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FEDERAL RESERVE BANK OF NEW YORK [ Circular No. 10806 October 6, 1995 ~1 ; INTERNATIONAL BANKING OPERATIONS Proposed Amendments to Regulation K C o m m e n ts R e q u e s t e d b y O c t o b e r 3 0 , 1 9 9 5 To All Depository Institutions, U.S. Branches, Agencies, and Representative Offices of Foreign Banks, and Bank Holding Companies in the Second Federal Reserve District, and Others Concerned: T h e follow ing statem ent has been issued by the Board o f G overnors o f the Federal R eserve System : T h e F e d e r a l R e s e r v e B o a r d h a s r e q u e s te d p u b lic c o m m e n t o n a p r o p o s e d r e v i s i o n to its R e g u l a ti o n K th a t w ill e a s e th e b u rd e n o n U .S . b a n k s s e e k in g to m a k e i n v e s t m e n ts in o v e r s e a s c o m p a n ie s . C o m m e n t is r e q u e s te d b y O c to b e r 3 0 . T h e p r o p o s e d r u le , w h ic h is p a rt o f a n o v e r a l l r e v i e w o f th e e n tir e r e g u la t i o n , w o u l d e x p a n d th e g e n e r a l c o n s e n t a u th o r ity f o r c e r ta i n f o r e ig n in v e s t m e n ts m a d e b y s t r o n g l y c a p i t a l i z e d a n d w e ll m a n a g e d b a n k s . N o p r io r n o t i c e o r a p p l ic a t i o n to th e B o a r d is r e q u ir e d b e f o r e a n in s titu tio n m a k e s a n in v e s t m e n t th a t fa lls w ith in th e g e n e r a l c o n s e n t a u th o r ity . T h e p r o p o s a l a l s o w o u ld s tr e a m lin e th e r e v i e w p r o c e d u r e s f o r n o t i c e s a n d a p p l ic a t i o n s . Printed on the follow ing pages is the text o f the B o ard ’s proposal, w hich has been published in the F e d e r a l R e g is te r. Com m ents thereon should be submitted by O ctober 3 0 , and may be sent to the Board o f G overnors, as specified in the notice, or to our Foreign B an kin g Applications D ivision. W illiam J. M c D onough , P r e s id e n t . 49350 Proposed Rules Federal Register Vol. 60, No. 185 Monday, September 25, 1995 This section of the FEDERAL REGISTER contains notices to the public of the proposed issuance ol rules and regulations. The purpose of these notices is to give interested persons an opportunity to participate in the rule making prior to the adoption of the final rules. FEDERAL RESERVE SYSTEM 12CFR Part 211 [Regulation K; Docket No. R-0896] International Operations of United States Banking Operations A G E N C Y : B o a r d o f G o v e r n o r s o f th e F e d e r a l R e s e r v e S y s te m . A C T IO N : P r o p o s e d r u le . S U M M A R Y : T h e B o a r d i s p u b li s h i n g fo r c o m m e n t p r o p o s e d a m e n d m e n t s to S u b p a r t A o f R e g u l a ti o n K ( I n te r n a tio n a l O p e r a t i o n s o f L L S . B a n k in g O p e r a ti o n s ) . T h e a m e n d m e n t s p r o v i d e a d d i ti o n a l g e n e r a l c o n s e n t a u t h o r i t y fo r de novo i n v e s t m e n t s in f o r e ig n c o m p a n i e s b y U .S . b a n k in g o r g a n iz a t i o n s t h a t a re stro n g ly c a p ita liz e d a n d w e ll m a n a g e d . T h is e x p a n d e d g e n e ra l c o n s e n t a u t h o r i t y is d e s ig n e d t o p e r m i t U .S . b a n k in g o r g a n iz a t i o n s m e e t i n g th e s e r e q u i r e m e n t s to m a k e c e r t a i n i n v e s t m e n t s w i t h o