidiaries may issue equity
derivatives products and engage in
related equity derivatives activities,
including swap transactions.
Requirem ent o f Supervisory R eview
Before Commencement o f Expanded
Securities A ctivities
The proposal would have required
only banking organizations not currently
engaged in underwriting or dealing in
equity securities to obtain the Board’s
specific consent before commencement
of such activities. The comments were
generally concerned about the purpose
of the review, whether the requirement
would be applied on an organization-byorganization basis or on a subsidiaryby-subsidiary basis, and the type of
approval that would be required — prior
notice or specific consent.
Under the proposal, any banking
organization currently engaged in equity
securities activities abroad would have
automatically been able to take
advantage of the expanded authority.
After further review of this issue, the
Board determined that while the new
limits for underwriting and dealing in
equity securities do not themselves raise
significant supervisory concerns where
proper operational and managerial
controls are in place, the proposed
authority could lead to an expansion in
the volume of overseas securities
activities. The Board recognized that
such expansion could affect the
adequacy of internal controls with
respect to an existing foreign securities
business and could also require that
additional capital be allocated to those
operations.
Accordingly, the Board has revised
the regulation to require each banking
organization that wishes to use the new
underwriting and dealing limits in
Regulation K to submit to a review by
the Board of its foreign securities
operations. Such a review will focus on
the adequacy of internal controls and
procedures for dealing with the new
limits. The review will also evaluate
whether the capital of existing foreign
securities operations would be adequate
to support any expansion of activity
contemplated under the new limits.
Banking organizations currently engaged
in equity securities activities are
authorized to continue such activities
under the existing limitations. However,
under Regulation K, significant
investments in new or existing foreign
securities affiliates require prior notice
to the Board, and any investors would,
be expected to be in strong financial
condition in order to make such
investments.
Dealing in Securities o f U.S. Issuers
The proposal would have continued to
implement the current limitation that
U.S. banking organizations may deal
abroad only in equity securities "of
foreign issuers.” Comments strongly
opposed this limitation, arguing that it
inhibits the ability of U.S. banking
organizations to underwrite equity
securities of U.S. issuers because an
underwriter needs to be able to support
an underwriting through dealing or
market-making activities in the
secondary market. The Board ha3
reviewed the statutory basis for this
interpretation and has revised the
proposal in this area.
The limitation reflected an
interpretation of paragraph 8(c) of the
Edge Act (12 U.S.C. 615), which prohibits
an Edge corporation from purchasing
and holding stock of any company that
engages in business in the United States
other than business incidental to its
foreign business. Under that
interpretation, dealing authority
excluded dealing in shares of U.S.
companies because the organization
could be viewed as “holding” the shares
in its dealing account in violation of the
statute. Many of the comments noted
that this limitation is not required by the
Edge Act because dealers do not "hold”
securities within the meaning of this
provision.
The legislative history of the Edge Act
demonstrates that the Congress was
concerned that the ownership of U.S.
equity securities by Edge corporations
could permit Edge corporations to
monopolize the businesses that they
were intended to finance, primarily
producers of agricultural products and
raw materials for export. In light of the
evolving nature of the business of
dealing in equity securities, the growing
internationalization of securities
markets that has led to increased
issuance of securities outside home
markets, and the legislative history of
the Edge Act, the Board is of the view
that "holding” stock in a dealing
account is not the kind of purchasing or
controlling of securities at which the
limitation in the Edge Act was aimed.
Therefore, the Board has determined
that subsidiaries of Edge corporations
and bank holding companies may deal
in equity securities of U.S. corporations
abroad; however, U.S. banking
organizations may only sell securities of
U.S. issuers to, or buy such securities
from, foreign persons, as that term is
defined in the revised regulation. In
addition, this authority may not be used
to evade the restrictions applicable to
the domestic securities activities of U.S.
banking organizations.
This determination is in keeping with
the requirements in the IBA, establishing
the five-year review of Regulation K,
that the Board consider ways of
enhancing the ability of U.S. banking
organizations to compete effectively
with foreign-owned institutions. This
determination with respect to the shares
of U.S. issuers must, however, take
account of the provisions of the Bank
Holding Company Act ("BHC Act”),
under which a U.S. banking organization
may not generally acquire more than 5
percent of the voting shares and 24.9
19552
Federal Register / Vol. 56, No. 82 / Monday, April 29, 1991 / Rules and Regulations
percent of the total equity o f a U,S,
company, Therefore, a bank holding
company may not exceed these limits on
an aggregate basis, even where such
shares are held in a foreign securities
subsidiary and regardless of whether
the ownership of the subsidiary is
through a bank holding company or an
Edge corporation that is a subsidiary of
a bank. Banking organizations engaged
in securities activities domestically
through the section 20 structure are
subject to these same limitations.
Applying the Dealing Limits on a Net
Basis
The Board proposed to apply both the
dollar limit on holding individual shares
and the aggregate dollar portfolio
investment limit, which is discussed
below, on a net basis by permitting
some offset for long and short positions
in the same security and for positions
hedged with derivative instruments.
Nine comments responded to the
Board’s request for comment on the
level of offset that would be permissible
for positions hedged with various
instruments. The comments generally
urged the Board to permit flexibility in
any formula used for determining
permissible offsets and recommended
against the implementation of any such
formulation by regulation, because of
the frequently changing nature of the
market in equity securities and their
derivatives. There were various
suggestions: that the Board could permit
any hedging technique approved by
Board interpretation or staff opinion;
that it could permit the Reserve Banks to
approve netting techniques under
delegated authority; or that it could
allow netting issues to be handled
through examination guidelines.
One comment expressed concern
about the proposal to impose a
percentage limit on hedging through
options or futures contracts in the
underlying security. Comments also
expressed concern about the Board's
failure to include in its proposal a
variety of equity derivatives, such as
options on stock indices and over-thecounter derivatives, as permissible
offsetting instruments.
The Board is of the view that
permitting an organization to establish
individual netting techniques, subject to
organization-by-organization approval,
would give banking organizations the
flexibility they desire while limiting the
level of exposure to rides presented by
dealing in equity securities and
providing for regulatory review of
hedging techniques. The Board has
concluded that a Emit or “ haircut,*’ on
the use of such techniques is necessary
both to account for risk and to impose a
ceiling on the dollar amount of equity
securities that may be held by a U.S.
banking organization.
Accordingly, the Board has adopted
the following amendments:
(1) R egulation K h a s b e e n rev ised to perm it
a banking organization to use netting
techniques to hedge risks from positions in
equity securities w ithin certain lim itations:
long and short p ositions in the sam e security
m ay be netted, a n d p ositions in equity
securities m ay also be offset through the use
of derivative instrum ents, such a s futures,
forw ards, options, a n d sim ilar instrum ents
referenced to the sam e equity security
(including m atched indices), subject to the
requirem ent that, for the purposes of the
lim its in Regulation K, the risk exposure
associated w ith the holding o f a position in a
given equity will in no event b e view ed as
having b e en reduced b y m ore th an 75 percent
through hedging;*
(2) R egulation K h a s further b een revised to
sta te th at an organization’s proposed specific
hedging m ethod for netting is subject to the
Board's prior approval; a n d
(3) The B oard’s Rules R egarding D elegation
of A uthority (12 CFR p a rt 265) have been
revised to delegate to the S taff D irector of
Banking S upervision a n d R egulation the
authority to approve specific hedging
m ethods.
Including Underwriting Com mitments
and Shares H eld in Dealing A ccounts in
the Aggregate Lim its on Im perm issible
Investm ents
Both the current regulation and the
proposal include underwriting
commitments and shares held in dealing
accounts in the aggregate limit on
ownership of “impermissible” equity
securities — generally, equity securities
of a company engaged in nonfinancial
activities. The aggregate limit is
currently 100 percent of the investor’s
capital and surplus. As noted above and
discussed in greater detail below, the
Board proposed to lower the aggregate
limit to 25 percent of the investor’s Tier
1 capital when the investor is a bank
holding company.8
A number of comments objected to
including underwriting commitments
and equity securities held in dealing
accounts in this aggregate limit. The
comments noted that there is a
significant difference between, on the
one hand, underwriting and dealing in
shares that are generally held for a short
period and marked-to-market daily, and,
* Thus, the maximum fully-hedged long position
in a single stock could be $120 million — the $30
million dealing limit divided by the 25 percent
haircut. Stated otherwise, if 25 peroent of the risk is
always retained then the maximum folly-hedged
position is four times the $30 million dealing limit.
5 The investor can be a bank holding company.
Edge corporation, or foreign bank subsidiary oT a
member bank.
on the other hand, portfolio investments
that are held for a longer period and
recorded at historic cost.
The Board has determined that it is
appropriate to continue to include
underwriting commitments and equity
securities held in dealing accounts in the
aggregate limit on impermissible
investments. The limit is intended to
restrict the total exposure of U.S.
banking organizations to the risks
presented by equity holdings in
nonfinancial companies. Underwriting
commitments and equity securities held
in dealing accounts are, in particular,
subject to the risk of rapid changes in
market values. Few these reasons,
underwriting commitments for equity
shares and shares held in dealing
accounts are included in the aggregate
limit.
One comment requested that, at a
minimum, underwriting commitments in
excess of $60 million, as may be
authorized on an organization-byorganization basis, should not be
included in the aggregate amount
limitations because such commitments
would already have been counted
against capital specifically earmarked
for that purpose. The Board agrees that
because the risk of such commitments
would be addressed by the capital
deduction, underwriting commitments in
excess of $60 million are excluded from
the aggregate dollar limits on
impermissible investments. Given this
exclusion and the authority for shares
held in dealing accounts to be netted for
purposes of de termining compliance
with this limit, which is discussed
above, the Board does not believe that
the inclusion o f underwriting
commitments and shares held in dealing
accounts in the aggregate limitation on
impermissible investments will be
unduly burdensome with respect to
equity underwriting and dealing
activities.
Lim iting Voting Shares o f a Single
Issuer H eld in Dealing Accoun ts to 19.9
Percent
As discussed below with respect to
portfolio investments, Regulation K
prohibits an Investor or its affiliates
from holding 20 percent or more of the
voting shares of a company engaged in
impermissible activities. In the past this
limitation has included underwriting
commitments and shares held in dealing
accounts, as well as shares held in
investment accounts. H ie Board
proposed to exclude underwriting
commitments for securities from the 20
percent limit in order to permit U.S.
banking organizations to compete more
Federal Register / VoL 56, No. 82 / Monday, April 29, 1991 / Rules and Regulations
effectively, especially in underwriting
initial public offerings, and has adopted
this amendment as proposed.
The comments supported the proposal
to exclude underwriting commitments
from the 20 percent limit but opposed
the continuing inclusion of shares held
in dealing accounts in the limitation.
The Board has, however, determined
that it is appropriate to continue to
include shares held in dealing accounts
in the limitation on equity ownership of
a company engaged in impermissible
activities. Limiting the total percentage
of an issuer's shares that may be held by
a U.S. banking organization in both
dealing and investment accounts
assures that a U.S. banking
organization’s interest in a nonfinancial
company remains at a level
commensurate with a passive
investment.4 Without such limitation,
there is a potential for evasion of the
prohibition on exercising control over
nonfinancial companies, through holding
substantial blocks of equity in both an
investment and dealing account. The
19.9 percent limitation should not inhibit
underwriting activities because, as
discussed below, a banking organization
would have 90 days after the payment
date for an underwriting to sell down
any excess position obtained in
connection with an underwriting to a
position that meets the proposed limit or
to seek the Board’s approval to retain
the shares.
To address concerns that dealing
accounts should not be used to disguise
securities held as investments, one
comment proposed that the Board
require that any securities held in a
dealing account for more than a certain
period of time, such as 90 days, be
reported to the appropriate Federal
Reserve Bank with an explanation of the
dealer's strategy for disposing of the
securities. The comment suggested that
this procedure would be a preferable
alternative to limiting the percentage of
shares of an individual company that
may be held in dealing and portfolio
investment accounts. The Board does
not consider this proposal an adequate
substitute for the percentage limits on
ownership of shares of a nonfinancial
company. Moreover, the Board generally
would not expect shares to be held in a
dealing account longer than 90 days. In
the event shares are held longer than 90
days in a dealing account. Regulation K
is amended to require such holdings to
* As noted below in the discussion on portfolio
investments. Regulation & has been amended to
specify explicitly that total ec$uity ownership in ft
foreign company to limited to 40 percent Nonvoting
shares of a nonfinancial company held in a dealing
account are included in this limitation.
be reported to senior management of the
banking organization.
Underwriting Period
Under the Board’s proposal, a banking
organization would be permitted to
underwrite 100 percent of the equity
securities of an issuer, provided that 30
days after the close of the underwriting
period die underwriter and its affiliates
together do not hold in their dealing and
investment accounts more than the
permissible percentage and dollar
amounts of an issuer's shares.
Most comments opposed the 30-day
limitation, contending that it takes
significantly longer than 30 days to
distribute an equity issue outside the
United States, where markets are not as
developed, and thus not as deep or
broad, as the market in this country. A
number of the comments noted that a
short underwriting period after which
positions must be sold down to the
dealing limits could require U.S. banking
organizations to dispose of securities at
firesale prices. Accordingly, many of the
comments requested an underwriting
period of at least 90 days, with some
asking for up to six months. Comments
also requested that the Board clarify
what would constitute the end of the
underwriting period.
To address the concerns expressed in
the comments, the Board has revised
Regulation K to require underwriting
positions to be sold-dcwn to the dealing
limits within 90 days after the payment
date for the underwritten securities.
Market participants have stated that the
term “payment date” is clearly
understood to mean the date on which
the issuer receives the net proceeds of
the underwriting from the underwriters.
Thus, the use of the term “payment
date” will provide clarity in the
regulation. The Board has adopted a 90day period instead of a 30-day period to
reflect the fact that foreign markets may
not be as liquid as U.S. markets and
typically have longer underwriting
periods.
Underwriting in E xcess o f $60 M illion
The Board proposed to permit banking
organizations on an organization-byorganization basis to underwrite issues
in excess of the $60 million consolidated
limitation, provided that the banking
organization remains strongly
capitalized after a deduction from its
regulatory capital of the amount by
which its underwriting limit exceeds $60
million. The Board specifically
requested comment on whether to
require a guarantee from the bank
holding company parent for losses to a
subsidiary bank when underwriting
19553
activities are conducted under the bank
ownership chain.
The comments generally favored the
proposal because it would provide U.S.
banking organizations with greater
flexibility in their foreign underwriting
business. The comments generally
objected, however, to the requirement of
a permanent deduction of the entire
overline amount from the banking
organization’s regulatory capital. A
number of comments noted that to
require a deduction of the overline
amount on a permanent basis would be
inefficient because an organization’s use
of the full overline amount would be
sporadic.
The Board ha9 adopted the proposed
authority for underwriting in excess of
$60 million, including the requirement of
a capital deduction for the entire stand
by capability. The $60 million limit
establishes a ceiling on potential loss
from a particular underwriting, and the
requirement of a capital deduction for
amounts above $60 million helps ensure
that the safety net is not unduly exposed
to the additional risks of equity
securities activities beyond that amount.
The alternative to a permanent
deduction from regulatory capital of the
maximum overline amount would be to
deduct the amount on a transaction-bytransaction basis. A number of
comments dismissed the approach of
authority on a transaction-bytransaction basis as unworkable and as
likely to interfere too much with the
daily operations of an underwriting
subsidiary.
Several comments noted that the
“strongly capitalized” requirement was
vague. In the Board's view, "stronglycapitalized” means a risk-based capital
level well in excess of the Basle
standards after the overline amount is
deducted. As in the case of domestic
section 20 subsidiaries, the capital
deduction is required to be evenly
distributed with 50 percent from Tier 1
capital and 50 percent from Tier 2
capital. Approval will be granted on an
organizational basis to ensure that,
when the overline activity is conducted
by a subsidiary of a bank, the bank as
well as the bank holding company
remain "strongly-capitalized.” Thus, the
deduction from capital will be made on
a consolidated basis, including from the
bank’s capital, when the underwriting
subsidiary is held under a bank, as well
as from the parent bank holding
company’s capital. Moreover, excess
capital in other parts of the banking
organization cannot substitute for
capital in the bank for purposes of this
requirement.
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Four comments responded to the
Board's request for comment on whether
a bank holding company parent should
be required to guarantee a bank
subsidiary against losses resulting from
securities activities conducted indirectly
by the bank. All four comments opposed
the requirement of a parent guarantee as
unnecessary. One of these comments
also stated, however, that a requirement
for a parent guarantee was preferable to
the requirement of a capital deduction.
As noted above, the deduction from
regulatory capital will be made from the
capital of both the parent bank, where
relevant, and the parent bank holding
company. Further, overline authority
will be granted only on an organizationby-organization basis in order to ensure
that the banking organization, including
a parent bank of an underwriting
subsidiary, is sufficiently strong to
conduct expanded underwriting
activities in an indirect subsidiary.
Given these safeguards, the Board
believes that a bank will be adequately
shielded from losses that might result
from indirect equity underwriting
activities based on the overline
authority and that the holding company
guarantee is therefore unnecessary.
Accordingly, Regulation K does not
include the requirement of a separate
guarantee by the parent for use of
overline authority.
O ther E quity Securities Issues
Under the Board’s proposal,
underwriting commitments of affiliated
section 20 companies would be excluded
from the consolidated limit of the lesser
of $60 million or 25 percent of Tier 1
capital. Two comments noted their
support for this proposal but
recommended that the Board similarly
exempt equity shares held by affiliated
section 20 subsidiaries from the other
limitations in Regulation K, such as the
dollar limitations on dealing authority
and other limits applicable to dealing
accounts. The Board has adopted both
its proposal and clarifications that
exclude shares held by affiliated section
20 subsidiaries from the dollar amount
limitations on dealing authority and the
aggregate limit on impermissible
investments applicable to dealing
accounts. However, shares held in
dealing accounts of affiliated section 20
subsidiaries must be included in
determining compliance with the
percentage limitations under Regulation
K on voting and total equity ownership
of companies engaged in impermissible
activities.
In addition, one comment requested
that the Board modify the restriction on
purchases and sales of assets applicable
to section 20 companies to clarify that a
foreign securities subsidiary may
subunderwrite a portion of its
underwriting liability to its section 20
affiliate and transfer securities to the
latter in connection with the
underwriting. The Board does not
believe that the revision of Regulation K
is the appropriate context in which to
amend the restrictions applicable to
section 20 companies.
Portfolio Investment Authority
Regulation K currently permits U.S.
banking organizations to make a passive
portfolio investment in less than 20
percent of the voting shares of a foreign
company without regard to the nature of
its non-U.S. activities.® The regulation
does not currently expressly limit total
equity ownership — that is, ownership
of voting and non-voting equity shares
— although there is a requirement that
the investment be non-controlling. The
regulation also currently imposes an
aggregate limit on all investments in
companies engaged in impermissible
activities (including securities held in
trading or dealing accounts and
underwriting commitments for shares] of
100 percent of the investor’s capital and
surplus. An investor is either a bank
holding company, Edge corporation, or
foreign bank subsidiary of a member
bank, depending upon which entity
holds the investment. The Board
proposed a number of amendments to
this authority.
