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Federal R eserve Bank OF DALLAS ROBERT D. M c T E E R , J R . D A L LA S , T E X A S p re s id e n t A N D C H IE F E X E C U T IV E O F F I C E R AllgUSt 15 1996 7 5 2 6 5 -5 9 0 6 Notice 96-76 TO: The Chief Executive Officer of each member bank and others concerned in the Eleventh Federal Reserve District SUBJECT Final Rule Amending Regulation K (International Banking Operations) DETAILS The Board of Governors of the Federal Reserve System announced a final rule amending Regulation K (International Banking Operations) regarding the manage ment of offshore offices by U.S. branches and agencies of foreign banks. The rule imple ments a provision of the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 that amended the International Banking Act of 1978 by adding a new provision regarding the management of shell branches of foreign banks by such banks’ U.S. offices. The provision prohibits foreign banks from using their U.S. branches or agencies to manage types of activities through offshore offices that could not be managed by a U.S. bank at its foreign branches or subsidiaries. This prohibition applies to those offshore offices that are “managed or controlled” by a foreign bank’s U.S. branches or agencies. ATTACHMENT A copy of the Board’s notice as it appears on pages 39052-53, Vol. 61, No. 145, of the Federal Register dated July 26, 1996, is attached. MORE INFORMATION For more information, please contact Richard Burda at (713) 652-1503. For additional copies of this Bank’s notice, please contact the Public Affairs Department at (214) 922-5254. Sincerely yours, 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) 39052 Federal Register / Vol. 61, No. 145 / Friday, July 26, 1996 / Rules and Regulations other U.S. banking laws. Finally, the proposed rule states that U.S. Sandra L. Richardson, Managing Senior procedural or quantitative requirements will not apply to non-U.S. offices of Counsel (202/452-6406), Janet S. foreign banks. Crossen, Senior Attorney (202/452On February 16,1996, the Board 3281), Legal Division; Michael G. requested public comment on a Martinson, Assistant Director, Division proposed rule to implement section 7(k) of Banking Supervision and Regulation of the IBA. 61 FR 6956, Feb. 23,1996. (202/452-3640), Board of Governors of the Federal Reserve System. For users of The comment period ended on March Telecommunication Device for the Deaf 25,1996. The Board received two public comments on the proposal, one by a (TDD) only, please contact Dorthea banking organization and the other by a Thompson, (202/452-3544), Board of trade association. Both commenters Governors of the Federal Reserve generally supported the proposal. System, 20th and C Streets, N.W., Comments received addressed issues Washington, DC 20551. _ relating to the definition of “managed or SUPPLEMENTARY INFORMATION: In the controlled” and application of the rule Interstate Act, Congress amended to non-U.S. full-service offices. The section 7 of the IBA (12 U.S.C. 3105) to Board has considered the comments and prevent a foreign bank from using a U.S. has determined not to make any branch or agency to manage types of modifications to the final rule from that activities at offshore offices that are which was proposed. managed or controlled by the foreign One commenter proposed that the bank’s U.S. branch or agency if those Board should modify its definition of types of activities could not be managed “managed or controlled” so that a U.S. by a U.S. bank at its foreign branches or branch or agency would not be subject subsidiaries. The final rule adopted by to the regulation on the sole grounds the Board to implement that provision that recordkeeping with respect to the tracks the language of section 7(k) of the assets or liabilities of a non-U.S. office IBA and defines the term “managed or resides at the U.S. branch or agency. controlled” for purposes of the Alternatively, the commenter restrictions on activities set out in that requested that if the Board determined section. to retain the recordkeeping prong of the The definition of “managed or definition, the Board should clarify that controlled” for this final rule is maintaining records at a U.S. branch or consistent w ith the definition of that agency would not result in the term adopted by the Federal Financial application of the regulation to offshore Institutions Examination Council with branches that are managed by personnel respect to the Supplement (FFIEC 002S) outside the United States. The to the quarterly Report of Assets and commenter noted that many Liabilities of U.S. Branches and international banks maintain data Agencies of Foreign Banks (FFIEC 002), processing centers and keep other which is required to be filed by foreign records in their U.S. offices in order to banks with respect to their offshore provide support services for non-U.S. shell operations that are “managed or branches within the Western controlled” from the United States. 57 Hemisphere. FR 61907, Dec. 29, 1992. For purposes The Board has found that the presence of records in a U.S. branch or of the FFIEC 002S and the final rule, a agency relating to an offshore office non-U.S. office is considered to be often is evidence of involvement in the “managed or controlled” by a U.S. management of such offshore office by branch or agency of a foreign bank if a the U.S. branch or agency where the majority of the responsibility for records reside. Eliminating business decisions, including but not responsibility for recordkeeping as a limited to decisions with regard to lending or asset management or funding separate prong of the definition of “managed or controlled” could result in or liability management, or the the significant potential for evasion of responsibility for recordkeeping in the provision. Accordingly, the Board respect of assets or liabilities for that has determined not to modify the non-U.S. office, resides at the U.S. definition as suggested by the branch or agency. The final rule also specifies that the commenter. The Board, however, believes that types of activities that a branch or additional guidance may be helpful to agency may manage through an office assist foreign banks in determining located outside of the United States whether maintaining records at U.S. include the types of activities branches or agencies for an offshore authorized to a U.S. bank by state or branch would render them subject to the federal charters, regulations issued by regulation. In this regard, the Board chartering or regulatory authorities and EFFECTIVE DATE: August 28, 1996. FOR FURTHER INFORMATION CONTACT: FEDERAL RESERVE SYSTEM 12 CFR Part 211 [Regulation K; Docket No. R-0916] International