u t t h e n e e d fo r p r i o r a p p r o v a l o r r e v i e w . In o r d e r to s tr ik e a r e a s o n a b le b a l a n c e , h o w e v e r , b e tw e e n r e d u c e d r e g u la t o r y b u r d e n a n d c o n t i n u e d B o a r d o v e r s i g h t , th e a m e n d m e n t s w o u l d i m p o s e a g g re g a te l im it s o n t h e t o t a l a m o u n t o f g e n e r a l c o n s e n t in v e s tm e n ts th a t m a y b e m a d e i n t h e c o u r s e o f a y e a r . In a d d i ti o n , c e r ta in in v e s tm e n ts o r a c tiv itie s w o u ld n o t b e e lig ib le fo r t h e e x p a n d e d a u th o rity . T h e p ro p o s e d ru le w o u ld r e q u ir e a n i n v e s t o r m a k i n g u s e o f th e e x p a n d e d a u t h o r i t y t o p r o v i d e th e B o a r d w i t h a p o s t - i n v e s t m e n t n o t i c e . In a d d i t i o n , fo r t h o s e i n v e s t m e n t s r e q u ir in g p r i o r n o t i c e to t h e B o a r d , t h e p r o p o s e d r u l e w o u l d s t r e a m l i n e th e 5 : 1 5 p .m . w e e k d a y s , o r to t h e g u a r d s t a t i o n in t h e E c c l e s B u i l d i n g c o u r t y a r d o n 2 0 t h S tr e e t N W ., ( b e t w e e n C o n s t i t u t i o n A v e n u e a n d C S tr e e t) a t a n y t im e . C o m m e n t s r e c e i v e d w i l l b e a v a il a b le f o r i n s p e c t i o n in R o o m M P 5 0 0 o f th e M a rtin B u ild in g b e tw e e n 9 a .m . a n d 5 p .m . w e e k d a y s , e x c e p t a s p r o v i d e d in 1 2 C F R 2 6 1 . 8 o f t h e B o a r d ’s ru le s re g a rd in g th e a v a ila b ility o f in fo rm a tio n . FOR FU R THE R IN FO R M A TIO N C O N TA C T: K a th le e n M . O ’D a y , A s s o c i a t e G e n e r a l C o u n sel ( 2 0 2 /4 5 2 - 3 7 8 6 ) , S a n d ra L. R ic h a r d s o n , M a n a g in g S e n io r C o u n se l ( 2 0 2 / 4 5 2 - 6 4 0 6 ) , o r A n d re s L . N a v a rre te , A tto rn e y ( 2 0 2 / 4 5 2 - 2 3 0 0 ) , L e g a l D i v is io n ; W i l l i a m A . R y b a c k , A s s o c i a t e D ire c to r ( 2 0 2 / 4 5 2 - 2 7 2 2 ) , M ic h a e l G. M a rtin s o n , A s s is ta n t D ire c to r ( 2 0 2 / 4 5 2 2 7 9 8 ) , o r B e tsy C ro ss, M a n a g e r ( 2 0 2 / 4 5 2 —2 5 7 4 ) , D i v is io n o f B a n k in g S u p e r v i s i o n a n d R e g u l a ti o n , B o a r d o f G o v e rn o rs o f th e F e d e ra l R e se rv e S y s te m . F o r t h e u s e r s o f T e le c o m m u n ic a tio n D e v ic e fo r th e D eaf (T D D ) only, p l e a s e c o n t a c t D o r o th e a T h o m p s o n ( 2 0 2 / 4 5 2 —3 5 4 4 ) , B o a r d o f G o v ern o rs o f th e F e d e ra l R e se rv e S y s t e m , 2 0 t h a n d C S t r e e t s N W ., W a s h in g to n , D C 2 0 5 5 1 . S U P P LE M E N TA R Y IN FO R M A TIO N : S u b p a r t A o f t h e B o a r d ’s R e g u l a ti o n K s e t s o u t t h e r u l e s g o v e r n i n g t h e f o r e ig n a c t i v i t i e s o f U .S . b a n k in g o r g a n i z a t i o n s , i n c l u d i n g p r o c e d u r e s fo r m a k i n g i n v e s t m e n t s in f o r e ig n b a n k in g a n d n o n - b a n k i n g o r g a n iz a t i o n s . U n d e r § 2 1 1 . 5 ( c ) , a ll s u c h in v e s tm e n ts , w h e th e r m a d e d ir e c tly o r i n d i r e c t l y , a r e r e q u i r e d t o b e m a d e in a c c o r d a n c e w i t h th e g e n e r a l c o n s e n t , p rio r n o tic e , o r s p e c if ic c o n s e n t p ro c e d u r e s c o n ta in e d in th a t p a ra g ra p h . 