First, the Board proposed to limit the
total equity investment a U.S. banking
organization would be able to make
under the portfolio investment authority
to 24.9 percent, which was derived from
the limit on total equity ownership for
non-controlling investments under
Regulation Y. Unlike domestic noncontrolling investments, however, up to
19.9 percent of the equity could be in the
form of voting shares as currently
provided in Regulation K. In addition,
the Board proposed an exception to the
24.9 percent total equity limit to permit
banking organizations to make small
portfolio investments in up to 40 percent
of the total equity of a company,
provided that the total amount of equity
investments in, and loans to, the foreign
company would not exceed the
5 As noted in the discussion on equity securities
activities above, this limitation also previously
included underwriting commitments for voting
shares and voting shares held in dealing accounts.
As Regulation K has been revised, underwriting
commitments are excluded in determining
compliance with the 19.9 percent limitation on
voting shares and the 40 percent limitation on total
equity of companies engaged in impermissible
activities.
proposed general consent limit of $25
million.
Second, the Board proposed to define
“equity” to encompass various forms of
instruments conferring rights of
ownership, including loans that give
rights to participate in the profits of an
organization, and, as currently under
Regulation K, subordinated debt when
the investor also holds shares of the
company. This approach recognizes that
many types of hybrid instruments confer
ownership interests that are equivalent
to equity interests. The proposal also
provided, however, that an investor
could seek a specific determination from
the Board that participating loans or
subordinated debt would not be
considered equity in the circumstances
of a particular investment.
Third, the Board proposed to lower
the aggregate portfolio investment
authority for bank holding company
investors to 25 percent of the investor’s
Tier 1 capital.
The Board received thirteen
comments on the proposed revisions to
the portfolio investment authority. Two
comments opposed any authority for
U.S. banking organizations to make
investments in nonfinancial companies.
The other eleven comments opposed
various aspects of the proposal as too
restrictive. In light of the comments, the
Board has modified the original proposal
and has revised the portfolio investment
provisions as described below.
Total E quity Ownership
Eight comments opposed the proposed
25 percent total equity limitation on
investments in a nonfinancial company
when the organization's exposure to the
company exceeds $25 million. The
comments generally disagreed with the
Board’s position that large equity
interests may impair credit judgments,
with several comments noting that the
procedures and approvals required in
most banks for investments and credit
judgments are entirely separate and that
credit judgments are required to stand
on their own.
The Board has revised the portfolio
investment provisions to limit total
equity ownership of a nonfinancial
company to 40 percent, regardless of the
size of the investment. This approach is
consistent with interpretations of the
current provisions of Regulation K that
limited total equity positions in portfolio
investments to 40 percent, a number
derived from the maximum limitation on
debt-for-equity investments in private
sector, nonfinancial companies. The
Board has adopted a 40 percent
limitation for foreign portfolio
Federal Register / Vol. 56, No. 82 / Monday, April 29, 1991 / Rules and Regulations______19555
investments, rather than the domestic
24.9 percent limitation, in recognition
that U.S. banks compete abroad with
foreign banks that have the authority to
make these types of equity investments.
Under current practice, a U.S. banking
organization may invest in up to 19.9
percent of a foreign firm’s voting shares,
and may also invest in additional non
voting equity in the company as long as
the investment does not exceed a total
of 40 percent of the company's total
equity.®
In connection with these revisions to
Regulation K, the Board reiterates that
U.S. banking organizations may not
exert control over nonfinancial
companies in which they invest through
the portfolio investment authority.
Accordingly, a U.S. banking
organization may not be involved in the
operations of a company in which it
makes a portfolio investment except to
the extent necessary to protect its
investment. This stipulation generally
means that the U.S. banking
organization would be able to appoint
one—but not more than one—director to
the board of directors of the company, if
the organization has sufficient share
ownership to elect one director. No
officer, director, or employee of a U.S.
banking organization would be
permitted to be an employee or officer of
the company in which the investment is
made. Management agreements that
give a right to participate in the day-today operations of a company are also
contrary to the requirement that a
portfolio investment must be passive.
D efinition o f "Equity"
Nine comments opposed the proposed
definition of “equity” on the ground that
it was overly broad. The term “equity”
for purposes of the 40 percent limit on
total equity ownership has been defined
to include voting and nonvoting shares;
quasi-equity instruments, such as
warrants and other convertible
instruments; and loans that give rights to
participate in the profits of a company.
This is a less stringent standard than
proposed by the Board in that it
excludes subordinated debt when
determining the percentage of equity
ownership. The Board continues to
believe that ownership of warrants,
other convertible instruments, and profit
participation loans provide the holder
with an equity interest in, and the
potential to exercise influence over, a
* In determining the percentage of shares of a
foreign company held by a U.S. banking
organization, shares held under Regulation K or any
other authority are aggregated. The definitions of
"joint venture" and “subsidiary’*to Regulation K
have been clarified to this effect.
company and should therefore be
included for purposes of the limits on
equity holdings. The percentage of
equity ownership in a company is to be
determined on a fully diluted basis
where there are unexercised rights to
shares.7
D efinition o f “Investm ent”
The term "investment” for purposes of
both the dollar limitations under the
general consent provisions and the
aggregate dollar limit on portfolio
investments has been defined to include
all instruments incorporated within the
definition of "equity,” and also to
include subordinated debt when the
investor or an affiliate also owns 5
percent or more of the company’s shares
as an investment or in a dealing
account. The provision for subordinated
debt represents a liberalization of both
the proposal and the existing regulation
in that both include subordinated debt if
any shares are also owned by the
investor or an affiliate. The de m inim is 5
percent threshold is intended to permit a
banking organization to hold a small
investment or an inventory of a
company’s shares in a dealing account
without being subject to the general
consent dollar limitations when, for
example, the banking organization
makes a subordinated loan to the
company.
Unlike the original proposal, senior
loans would not be counted in the
general consent dollar limitations.
However, to address supervisory
concerns about equity ownership
affecting lending decisions, the
regulation has been revised to require
arms’s-Iength lending decisions when
the lender or an affiliate has an equity
investment in the company. This
requirement means, in ter alia, that
approvals of loans and equity
investments are to be obtained by
separate parts of a banking organization
to ensure against conflicts of interest.
7 A number of comments raised concerns about
the possible effect of incorporating the proposed
definition of “equity” into the term “equity
securities” as used in the underwriting and dealing
authority, although this Incorporation was not
specifically proposed by the Board. The comments
stated that such an incorporation would subject the
underwriting and dealing of many kinds of debt
instruments to the limitations on equity securities
activities in Regulation K, even though as a general
matter they are not currently subject to those
limitations. The proposed definition of “equity” was
not intended to carry over to "equity securities" for
purposes of underwriting and dealing authority.
Accordingly, the provisions of the regulation
addressing the limitations on underwriting and
dealing in equity securities use the term “shares"
instead of “equity securities” in order to confirm
that, consistent with current practice, debt
instruments with limited equity characteristics do
not come within the limitations on equity securities
activities in Regulation K.
Aggregate Lim itations on Portfolio
investm ents
The Board has adopted the proposal
to lower the aggregate limit on portfolio
investments in companies engaged in
nonfinancial activities from 100 percent
of capital and surplus to 25 percent of
Tier 1 capital when the investor is a
bank holding company. The limitations
on aggregate holdings are designed to
make certain that the overall
capitalization of an investor is not
impaired by market and other risks
attendant to equity holdings in non
affiliated companies. The aggregate limit
for portfolio investments by Edge
corporations and foreign bank
subsidiaries of member banks remains
at 100 percent; however, consistent with
the risk-based capital guidelines, the
regulation has been revised to indicate
that Tier 1 capital is the relevant
standard rather than the current
standard of capital and surplus.8
Six comments opposed the Board’s
proposal to decrease the aggregate
portfolio investment authority for bank
holding companies to 25 percent of Tier
1 capital. The comments were for the
most part concerned with the inhibiting
effect the proposal would have on their
equity underwriting and dealing
businesses. As noted above in the
discussion on equity securities powers,
equity shares of nonfinancial companies
held in dealing and trading accounts and
underwriting commitments for such
shares are included in the aggregate
limit on impermissible investments. The
proposed 25 percent limitation for bank
holding companies would not appear to
constrain unduly the existing equity
securities activities of such companies.
In addition, as noted above, shares held
in dealing accounts can be netted for
purposes of determining compliance
with this limit. The Board will, however,
monitor future developments in this area
to determine the continued
appropriateness of the aggregate
limitations.
O ther Issues
One comment sought expanded
authority to make portfolio investments
in foreign companies that derive up to 10
percent of their consolidated assets and
revenues from business in the United
States. The Board has determined that
such authority in the context of new
investments in foreign companies would
not be consistent with the requirement
8 Regulation K has been revised to state that Tier
1 capital is the relevant standard for all capital
measures other than those implementing statutory
restrictions based on capital and surplus.
19556
Federal Register / Vol. 56, No. 82 / Monday, April 29, 1991 / Rules and Regulations
in the Edge Act that investments in
foreign companies be limited to those
engaged only in U.S. business that is
incidental to foreign business. Moreover,
U.S. banking organizations already have
the authority under Regulation K to
invest in up to 5 percent of the voting
shares of foreign companies engaged in
business in the United States.
General Consent Procedures
The Board proposed to increase the
dollar limitation on investments under
the general consent provisions of
Regulation K from $15 million to $25
million. Thus, a bank holding company,
member bank, or an Edge corporation
engaged in banking would be permitted
to invest the lesser of $25 million or 5
percent of its Tier 1 capital in activities
and investments abroad permitted under
Regulation K without providing the
Board with prior notice of the
investment.9 Permissible activities are
those activities specifically listed in
Regulation K that the Board has found to
be usual in connection with the
transaction of banking or other financial
operations abroad. Under the general
consent authority, U.S. banking
organizations may also make portfolio
investments in companies that engage in
“impermissible," usually nonfinancial,
activities, and in joint ventures and
subsidiaries engaged largely in
permissible activities abroad.
D ollar Lim itations
The Board received eleven comments
on the proposed liberalization of the
general consent authority. One comment
specifically opposed the proposal on the
grounds that any expansion of foreign
powers threatens the deposit insurance
fund. Ten comments supported the
liberalization although most of them
would prefer more liberal authority in
the form of either a larger dollar amount
or a limitation based only upon a
percentage of the investor’s capital. The
comments generally argued that a
percentage of the investor’s capital was
a more accurate reflection of the
exposure of a banking organization to a
particular investment than an absolute
dollar limitation.
Meaningful Board review of foreign
investments has been a primary
justification for giving U.S. banking
organizations the authority to make
investments in a wide range of activities
through subsidiaries of U.S. banks
abroad. The Board's proposal sought to
balance the need for continuing
8 Edge corporations not engaged In banking
would be able to invest the lesser of $25 million or
25 percent of Tier 1 capital, without giving the Board
prior notice.
oversight — and to encourage more
substantial internal review of such
investments by banking organizations
when a prior notice to the Board is
required — against any inconvenience
to the investors from Board review.
One of the factors that the Board
considered in proposing this revision to
the general consent limitations was that
the existing limitations do not appear to
be unduly burdensome. The general
consent procedures — even with the $15
million limitation — accommodated
approximately 60 percent of the dollar
amount of foreign investments and 80 to
90 percent of the total number of foreign
investments by a sample group of eight
multinational bank holding companies
in 1988.
The Board proposed to increase the
dollar limitation from $15 million to $25
million to reflect the average growth of
the dollar amount of the Tier 1 capital of
multinational banks since the last fiveyear review of Regulation K, which was
slightly less than one-third, with a
projection for the same amount of
growth over the next five years. The
Board does not believe that the
comments provide any additional
insights that have not already been
considered by the Board. Moreover,
there seems to have been no diminution
of risk to the banking system over the
past five years that would warrant more
substantial liberalization at this time.
Accordingly, the Board has adopted the
general consent provisions as proposed.
Two comments proposed that the
Board include subordinated debt in the
definition of "historical cost” in
Regulation K, because in certain cases
Regulation K defines subordinated debt
to be an investment in capital for
purposes of the investment provisions.
The historical cost of an investment is
one of the factors used to determine the
dollar amount of permissible additional
investments that can be made in an
organization each calendar year under
the general consent provisions. The
Board is of the view that, although it is
appropriate to view subordinated debt
as an investment in a company for
regulatory purposes in certain
circumstances where it functions much
like preferred shares, subordinated debt
should not be viewed as part of the
historical cost of an investment because
debt is contractually required to be
repaid.
Exceptions fo r Joint Ventures and
Subsidiaries A cquired as Going
Concerns
Regulation K currently permits U.S.
banking organizations to invest in (1) a
joint venture that derives up to 10
percent of its assets and revenues from
impermissible activities, that is,
activities not on Regulation K’s list of
permissible activities, and (2) a
subsidiary acquired as a going concern
that derives up to 5 percent of its assets
and revenues from impermissible
activities. Three comments proposed
that these allowances for impermissible
activities be increased by various
amounts, from 20 to 25 percent for joint
ventures and 10 to 15 percent for
subsidiaries. The Board is of the view
that the existing standards already
provide sufficient leeway for foreign
investments in joint ventures and
subsidiaries acquired as going concerns,
while limiting the risks associated with
impermissible investments, and that
increases in the level of permissible
activities such as those proposed would
not be appropriate at this time.
D efinition o f Subsidiary
The Board proposed to clarify
Regulation K by specifying that any
company of which an investor or its
affiliate is a general partner will be
considered a subsidiary of the investor.
This policy is consistent with definitions
in Regulation Y and with existing
interpretations under Regulation K. The
rationale for this policy is that general
partners usually have full management
powers and full liability for partnership
debt and commitments. Thus, general
partners can be deemed to control the
partnership. The comments did not
object to this proposal and the definition
of subsidiary has been revised to reflect
this clarification.
O ther Issues
The regulation has also been amended
to clarify that, in computing the amounts
that may be invested in a company
under the general consent procedures of
Regulation K, an investor must also
include amounts that have been
invested in the same company by the
investor or its affiliates under any
authority other than Regulation K. For
example, if an investor proposes to
make an investment in a company under
Regulation K, an investment in the
company held by a bank holding
company under section 4(c)(6) of the
BHC Act (12 U.S.C. 1843(c)(6)) must also
be included for purposes of determining
compliance with the general consent
procedures.
Debt-for-Equity Investments
The Board amended Regulation K in
1987 and 1988 to permit specifically
investments to be made by banking
organizations for their own accounts
Federal Register / Vol. 56, No. 82 / Monday, April 29, 1991 / Rules and Regulations______19557
through debt-for-equity swaps in heavily
indebted countries, subject to certain
limitations. As an analogy to the
authority for banks to acquire
investments to prevent a loss on debts
previously contracted ("DPC"), the
Board permitted a banking organization
to acquire as a debt-for-equity
investment as much as 100 percent of
the shares of a foreign nonfinancial
company being privatized by a heavily
indebted foreign government. The Board
also permitted a banking organization to
acquire up to 40 percent of the equity of
a private sector company in a heavily
indebted country through a debt-forequity swap, subject to certain
limitations. Generally, a debt-for-equity
investment in a nonfinancial company
must be made through a bank holding
company rather than a bank. However,
Regulation K currently provides that in
special circumstances, as permitted by
the Board on a case-by-case basis, such
debt-for-equity investments may be
made by banks or their subsidiaries.
Furthermore, Regulation K permits debtfor-equity investments to be made under
special general consent procedures that
require no prior notice to the Board
unless the size of the investment
exceeds the greater of U.S. $15 million or
one percent of the bank holding
company’s equity capital.
The Board proposed several technical
modifications to the provisions of
Regulation K governing debt-for-equity
investments. First, the Board proposed
to increase the general consent amount
for debt-for-equity investments to the
greater of $25 million or 1 percent of Tier
1 capita! (from the greater of $15 million
or 1 percent of equity capital). Second,
the Board proposed to modify the
reference to the procedures for
exchanges of debt-for-equity to make
clear that such procedures need not be
pursuant to a formal government
program as long as the procedures are
otherwise permitted under applicable
law or regulation. Along these lines, the
Board proposed to adjust the divestiture
requirement for debt-for-equity
investments, which requires that
investments be divested within two
years after repatriation of the
investment is permitted by the debtor
country, with a maximum divesture
period of fifteen years. To take account
of the fact that there may not be any
restrictions on repatriation, the Board
proposed the alternative of requiring
divestiture within ten years of an
acquisition, subject to extensions of time
approved by the Board for up to an
additional five years.
The Board received eight public
comments on the debt-for-equity
investment proposal. The comments
generally favored the technical
modifications proposed by the Board,
but recommended more substantive
changes to the provisions of Regulation
K governing debt-for-equity investments.
The Board has adopted the technical
revisions discussed above. In
connection with the divestiture
requirement for debt-for-equity
investments, the Board has also
simplified the reporting requirements. In
addition, in response to the requests for
further revisions to the debt-for-equity
procedures, the Board has adopted
several substantive revisions to the
regulation.
Cash Investm ent
The Board has revised the debt-forequity investment provisions of
Regulation K to allow U.S. banking
organizations to make a relatively small
new cash investment a3 part of a debtfor-equity investment in heavily
indebted countries under the applicable
general consent limit. Some heavily
indebted countries that have sought to
privatize government-owned companies
in recent years have required that
investors include a cash component in
their bids to acquire such companies
through debt-for-equity investments.
The special provisions in Regulation K
applicable to debt-for-equity
investments do not generally permit
additional cash investments without
prior notice to, or approval from, the
Board.
While this issue was not raised in
written comments on the Board’s
proposal, discussions at various times
between industry representatives and
Board staff in connection with specific
investments have indicated that U.S.
banking organizations find the general
consent provisions for debt-for-equity
investments unduly limiting without the
ability to include a cash component.
Regulation K has been amended to
permit a cash component for debt-forequity investments under the special
provisions of the regulation as long as
the cash component does not exceed ten
percent of the fair value of the debt
being invested. As a condition of such
investments, the Board expects that a
reasonable judgment can be made that
the likelihood of recovery frpm the
investment would be greater than the
potential risks of not collecting on the
existing debt. In addition, if a larger
cash component were required, the
investor could request authority under
other provisions of Regulation K.
D ivestiture and B usiness in the United
States
While the comments supported the
Board’s proposal to revise the
divestiture requirement of Regulation K
to take account of the fact that there is
often no formal debt-for-equity program
in eligible countries, five comments
objected to the requirement that an
investment in a foreign company be
automatically divested if the company
engages in business in the United States.
The comments contended that the debtfor-equity investment itself is already
subject to divestiture after a period of
years and that foreign companies that
engage in a limited U.S. business
represent some of the best investment
opportunities in heavily indebted
countries. In response to these
comments, the Board has eliminated the
automatic divestiture requirement for
debt-for-equity investments in
companies that engage in a small level
of business activities in the United
States.
The Board has amended Regulation K
to permit bank holding companies to
retain, for the permitted holding period,
debt-for-equity investments in
companies that derive no more than 10
percent of their consolidated assets or
revenues from activities conducted
within the United States. To prevent any
attempt to avoid the restrictions on the
domestic activities of U.S. banking
organizations, however, this authority
excludes financial activities in the
United States that otherwise require the
Board’s prior approval.