Banking Operations Board of Governors of the Federal Reserve System. ACTION: Final rule. AGENCY: SUMMARY: This final rule amends Regulation K to im plement a provision of the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (the Interstate Act) that amended the International Banking Act of 1978 (the IBA) by adding a new subsection regarding the management of shell branches of foreign banks by such banks’ U.S. offices. The provision prohibits foreign banks from using their U.S. branches or agencies to manage types of activities through offshore offices that could not be managed by a U.S. bank at its foreign branches or subsidiaries. This prohibition applies w ith respect to those offshore offices that are “managed or controlled” by a foreign bank’s U.S. branches or agencies. Federal Register / Vol. 61, No. 145 / Friday, July 26, 1996 / Rules and Regulations considers that the phrase “responsibility for recordkeeping” entails formal responsibility for the maintenance of records relating to the offshore operations. Simple data processing activities such as compiling and sorting data entries that were originated, approved and confirmed by personnel outside the United States and routing and distributing such processed data to destinations outside the United States would ordinarily not constitute “responsibility for recordkeeping.” If the U.S. branch or agency, however, originates the underlying information or utilizes the information for making business decisions or for the purpose of notifying or confirming transactions with customers, such activities could no longer be considered merely data processing. In addition, the Board considers that a U.S. branch or agency would have responsibility for recordkeeping w ithin the meaning of the rule if it is the sole full-service office at which such records are maintained. Foreign banks that maintain records in the United States but do not believe they have “responsibility for recordkeeping” may consult w ith Board staff for guidance in determining whether they fall within the scope of the rule. One commenter also recommended that the Board modify the regulation to make clear that it applies to offshore shell offices rather than offshore offices generally. The Board notes that the preamble to the proposed rule stated that the restrictions in that rule generally would not apply with respect to offshore branches that are full-service facilities managed or controlled by staff located at the offshore office or at locations other than in the United States. In addition, the title of the proposed rule, which is identical to the title of the statutory provision, refers to “shell” branches. In view of the foregoing, the Board has determined that no modification to the rule is necessary. As the Board noted in the preamble to the proposed rule, section 7(k) of the IBA does not confer upon foreign banks any right to manage activities at an offshore office from a U.S. office. The Board will continue to monitor relationships between the U.S. and offshore offices of foreign banks in the supervisory process in order to determine whether such activities are consistent with considerations relating to the safety and soundness of the U.S. operations of the foreign bank and its affiliates and compliance w ith law. P aperw ork R eduction Act In accordance w ith section 3506 of the Paperwork Reduction Act of 1995 (44 U.S.C. Ch. 35; 5 CFR 1320 Appendix A .l), the Board reviewed the rule under the authority delegated to the Board by the Office of Management and Budget. No collections of information pursuant to the Paperwork Reduction Act are contained in the rule. R egulatory F lex ib ility A ct A n alysis Pursuant to section 605(b) of the Regulatory Flexibility Act (5 U.S.C. 601-612), the Board certifies that the this final rule will not have a significant economic impact on a substantial number of small entities. List o f Subjects in 12 CFR Part 211 Exports, Federal Reserve System, Foreign banking, Holding companies, Investments, Reporting and recordkeeping requirements. For the reasons set out in the preamble, the Board of Governors amends 12 CFR Part 211 as set forth below. PART 211—INTERNATIONAL BANKING OPERATIONS (REGULATION K) 1. The authority citation for 12 CFR Part 211 continues to read as follows: Authority: 12 U.S.C. 221 etseq., 1818, 1841 et seq., 3101 et seq., 3901 et seq. 2. Section 211.20 is amended by removing “an d” at the end of paragraph (b)(8), by removing the period at the end of paragraph (b)(9) and adding “ ; and” in its place, and by adding a new paragraph (b)(10) to read as follows: § 211.20 * Authority, purpose, and scope. * * * * (b) * * * (10) The management of shell branches (12 U.S.C. 3105(k)). * * * * * 3. Section 211.24 is amended by adding a new paragraph (g) to read as follows: § 211.24 Approval of offices of foreign banks; procedures for applications; standards for approval; representative office activities and standards for approval; preservation of existing authority. * * * * * (g) Management o f shell branches. (1) A state-licensed branch or agency shall not manage, through an office of the foreign bank which is located outside the United States and is managed or controlled by such state-licensed branch or agency, any type of activity that a bank organized under the laws of the United States or any State is not 39053 permitted to manage at any branch or subsidiary of such bank which is located outside the United States. (2) For purposes of this paragraph (g), an office of a foreign bank located outside the United States is “managed or controlled” by a state-licensed branch or agency if a majority of the responsibility for business decisions, including but not limited to decisions with regard to lending or asset management or funding or liability management, or the responsibility for recordkeeping in respect of assets or liabilities for that non-U.S. office, resides at the state-licensed branch or agency. (3) The types of activities that a statelicensed branch dr agency may manage through an office located outside the United States that it manages or controls include the types of activities authorized to a U.S. bank by state or federal charters, regulations issued by chartering or regulatory authorities, and other U.S. banking laws, including the Federal Reserve Act, and the implementing regulations, but U.S. procedural or quantitative requirements that may be applicable to the conduct of such activities by U.S. banks shall not apply. By order of the Board of Governors of tho Federal Reserve System, July 17, 1996. William W. Wiles, Secretary o f the Board. [FR Doc. 96-19043 Filed 7-25-96; 8:45 am] BILUNG CODE 6 2 1 0 -0 1 -P
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