1 2 C F R 2 1 1 .5 ( c ) . N o p rio r n o tic e o r a p p l i c a t i o n is r e q u ir e d f o r a n y i n v e s t m e n t t h a t fa lls w i t h i n t h e g e n e r a l c o n s e n t a u th o rity . S u c h a u th o rity at p r e s e n t is l im it e d to i n v e s t m e n t s w h e r e th e t o t a l a m o u n t i n v e s t e d i n a n y o n e o r g a n i z a t i o n , in o n e t r a n s a c t i o n o r a D A TE S : C o m m e n t s m u s t b e s u b m it t e d b y s e r ie s o f t r a n s a c t i o n s , d o e s n o t e x c e e d th e l e s s e r o f $ 2 5 m i l l i o n o r 5 p e r c e n t o f t h e i n v e s t o r ’s T i e r 1 c a p i t a l w h e r e th e O c to b e r 3 0 , 1 9 9 5 . i n v e s t o r is a m e m b e r b a n k , b a n k h o l d in g A D D R E S S E S : C o m m e n t s s h o u l d r e f e r to c o m p a n y , o r E d g e c o rp o ra tio n en gag ed D o ck e t N o. R - 0 8 9 6 , a n d m a y b e m a ile d to W illia m W . W ile s , S e c re ta ry , B o a rd of in b a n k i n g .1 T h e B o a rd h a s re v ie w e d th e g en eral p ro ce ssin g o f su c h n o tice s. G o v e rn o rs o f th e F e d e ra l R e se rv e S y s t e m , 2 0 t h a n d C S tr e e ts N W ., W a s h i n g t o n , D C 2 0 5 5 1 . C o m m e n t s a ls o m a y b e d e li v e r e d to R o o m B - 2 2 2 2 o f th e E c c l e s B u i ld in g b e t w e e n 8 : 4 5 a .m . a n d c o n s e n t a u t h o r i t y in lig h t o f t h e a m o u n t 1 In the case of an Edge corporation not engaged in banking, the relevant general consent limit is the lesser of $25 million or 25 percent of its Tier 1 capital. a n d n a tu re o f th e in v e s tm e n ts th a t r e q u ir e d p r i o r r e v i e w b e c a u s e t h e y e x c e e d e d th e g e n e ra l c o n s e n t d o lla r l im it s . T h e B o a r d h a s c o n c l u d e d t h a t th e c u rr e n t g e n e ra l c o n s e n t a u th o rity m a y b e s a f e ly e x p a n d e d fo r U .S . b a n k in g o r g a n i z a t i o n s t h a t a r e s t r o n g l y c a p ita liz e d a n d w e ll m a n a g e d . T h is e x p a n d e d g e n e r a l c o n s e n t a u t h o r i t y is i n t e n d e d to r e d u c e t h e b u r d e n a s s o c i a t e d w it h o b t a i n i n g a p p r o v a l fo r s u c h i n v e s t m e n t s fo r U .S . b a n k in g o r g a n iz a t i o n s m e e t i n g t h e s e r e q u ir e m e n ts . T h e c o n s tra in in g lim it in th e g e n e ra l c o n s e n t a u th o rity th a t trig g e rs th e re q u ire m e n t o f p rio r n o tic e o fte n h a s b e e n th e $ 2 5 m illio n c a p . T h e B o a rd se e k s c o m m e n t o n a ru le th a t, in o rd e r to r e d u c e b u r d e n o n a p p l i c a n t s , w o u l d a d d a d d itio n a l g e n e ra l c o n s e n t a u th o rity fo r U .S . b a n k in g o r g a n i z a t i o n s t h a t a r e stro n g ly c a p ita liz e d a n d w e ll m a n a g e d b y r e m o v i n g t h e a b s o lu te d o l l a r l im it a n d l in k in g t h e g e n e r a l c o n s e n t l im it s s o l e ly t o p e r c e n t a g e s o f c a p i t a l . Proposed R u le T h e p ro p o s e d ru le w o u ld s tre a m lin e t h e B o a r d ’s n o t i c e r e q u i r e m e n t u n d e r S u b p a r t A o f R e g u l a ti o n K b y i n c r e a s i n g t h e l im it o n i n v e s t m e n t s t h a t m a y b e m a d e a