This revision will permit foreign
companies in which U.S. banking
organizations have invested through
debt-for-equity swaps to engage in a
greater amount of business in the United
States than is currently permitted for
other investments under Regulation K,
where only U.S. activities otherwise
incidental to the foreign business are
permitted. The Board nevertheless
believes that debt-for-equity
investments can be distinguished from
other types of investments with respect
to their U.S. activities because, as noted
by the comments, such investments are
subject to a requirement of divestiture.10
In addition, the Board has determined
that in the context of U.S. banking
organizations seeking to manage their
exposure to heavily indebted countries
10 There is some precedent for this type of
distinction: when a foreign company in which a U.S.
banking organization has invested subsequently
commences activities in the United States, the U.S.
banking organization is given a grace period before
divestiture of the foreign company is required, albeit
a much shorter period than the holding period
permitted for debt-for-equity investments.
19558
Federal Register / Vol. 56, No. 82 / Monday, April 29, 1991 / Rules and Regulations
through investments in foreign
companies with limited business in the
United States, such U.S. business is
incidental to foreign business as
required by the Edge A c t Therefore, the
Board has amended Regulation K to
permit debt-for-equity investments in
companies that derive no more than 10
percent of their consolidated assets or
revenues from U.S. activities.
D ollar Lim itations Under the Consent
Procedures
As noted above, the Board has
increased the maximum dollar amount
limitations under the consent provisions
for debt-for-equity investments from $15
million to $25 million. A number of
comments suggested further increases in
the maximum amount that could be
invested under the special general
consent provisions for debt-for-equity
investments — from 1 to 2 percent of the
Tier 1 capital of the investor. One
comment also suggested a maximum
general consent amount of 10 percent of
the capital of the investor if the investor
is an Edge corporation, while another
suggested 3 percent. Two comments also
urged that loans be excluded from the
definition of “investment" for purposes
of the provisions applicable to debt-forequity investments.
In the Board’s experience, few
proposed debt-for-equity investments
have exceeded the amount limitations of
the general consent provisions for debtfor-equity investments and those that
have were handled on an expedited
basis, when requested by the banking
organization. The Board has amended
Regulation K, however, to provide
additional leeway in the general consent
procedures by excluding senior loans
and extensions of credit from the
definition of “investment” for purposes
of the general consent procedures
applicable to debt-for-equity
investments.11 Consistent with the
definition of “investment” generally
under Regulation K, which is discussed
above, investments for purposes of the
debt-for-equity provisions will continue
to include subordinated debt and loans
conferring rights to participate in profits
of an organization when the banking
organization also has an equity interest
in the company. Thus, the same
definition of “investment" will apply to
both debt-for-equity investments and
other investments under Regulation K,
11 Bank holding companies making debt-forequity in more than 25 percent of the voting shares
of a private-sector company continue to be subject
to the restriction in Regulation K that lending by the
bank holding company and its affiliates to the
foreign company may not exceed 50 percent of the
total loans to the company.
Accordingly, the special definition of
“investment” in the debt-for-equity
provisions has been eliminated.12
Investm ent Vehicle
The proposed revisions to Regulation
K discussed above will provide
substantial additional authority for U.S.
banking organizations to make debt-forequity investments in heavily indebted
countries; however, an issue addressed
by several comments was the
appropriate vehicle for such
investments. Five comments
recommended the elimination of the
restriction requiring that debt-for-equity
investments be held by or through the
bank holding company unless the Board
specifically approves an investment
under the bank. One comment observed
that requiring such investments to be
held by the bank holding company or a
subsidiary of a bank holding company
may be inconsistent with the law of the
country where the investment is taking
place. Several of the comments stated
that transferring debt from a bank to the
bank holding company for purposes of
making a debt-for-equity investment can
raise tax and accounting issues. The
comments advocated that the Board
permit debt-for-equity investments to be
made in nonfinancial companies through
subsidiaries of the bank and not only
subsidiaries of the bank holding
company.
It should be noted that Regulation K
currently permits debt-for-equity
investments by Edge corporation and
foreign bank subsidiaries of a bank
under the portfolio investment
provisions of Regulation K, including
investments involving amounts in
excess of the general consent limits,
although the portfolio investment
provisions limit ownership of voting
shares to 19.9 percent. In response to the
concerns expressed in the comments,
however, the Board will give substantial
consideration on a case-by-case basis to
permitting debt-for-equity investments
under the special provisions of
Regulation K through Edge corporation
and foreign bank subsidiaries of a bank.
Regulation K has therefore been
amended to provide more flexibility for
the Board to approve such investments.
In making such judgments on
applications in this area, the Board will
look closely at, among other factors, the
existing and contingent risks posed to
the bank by the proposed investment.
After experience is gained with these
12 The definitions of “loans and extensions of
credit” and “eligible country” have been moved
from the special debt-for-equity investment
provisions of Regulation K to the definitions
applicable to the entire regulation.
types of investments, the Board will
consider implementing appropriate
general consent authority for debt-forequity investments under the special
provisions of Regulation K through an
Edge corporation or foreign bank
subsidiary of a bank.
40 Percent Lim itation on Shares o f
Private Sector Companies
Bank holding companies are permitted
to acquire up to 40 percent of the equity
of a private sector company under the
special debt-for-equity provisions of
Regulation K, subject to certain
restrictions. Six comments
recommended the elimination of the 40
percent of equity limitation on the
shares that can be held in private sector
companies that are acquired through
debt-for-equity investments. These
comments noted that some of the best
investment opportunities are in the
private sector in heavily indebted
countries and that it appears to be
inconsistent to limit investments in
these private sector companies while
permitting the acquisition of 100 percent
of the equity in public companies being
privatized, when such companies may
present greater investment risks. One of
the comments also suggested that if the
40 percent limit is not increased, then
the Board should clarify that
investments made by two or more U.S.
banking organizations in the same
company would not be aggregated for
purposes of the 40 percent of equity
limitation.
The Board continues to believe that
the 40 percent limitation serves a useful
purpose, namely to permit U.S. banking
organizations to have a significant stake
in private sector companies, while
assuring that there would be substantial
participation by other investors in such
companies. The limitation is intended to
assure that a U.S. banking organization
does not bear primary responsibility for
the risks associated with running
nonfinancial enterprises. Limiting a
debt-for-equity swap participation in a
private sector company to a substantial,
but minority, position should help
protect against the possibility that a U.S.
banking organization would be so linked
to its investment in the private sector
company that it would make imprudent
loans to an ailing enterprise or be held
responsible for the liabilities incurred by
such companies. Therefore, — and in
keeping with the total equity limitation
on portfolio investments — the Board
has retained the 40 percent equity limit
on debt-for-equity investments in
nonfinancial private sector companies.
Unless there are other indicia of control,
Federal Register / Vol. 56, No. 82 / Monday, April 29, 1991 / Rules and Regulations______19559
however, separate debt-for-equity
investments by two or more U.S.
banking organizations in the same
private sector company will not be
aggregated for purposes of calculating
the 40 percent limitation.
Edge Corporations
D om estic Powers
The Edge Act limits the powers of
lending and deposit-taking by Edge
corporations in the United States to
transactions that the Board has
determined are incidental to the
international or foreign business of the
Edge corporation. Thus, an Edge
corporation is generally required to
verify that every deposit-taking or credit
transaction it conducts is related to an
international transaction. There are
certain exceptions to this requirement.
First, Edge corporations may take all
types of deposits from foreign persons
and governments. Second, Edge
corporations are permitted to provide
general banking services — including
lending and deposit-taking — to socalled qualified business entities
("QBE”), companies that are listed in
Regulation K that by charter or license
are engaged in activities of an
international character, without having
to document the international character
of each transaction. The Board
requested comment on whether there
are other entities for which Edge
corporations could appropriately act as
full service banks in the United States.
Most of the comments expressed the
view that the U.S. activities of Edge
corporations were too restrictive for
Edge corporations to remain competitive
and proposed numerous revisions,
although one comment opposed any
expansion of the domestic powers of
Edge corporations other than adding to
the list of QBEs, as currently defined.
Comments proposed expansive
liberalization of both QBE authority and
the permissible U.S. activities of Edge
corporations. Eight comments stated
that the QBE list should be expanded to
include foreign correspondent banks
generally, or foreign organizations
whose assets or revenues are
predominantly foreign and
predominantly derived from the
business of banking, that is, foreign
organizations that qualify as qualified
foreign banking organizations.
corporations to offer full banking
services, including credit services for
U.S. purposes, to foreign persons.13 The
Board has previously determined that
the foreign status of a person or
company constitutes a sufficient
"international” nexus to meet the
requirement in the Edge Act that Edge
corporations engage only in
“international or foreign business.” At
present, Edge corporations may take
deposits from, but generally cannot
make loans to, foreign persons for
domestic purposes. Thus, the revision to
Regulation K with respect to credit
extensions and other banking services
parallels current authority for Edge
corporations to accept domestic
deposits from foreign governments and
persons. Edge corporations also
continue to be able to provide full
banking services for U.S. entities that
are QBEs under Regulation K.
This revision will enable Edge
corporations to participate in the
domestic activities of their foreign
customers, as requested by a number of
comments. It will, for example, enable
Edge corporations to offer a full range of
services to foreign correspondent banks
and to foreign insurance and
reinsurance companies, as requested by
several comments. Nine comments
requested authority to provide standby
letters of credit to their customers,
regardless of whether the specific
transaction has an international origin.
The Board’s revision to Regulation K
will enable an Edge corporation to
provide a domestic standby letter of
credit as long as the customer is a
foreign person. Similarly, the revisions
should satisfy the desire, reflected in
four comments, for authority for Edge
corporations to provide domestic as well
a3 international wire transfers for
foreign-based customers.
Overdrafts
Domestic Lending and Other Banking
Services to Foreign Persons
The existing regulation permits Edge
corporations to receive deposits from
foreign governments and foreign
persons. The Board proposed to add to
this provision the limitation that
overdrafts in a deposit account may not
be frequent and should be restored
within a short period of time because
overdrafts are essentially extensions of
credit that are not authorized by the
regulation. One comment opposed this
new limitation, indicating that overdraft
financing had been a good source of
revenue.
In response to these comments, the
Board has substantially liberalized the
domestic powers of Edge corporations
by revising the regulation to permit Edge
13 This includes foreign governments and their
agencies and instrumentalities; and offices or
establishments located, and individuals residing,
outside the United States.
The purpose of the proposed
limitation was to limit extensions of
credit in the form of overdrafts to
foreign customers so that they would be
consistent with the deposit-taking and
credit authority of Edge corporations. In
light of the Board’s amendment that
permits Edge corporations to make loans
to foreign persons for any purpose, as
discussed above, the Board has decided
that this amendment is unnecessary.
Other Comments
Five comments advocated permitting
Edge corporations to provide a full range
of services for their parent banks. Such
services would include funds transfers,
check collection, and processing of
letters of credit. These services are
currently permissible where the
transaction is related to international or
foreign business. If the transaction is not
related to international or foreign
business, the Board takes the view that
the Edge Act was not intended to permit
an Edge corporation effectively to act as
a branch of the parent bank.
Capitalization o f Edge Corporations
The Board proposed changing the
capitalization requirement for Edge
corporations engaged in banking from 7
percent of risk assets to 10 percent of
risk-weighted assets as computed under
the risk-based capital standards, with at
least half of that amount consisting of
Tier 1 capital. The 10 percent standard
is higher than the 8 percent ratio
required by the Board for state member
banks and bank holding companies. As
with the 8 percent ratio, the proposed 10
percent standard is considered a
minimum standard. In both cases, the
Board continues to have supervisory
discretion to impose higher standards as
appropriate on the basis of the nature of
the activities and the condition of the
organization as a whole.
Most of the comments received on this
proposal were strongly opposed to a
ratio higher than 8 percent, which they
deemed unfair and anticompetitive.
They argued that the activities of Edge
corporations were no more inherently
risky than the activities of their parent
banks and that the various risks
inherent in the activities of Edge
corporations were adequately taken into
account in the new, risk-based capital
standards. Three comments stated that
the imposition of a 10 percent standard
would greatly reduce their ability to
issue letters of credit and participate in
clearing activities.
Despite the objections of the
comments, nearly all of the Edge
corporations engaged in banking appear
19560______Feaeral Register / Vol. 56, No. 82 / Monday, April 29, 1991 / Rules and Regulations
to meet the 10 percent minimum
standard and most are at substantially
higher capital levels. The Board believes
that the higher risk-based standard for
Edge corporations is justifiable in light
of the fact that Edge corporations are
specialized U.S. deposit-taking entities
that have unique risk characteristics, as
compared to insured banks. Due to their
specialized nature, Edge corporations
currently have different capital
standards than banks, and it should be
noted that the proposed changes do not
subject Edge corporations to the
additional requirement of a leverage
limit.
Accordingly, the Board has adopted a
minimum 10 percent risk-based capital
standard, with at least half that amount
consisting of Tier 1 capital, effective
December 31,1992. However, because of
restraints on investments in Edge
corporations and their limited access to
the markets, the Board will permit all of
the Tier 2 capital of an Edge corporation
to be comprised of subordinated debt.
At present, Edge corporations may not
count subordinated debt as capital.
Until the new capital standards become
effective, Edge corporations are required
to abide by the current capital
standards.
Emergency M eeting o f Shareholders o f
an Edge Corporation
The Board proposed to amend
Regulation K to require that the bylaws
of an Edge corporation contain a
provision giving the Federal Reserve
Board the authority to call an emergency
meeting of shareholders to address
pressing problems of the Edge
corporation. The Board has adopted this
proposal. The regulation requires any
shareholder or group of shareholders
that own or control 25 or more percent
of the shares, or a representative of such
shareholder or group of shareholders, to
attend the meeting or risk being barred
from further direct or indirect
participation in the management and
affairs of the Edge corporation. This
provision is designed to give the Board
an alternative supervisory tool to a more
time-consuming enforcement
proceeding.
Two comments were received on this
proposal. One comment opposed the
proposal and another comment
suggested that the regulation be revised
to limit expressly the purpose for which
the Board could call such a meeting to
the discussion of serious problems of the
Edge corporation. The Board has
nonetheless adopted the requirement
because it provides necessary authority
to deal quickly and efficiently with
serious developing problems in an Edge
corporation.
Additions to the List of Permissible
Activities Abroad
Swap A ctivities
The Board proposed to add acting as
principal or agent in swap transactions
relating to currency or interest rate
obligations and their derivative products
to Regulation K’s list of permissible
activities. The Board received ten
comments on this proposal, all of which
opposed the proposal. One comment
opposed the proposal on the grounds
that such swap transactions present
risks that threaten the deposit insurance
fund. Nine comments opposed the
proposal on the theory that (1) the
authority under Regulation K to engage
in commercial and other banking
activities already provides foreign
subsidiaries with the authority to engage
in swap transactions, and (2) the
limitation in the proposal to currency
and interest rate obligations and their
derivative products suggests that other
such products, such a3 commodity
swaps, are not covered, and therefore
the proposal narrows the existing
authority.
In recognition of the fact that national
and state banks are currently engaged in
some commodity-linked transactions
under permission granted by their
chartering authorities, the Board has
amended Regulation K to permit U.S.
banking organizations to engage in swap
activities abroad, including commodity
swaps, to the same extent that state
member banks are permitted to engage
in such activities domestically.
Therefore, such activities would be
permitted unless the Board takes action
to prohibit or limit state member banks
from engaging in a particular swap
activity domestically.14 The Board
intends to review the parameters for
permissible swap activities for state
member banks.
With respect to commodity-linked
swap transactions there is, however,
another issue. The Edge Act generally
prohibits an Edge corporation from
trading in commodities (12 U.S.C. 617).
This requirement was generally
intended to safeguard against Edge
corporations attempting to control the
prices of commodities. Thus, to the
extent that U.S. banks are authorized to
engage in commodity swap transactions
and such transactions are not prohibited
or limited for state member banks, the
authority for Edge corporations to
14 Swap transactions involving equity derivative
products are separately authorized under
Regulation K as incidental to equity securities
powers.
engage in such activities abroad is
limited to contracts with an option for
cash settlement This requirement is
intended to prevent foreign subsidiaries
of Edge corporations from taking
delivery of commodities in settlement of
swap contracts, thereby trading in the
commodities themselves in violation of
the statutory prohibition.
Life Insurance Underwriting
The Board proposed to add the
underwriting of life insurance and other
actuarially predictable risks to the list of
permissible overseas activities, subject
to the requirements that (1) the activity
be conducted through a bank holding
company subsidiary, and (2) capital
investments in, and unsecured
extensions of credit to, an insurance
underwriting subsidiary be deducted
from the regulatory capital of the bank
holding company.
Ten comments supported the Board's
proposal to add life insurance
underwriting to the list. Six of the
comments objected, however, to the
requirement that the activity be
conducted through a subsidiary of a
bank holding company and not a
subsidiary of a bank. Six comments also
opposed the requirement of a capital
deduction. Several of the comments
maintained that such requirements
should not be necessary given the
Board’s determination that underwriting
actuarially predictable risks does not
present undue risks to U.S. banking
organizations.
The Board has added the underwriting
of life insurance, insurance written in
connection with pension funds and
annuities, and the underwriting of other
actuarially predictable risks to the list of
permissible activities abroad under
Regulation K, subject to the above
stated requirements. Unlike securities
activities, insurance underwriting has
not traditionally been conducted by
banks through their Edge corporation
and foreign bank subsidiaries. As a
result, the Board believes it is
appropriate to require life insurance
underwriting abroad to be conducted
generally through a subsidiary of a bank
holding company and not a bank.
Moreover, a deduction from regulatory
capital is appropriate because, although
banking and insurance may be
complementary activities and may even
at times offer functionally equivalent
products, some of the risks are
sufficiently different from banking that
the most appropriate method for
evaluating capital adequacy is on an
unconsolidated basis. Such an approach
is consistent with the Basle agreement.
Federal Register / Vol. 56, No. 82 / Monday, April 29, 1991 / Rules and Regulations______19561
The addition of annuity and pension
fund-related insurance underwriting
responds to the request of one comment
for clarification as to the types of
activities contemplated by the provision
with respect to “other actuarially
predictable risks.” These types of
activities have previously been
approved by the Board on a case-bycase basis.15
FCM A ctivities
The Board proposed to add futures
commission merchant (“FCM”) activities
on exchanges that the Board has
previously approved to the list of
permissible activities in Regulation K.
subject to the requirement that any
activities by foreign subsidiaries of U.S.
banks on mutual exchanges or any
activities involving nonfinancial
instruments or their derivative products
continue to require the Board’s prior
approval.
Three comments opposed the Board's
proposal. Two comments objected on
the basis that FCM activities are risky
and threaten the deposit insurance fund.
One comment generally objected to the
proposal because it would require FGMs
that are operating subsidiaries of
national banks to obtain the approval of
both the Board and the Comptroller of
the Currency (“Comptroller”) before
becoming members of mutual exchanges
abroad.
Seven comments generally supported
the Board’s proposal. Five of those
comments recommended, however, that
the Board also permit the brokerage of
nonfinancial instruments without prior
Board approval because, the comments
maintained, the brokerage function and
risk are no different for financial and
nonfinancial futures. Three comments
noted that the Comptroller permits the
brokerage of nonfinancial futures.
The Board is of the view that the
addition of FCM activities with respect
to financial instruments is an
appropriate addition to the list of
permissible activities, particularly given
that such activities are permissible
domestically under Regulation Y. The
Board, however, does not believe it is
appropriate to add the brokerage of
15 Specifically, the Board has approved: (1)
underwriting life insurance in the United Kingdom.
Federal Republic of Germany, and Australia; (2)
underwriting credit insurance not directly related to
extensions of credit by affiliates, savings
completion insurance, and home loan life insurance
and endowment life insurance related to mortgage
lending activities of affiliates, in Belgium and
Luxembourg; (3) underwriting pension fund-related
insurance and disability insurance in connection
with Chilean mandated worker pensions; (4)
underwriting retirement-related life insurance in
Argentina; and (5) underwriting permanent health
insurance in the United Kingdom.
nonfinancial instruments to Regulation
K’s list of permissible activities at this
time because such “nonfinancial"
activities present additional risks for
banking organizations in nontraditional
areas where they have little experience
and expertise. Accordingly, as proposed,
the Board has added FCM activities on
exchanges that the Board has previously
approved to the list of permissible
activities in Regulation K.16 The Board
has nevertheless limited such authority
to financial instruments of the type it
has previously approved under
Regulation K. Basically, these include
instruments with respect to which FCM
activities have been authorized
domestically under Regulation Y (12
CFR 225.25(b)(18)) and the foreign
equivalents of such instruments,
including futures and options on stock
indices, bond indices, other interest rate
contracts, and foreign exchange
contracts. The Board would expect U.S.
banking organizations to consult with
Board staff when there is a question as
to whether a product is a financial
instrument of the type previously
approved by the Board.
The Board also proposed to require
prior approval for foreign subsidiaries of
U.S. banks to engage in FCM activities
on any mutual exchange. Two comments
noted that this requirement would
encompass mutual exchanges that the
Board had previously approved and
proposed that the Board require prior
approval for bank subsidiaries to
become members of mutual exchanges
only when the Board has not previously
approved the particular mutual
exchange. One comment recommended
that the prior approval requirement for
mutual exchanges be eliminated when
the exchange acknowledges that the
parent bank is not liable for its
subsidiary’s obligations to the exchange.
Upon further review, because of the
risks associated with mutual exchanges,
the Board will require prior approval for
foreign subsidiaries to engage in FCM
activities on a mutual exchange,
regardless of whether the parent of the
foreign subsidiary is a bank or a bank
16 The Board, under Regulation K. has approved
FCM activities for certain banking organizations on
the London Gold Futures Market; the London
International Financial Futures Exchange; the
Singapore International Monetary Exchange; the
Sydney Futures Exchange; the Tokyo Stock
Exchange; the Marche a Terme d’lnstruments
Financiers, Paris; the Hong Kong Futures Exchange;
the Bolsa Mercantile & de Futuros Exchange, Sao
Paulo; the Bolsa de Mercadorias de Sao Paulo; the
Bolsa Brasileira de Futuros, Rio de Janeiro; the
Amsterdam Financial Futures Market; the Tokyo
International Financial Futures Exchange; the DTB
Deutsche Terminborse; the New Zealand Futures
and Options Exchange Limited, Auckland; and the
Osaka Securities Exchange.
holding company. In response to the
comments regarding mutual exchanges
that the Board has previously approved,
however, the Board has delegated to
Reserve Banks the authority to approve
applications to become members of
mutual exchanges, provided that the
mutual exchange has previously been
approved by the Board and membership
is on the same basis, and subject to the
same terms and conditions, as that
which the Board has previously
approved. This requirement generally
means (hat a Reserve Bank has the
authority to approve such applications if
the applicant has made the same
commitments as the commitments on
which the Board relied in previously
authorizing membership on that mutual
exchange. Approval for any new
exchange, including any new mutual
exchange, would continue to be granted
by the Board.
O ther A ctivities
Two comments recommend that the
Board add Islamic banking products,
such as purchase and repurchase
arrangements involving goods and real
property, which the comments
maintained are the functional equivalent
of extensions of credit, to the list of
permissible activities. The Board
recognizes that such activities may be
usual in connection with the transaction
of banking or other financial operations
in certain foreign jurisdictions, and in
that situation a banking organization
may seek the Board’s prior approval to
engage in the activities in that
jurisdiction. In the Board’s view,
however, such activities are not so
prevalent or necessarily generically the
same so as to warrant addition to the
list of permissible activities in all foreign
jurisdictions.
Another comment proposed that the
current leasing authority in Regulation
K, which is limited to leasing that is the
functional equivalent of credit, be
broadened to reflect recant changes
domestically in leasing powers for
banks and bank holding companies. For
example, the Board has proposed to
amend the list of permissible activities
for bank holding companies in
Regulation Y to include leasing
transactions that rely upon an estimated
residual value of up to 100 percent of the
acquisition cost of the property leased
(See 55 FR 22348 and 23446). Because
the list of permissible activities in
Regulation K incorporates activities
permissible under Regulation Y, such
leasing activities would be permissible
under Regulation K if any revisions are
made to Regulation Y. Accordingly, the
19562
Federal Register / Vol. 56, No. 82 / Monday, April 29, 1991 / Rules and Regulations
Board does not believe it is necessary to
expand the leasing authority in
Regulation K at this time.
Finally, one comment requested that
the Board add real estate brokerage and
management, and pension fund
administration to the list of permissible
activities. The Board has approved these
activities in a limited number of
instances on a case-by-case basis. The
Board continues to believe that such
activities are best addressed in
connection with a case-by-case review
of the nature of each of the activities
and the usualness of each activity in the
proposed foreign jurisdiction, rather
than by adding such activities to the list
of permissible activities in Regulation K.
More specifically, absent the Board’s
specific approval, U.S. banking
organizations should not engage in real
estate development through any
combination of authorities for
permissible activities.
Qualifying Foreign Banking
Organizations
Regulation K implements statutory
exemptions from the BHC Act for
certain activities of foreign banks. These
exemptions are granted to qualifying
foreign banking organizations
("QFBOs”). In order to be deemed a
QFBO, the foreign banking organization
generally must derive more than half of
its non-U.S. business from banking and
more than half of its banking business
from outside the United States. Banking
business is defined to include any
activity listed as permissible in
Regulation K, if such activities are
conducted in the bank ownership chain,
that is, by the foreign bank or a
subsidiary of the foreign bank.
The Board requested comments on
several issues under Regulation K to
address the increasing number of foreign
affiliations between banks and other
financial services companies, including
insurance companies. In particular, the
Board was concerned about foreign
acquisitions that could prevent a
previously qualifying foreign bank from
satisfying the QFBO standard and the
related extraterritorial effects of the
Board’s regulation. The proposals were
to:
1. A dd underw riting life and related
insurance to the list of activities that are
perm issible for a U.S. banking organization
ab ro ad so that insurance activities conducted
in the bank ow nership chain w ould
contribute tow ard a banking organization's
qualification under the QFBO test.
2.Exercise the B oard's discretion on a caseby-case basis to grant specific determ inations
of eligibility under the QFBO sta n d ard to
prevent hardships to foreign financial
services com panies that are engaged largely
in activities perm issible to U.S. b an k holding
com panies abroad.
3. A m end Regulation K to sta te th at
specific determ inations of eligibility w ould
generally not be granted to a foreign
industrial or com m ercial com pany th at ow ns
a foreign bank or to a com pany th at derives
less of its com m ercial banking business from
outside the U nited S tates th an it derives from
inside the U nited States. In this context a
com m ercial banking business m eans a
banking business conducted through a
regulated foreign com m ercial bank.
4. M odify R egulation K to perm it a
previously qualifying organization th at falls
out of com pliance w ith the QFBO sta n d ard to
continue to conduct activities and m ake
acquisitions ab ro ad w ithout prior Board
review until such tim e as the Board acts on a
request for exem ption from the QFBO
standard.
The Board received twelve public
comments on these issues. Most of the
comments supported the Board’s
proposal, but some comments stated
that the Board did not go far enough to
avoid undue extraterritorial application
of U.S. law to the activities of foreign
banking organizations. Many of the
comments provided extensive, detailed
suggestions for liberalizing the QFBO
standard, expanding the permissible
activities of QFBOs, and clarifying
means of compliance with the QFBO
exemptions.
D efinition o f Banking under the QFBO
Test
The comments supported the Board’s
decision to expand the kinds of
activities that U.S. banks may conduct
abroad to include life insurance,
recognizing that this proposed change
will help international banks that
acquire insurance companies to meet
the QFBO standard. A number of
comments, however, proposed further
expansion of the definition of “banking
assets” for purposes of determining
compliance with the QFBO standard.
The proposals varied widely, including a
proposal that the Board consider any
activity permitted by the home regulator
as “banking” and several proposals that
the Board eliminate the requirement that
banking activities be conducted in the
bank ownership chain for purposes of
determining compliance with the QFBO
standard. These comments argued that
the current rules do not accommodate a
bank holding company structure
because the activities conducted by the
subsidiaries held outside of the bank
ownership chain do not count towards
qualifying status.
These issues were considered in
connection with the proposed revisions
to Regulation K. The Board determined
that, because of the many unknown
varieties of corporate combinations that
may exist outside the United States, it is
preferable at this time to retain the
existing standard and to permit case-bycase exemptions rather than to create a
new standard. In addition, a new
standard could be considered after more
experience is gained with respect to the
ongoing consolidations in Europe and
elsewhere. A number of comments
expressly noted their support for the
case-by-case exemptive procedure
proposed by the Board to grant interim
authority to non-qualifying foreign
banking organizations to continue their
activities outside the United States
while their request for exemption is
under consideration. Accordingly, the
Board has adopted the four proposals
listed above. It should be noted,
however, that the temporary authority to
engage in activities abroad prior to the
Board’s determination of an exemption
from the QFBO standard would be
provided only to foreign organizations
that previously satisfied the QFBO
standard and to affiliates of such
organizations, but not to organizations
that have never satisfied, and are not
affiliated with organizations that
previously satisfied, the QFBO test.
A number of comments also suggested
that the Board provide certain
grandfather rights to QFBOs, including
QFBOs that have fallen out of
compliance. One comment suggested
grandfather rights for a QFBO that falls
out of compliance because the growth of
its U.S. banking operations exceeds that
of its worldwide banking business. Two
comments suggested that the Board
grandfather U.S. insurance and banking
operations that pre-date an affiliation
outside the United States.
The Board has not adopted any
provisions that provide grandfather
rights for QFBOs. The first suggestion is
in part dealt with by the Board’s
decision to treat certain foreign
insurance activities conducted in the
bank ownership chain, or otherwise
permitted by the Board on an exemptive
basis, as foreign “banking" activities.
Where such grandfather rights would
permit a foreign organization to develop
substantial U.S. banking operations
without the support of a foreign bank
parent of nearly equivalent size, broader
issues of supervisory and regulatory
policy are raised. The second
suggestion, if permitted on a permanent
basis, would give foreign banks a
significant competitive advantage over
U.S. banking organizations.
Federal Register / Vol. 56, No. 82 / Monday, April 29, 1991 / Rules and Regulations
Exem ptions fo r Nonbanking A ctivities
o f QFBOs
QFBOs are granted authority in two
respects under Regulation K to engage in
certain nonfinancial activities within the
United States that are impermissible for
domestic bank holding companies. First,
Regulation K implements section 2(h)(2)
of the BHC Act (12 U.S.C. 1841(h)(2)) by
authorizing a QFBO to control a foreign
company that is engaged directly or
indirectly in nonfinancial activities in
the United States, provided that (1) more
than 50 percent of the foreign company's
assets and revenues derive from outside
the United States, and (2) the U.S.
activities of the foreign company are in
the same line of business as its foreign
activities. Second, Regulation K
implements section 4(c)(9) of the BHC
Act (12 U.S.C. 1843(c)(9)) by permitting a
QFBO to engage directly in the United
States in activities incidental to its
activities outside the United States and
to own or control the voting shares of a
company engaged in U.S. activities that
are incidental to the international or
foreign business of such company.
Comments proposed introducing into
Regulation K a basket exemption for
small foreign venture capital
investments, without regard to the U.S.
activities of such companies. Section
2(h)(2) of the BHC Act authorizes foreign
banking organizations to invest in
foreign companies that are “principally
engaged in business outside the United
States.” Under the proposed basket
exemption there would be no way to
ensure compliance with the statutory
requirement, and such an exemption
would provide a foreign banking
organization with business opportunities
unavailable to U.S. banking
organizations.
One comment suggested that the
Board should establish a “safe harbor”
presumption of non-control for
investments in a foreign company by a
QFBO. The comment further suggested
that the standard for control in
Regulation K should not be as stringent
as that in Regulation Y because of the
extraterritorial consequences. The
Board has not adopted these suggestions
because they would allow foreign
banking organizations to make
significant equity investments in foreign
companies conducting business in the
United States that would be
impermissible for U.S. bank holding
companies.
A comment also asked that the Board
make it clear that the Board will not
apply its policy guidelines limiting
nonvoting equity investments by bank
holding companies (See 12 CFR 225.143)
to foreign venture capital investments
that may engage in impermissible
activities in the United States. For
purposes of foreign banking
organizations. Regulation K assumes
control to exist at any level of share
ownership in excess of 24.9 percent of
voting shares. Whether ownership of
voting shares below that level could
constitute control is a question of fact
and depends upon whether there are
other indicia of control.
Compliance Issues R elated to QFBOs
The proposal and comments also
raised a number of issues concerning the
method of determining compliance with
certain exemptions from the BHC Act
available to QFBOs. As noted above, in
implementing the exemption in section
2(h)(2) Gf the BHC Act for investments in
foreign companies with U.S. business,
Regulation K requires that (1) 50 percent
of the foreign company's consolidated
assets and revenues derive from outside
the United States, and (2) the U.S.
activities of the foreign company be in
the same line of business as the
activities of the foreign company
abroad. In computing the amount of
business of a foreign company that is
conducted outside the United States,
assets and revenues are considered to
be derived from outside the United
States unless the assets are located in,
or revenues generated by, the U.S.
offices of the foreign company. Thus, the
test is based on the location of the
offices conducting the business and not
the residency of the customers of the
foreign company.
50 Percent Requirement
The requirement that 50 percent of the
foreign company’s consolidated assets
and revenues derive from outside the
United States is designed to implement
the statutory requirement that the
foreign company be “principally
engaged in business outside of the
United States.” One comment stated
that the Board has not made clear the
dates or periods of time that are to be
used in determining compliance with the
consolidated assets and revenues tests.
Although the Board does not believe
that this has been an area of confusion,
it should be noted that financial
information as of the previous fiscal
year should be used unless there is more
recent information readily available.
The comment also suggested that
Regulation K could be amended to
clarify that where a foreign bank does
not actually control a company, the
foreign bank should be entitled to rely
on information that is “reasonably
available" to it for purposes of the
19563
Board's regulation? The regulation
currently includes a provision permitting
reliance on reasonably available
information; however, to remedy
possible confusion as to the types of
reports to which the provision is
applicable, the Board has made certain
technical amendments to the regulation
to the effect that this provision applies
to all reports on minority investments by
foreign banks required under Regulation
K.
This comment also proposed
grandfathering investments that satisfy
the 50 percent test at the time of
investment but, because of changes
beyond the control of the investor,
subsequently cease to satisfy the 50
percent test. The Board has rejected this
suggestion because it is inconsistent
with the statutory requirement that
foreign companies be “principally
engaged in business outside the United
States.”
Noting the hardship imposed by a
divestiture requirement for
nonqualifying investments, the comment
also proposed that if a company falls out
of compliance with the assets or
revenues test, the foreign bank should
generally be given two years from that
date to sell the investment. The Board
has revised Regulation K to provide that
if the investment fails to satisfy the 50
percent test for two consecutive years,
the QFBO may either divest the
investment within one year or seek the
Board’s specific approval to retain the
investment for a longer period.
Sam e Line of Business Requirem ent
Regulation K looks to the Standard
Industrial Classification (the “SIC”) to
determine whether activities are in the
same line of business for purposes of the
section 2(h)(2) exemption. The SIC was
modified in 1987. The Board proposed to
revise the references to the SIC in
Regulation K to reflect the new SIC
categories. No public comments were
received on the issue. Thus, the Board
has revised the references to the SIC in
Regulation K as proposed.
Lending by Foreign Bank Subsidiaries of
U.S. Banking Organizations to U.S.
Residents
Although the Board did not solicit
comments on this topic, three comments
recommended that the Board rescind its
policy which prohibits foreign bank
subsidiaries of U.S. banking
organizations from making loans to U.S.
residents except for international
purposes.17 The comments contended
” Letter, dated November 13,1970. from Kenneth
A. Kenyon to American International Bank ("AIB").
Continued
19564_____ Federal Register / Vol. 56, No. 82 / Monday, April 29, 1991 / Rules and Regulations
that U.S. banking organizations are
competitively disadvantaged by this
requirement because foreign banks are
permitted to make loans to U.S.
residents.
The Board’s decision to impose this
restriction in 1970 was based in large
part upon concern that permitting
foreign subsidiaries of U.S. banking
organizations to make loans to U.S.
residents would permit avoidance of
reserve requirements, as loans by
foreign subsidiaries to U.S. residents
would not be subject to the reserve
requirements that would apply to such
loans if made by the parent bank or its
foreign branches. In light of the Board’s
recent decision to reduce to a rate of
zero the reserve requirements on
nonpersonal time and net Eurocurrency
transactions, the incentive for banks to
encourage foreign subsidiaries to make
domestic loans in order to avoid reserve
requirements no longer exists.
Accordingly, the Board has suspended
the prohibition against lending by
foreign bank subsidiaries of U.S.
banking organizations to U.S. residents
for domestic purposes, as long as
reserve requirements on nonpersonal
time and Eurocurrency transactions are
set at zero.
Powers of Foreign Branches of Member
Banks
Investing, Underwriting, and Dealing in
Government Obligations
Foreign branches of member banks
are permitted to (1) invest in the
securities of “governmental entities” of
the country in which the foreign branch
is located, and (2) to underwrite,
distribute, buy, and sell obligations of
“an agency or instrumentality of the
national government of the country in
which the branch is located." The
former authority is limited to 1 percent
of the total deposits of the bank’s
branches in that country and the latter
authority is limited to 10 percent of the
bank’s capital and surplus. The Board
proposed to limit both authorities to
obligations or securities that are
supported by the taxing authority or the
full faith and credit of the national
gov ernment.
Four comments opposed the proposed
limitation to “full faith and credit"
obligations of the national government
as too restrictive. The Board proposed
this amendment because the question of
what constitutes the security of a
governmental entity or the obligation of
an instrumentality of a national
regarding AIB’s investment in Henry Ansbacher 8t
Co., Limited. London. England (the “Ansbacher
letter)
government has been raised in
connection with several proposed
foreign investments. The Board has
adopted its proposal to define
obligations of an agency or
instrumentality as those supported by
the taxing authority or full faith and
credit of the national government to
provide clarity as to what is intended by
the regulation. The Board has, however,
defined the authority to invest in
securities of governmental entities to
include securities of governmental
entities not supported by the taxing
authority or full faith and credit of the
national government. The Board has
clarified that the authority to
underwrite, distribute, buy, and sell
obligations, includes the authority to
hold such obligations; thus the authority
to invest in securities of governmental
entities under this provision is authority
in addition to the authority for
investments in obligations of an agency
or instrumentality.