b ro a d w ith o u t p ro v id in g p rio r n o tic e to th e B o a rd . T h is lib e ra liz a tio n w o u l d b e a v a il a b le in r e l a t i o n t o c e r t a i n de novo i n v e s t m e n t s a n d f o r a d d i t i o n a l i n v e s t m e n t s in e x i s t i n g s u b s i d i a r i e s a n d j o in t v e n t u r e s b y i n v e s t o r s t h a t h a v e d e m o n s tra te d stro n g c a p ita l a n d m a n a g e m e n t. T h is e x p a n d e d g e n e ra l c o n s e n t a u t h o r i t y a l s o is i n t e n d e d to r e d u c e t h e b u r d e n a s s o c i a t e d w it h o b ta in in g a p p r o v a l fo r s u c h in v e s tm e n ts f o r U .S . b a n ld n g o r g a n i z a t i o n s m e e t i n g th e s tro n g ly -c a p ita liz e d a n d w e llm a n a g e d s ta n d a rd s. T h e B o a rd seek s c o m m e n t o n e a c h o f th e re q u ire m e n ts o r l i m i t a t i o n s d i s c u s s e d b e lo w . Strongly-Capitalized and Well-Managed Requirement T h e e x p a n d e d g en eral co n se n t a u t h o r i t y w o u l d b e a v a i l a b l e fo r i n v e s t m e n t s b y m e m b e r b a n k s , b .ank h o ld in g c o m p a n ie s , E d g e c o rp o ra tio n s t h a t a r e n o t e n g a g e d i n b a n k in g , a n d a g re e m e n t c o rp o ra tio n s . T h e e x p a n d e d a u th o rity w o u ld o n ly b e a v a ila b le w h e re t h e i n v e s t o r , i ts p a r e n t m e m b e r b a n k , i f a n y , a n d t h e b a n k h o l d i n g c o m p a n y a re stro n g ly c a p ita liz e d a n d w e ll m a n a g e d , as th o s e te rm s a re d e fin e d b y th e B o a rd . “ S tr o n g ly c a p i t a l i z e d ,” i n r e l a t i o n to Federal Register / Vol. 60, No. 185 / Monday, September 25, 1995 / Proposed Rules m e m b e r b a n k s , is d e f i n e d w i t h r e f e r e n c e to t h e d e f i n i ti o n o f “ w e l l c a p i t a l i z e d ” s e t o u t in t h e p r o m p t c o r r e c t i v e a c t i o n s t a n d a r d s , w h i c h r e q u ir e s , a t a m in im u m , a 6 p e rc e n t T ie r 1 a n d 1 0 p e r c e n t t o t a l ris k -b a s e d c a p i t a l r a t i o a n d a l e v e r a g e r a t i o o f 5 p e r c e n t .2 1 2 C F R 2 0 8 . 3 3 ( b ) ( 1 ) . F o r p u r p o s e s o f R e g u l a ti o n K , E d g e o r a g re e m e n t co rp o ra tio n s a n d b a n k h o l d in g c o m p a n i e s w o u l d b e r e q u ir e d t o h a v e a t o t a l r i s k -b a s e d c a p i t a l r a t i o o f 1 0 p e r c e n t o r m o r e in o r d e r t o b e c o n s i d e r e d s tr o n g ly c a p i t a l i z e d fo r p u r p o s e s o f th e e x p a n d e d a u th o r i ty . A d e f i n i ti o n o f “ w e l l m a n a g e d ” is a l s o i n c l u d e d i n th e p r o p o s e d r u l e , w h i c h p r o v id e s t h a t , in o r d e r t o b e c o n s i d e r e d w e ll m a n a g e d , t h e E d g e o r a g r e e m e n t c o r p o r a t i o n , its p a r e n t m e m b e r b a n k , i f a n y , a n d th e b a n k h o l d in g c o m p a n y m u s t e a c h h a v e r e c e iv e d a c o m p o s ite ra tin g o f at le a st 1 o r 2 , w it h n o c o m p o n e n t b e lo w 3 , a t its m o s t r e c e n t e x a m i n a ti o n o r r e v i e w . r e g u la t o r y i n t e r f e r e n c e , a n d r e q u ir in g p r i o r r e v i e w f o r i n v e s t m e n t s i n v o lv i n g a h ig h p e r c e n t a g e o f c a p i t a l . T h e