Several comments requested that the
Board increase the additional authority
to invest in securities of governmental
entities irom 1 percent to 5 or 10 percent
of the deposits of a bank's branches in
that country. Because this authority
includes securities that are not
supported by the full faith and credit of
the national government, the Board has
not expanded the authority. However,
the Board has revised the authority to
underwrite, distribute, buy, sell, and
hold governmental obligations
supported by the full faith and credit of
the national government from 10 percent
of a member bank’s capital and surplus
to the greater of 10 percent of a member
bank's Tier 1 capital or 10 percent of the
deposits of a bank’s branches in that
country.
Six comments requested that the
Board remove the limitations in the
authority to invest in, and underwrite
and deal in, obligations of a foreign
government that restricts such authority
to the country in which the branch is
located. The comments noted the
globalization of financial markets and
stated that eliminating the restriction
would give branches additional
flexibility in managing their assets and
would give banks greater flexibility in
organizing their government securities
activities. The Board has rejected this
suggestion because it would permit
banking organizations to build global
government securities operations in a
branch of the bank rather than through a
separate subsidiary, which is contrary to
the Board’s policy of protecting insured
banks from the direct risk of securities
activities.
Finally, the term "political
subdivision” has been substituted for
the current language of “municipality or
other local or regional governmental
entity.” This term is generally intended
to mean municipalities or local or
regional governments with independent
taxing authority.
Operating Subsidiaries
Regulation K currently permits foreign
branches, with the Board’s specific
approval, to establish wholly-owned
subsidiaries where required by local
law. The Board’s proposal removed the
condition that such subsidiaries be
required by local law. A number of
comments supported this proposal and
some requested even broader authority
to establish operating subsidiaries,
including elimination of the requirement
that such subsidiaries be wholly-owned
by the branch. The Board has adopted
its proposal, thereby removing the
restriction that such subsidiaries be
required by local law. This revision will
given U.S. banking organizations greater
flexibility in their foreign operations by
permitting them, with the approval of
the Board, to establish operating
subsidiaries in countries where a bank
operates a branch whenever permitted
— rather than required — by local law.
In addition, in response to the comments
that in some foreign jurisdictions 100
percent ownership of an operating
subsidiary by a branch may not be
legally permissible, the Board has
revised the authority to permit less than
100 percent ownership where local law
or regulation requires local investors to
hold directors’ qualifying shares or
equivalent types of share interests. Any
investments by a branch in an operating
subsidiary, however, are subject to the
Board's prior approval and the Board
would not generally expect investments
by another investor to be substantial.
Export Trading Companies
The Board proposed to amend
formally its provisions governing export
trading companies to conform with
certain standards mandated by
Congress in the Omnibus Trade and
Competitiveness Act of 1S88 (P. L. 100418). The Board has previously
implemented the statutory requirements
administratively. The Board proposed to
(1) neutralize the effect of third party
transactions for purposes of determining
whether a company is a permissible
bank-affiliated export trading company;
(2) provide companies with a longer
period to satisfy the revenues test for
purposes of determining their status as a
permissible export trading company;
and (3) eliminate certain Board
Federal Register / Vol. 56, No. 82 / Monday, April 29, 1991 / Rules and Regulations______ 19565
Delegation Rules regarding leverage
ratios and dollar amounts of inventory
for bank-affiliated export trading
companies.
The Board received two comments on
this proposal. One banking organization
stated that the amendments would be
useful. In addition, the United States
Department of Commerce
(“Commerce”), which has a role in
implementing other aspects of the Bank
Export Services Act, the statute that
authorizes bank-affiliated export trading
companies, generally supported the
proposed revisions. Commerce
suggested, however, an amendment to
the Board’s proposal that would have
the effect of permitting revenues derived
from third country trade to be
considered as derived from the export of
a service produced in the United States.
Under this approach, such revenues
could be counted as derived from
exports for purposes of satisfying
requirements for export trading
company status. This issue was raised
at the time the statute mandating these
amendments was adopted and the
proposal was rejected by the Congress.
Accordingly, the Board has adopted the
revisions with regard to export trading
companies as proposed without making
the revision requested by Commerce.
Other Technical Revisions
subparts A, B, and C, and part 265 as
follows:
PART 211—INTERNATIONAL
BANKING OPERATIONS
1. The authority citation for part 211 is
revised to read as follows:
Authority: Federal R eserve A ct (12 U.S.C.
221 et seq.); Bank Holding C om pany A ct of
1956, a s am ended (12 U.S.C. 1841 et seq.)\ the
International Banking A ct of 1978 (Pub. L. 95369; 92 Stat. 607; 12 U.S.C. 3101 et seq.); the
Bank E xport Services A ct (Title II, Pub. L. 97290, 96 Stat. 1235); the International Lending
Supervision A ct (Title IX, Pub. L. 98-181, 97
Stat. 1153,12 U.S.C. 3901 et seq.); a n d the
Export T rading C om pany A ct A m endm ents
of 1988 (Title III, Pub. L. 100-418,102 Stat.
1384 (1988)).
2. Subpart A (§ § 211.1 through 211.7)
is revised to read as follows:
Subpart A—International Operations of
United States Banking Organizations
Sec.
211.1 A uthority, purpose, a n d scope.
211.2 Definitions.
211.3 Foreign branches of U.S.
banking organizations.
211.4 Edge a n d Agreem ent
corporations.
211.5 Investm ents a n d activities
abroad.
211.6 Lending lim its a n d capital
requirem ents.
211.7 Supervision a n d reporting.
Other technical revisions that are not
substantive in nature have been made to
Regulation K to clarify existing
provisions.
Subpart A—International Operations
of United States Banking
Organizations
Regulatory Flexibility Act Analysis
(a) Authority. This subpart is issued
by the Board of Governors of the
Federal Reserve System (“Board”) under
the authority of the Federal Reserve Act
(“FRA”) (12 U.S.C. 221 et seq.)-, the Bank
Holding Company Act of 1956 (“BHC
Act”) (12 U.S.C. 1841 et seq.); and the
International Banking Act of 1978
(“IBA") (12 U.S.C. 3101 et seq.).
Requirements for the collection of
information contained in this regulation
have been approved by the Office of
Management and Budget under the
provision of 44 U.S.C. 3501, et seq. and
have been assigned OMB Nos. 71000107; 7100-0109; 7100-0110; 7100-0069;
7100-0086; and 7100-0073.
(b) Purpose. This subpart sets out
rules governing the international and
foreign activities of U.S. banking
organizations, including procedures for
establishing foreign branches and Edge
corporations to engage in international
banking and for investments in foreign
organizations.
(c) Scope. This subpart applies to:
(1) Corporations organized under
section 25(a) of the FRA (12 U.S.C. 611631). “Edge corporations”;
Pursuant to section 605(b) of the
Regulatory Flexibility Act (Pub. L. 96354, 5 U.S.C. 601 et seq.), the Board of
Governors of the Federal Reserve
System certifies that this final rule will
not have a significant economic impact
on a substantial number of small entities
that are subject to the regulation.
List of Subjects
12 CFR Part 211
Accounting for fees on international
loans. Allocated transfer risk reserve,
Banking, Banks, Export trading
companies, Exports, Federal Reserve
System, Foreign banking, Holding
companies. Investment made through
debt-for-equity conversions,
Investments, Reporting and
recordkeeping requirements, Reporting
and disclosure of international assets.
12 CFR Part 265
Authority delegations (Government
agencies), Federal Reserve System.
For the reasons set forth above, the
Board has amended 12 CFR part 211,
§ 211.1
Authority, purpose, and scope.
(2) Corporations having an agreement
or undertaking with the Board under
section 25 of the FRA (12 U.S.C. 601604a), “Agreement corporations”;
(3) Member banks with respect to
their foreign branches and investments
in foreign banks under section 25 of the
FRA (12 U.S.C. 601-604a);1 and
(4) Bank holding companies with
respect to the exemption from the
nonbanking prohibitions of the BHC Act
afforded by section 4(c)(13) of the BHC
Act (12 U.S.C. 1843(c)(13)).
§211.2
Definitions.
Unless otherwise specified, for the
purposes of this subpart:
(a) An affiliate of an organization
means:
(1) Any entity of which the
organization is a direct or indirect
subsidiary; or
(2) Any direct or indirect subsidiary of
the organization or such entity.
(b) Capital Adequacy Guidelines
means the Capital Adequacy Guidelines
for State Member Banks: Risk-Based
Measure (12 CFR part 208, app. A).
(c)Capital and surplus means paid-in
and unimpaired capital and surplus, and
includes undivided profits but does not
include the proceeds of capital notes or
debentures.
(d)
D irectly or indirectly, when used
in reference to activities or investments
of an organization, means activities or
investments of the organization or of
any subsidiary of the organization.
(e) Eligible country means a country
that, since 1980, has restructured its
sovereign debt held by foreign creditors,
and any other country that the Board
deems to be eligible.
(f) An Edge corporation is engaged in
banking if it is ordinarily engaged in the
business of accepting deposits in the
United States from nonaffiliated
persons.
(g) Engaged in business or engaged in
activities in the United States means
maintaining and operating an office
(other than a representative office) or
subsidiary in the United States.
(h) E quity means an ownership
interest in an organization, whether
through:
(1) Voting or nonvoting shares;
(2) General or limited partnership
interests;
(3) Any other form of interest
conferring ownership rights, including
Warrants, debt, or any other interests
1 Section 25 of the FRA, which refers to national
banking associations, also applies to state member
banks of the Federal Reserve System by virtue of
section 9 of the FRA (12 U.S.C. 321).
19566
Federal Register / Vol. 56, No. 82 / Monday, April 29, 1991 / Rules and Regulations
that are convertible into shares or other
ownership rights in the organization; or
(4) Loans that provide rights to
participate in the profits of an
organization, unless the investor
receives a determination that such loans
should not be considered equity in the
circumstances of the particular
investment.
(i) Foreign a t foreign country refers to
one or more foreign nations, and
includes the overseas territories,
dependencies, and insular possessions
of those nations and of the United
States, and the Commonwealth of
Puerto Rico.
(j) Foreign bank means an
organization that:
(1) is organized under the laws of a
foreign country;
(2) Engages in the business of banking;
(3) !a recognized as a bank by the
bank supervisory o f monetary authority
of the country of its organization or
principal banking operations;
(4) Receives deposits to a substantial
extent in the regular course of its
business; and
(5) Has the power to accept demand
deposits.
(k) Foreign branch means an office of
an organization (other than a
representative office) that is located
outside the country under the laws of
which the organization is established, at
which a banking or financing business is
conducted.
(1) Foreign person means an office or
establishment located, or individual
residing, outside the United States.
(m) Investm ent means:
(1) The ownership or control of equity;
(2) Binding commitments to acquire
equity;
(3) Contributions to the capital and
surplus of an organization; and
(4) The holding of an organization’s
subordinated debt when the investor
and the investor's affiliates hold more
than 5 percent of the equity of the
organization.
(n) Investor means an Edge
corporation, Agreement corporation,
bank holding company, or member bank.
(o) Joint venture mean3 an
organization that has 20 percent or more
of its voting shares held directly or
indirectly by the investor or by an
affiliate of the investor under any
authority, but which is not a subsidiary
of the investor.
(p) Loans and extensions o f credit
means all direct and indirect advances
of funds to a person made on the basis
of any obligation of that person to repay
funds.
(q) Organization means a corporation,
government, partnership, association, or
any other entity.
(r) Person means an individual or an
organization.
(s) Portfolio investm ent means an
investment in an organization other than
a subsidiary or joint venture.
(t) R epresentative office means an
office that:
(1) Engages solely in representational
and administrative functions such as
solicitation of new business for or
liaison between the organization’s head
office and customers in the United
States; and
(2) Does not have authority to make
business decisions for the account of the
organization represented.
(u) Subsidiary means an organization
more than 50 percent of the voting
shares of which is held directly or
indirectly, or which is otherwise
controlled or capable of being
controlled, by the investor or an affiliate
of the investor under any authority.
Among other circumstances, an investor
is considered to control an organization
if the investor or an affiliate is a general
partner of the organization or if the
investor and its affiliates directly or
indirectly own or control more than 50
percent of the equity of the organization.
(v) Tier 1 capital has the same
meaning as provided under the Capital
Adequacy Guidelines (12 CFR part 208,
appendix A).
§ 211.3 Foreign branches of U.S. banking
organizations.
(a) E stablishm ent o f foreign branches.
(1) Right to establish branches.
Foreign branches may be established by
any member bank having capital and
surplus of $1,000,000 or more, an Edge
corporation, an Agreement corporation,
or a subsidiary held pursuant to this
subpart. Unless otherwise provided in
this section, the establishment of a
foreign branch requires the specific prior
approval of die Board.
(2) Branching within a foreign
country. Unless the organization has
been notified otherwise, no prior Board
approval is required for an organization
to establish additional branches in any
foreign country where it operates one or
more branches.2
(3) Branching into additional foreign
countries. After giving the Board 45
days’ prior written notice, an
organization that operates branches in
two or more foreign countries may
establish a branch in an additional
foreign country, unless notified
otherwise by the Board.2
2 For the purpose of this paragraph, a subsidiary
other than a bunk or an Edge or Agreement
corporation is considered to be operating a branch
m a foreign country if it has an affiliate that
operates an office (other than a representative
office) in that country.
(4) Expiration o f branching authority.
Authority to establish branches through
prior approval or prior notice shall
expire one year from the earliest date on
which the authority could have been
exercised, unless the Board extends the
period.
(5) Reporting. Any organization that
opens, closes, or relocates a branch
shall report such change in a manner
prescribed by the Board.
(b) Further pow ers o f foreign
branches o f m em ber banks. In addition
to its general banking powers, and to the
extent consistent with its charter, a
foreign branch of a member bank may
engage in the following activities so far
as usual in connection with the business
of banking in the country where it
transacts business:
(1) Guarantees. Guarantee debts, or
otherwise agree to make payments on
the occurrence of readily ascertainable
events,3 if the guarantee or agreement
specifies a maximum monetary liability,
but except to the extent that the member
bank is fully secured, it may not have
liabilities outstanding for any person on
account of such guarantees or
agreements which, when aggregated
with other unsecured obligations of the
same person, exceed the limit contained
in paragraph (a)(1) of section 5200 of the
Revised Statutes (12 U.S.C. 84) for loans
and extensions of credit;
(2) G overnm ent obligations .
Underwrite, distribute, buy, sell, and
hold obligations of:
(i) The national government of the
country in which the branch is located;
(ii) An agency or instrumentality of
the national government where
supported by the taxing authority,
guarantee, or full faith and credit of the
national government; and
(iii) A political subdivision of the
country;
Provided however that, no member bank
may hold, or be under commitment with
respect to, such obligations for its own
account in an aggregate amount
exceeding the greater of:
(A) 10 percent of its Tier 1 capital; or
(B) 10 percent of the total deposits of
the bank’s branches in that country on
the preceding year-end call report date
(or the date of acquisition of the branch
in the case of a branch that has not been
so reported);
(3) O ther Investm ents. Invest in:
(i)
The securities of the central bank,
clearing houses, governmental entities
other than those authorized under
3 “Readily ascertainable events'* include, but are
not limited to* events such as nonpayment of taxes,
rentals, customs duties* or costs of transport and
loss or nonconformance of shipping document!*.
Federal Register / Vol. 56, No. 82 / Monday, April 29, 1991 / Rules and Regulations
paragraph (b)(2) of this section, and
government-sponsored development
banks of the country in which the
foreign branch is located;
(ii) Other debt securities eligible to
meet local reserve or similar
requirements; and
(iii) Shares of automated electronic
payments networks, professional
societies, schools, and the like
necessary to the business of the branch;
Provided however that, the total
investments of the bank's branches in
that country under this paragraph
(exclusive of securities held as required
by the law of that country or as
authorized under section 5136 of the
Revised Statutes (12 U.S.C. 24, Seventh))
may not exceed 1 percent of the total
deposits of the bank’s branches in that
country on the preceding year-end call
report date (or on the date of acquisition
of the branch in the case of a branch
that has not so reported);
(4) Credit extensions to ban k’
s
officers. Extend credit to an officer of
the bank residing in the country in
which the foreign branch is located to
finance the acquisition or construction
of living quarters to be used as the
officer’s residence abroad, provided
however that;
(i) The credit extension is reported
promptly to the branch’s home office;
and
(ii) Any extension of credit exceeding
$100,000 (or the equivalent in local
currency) is reported also to the bank’s
board of directors;
(5) R eal estate loans. Take liens or
other encumbrances on foreign real
estate in connection with its extensions
of credit, whether or not of first priority
and whether or not the real estate has
been improved;
(6) Insurance. Act as insurance agent
or broker;
(7) Em ployee benefits program. Pay to
an employee of the branch, as part of an
employee benefits program, a greater
rate of interest than that paid to other
depositors of the branch;
(8) Repurchase agreements. Engage in
repurchase agreements involving
securities and commodities that are the
functional equivalents of extensions of
credit;
(9) Investm ent in subsidiaries. With
the Board’s prior approval, acquire all of
the shares of a company (except where
local law requires other investors to
hold directors’ qualifying shares or
similar types of instruments) that
engages solely in activities:
(i) In which the member bank is
permitted to engage; or
(ii) That are incidental to the activities
of the foreign branch; and
(10) O ther activities. With the Board’s
prior approval, engage in other activities
that the Board determines are usual in
connection with the transaction of the
business of banking in the places where
the member bank’s branches transact
business.
(c) Reserves o f foreign branches o f
m em ber banks. Member banks shall
maintain reserves against foreign
branch deposits when required by part
204 of this chapter (Regulation D).
§ 211.4 Edge and Agreement
corporations.
(а) O rganization.— (1) Board
authority. The Board shall have the
authority to approve:
(1) The establishment of Edge
corporations; and
(11) Investments by member banks and
bank holding companies in Agreement
corporations.
(2) Permit. A proposed Edge
corporation shall become a body
corporate when the Board issues a
permit approving its proposed name,
articles of association, and organization
certificate.
(3) Nam e. The name shall include
“international,” “foreign,” “overseas,”
or some similar word, but may not
resemble the name of another
organization to an extent that might
mislead or deceive the public.
(4) Federal Register notice. The Board
shall publish in the Federal Register
notice of any proposal to organize an
Edge corporation and will give
interested persons an opportunity to
express their views on the proposal.
(5) Factors considered b y the Board.
The factors considered by the Board in
acting on a proposal to organize an Edge
corporation include:
(i) The financial condition and history
of the applicant;
(ii) The general character of its
management;
(iii) The convenience and needs of the
community to be served with respect to
international banking and financing
services; and
(iv) The effects of the proposal on
competition.
(б) A uthority to com m ence business.