l a tt e r in v e s tm e n ts m a y c a u s e su p e rv is o ry c o n c e r n b e c a u s e a n i n i ti a l c a p i t a l in v e s tm e n t c a n b e le v e ra g e d m a n y t im e s . T h e p r o p o s e d r u l e a l s o s e t s a n o v e r a ll a g g r e g a te l i m i t o n a l l i n v e s t m e n t s m a d e d u r in g t h e p r e v i o u s 1 2 - m o n t h p e r i o d u n d e r th e e x is tin g a n d th e e x p a n d e d g e n e ra l c o n s e n t a u th o rity . A ll s u c h in v e s tm e n ts m a d e b y a n E d g e c o r p o r a t i o n n o t e n g a g e d in b a n k in g o r an a g re e m e n t c o rp o ra tio n , w h e n T h e n e w p r o p o s e d l im it s fo r th e e x p a n d e d g e n e r a l c o n s e n t a u th o r i ty w o u l d b e t ie d to th e c a p i t a l o f th e i n v e s t o r . W i t h r e g a r d to l im it s o n i n v e s t m e n t s in a n y o n e c o m p a n y b y E d g e c o r p o r a t i o n s n o t e n g a g e d in b a n k in g o r a g r e e m e n t c o r p o r a t i o n s t h a t m e e t t h e r e q u ir e m e n ts d i s c u s s e d a b o v e , t h e B o a r d p r o p o s e s t h a t t h e l im it s s h o u l d b e c h a n g e d to t h e l e s s e r o f 2 0 p e rc e n t o f th e E d g e o r a g re e m e n t c o r p o r a t i o n ’s T i e r 1 c a p i t a l o r 2 p e r c e n t o f th e T ie r 1 c a p ita l o f th e m e m b e r b a n k .3 S o lo n g a s th e 2 p e r c e n t l im i t is n o t e x c e e d e d b y i ts p a r e n t , E d g e c o r p o r a t i o n s n o t e n g a g e d i n b a n k in g w ill b e p e rm itte d to in v e s t u p to 2 0 p e r c e n t o f t h e i r c a p i t a l . T h i s h ig h e r l i m i t is a u t h o r i z e d b e c a u s e s u c h E d g e c o r p o r a t i o n s d o n o t ta k e d e p o s i ts in th e U n i t e d S ta t e s o r o w n U .S . d e p o s i t o r y i n s t i t u t i o n s . A n y f i n a n c i a l e f f e c t o n th e p a re n t b a n k w o u ld b e c o n s tr a in e d b y t h e 2 p e r c e n t lim it. A lim it o f 2 p e rc e n t o f th e T ie r 1 c a p i t a l o f a m e m b e r b a n k a p p e a r s to s t r i k e a r e a s o n a b le b a l a n c e b e tw e e n t w o o b j e c t iv e s : p e r m i t ti n g a n o r g a n iz a t i o n c o n s i d e r e d to b e s t r o n g ly c a p i t a l i z e d a n d w e ll m a n a g e d to m a k e in v e s tm e n ts a g g r e g a te d w i t h t h e p r o p o s e d i n v e s t m e n t , w o u l d n o t b e p e r m i t t e d to e x c e e d th e le s s e r o f 5 0 p e r c e n t o f th e E d g e o r a g r e e m e n t c o r p o r a t i o n ’s t o ta l c a p ita l o r 5 p e rc e n t o f th e p a re n t m e m b e r b a n k ’s t o t a l c a p i t a l . A n o v e r a ll a g g r e g a te l im i t o f 5 p e r c e n t o f t h e i r to ta l c a p ita l w o u ld a p p ly to in v e s tm e n ts b y m e m b e r b a n k s a n d b a n k h o l d in g c o m p a n i e s . T h e s e l im it s a g a in w e r e s e l e c t e d i n a n e ff o rt t o s t r i k e a r e a s o n a b l e b a l a n c e b e t w e e n g iv in g s u c h e n t i t i e s c r e d i t fo r t h e i r s t r o n g l y c a p i t a l i z e d a n d w e l l - m a n a g e d s t a tu s , in th e fo rm o f re d u c e d re g u la to ry b u rd e n , b u t m a i n t a i n i n g t h e r e q u i r e m e n t fo r, a t a m in im u m , p rio r n o tic e to th e B o a rd o n c e t h e o v