(i) After the Board issues a permit, the
Edge corporation may elect officers and
otherwise complete its organization,
invest in obligations of the United States
Government, and maintain deposits
with depository institutions, but it may
not exercise any other powers until at
least 25 percent of the authorized capital
stock specified in the articles of
association has been paid in cash, and
each shareholder has paid in cash at
least 25 percent of that shareholder’s
stock subscription.
19567
(ii) Unexercised authority to
commence business as an Edge
corporation shall expire one year after
issuance of the permit, unless the Board
extends the period.
(7) Am endm ents to articles o f
association. No amendment to the
articles of association shall become
effective until approved by the Board.
(8) Shareholders m eeting. An Edge
Corporation shall provide in its bylaws
that:
(1) A shareholders meeting shall be
convened at the request of the Board
within five days after the Board gives
notice of the request to the Edge
corporation;
(ii) Any shareholder or group of
shareholders that owns or controls 25
percent or more of the shares of the
Edge corporation shall attend such a
meeting in person or by proxy; and
(iii) Failure by a shareholder or
authorized representative to attend any
such meeting in person or by proxy may
result in removal or barring of such
shareholders or any representatives
from further participation in the
management or affairs of the Edge
corporation.
(b) Nature and ownership o f shares —
(1) Shares, (i) Shares of stock in an Edge
corporation may not include no-par
value shares and shall be issued and
transferred only on its books and in
compliance with section 25(a) of the
FRA and this subpart.
(ii) The share certificates of an Edge
corporation shall:
(A) Name and describe each class of
shares indicating its character and any
unusual attributes such as preferred
status or lack of voting rights; and
(B) Conspicuously set forth the
substance of:
01) Any limitations upon the rights of
ownership and transfer of shares
imposed by section 25(a) of the FRA;
and
[2] Any rules that the Edge
corporation prescribes in its by-laws to
ensure compliance with this paragraph.
(iii) Any change in status of a
shareholder that causes a violation of
section 25(a) of the FRA shall be
reported to the Board as soon as
possible, and the Edge corporation shall
take such action as the Board may
direct.
(2) O wnership o f Edge corporations
by foreign institutions.—(i) Prior Board
approval. One or more foreign or
foreign-controlled domestic institutions
referred to in paragraph 13 of section
25(a) of the FRA (12 U.S.C. 619) may
apply for the Board’s prior approval to
acquire directly or indirectly a majority
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Federal Register / Vol. 56, No. 82 / Monday, April 29, 1991 / Rules and Regulations
of the shares of the capital stock of an
Edge corporation.
(ii) Conditions a nd requirem ents. Such
an institution shall:
(A) Provide the Board information
related to its financial condition and
activities and such other information as
the Board may require;
(B) Ensure that any transaction by an
Edge corporation with an affiliate4 is on
substantially the same terms, including
interest rates and collateral, as those
prevailing at the same time for
comparable transactions by the Edge
corporation with nonaffiliated persons,
and does not involve more than the
normal risk of repayment or present
other unfavorable features;
(C) Ensure that the Edge corporation
will not provide funding on a continual
or substantial basis to any affiliate or
office of the foreign institution through
transactions that would be inconsistent
with the international and foreign
business purposes for which Edge
corporations are organized;
(D) Invest no more than 10 percent of
the institution’s capital and surplus in
the aggregate amount of stock held in ail
Edge corporations; and
(E) In the case of a foreign institution
not subject to section 4 of the BHC Act:
(1) Comply with any conditions that
the Board may impose that are
necessary to prevent undue
concentration of resources, decreased or
unfair competition, conflicts of interest,
or unsound banking practices in the
United States; and
(2) Give the Board 45 days’ prior
written notice, in a form to be
prescribed by the Board, before
engaging in any nonbanking activity in
the United States, or making any initial
or additional investments in another
organization, that would require prior
Board approval or notice by an
organization subject to section 4 of the
BHC Act; in connection with such
notice, the Board may impose conditions
necessary to prevent adverse effects
that may result from such activity or
investment.
(3) Change in control.—(/) Prior
notice. Any person shall give the Board
60 days’ prior written notice, in a form to
be prescribed by the Board, before
acquiring, directly or indirectly, 25
percent or more of the voting shares, or
otherwise acquiring control, of an Edge
corporation. The Board may extend the
60-day period for an additional 30 days
by notifying the acquiring party. A
notice under this paragraph need not be
4 For purposes of this paragraph, “affiliate**
means any organization that would be an “affiliate"’'
under section 23A of the FRA (12 UJSXL 371c) if the
Edge corporation were a member bank.
filed where a change in control is
effected through a transaction requiring
the Board's approval under section 3 of
the BHC Act (12 U.S.C. 1842).
(ii) Board review . In reviewing a
notice filed under this paragraph, the
Board shall consider the factors set forth
in paragraph (a)(5) of this section and
may disapprove a notice or impose any
conditions that it finds necessary to
assure the safe and sound operation of
the Edge corporation, to assure the
international character of its operation,
and to prevent adverse effects such as
decreased or unfair competition,
conflicts of interest; or undue
concentration of resources.
(c) D om estic branches—(1) Prior
notice, (i) An Edge corporation may
establish branches in the United States
45 days after the Edge corporation has
given notice to its Reserve Bank, unless
the Edge corporation is notified to the
contrary within that time.
(ii) The notice to the Reserve Bank
shall include a copy of the notice of the
proposal published in a newspaper of
general circulation in the communities to
be served by the branch.
(iii) The newspaper notice may appear
no earlier than 90 calendar days prior to
submission of notice of the proposal to
the Reserve Bank. The newspaper notice
must provide an opportunity for the
public to give written comment on the
proposal to the appropriate Reserve
Bank for at least 30 days after the date
of publication.
(2) Factors considered. The factors
considered in acting upon a proposal to
establish a branch are enumerated in
paragraph (a)(5) of this section.
(3) Expiration o f authority. Authority
to open a branch under prior notice shall
expire one year from the earliest date on
which that authority could have been
exercised, unless the Board extends the
period.
(d) R eserve requirem ents and interest
rate lim itations. The deposits of an Edge
or Agreement corporation are subject to
parts 204 and 217 of this chapter
(Regulations D and Q) in the same
manner and to the same extent as if the
Edge or Agreement corporation were a
member bank.
(e) Perm issible activities in the
U nited States. An Edge corporation may
engage directly or indirectly in activities
in the United States that are permitted
by the sixth paragraph of section 25(a)
of the FRA and are incidental to
international or foreign business, and in
such other activities as the Board
determines are incidental to
international or foreign business. The
following activities will ordinarily be
considered incidental to an Edge
corporation’s international or foreign
business:
(1) D eposit activities —(i) D eposits
from foreign governm ents and foreign
persons. An Edge corporation may
receive in the United States transaction
accounts, savings, and time deposits
(including issuing negotiable certificates
of deposits) from foreign governments
and their agencies and instrumentalities,
and from foreign persons.
(ii) D eposits from other persons. An
Edge corporation may receive from any
other person in the United States
transaction accounts, savings, and time
deposits (including issuing negotiable
certificates of deposit) if such deposits;
(A) Are to be transmitted abroad;
(B) Consist of funds to be used for
payment of obligations to the Edge
corporation or collateral securing such
obligations;
(C) Consist of the proceeds of
collections abroad that are to be used to
pay for exported or imported goods or
for other costs of exporting or importing
or that are to be periodically transferred
to the depositor’s account at another
financial institution;
(D) Consist of the proceeds of
extensions of credit by the Edge
corporation:
(E) Represent compensation to the
Edge corporation for extensions of credit
or services to the customer;
(F) Are received from Edge or
Agreement corporations, foreign banks
and other depository institutions (as
described in part 204 of this chapter
(Regulation D});
(G) Are received from an organization
that by its charter, license, or enabling
law is limited to business that is of an
international character, including
Foreign Sales Corporations (26 U.S.C.
921); transportation organizations
engaged exclusively in the international
transportation of passengers or in the
movement of goods, wares, commodities
or merchandise in international or
foreign commerce; and export trading
companies that are exclusively engaged
in activities related to international
trade.
(2) Liquid funds. Funds of an Edge or
Agreement corporation that are not
currently employed in its international
or foreign business, if held or invested in
the United States, shall be in the form
of:
(i) Cash;
(ii) Deposits with depository
institutions, as described in part 204 of
this chapter (Regulation D), and other
Edge and Agreement corporations;
(iii) Money market instruments
(including repurchase agreements with
respect to such instruments), such as
Federal Register / Vol. 56, No. 82 / Monday, April 29, 1991 / Rules and Regulations______ 19569
bankers' acceptances, federal funds
sold, and commercial paper; and
(iv) Short- or long-term obligations of.
or fully guaranteed by, federal state,
and local governments and their
instrumentalities.
(3) Borrowings. An Edge corporation
may:
(i) Borrow from offices of other Edge
and Agreement corporations, foreign
banks, and depository institutions (as
described in part 204 of this chapter
(Regulation D)) or issue obligations to
the United States or any of its agencies
or instrumentalities;
(ii) Incur indebtedness from a transfer
of direct obligations of, or obligations
that are fully guaranteed as to principal
and interest by, the United States or any
agency or instrumentality thereof that
the Edge corporation is obligated to
repurchase;
(iii) Issue long-term subordinated debt
that does not qualify as a “deposit”
under part 204 of this chapter
(Regulation D).
(4) Credit activities. An Edge
corporation may:
(i) Finance the following:
(Aj-Contracts, projects, or activities
performed substantially abroad;
(B) The importation into or
exportation from the United States of
goods, whether direct or through brokers
or other intermediaries;
(C) The domestic shipment or
temporary storage of goods being
imported or exported (or accumulated
for export}; and
(D) The assembly or repackaging of
goods imported or to be exported;
(ii) Finance the costs of production of
goods and services for which export
orders have been received or which are
identifiable as being directly for export;
(iii) Assume or acquire participations
in extensions of credit, or acquire
obligations arising from transactions the
Edge corporation could have financed,
including acquisitions of obligations of
foreign governments;
(iv) Guarantee debts, or otherwise
agree to make payments on the
occurrence of readily ascertainable
events,5 if the guarantee or agreement
specifies the maximum monetary
liability thereunder and is related to a
type of transaction described in
paragraphs (e)(4)(i) and (ii) of this
section; and
(v) Provide credit and other banking
services for domestic and foreign
purposes to foreign governments and
their agencies and instrumentalities;
foreign persons; and organizations of the
type described in paragraph
211.4(e)(l)(ii)(G) of this section.
(5) Paym ents and collections. An Edge
corporation may receive checks, bills,
drafts, acceptances, notes, bonds,
coupons, and other instruments for
collection abroad, and collect such
instruments in the United States for a
customer abroad; and may transmit and
receive wire transfers of funds and
securities for depositors.
(6) Foreign exchange. An Edge
corporation may engage in foreign
exchange activities.
(7) Fiduciary and investm ent advisory
activities. An Edge corporation may:
(i) Hold securities in safekeeping for,
or buy and sell securities upon the order
and for the account and risk of, a
person, provided such services for U.S.
persons shall be with respect to foreign
securities only;
(ii) Act as paying agent for securities
issued by foreign governments or other
entities organized under foreign law;
(iii) Act as trustee, registrar,
conversion agent, or paying agent with
respect to any class of securities issued
to finance foreign activities and
distributed solely outside the United
States;
(iv) Make private placements of
participations in its investments and
extensions of credit; however, except to
the extent permissible for member
banks under section 5136 of the Revised
Statutes (12 U.S.C. 24, Seventh), no Edge
corporation may otherwise engage in the
business of underwriting, distributing, or
buying or selling securities in the United
States;
(v) Act as investment or financial
adviser by providing portfolio
investment advice and portfolio
management with respect to securities,
other financial instruments, real
property interests and other investment
assets,6 and by providing advice on
mergers and acquisitions, provided such
services for U.S. persons shall be with
respect to foreign assets only; and
(vi) Provide general economic
information and advice, general
economic statistical forecasting services
and industry studies, provided such
services for U.S. persons shall be with
respect to foreign economies and
industries only.
(8) Banking services fo r em ployees.
Provide banking services, including
deposit services, to the officers and
employees of the Edge corporation and
its affiliates; however, extensions of
• "Readily ascertainable events" indude, but are
not limited to, events such as nonpayment of taxes,
rentals, custom* duties, or cost of transport and Joss
or nonconformance of shipping documents.
* For purposes of this section, management of an
investment portfolio does not include operational
management of real property, or industrial or
commercial assets.
credit to such persons shall be subject to
the restrictions of part 215 of this
chapter (Regulation O) as if the Edge
corporation were a member bank
(9) O ther activities. With the Board's
prior approval, engage in other activities
in the United States that the Board
determines are incidental to the
international or foreign business of Edge
corporations.
(f) Agreem ent corporations. With the
prior approval of the Board, a member
bank or bank holding company may
invest in a federally- or state-chartered
corporation that has entered into an
agreement or undertaking with the
Board that it will not exercise any
power that is impermissible for an Edge
corporation under this subpart.
§ 211.5
Investments and activities abroad.
(a) G eneral policy. Activities abroad,
whether conducted directly or indirectly,
shall be confined to activities of a
banking or financial nature and those
that are necessary to carry on such
activities. In doing so, investors shall at
all times act in accordance with high
standards of banking or financial
prudence, having due regard for
diversification of risks, suitable
liquidity, and adequacy of capital.
Subject to these considerations and the
other provisions of this section, it is the
Board's policy to allow activities abroad
to be organized and operated as best
meets corporate policies.
(b) Investm ent requirem ents^)
Eligible investm ents. Subject to the
limitations in paragraph (b)(2) of this
section, an investor may directly or
indirectly:
(i) Invest in a subsidiary that engages
solely in activities listed in paragraph
(d) of this section or in such other
activities as the Board has determined
in the circumstances of a particular case
are permissible; provided however that,
in the case of an acquisition of a going
concern, existing activities that are not
otherwise permissible for a subsidiary
may account for not more than 5 percent
of either the consolidated assets or
revenues of the acquired organization;
(ii) Invest in a joint venture provided
that, unless otherwise permitted by the
Board, not more than 10 percent of the
joint venture’s consolidated assets or
revenues are attributable to activities
not listed in paragraph (d) of this
section; and
(iii) Make portfolio investments in an
organization, provided however that:
(A) The total direct and indirect
portfolio investments by the investor
and its affiliates in organizations
engaged in activities that are not
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Federal Register / Vol. 56, No. 82 / Monday, April 29, 1991 / Rules and Regulations
permissible for joint ventures do not
exceed:
(1) 40 percent of the total equity of the
organization, when combined with
shares in the organization held in
trading or dealing accounts pursuant to
paragraph (d)(14) of this section and
shares in the organization held under
any other authority: or
(2) 25 percent of the investor’s Tier 1
capital where the investor is a bank
holding company or 100 percent of Tier 1
capital for any other investor, when
combined with underwriting
commitments and shares held in trading
or dealing accounts pursuant to
paragraph (d)(14) of this section;7 and
(B) Any loans and extensions of credit
made by an investor or its affiliates to
the organization are on substantially the
same terms, including interest rates and
collateral, as those prevailing at the
same time for comparable transactions
between the investor or its affiliates and
nonaffiliated persons.
(2) D irect investm ents b y m em ber
banks. A member bank’s direct
investments under section 25 of the FRA
shall be limited to:
(i) Foreign banks;
(ii) Foreign organizations formed for
the sole purpose of either holding shares
of a foreign bank or performing
nominee, fiduciary, or other banking
services incidental to the activities of a
foreign branch or foreign bank affiliate
of the member bank; and
(iii) Subsidiaries established pursuant
to § 211.3(b)(9) of this subpart.
(3) Investm ent lim it. In computing the
amount that may be invested in any
organization under this section, there
shall be included any unpaid amount for
which the investor is liable and any
investments in the same organization
held by affiliates under any authority.
(4) D ivestiture. An investor shall
dispose of an investment promptly
(unless the Board authorizes retention)
if:
(i) The organization invested in:
(A) Engages in the general business of
buying or selling goods, wares,
merchandise, or commodities in the
United States;
(B) Engages directly or indirectly in
other business in the United States that
is not permitted to an Edge corporation
in the United States except that an
investor may hold up to 5 percent of the
shares of a foreign company that
engages directly or indirectly in
business in the United States that is not
permitted to an Edge corporation; or
7 For this purpose, a direct subsidiary of a
member bank is deemed to be an investor.
(C) Engages in impermissible
activities to an extent not permitted
under paragraph (b)(1) of this section; or
(ii) After notice and opportunity for
hearing, the investor is advised by the
Board that its investment is
inappropriate under the FRA, the BHC
Act, or this subpart.
(c) Investm ent procedures .* Direct
and indirect investments shall be made
in accordance with the general consent,
prior notice, or specific consent
procedures contained in this paragraph.
Except as the Board may otherwise
determine, in order for an investor to
make investments under the general
consent procedure, the investor and any
other investor of which it is a subsidiary
shall be in compliance with applicable
minimum standards for capital
adequacy. The Board may at any time,
upon notice, modify or suspend the
general consent and prior notice
procedures with respect to any investor
or with respect to the acquisition of
shares of organizations engaged in
particular kinds of activities. An
investor shall apply for and receive the
prior specific consent of the Board for its
initial investment in its first subsidiary
or joint venture unless an affiliate has
made such an investment. Authority to
make investments under prior notice or
specific consent shall expire one year
from the earliest date on which the
authority could have been exercised,
unless the Board extends the period.
(1) General consent. Subject to the
other limitations of this section, the
Board grants its general consent for the
following:9
(i)
Any investment in a joint venture
or subsidiary, and any portfolio
investment, if the total amount invested
(in one transaction or in a series of
transactions) does not exceed the lesser
of:
(A) $25 million; or
(B) 5 percent of the investor’s Tier 1
capital in the case of a member bank,
bank holding company, or Edge
corporation engaged in banking, or 25
percent of the investor’s Tier 1 capital in
the case of an Edge corporation not
engaged in banking;
•When necessary, the general consent and prior
notice provisions of this section constitute the
Board’s approval under the eighth paragraph of
section 25(a) of the FRA for investments in excess
of the limitations therein based on capital and
surplus.
9 In determining compliance with these limits, an
investor shall combine the value of all shares of an
organization held in trading or dealing accounts
under paragraph 211.5(d)(14)of this section with
investments in the same organization. Shares held
in trading or dealing accounts are also subject to the
limits in paragraph 211.5(d)(14) of this section.
(ii) Any additional investment in an
organization in any calendar year so
long as:
(A) The total amount invested in that
calendar year does not exceed 10
percent of the investor’s Tier 1 capital;
and
(B) The total amount invested under
§ 211.5 (including investments made
pursuant to specific consent or prior
notice) in that calendar year does not
exceed cash dividends reinvested under
paragraph (c)(l)(iii) of this section plus
10 percent of the investor’s direct and
indirect historical cost10 in the
organization, which investment
authority, to the extent unexercised,
may be carried forward and
accumulated for up to five consecutive
years;
(iii) Any additional investment in an
organization in an amount equal to cash
dividends received from that
organization during the preceding
twelve calendar months; or
(iv) Any investment that is acquired
from an affiliate at net asset value.
(2) Prior notice. An investment that
does not qualify under the general
consent procedure may be made after
the investor has given 45 days’ prior
written notice to the Board. The Board
may waive the 45-day period if it finds
immediate action is required by the
circumstances presented. The notice
period shall commence at the time the
notice is accepted. The Board may
suspend the period or act on the
investment under the Board's specific
consent procedures.
(3) Specific consent. Any investment
that does not qualify for either the
general consent or the prior notice
procedure shall not be consummated
without the specific consent of the
Board.
(d) Perm issible activities. The Board
has determined that the following
activities are usual in connection with
the transaction of banking or other
financial operations abroad:
(1) Commercial and other banking
activities;
10 The “historical cost” of an investment consists
of the actual amounts paid for shares or otherwise
contributed to the capital accounts, as measured in
dollars at the exchange rate in effect at the time
each investment was made. It does not include
subordinated debt or unpaid commitments to invest
even though these may be considered investments
for other purposes of this part. For investments
acquired indirectly as a result of acquiring a
subsidiary, the historical cost to the investor is
measured as of the date of acquisition of the
subsidiary at the net asset value of the equity
interest in the case of subsidiaries and joint
ventures, and in the case of portfolio investments, at
the book carrying value.
Federal Register
]
Vol. 56, No. 82 / Monday, April 29, 1991 / Rules and Regulations_____ 19571
(2) Financing, including commercial
financing, consumer financing, mortgage
banking, and factoring;
(3) Leasing real or personal property,
or acting as agent, broker, or advisor in
leasing real or personal property, if the
lease serves as the functional equivalent
of an extension of credit to the lessee of
the property;
(4) Acting as fiduciary;
(5) Underwriting credit life insurance
and credit accident and health
insurance;
(6) Performing services for other direct
or indirect operations of a U.S. banking
organization, including representative
functions, sale of long-term debt, name
saving, holding assets acquired to
prevent loss on a debt previously
contracted in good faith, and other
activities that are permissible
domestically for a bank holding
company under sections 4(a)(2)(A) and
4(c)(1)(C) of the BHG Act;
(7) Holding the premises of a branch
of an Edge corporation or member bank
or the premises of a direct or indirect
subsidiary, or holding or leasing the
residence of an officer or employee of a
branch or subsidiary;
(8) Providing investment, financial, or
economic advisory services;
(9) General insurance agency and
brokerage;
(10) Data processing;
(11) Organizing, sponsoring, and
managing a mutual fund if the fund's
shares are not sold or distributed in the
United States or to U.S. residents and
the fund does not exercise managerial
control over die firms in which it
invests;
(12) Performing management
consulting services provided that such
services when rendered with respect to
the U.S. market shall be restricted to the
initial entry;
(13) Underwriting, distributing and
dealing in debt securities outside the
United States;
(14) Underwriting, distributing, and
dealing in equity securities outside the
United States as follows;
(i) By an investor, or an affiliate, that
had commenced such activities prior to
March 27,1991, and subject to
limitations in effect at that time (12 CFR
part 211 (1990)); or
(ii) With the approval of the Board,
underwriting equity securities if:
(A) Commitments by an investor and
its affiliates for the shares of an
organization do not in the aggregate
exceed the lesser of $60 million or 25
percent of the investor’s Tier 1 capital
unless the underwriter is covered by
binding commitments from
subunderwriters or other purchasers
obtained by the investor or its affiliates;
and
(B) Commitments by an investor and
its affiliates for the shares of an
organization in excess of those
permitted by paragraph (d)(14)(ii)(A) of
this section provided that:
(1) Hie underwriting level approved
by the Board for the investor and its
affiliates in excess of the limitations of
paragraph (d)(14)(ii)(A) of this section is
fully deducted from the capital of the
bank holding company, and from the
capital of the bank where the securities
activities are conducted by a subsidiary
of a U.S. bank;11 and
(2) In the Board's judgment such bank
holding company and bank would
remain strongly capitalized after such
deduction from capital; and
(iii) With the approval of the Board,
dealing in the shares of an organization
(including the shares of a U.S.
organization with respect to foreign
persons only and subject to the
limitations on owning or controlling
shares of a company in section 4 of the
BHC Act and the Board’s Regulation Y
(12 CFR part 225)) where the shares held
in the trading or dealing accounts of an
investor and its affiliates, when
combined with any shares held pursuant
to the authority provided under
paragraph (b) o f this section, do not in
the aggregate exceed the lesser of $30
million or 10 percent of the investor's
Tier 1 capital, provided however that:
(A) For purposes of determining
compliance with the limitations of this
paragraph (d)(14)(iii) and paragraph
(b)(l)(iii)(A){2) of this section, long and
short positions in the same security may
be netted and positions in a security
may be offset by futures, forwards,
options, and similar instruments
referenced to the same security through
hedging methods approved by the
Board, except that any position in a
security shall not be deemed to have
been reduced by more than 75 percent;
(B) Any shares held in trading or
dealing accounts for longer than 90 days
shall be reported to the senior
management of the investor;
(C) Any shares acquired pursuant to
an underwriting commitment for up to 90
days after the payment date for such
underwriting shall not be subject to the
dollar and percentage limitations of
paragraph (d)(14)(iii) of this section or
the investment provisions of paragraph
(b) of this section, other than the
aggregate limits in paragraph
(b)(l)(iii)(A)(2) of this section; and
(D) Shares of an organization held in
all trading and dealing accounts, when
11 Fifty percent of such capital deductions shall
be from Tier 1 capital.
combined with all-other equity interests
in the organization held by the investor
and its affiliates, other than
underwriting commitments for shares
and shares held pursuant to an
underwriting for 90 days following the
payment date for such shares, must
conform to the permissible limits for
investments in an organization under
paragraph (b) of this section.12
(iv) Underwriting commitments for
shares and shares held by an affiliate
authorized to underwrite equity
securities under section 4(c)(8) of the
BHC Act shall not be included in
determining compliance with the
aggregates limits in paragraph
(b)(l)(iii)(A)(2) and the limits of
paragraphs (d)(14)(ii)(A) and (iii) of this
section, except that shares held by such
an affiliate shall be included for
purposes of determining compliance
with paragraph (d)(14)(iii)(D) of this
section.
(15) Operating a travel agency
provided that the travel agency is
operated in connection with financial
services offered abroad by the investor
or others;
(16) Underwriting life, annuity,
pension fund-related, and other types of
insurance, where the associated risks
have been previously determined by the
Board to be actuarially predictable,
provided however that:
(i) Investments in, and loans and
extensions of credit (other than loans
and extensions of credit fully secured in
accordance with the requirements of
section 23A of the FRA (12 U.S.C. 371c)
or with such other standards as the
Board may require) to, the company by
the investor or its affiliates are deducted
from the capital of the investor;13 and
(ii) Activities conducted directly or
indirectly by a subsidiary of a U.S.
insured bank are excluded from the
authority of this paragraph.
(17) Acting as a futures commission
merchant for financial instruments of
the type, and on exchanges, that the
Board has previously approved,
provided however that:
(i)
Activities are conducted in
accordance with the standards set forth
in § 225.25(b){18) of the Board's
Regulation Y (12 CFR 225.25(b)(18)); and
12 Underwriting commitments are combined with
shares held by an investor and its affiliates (other
than an affiliate authorized to deal in shares under
section 4(c)(8) of the BHC Act) m dealing or trading
accounts and with portfolio investments for
purposes of determining compliance with the
aggregate limits in paragraph (b)(l)(iiij(A){2) of this
section.
13 Fifty percent of such capital deduction shall be
from Tier 1 capital.
19572
Federal Register / Vol. 56, No. 82 / Monday, April 29, 1991 / Rules and Regulations
(ii) Prior approval must be obtained
for activities conducted on an exchange
that requires members to guarantee or
otherwise contract to cover losses
suffered by other members.
(18) Acting as principal or agent in
swap transactions14 subject to any
limitations applicable to state member
banks under the Board’s Regulation H
(12 CFR part 208), except that where
such activities involve contracts related
to a commodity, such contracts must
provide an option for cash settlement
and the option must be exercised upon
settlement.
(19) Engaging in activities that the
Board has determined in Regulation Y
(12 CFR 225.25(b)) are closely related to
banking under section 4(c)(8) of the BHC
Act; and
(20) With the Board’s specific
approval, engaging in other activities
that the Board determines are usual in
connection with the transaction of the
business of banking or other financial
operations abroad and are consistent
with the FRA or the BHC Act.
(e) D ebts previously contracted.
Shares or other ownership interests
acquired to prevent a loss upon a debt
previously contracted in good faith are
not subject to the limitations or
procedures of this section; however,
they shall be disposed of promptly but
in no event later than two years after
their acquisition, unless the Board
authorizes retention for a longer period.
(f) Investm ents m ade through debtfor-equity conversions —(1) Perm issible
investm ents. A bank holding company
may make investments through the
conversion of sovereign or private debt
obligations of an eligible country, either
through direct exchange of the debt
obligations for the investment or by a
payment for the debt in local currency,
the proceeds of which, including an
additional cash investment not
exceeding in the aggregate more than 10
percent of the fair value of the debt
obligations being converted as part of
such investment, are used to purchase
the following investments:
(i) Public sector companies. A bank
holding company may acquire up to and
incfuding 100 percent of the shares of (or
other ownership interests in) any foreign
company located in an eligible country if
the shares are acquired from the
government of the eligible country or
from its agencies or instrumentalities.
(ii) Private sector com panies. A bank
holding company may acquire up to and
including 40 percent of the shares,
including voting shares, of (or other
14 Swap transactions involving equity
instruments are separately authorized under
paragraph (d)(14) of this section.
ownership interests in) any other foreign
company located in an eligible country
subject to the following conditions:
(A) A bank holding company may
acquire more than 25 percent of the
voting shares of the foreign company
only if another shareholder or control
group of shareholders unaffiliated with
the bank holding company holds a larger
block of voting shares of the company;
(B) The bank holding company and its
affiliates may not lend or otherwise
extend credit to the foreign company in
amounts greater than 50 percent of the
total loans and extensions of credit to
the foreign company; and
(C) The bank holding company's
representation on the board of directors
or on management committees of the
foreign company may be no more than
proportional to its shareholding in the
foreign company.
(2) Investm ents b y bank subsidiary o f
bank holding com pany. Upon
application, the Board may permit an
indirect investment to be made pursuant
to this paragraph through an insured
bank subsidiary of the bank holding
company where the bank holding
company demonstrates that such
ownership is consistent with the
purposes of the FRA. In granting its
consent, the Board may impose such
conditions as it deems necessary or
appropriate to prevent adverse effects,
including prohibiting loans from the
bank to the company in which the
investment is made.
(3) D ivestiture —(i) Tim e lim its for
divestiture. The bank holding company
shall divest the shares of, or other
ownership interests in, any company
acquired pursuant to this paragraph
(unless the retention of the shares or
other ownership interest is otherwise
permissible at the time required for
divestiture) within the longer of:
(A) Ten years from the date of
acquisition of the investment except that
the Board may extend such period if, in
the Board's judgment, such an extension
would not be detrimental to the public
interest; or
(B) Two years from the date on which
the bank holding company is permitted
to repatriate in full the investment in the
foreign company;
Provided however that, in either event
divestiture occurs within fifteen years of
the date of the acquisition.
(ii) Report to the Board. The bank
holding company shall report to the
Board on its plans for divesting an
investment made under this paragraph
two years prior to the final date for
divestiture, in a manner to be prescribed
by the Board.
(iii) O ther conditions requiring
divestiture. All investments made
pursuant to this paragraph are subject to
paragraphs (b)(4)(i)(A) and (B) of this
section requiring prompt divestiture
(unless the Board upon application
authorizes retention) if the company
invested in engages in impermissible
business in the United States that
exceeds in the aggregate 10 percent of
the company’s consolidated assets or
revenues calculated on an annual basis;
provided however that, such company
may not engage in activities in the
United States that consist of banking or
financial operations (as defined in
§ 211.23(f)(5)(iii)(B) of this chapter), or
types of activities permitted by
regulation or order under section 4(c)(8)
of the BHC Act, except under
regulations of the Board or with the
prior approval of the Board.
(4) Investm ent procedures —(i)
General consent. Subject to the other
limitations of this paragraph, the Board
grants its general consent for
investments made under this paragraph
if the total amount invested does not
exceed the greater of $25 million or 1
percent of the Tier 1 capital of the
investor.
(ii) All other investments shall be
made in accordance with the procedures
of paragraph (c) of this section requiring
prior notice or specific consent.
(5) Conditions— (i) Nam e. Any
company acquired pursuant to this
paragraph shall not bear a name similar
to the name of the acquiring bank
holding company or any of its affiliates.
(ii) C onfidentiality. Neither the bank
holding company nor its affiliates shall
provide to any company acquired
pursuant to this paragraph any
confidential business information or
other information concerning customers
that are engaged in the same or related
lines of business as the company.
§ 211.6 Lending limits and capita!
requirements.
(a) A cceptances o f Edge
corporations— (1) Lim itations. An Edge
corporation shall be and remain fully
secured for:
(1) All acceptances outstanding in
excess of 200 percent of its Tier 1
capital; and
(ii) All acceptances outstanding for
any one person in excess of 10 percent
of its Tier 1 capital;
Provided however that, these limitations
apply only to acceptances of the types
described in paragraph 7 of section 13 of
the FRA (12 U.S.C. 372).
(2) Exceptions. These limitations do
not apply if the excess represents the
Federal Register / Vol. 56, No. 82 / Monday, April 29, 1991 / Rules and Regulations_____ 19573
international shipment of goods and the
Edge corporation is:
(i) Fully covered by primary
obligations to reimburse it that are
guaranteed by banks or bankers: or
(ii] Covered by participation
agreements from other banks, as such
agreements are described in section
250.165 of this chapter.
(b) Loans and extensions o f credit to
one person — (1) Lim itations. Except as
the Board may otherwise specify:
(1) The total loans and extensions of
credit outstanding to any person by an
Edge corporation engaged in banking
and its direct or indirect subsidiaries
may not exceed 15 percent of the Edge
corporation's Tier 1 capital;15 and
(ii) The total loans and extensions of
credit to any person by a foreign bank or
Edge corporation subsidiary of a
member bank, and by majority-owned
subsidiaries of a foreign bank or Edge
corporation, when combined with the
total loans and extensions of credit to
the same person by the member bank
and its majority-owned subsidiaries,
may not exceed the member bank’s
limitation on loans and extensions of
credit to one person.
(2) "Loans and extensions of credit”
has the meaning set forth in S 211.2(p) of
this part18 and, for purposes of this
paragraph, include:
(i) Acceptances outstanding that are
not of the types described in paragraph
7 of section 13 of the FRA (12 U.S.C.
372);
(ii) Any liability of the lender to
advance funds to or on behalf of a
person pursuant to a guarantee, standby
letter of credit, or similar agreements;
(iii) Investments in the securities of
another organization except where the
organization is a subsidiary; and
(iv) Any underwriting commitments to
an issuer of securities where no binding
commitments have been secured from
subunderwriters or other purchasers.
(3) Exceptions. The limitations of
paragraph (b)(1) of this section do not
apply to:
(i)
Deposits with banks and federal
funds sold;
15 For purposes of this subsection, “subsidiary"
includes subsidiaries controlled by the Edge
corporation but does not include companies
otherwise controlled by affiliates of the Edge
corporation.
'• In the case of a foreign government, these
include loans and extensions of credit to the foreign
government’s departments or agencies deriving their
current funds principally from general tax revenues.
In the case of a partnership or firm, these include
loans and extensions of credit to its members and,
in the case of a corporation, these include loans and
extensions of credit to the corporation’s affiliates
where the affiliate incurs the liability for the benefit
of the corporation.
operations under this subpart shall
supervise and administer their foreign
branches and subsidiaries in such a
manner as to ensure that their
operations conform to high standards of
banking and financial prudence.
Effective systems of records, controls,
and reports shall be maintained to keep
management informed of their activities
and condition. Such systems shall
provide, in particular, information on
risk assets, liquidity management,
operations, internal controls, and
conformance to management policies.
Reports on risk assets shall be sufficient
to permit an appraisal of credit quality
and assessment of exposure to loss, and
for this purpose provide full information
on the condition of material borrowers.
Reports on the operations and controls
shall include internal and external
audits of the branch or subsidiary.
(2) Joint ventures. Investors shall
maintain sufficient information with
respect to joint ventures to keep
informed of their activities and
condition. Such information shall
include audits and other reports on
financial performance, risk exposure,
management policies, operations, and
controls. Complete information shall be
maintained on all transactions with the
joint venture by the investor and its
affiliates.
(3) A va ilab ility o f reports to
exam iners. The reports and information
specified in paragraphs (a)(1) and (2) of
this section shall be made available to
examiners of the appropriate bank
supervisory agencies.
(b) Exam inations. Examiners
appointed by the Board shall examine
each Edge corporation once a year. An
Edge corporation shall make available
to examiners sufficient information to
assess its condition and operations and
the condition and activities of any
organization whose shares it holds.
(c) Reports —(1) Reports o f condition.
Each Edge corporation shall make
reports of condition to the Board at such
times and in such form as the Board may
prescribe. The Board may require that
statements of condition or other reports
be published or made available for
public inspection.
(2) Foreign operations. Edge and
Agreement corporations, member banks,
and bank holding companies shall file
such reports on their foreign operations
as the Board may require.
(3) A cquisition or disposition o f
shares. A member bank, Edge or
Agreement corporation or a bank
§ 211.7 Supervision and reporting.
holding company shall report, in a
(a)
Supervision — (1) Foreign branches manner prescribed by the Board, any
acquisition or disposition of shares.
and subsidiaries. Organizations
(d) Filing and processing procedures.
conducting international banking
(ii) Bills or drafts drawn in good faith
against actual goods and on which two
or more unrelated parties are liable;
(iii) Any bankers' acceptance of the
kind described in paragraph 7 of section
13 of the FRA that is issued and
outstanding;
(iv) Obligations to the extent secured
by cash collateral or by bonds, notes,
certificates of indebtedness, or Treasury
bills of the United States;
(v) Loans and extensions of credit that
are covered by bona fide participation
agreements; or
(vi) Obligations to the extent
supported by the full faith and credit of
the following:
(A) The United States or any of its
departments, agencies, establishments,
or wholly-owned corporations (including
obligations to the extent insured against
foreign political and credit risks by the
Export-Import Bank of the United States
or the Foreign Credit Insurance
Association), the International Bank for
Reconstruction and Development, the
International Finance Corporation, the
International Development Association,
the Inter-American Development Bank,
the African Development Bank, the
Asian Development Bank, or the
European Bank for Reconstruction and
Development;
(B) Any organization if at least 25
percent of such an obligation or of the
total credit is also supported by the full
faith and credit of, or participated in by,
any institution designated in paragraph
(b)(3)(vi)(A) of this section in such
manner that default to the lender will
necessarily include default to that
entity. The total loans and extensions of
credit under this paragraph (b)(3)(vi)(B)
to any person shall at no time exceed
100 percent of the Tier 1 capital of the
Edge corporation.
(c)
Capitalization. An Edge
corporation shall at all times be
capitalized in an amount that is
adequate in relation to the scope and
character of its activities. In the case of
an Edge corporation engaged in banking,
after December 31,1992, its minimum
ratio of qualifying total capital to
weighted-risk assets, as determined
under the Capital Adequacy Guidelines,
shall not be less than 10 percent, of
which at least 50 percent shall consist of
Tier 1 capital; provided however that for
purposes of this paragraph, no limitation
shall apply as to the inclusion of
subordinated debt that qualifies as Tier
2 capital under the Capital Adequacy
Guidelines.
19574_____ Federal Register / Vol. 56, No. 82 / Monday, April 29, 1991 / Rules and Regulations
(1) Unless otherwise directed by the
Board, applications, notifications, and
reports required by this part shall be
filed with the Reserve Bank of the
district in which the parent bank or
bank holding company is located or, if
none, the Reserve Bank of the district in
which the applying or reporting
institution is located. Instructions and
forms for such applications,
notifications and reports are available
from the Reserve Banks.
(2) The Board shall act on an
application or notification under this
subpart within 60 calendar days after
the Reserve Bank has accepted the
application or notification unless the
Board notifies the investor that the 60day period is being extended and states
the reasons for the extension.
Subpart B—Foreign Banking
Organizations
3. Section 211.21 is revised to read as
follows:
§ 211.21
Authority, purpose, and scope.
(a) A uthority. This subpart is issued
by the Board of Governors of the
Federal Reserve System ("Board") under
the authority of the Bank Holding
Company Act of 1956 (12 U.S.C. 1841 et
seq.) (“BHC Act”); and the International
Banking Act of 1978 (12 U.S.C. 3101 et
seq.) (“IBA”).
(b) Purpose and scope. This subpart is
in furtherance of the purposes of the
BHC Act and the IBA. It applies to
foreign banks and foreign banking
organizations with respect to:
(1) The limitations on interstate
banking under section 5 of the IBA (12
U.S.C. 3103); and
(2) The exemptions from the
nonbanking prohibitions of the BHC Act
and the IBA afforded by sections 2(h)
and 4(c)(9) of the BHC Act (12 U.S.C.
1841(h) and 1843(c)(9)).
4. In § 211.22, paragraphs (a)(2), and
(a)(5) are revised to read as follows:
§211.22 interstate banking operations of
foreign, banking organizations.
*
*
(a)
*
*
*
*
*
D efinitions. * * *
*
*
*
(2) Banking subsidiary, with respect
to a specified foreign bank, means a
bank that is a subsidiary as the terms
bank and subsidiary are defined in .
section 2 of the BHC Act (12 U.S.C.
1841).
*
*
*
*
*
(5) Foreign bank, for purposes of this
section, is an organization that is
organized under the laws of a foreign
country and that engages in the business
of banking.
5. In § 211.23, paragraphs (d), (e),
(f)(4), (f)(5), (g), and (h) are revised, and
paragraph (i) is added, to read as
follows:
§ 211.23 Nonbanking activities of foreign
banking organizations.
*
*
*
*
*
(d) Loss o f eligibility fo r exem ptions.
(1) A foreign banking organization
that qualified under paragraph (b) of this
section shall cease to bs eligible for the
exemptions of this section if it fail3 to
meet the requirements of paragraph (b)
of this section for two consecutive years
as reflected in its Annual Reports (F.R.
Y-7) filed with the Board.
(2) A foreign banking organization
that ceases to be eligible for the
exemptions of "this section may continue
to engage in activities or retain
investments commenced or acquired
prior to the end of the first fiscal year for
which its Annual Report reflects
nonconformance with paragraph (b) of
this section. Activities commenced or
investments made after that date shall
be terminated or divested within three
months of the filing of the second
Annual Report unless the Board grants
consent to continue the activity or retain
the investment under paragraph (e) of
this section.
(3) A foreign banking organization
that ceases to qualify under paragraph
(b) of this section, or an affiliate of such
foreign banking organization, that
requests a specific determination of
eligibility under paragraph (e) of this
section may, prior to the Board’s
determination on eligibility, continue to
engage in activities and make
investments under the provisions of
paragraphs (f)(1), (2) and (4) of this
section.
(e) Specific determ ination o f
eligibility fo r nonqualifying foreign
banking organizations. (1) A foreign
banking organization that does not
qualify under paragraph (b) of this
section for the exemptions afforded by
this section, or that has lost its eligibility
for the exemptions under paragraph (d)
of this section, may apply to the Board
for a specific determination of eligibility
for the exemptions.
(2) A foreign banking organization
may apply for a specific determination
prior to the time it ceases to be eligible
for the exemptions afforded by this
section.
(3) In determining whether eligibility
for the exemptions would be consistent
with the purposes of the BHC Act and in
the public interest, the Board shall
consider.
(i) The history and the financial and
managerial resources of the
organization;
(ii) The amount of its business in the
United States;
(iii) The amount, type, and location of
its nonbanking activities, including
whether such activities may be
conducted by U.S. banks or bank
holding companies; and
(iv) Whether eligibility of the foreign
banking organization would result in
undue concentration of resources,
decreased or unfair competition,
conflicts of interests, or unsound
banking practices.
(4) Such determination shall be
subject to any conditions and limitations
imposed by the Board, including any
requirements to cease activities or
dispose of investments.
(5) Determinations of eligibility would
generally not be granted where a
majority of the business of the foreign
banking organization derives from
commercial or industrial activities or
where the U.S. banking business of the
organization is larger than the non-U.S.
banking business conducted directly by
the foreign bank or banks (as defined in
§ 211.2(j) of this part) of the
organization.
(f)
Perm issible activities and
investm ents. A foreign banking
organization that qualifies under
paragraph (b) of this section may:
*
*
*
*
*
(4) Own or control voting shares of
any company in a fiduciary capacity
under circumstances that would entitle
such shareholding to an exemption
under section 4(c)(4) of the BHC Act if
the shares were held or acquired by a
bank.
(5) Own or control voting shares of a
foreign company that is engaged directly
or indirectly in business in the United
States other than that which is
incidental to its international or foreign
business, subject to the following
limitations:
(i)
More than 50 percent of the foreign
company’s consolidated assets shall be
located, and consolidated revenues
derived from, outside the United States;
provided however that, if the foreign
company fails to meet the requirements
of this paragraph for two consecutive
years (as reflected in Annual Reports
(F.R. Y-7)) filed with the Board by the
foreign banking organization, the foreign
company shall be divested or its
activities terminated within one year of
the filing of the second consecutive
Annual Report that reflects
nonconformance with the requirements
of this paragraph, unless the Board
Federal Register / Vol. 56, No. 82 / Monday, April 29, 1991 / Rules and Regulations_____ 19575
grants consent to retain the investment
under paragraph (g) of this section;
(ii) The foreign company shall not
directly underwrite, sell, or distribute,
nor own or control more than 5 percent
of the voting shares of a company that
underwrites, sells, or distributes
securities in the United States except to
the extent permitted bank holding
companies;
(iii) If the foreign company is a
subsidiary of the foreign banking
organization, the foreign company must
be, or must control, an operating
company, and its direct or indirect
activities in the United States shall be
subject to the following limitations:
(A) The foreign company’s activities
in the United States shall be the same
kind of activities or related to the
activities engaged in directly or
indirectly by the foreign company
abroad as measured by the
"establishment" categories of the
Standard Industrial Classification (SIC)
(an activity in the United States shall be
considered related to an activity outside
the United States if it consists of supply,
distribution, or sales in furtherance of
the activity);
(B) The foreign company may engage
in activities in the United States that
consist of banking, securities, insurance
or other financial operations, or types of
activities permitted by regulation or
order under section 4(c)(8) of the BHC
Act, only under regulations of the Board
or with the prior approval of the Board.
(1) Activities within Division H
(Finance, Insurance, and Real Estate) of
the SIC shall be considered banking or
financial operations for this purpose,
with the exception of acting as operators
of nonresidential buildings (SIC 6512),
operators of apartment buildings (SIC
6513), operators of dwellings other than
apartment buildings (SIC 6514), and
operators of residential mobile home
sites (SIC 6515); and operating title
abstract offices (SIC 6541); and
(2) The following activities shall be
considered financial activities and may
be engaged in only with the approval of
the Board under subsection (g): Credit
reporting services (SIC 7323); computer
and data processing services (SIC 7371,
7372. 7373, 7374, 7375, 7376, 7377, 7378,
and 7379); armored car services (SIC
7381); management consulting (SIC 8732,
8741, 8742, and 8748); certain rental and
leasing activities (SIC 4741, 7352, 7353.
7359, 7513, 7514, 7515, and 7519);
accounting, auditing and bookkeeping
services (SIC 8721); courier services (SIC
4215 and 4513); and arrangement of
passenger transportation (SIC 4724,
4725, and 4729).
(g) Exem ptions under section 4(c)(9)
o f the BHC A ct. A foreign banking
organization that is of the opinion that
other activities or investments may, in
particular circumstances, meet the
conditions for an exemption under
section 4(c)(9) of the BHC Act may
apply to the Board for such a
determination by submitting to the
Reserve Bank of the District in which its
banking operations in the United States
are principally conducted a letter setting
forth the basis for that opinion.
(h) Reports. (1) The foreign banking
organization shall inform the Board
through the organization’s Reserve Bank
within 30 days after the close of each
quarter of all shares of companies
engaged, directly or indirectly, in
activities in the United States that were
acquired during such quarter under the
authority of this section.
(2) The foreign banking organization
shall also report any direct activities in
the United States commenced during
such quarter by a foreign subsidiary of
the foreign banking organization. This
information shall (unless previously
furnished) include a brief description of
the nature and scope of each company's
business in the United States, including
the 4-digit SIC numbers of the activities
in which the company engages. Such
information shall also include the 4-digit
SIC numbers of the direct parent of any
U.S. company acquired, together with a
statement of total assets and revenues
of the direct parent.
(i) A va ilability o f inform ation. If any
information required under this section
is unknown and not reasonably
available to the foreign banking
organization, either because obtaining it
would involve unreasonable effort or
expense or because it rests peculiarly
within the knowledge of a company that
is not controlled by the organization, the
organization shall:
(1) Give such information on the
subject as it possesses or can
reasonably acquire together with the
sources thereof; and
(2) Include a statement either showing
that unreasonable effort or expense
would be involved or indicating that the
company whose shares were acquired is
not controlled by the organization and
stating the result of a request for
information.
6.
Subpart C (§ § 211.31 through
211.34) is revised to read as follows:
Subpart C—Export Trading Companies
211.31 Authority, purpose, and scope.
211.32 Definitions.
211.33 Investm ents a n d extensions of credit.
211.34 Procedures for filing a n d processing
notices.
Subpart C—Export Trading Companies
§ 211.31
Authority, purpose, and scope.
(a) Authority. This subpart is issued
by the Board of Governors of the
Federal Reserve System (“Board”) under
the authority of the Bank Holding
Company Act of 1956, as amended (12
U.S.C. 1841 et s e q . ) (“BHC Act”), the
Bank Export Services Act (Title II, Pub.
L. 97-290, 96 Stat. 1235 (1982)) (“BESA”),
and the Export Trading Company Act
Amendments of 1988 (Title III, Pub. L
100-418,102 Stat. 1384 (1988)) (“ETC Act
Amendments”).
(b) Purpose and scope. This subpart is
in furtherance of the purposes of the
BHC Act, the BESA, and the ETC Act
Amendments, the latter two statutes
being designed to increase U.S. exports
by encouraging investments and
participation in export trading
companies by bank holding companies
and the specified investors. The
provisions of this subpart apply to the
following (hereinafter referred to as
“eligible investors”):
(1) Bank holding companies as defined
in section 2 of the BHC Act (12 U.S.C.
1841(a));
(2) Edge and Agreement corporations,
as described in § 211.1(c) of this part,
that are subsidiaries of bank holding
companies but are not subsidiaries of
banks;
(3) Bankers’ banks as described in
section 4(c)(14)(F)(iii) of the BHC Act (12
U.S.C. 1843(c)(14)(F)(iii)); and
(4) Foreign banking organizations as
defined in § 211.23(a)(2) of this part.
§211.32
Definitions.
The definitions of § 211.2 in subpart A
apply to this subpart subject to the
following:
(a) Export trading com pany means a
company that is exclusively engaged in
activities related to international trade
and, by engaging in one or more export
trade services, derives:
(1) At least one-third of its revenues in
each consecutive four-year period from
the export of, or from facilitating the
export of, goods and services produced
in the United States by persons other
than the export trading company or its
subsidiaries; and
(2) More revenues in each four-year
period from export activities as
described in paragraph (a)(1) of this
section than it derives from the import,
or facilitating the import, into the United
States of goods or services produced
outside the United States.
For purposes of this section, “revenues”
shall include net sales revenues from
exporting, importing, or third party trade
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Federal Register / Vol. 56, No. 82 / Monday, April 29, 1991 / Rules and Regulations
in goods by the export trading company
for its own account, and gross revenues
derived from all other activities of the
export trading company.
(1>) The terms bank, com pany and
subsidiary have the same meanings as
those contained in section 2 of the BHC
Act (12 U.S.C. 1841).
§ 211.34 Procedures for filing and
processing notices.
(a) Filing notice —(1) Prior notice o f
investm ent. An eligible investor shall
give the Board 60 days’ prior written
notice of any investment in an export
trading company.
(2) Subsequent notice — (i) An eligible
investor shall give the Board 60 days'
§ 211.33 Investments and extensions of
prior written notice of changes in the
credit.
activities of an export trading company
(a) A m ount o f investm ents. In
that is a subsidiary of the investor if the
accordance with the procedures of
export trading company expands its
activities beyond those described in the
§ 211.34 of this subpart, an eligible
initial notice to include:
investor may invest no more than 5
(A) Taking title to goods where the
percent of its consolidated capital and
export trading company does not have a
surplus in one or more export trading
firm order for the sale of those goods;
companies, except that an Edge or
(B) Product research and design;
Agreement corporation not engaged in
(C) Product modification; or
banking may invest as much as 25
(D) Activities not specifically covered
percent of its consolidated capital and
by the list of activities contained in
surplus but no more than 5 percent of
section 4(c)(14)(F)(ii) of the BHC A c t
the consolidated capital and surplus of
(ii) Such an expansion of activities
its parent bank holding company.
shall be regarded as a proposed
(b) Extensions o f credit—(1) Amount.
investment under this subpart.
An eligible investor in an export trading
(b) Time period fo r Board action. (1) A
company or companies may extend
proposed investment that has not been
credit directly or indirectly to the export
disapproved by the Board may be made
trading company or companies in a total
60 days after the Reserve Bank accepts
amount that at no time exceeds 10
the notice for processing. A proposed
percent of the investor’s consolidated
investment may be made before the
capital and surplus.
expiration of the 60-day period if the
(2) Terms—(i) An eligible investor in
Board notifies the investor in writing of
an export trading company may not
its intention not to disapprove the
extend credit directly or indirectly to the
investment.
export trading company or any of its
(2) The Board may extend the 60-day
customers or to any other investor
period for an additional 30 days if the
holding 10 percent or more of the shares
Board determines that the investor has
of the export trading company on terms
not furnished all necessary information
more favorable than those afforded
or that any material information
similar borrowers in similar
furnished is substantially inaccurate.
circumstances, and such extensions of
The Board may disapprove an
credit shall not involve more than the
investment if the necessary information
normal risk of repayment or present
is provided within a time insufficient to
other unfavorable features.
allow the Board reasonably to consider
(ii) For the purposes of this provision, the information received.
an investor in an export trading
(3) Within three days of a decision to
company includes any affiliate of the
disapprove an investment, the Board
investor.
shall notify the investor in writing and
(3) Collateral requirem ents. Covered
state the reasons for the disapproval.
transactions between a bank and an
(c) Tim e period fo r investm ent. An
affiliated export trading company in
investment in an export trading
which a bank holding company has
company that has not been disapproved
invested pursuant to this subpart are
shall be made within one year from the
subject-to the collateral requirements of
date of the notice not to disapprove,
section 23A of the Federal Reserve Act
unless the time period is extended by
(12 U.S.C. 371c), except where a bank
the Board or by the appropriate Reserve
issues a letter of credit or advances
Bank.
funds to an affiliated export trading
(d) Time period fo r calculating
company solely to finance the purchase
revenues. For any export trading
of goods for which:
company that commenced operations
(i) The export trading company has a
two years or more prior to August 23,
bona fide contract for the subsequent
1988, the four-year period within which
sale of the goods; and
to calculate revenues derived from its
(ii) The bank has a security interest in
activities under § 211.32(a) of this part
the goods or in the proceeds from their
shall be deemed to have commenced
sale at least equal in value to the letter
with the beginning of the 1988 fiscal
of credit or the advance.
year for that export trading company.
For all other export trading companies,
the four-year period shall commence
with the first fiscal year after the
respective export trading company has
been m operation for two years.
PART 265—RULES REGARDING
DELEGATION OF AUTHORITY
1. The authority citation for part 265
continues to read a3 follows:
Authority: Sec. ll(k ), 38 Stat. 261 and 80
S ta t 1314 (12 U.S.C. 248(k}}.
2. In § 265.2, paragraph (c)(38) >9
added to read as follows*
§ 265.2 Specific functions delegated to
Board employees and to Federal Reserve
Banks.
*
*
*
*
*
(c) * * *
(38) Under § 211.5(d)(4) of this chapter
(Regulation K):
(i) To approve requests for authority
to engage in the activities of
underwriting, distributing, and dealing
in shares outside the United States,
provided that the Staff Director has
determined that the internal procedures
and operations of the organization and
the effect of the proposed activities on
capital adequacy are consistent with
approval; and
(ii) To approve hedging methods
authorized under § 211.5(d)(14)(iii)(A) of
this chapter.
*
*
*
*
»
§ 235.2 [Amended]
3. In § 265.2, paragraphs (f)(46)(iii) and
(46)(v) are removed; paragraphs
(f)(46)(iv) and (46)(vi) are redesignated
as (f)(46)(iii) and (46)(iv) respectively;
and paragraph (f)(46)(ii) is revised, and
paragraph (f)(53) is added, to read a3
follows:
*
*
*
*
*
*
(f)
*
Each Federal R eserve Bank * * *
*
*
*
(46) * * *
(i) * * *
(ii) A bank holding company investor
and its lead bank meet the minimum
capital adequacy guidelines of the
Board, the Comptroller of the Currency
or the Federal Deposit Insurance
Corporation or have enacted capital
enhancement plans that have been
determined by the appropriate
supervisory authority to be acceptable;
*
*
*
*
*
(53) Under § 211.5(d)(17) of this
chapter (Regulation K) to approve
applications to engage in futures
commission merchant activities on an
exchange that requires members to
guarantee or otherwise contract to cover
Federal Register / Vol. 56, No. 82 / Monday, April 29, 1991 / Rules and Regulations
losses suffered by other members,
provided that the Board has previously
approved the exchange and the
application is on the same terms and
conditions on which the Board based its
approval of the exchange.
*
*
»
*
*
Board of G overnors of the Federal Reserve
System, A pril 18,1991.
William W . W iles,
Secretary of the Board.
[FR Doc. 91-9672 Filed 4-26-91; 8:45 am j
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