e r a l l l e v e l o f f o r e ig n i n v e s t m e n t s m a y g iv e r i s e to s u p e rv is o ry c o n c e rn . T h e p ro p o s a l p ro v id e s , h o w e v e r, th a t in d e t e r m i n i n g c o m p l i a n c e w i t h t h e s e a g g r e g a te l im it s , a n i n v e s t m e n t in a s u b s i d i a r y s h a ll b e c o u n t e d o n l y o n c e n o tw ith s ta n d in g th a t s u c h su b sid ia ry m a y , w ith in th e n e x t 1 2 m o n th s , d o w n s tre a m a ll o r p a rt o f s u c h i n v e s t m e n t t o a n o t h e r s u b s i d i a r y . T h is c h a n g e i s d e s ig n e d t o a v o i d d o u b l e c o u n t i n g a n d s i m p ly r e c o g n i z e s th a t o f t e n , e s p e c i a l l y fo r t a x p u r p o s e s , i n v e s t m e n t s a r e d o w n s t r e a m e d fr o m o n e s u b s i d i a r y t o a n o t h e r in a b a n k in g g r o u p — a n e v e n t t h a t , s o lo n g a s th e in v e s to rs a re s tro n g ly c a p ita liz e d a n d w e l l m a n a g e d , g e n e r a ll y w o u l d n o t r a i s e s u p e r v i s o r y c o n c e r n s . It w o u l d , h o w e v e r , s i g n i f i c a n t l y r e d u c e th e b u r d e n u p o n i n v e s t o r s t h a t m e e t th e r e q u i r e m e n t s fo r t h e e x p a n d e d a u t h o r i t y b y r e m o v i n g t h e n e e d fo r p r i o r n o t i c e s t o t h e B o a r d fo r t r a n s a c t i o n s t h a t r e a l l y th a t m a n a g e m e n t c o n s id e rs to b e a p p r o p r i a t e w it h a m i n im u m o f c o n s titu te th e m o v e m e n t o f fu n d s w i t h i n t h e b a n k in g g r o u p . Expanded Authority for General Consent Investments 2 The member bank also may not be subject to any written agreement, order, capital directive, or prompt corrective action directive issued by the Board to meet and maintain a specific capital level for any capital measure. 12 CFR 208.33(b)(1). 3 The proposed 20 percent limit of the Edge’s Tier 1 capital derives from the constraint imposed by section 25A of the Federal Reserve Act, which prohibits any investment in excess of 10 percent of the subscribing bank’s capital in Edge and agreement corporations. Additional Investments T h e p ro p o s e d ru le a ls o c o n firm s th a t s t r o n g l y - c a p i t a l i z e d a n d w e ll -m a n a g e d 49351 2 1 1 . 5 ( c ) ( l ) ( i i - i v ) . T h u s , o n c e th e e x p a n d e d g e n e r a l c o n s e n t a u t h o r i t y fo r in itia l in v e s tm e n ts h a s b e e n e x h a u s te d i n r e s p e c t o f o n e o r g a n iz a t i o n , a d d itio n a l in v e s tm e n ts m a y b e m a d e c o n s is te n t w ith th e p ro v is io n s o f § 2 1 1 .5 ( c ) ( 1 ) . Eligible Investments T h e p r o p o s e d r u l e e s t a b l i s h e s th e n a t u r e o f i n v e s t m e n t s e lig ib le fo r th e e x p a n d e d g e n e ra l c o n s e n t a u th o rity , as w e ll a s t h e t y p e s o f a c t i v i t i e s t h a t m a y b e c o n d u c t e d b y t h e o r g a n iz a t i o n in w h i c h t h e i n v e s t m e n t is t o b e m a d e . S u b je c t t o c e r t a i n e x c e p t i o n s , t h e r u l e w o u ld p e rm it in v e s tm e n ts in a n y a c t i v i t i e s e i t h e r p e r m i s s i b le fo r s u b s i d i a r i e s u n d e r R e g u l a ti o n K o r p e rm is s ib le fo r n a tio n a l b a n k s to en g a g e in d i r e c t l y . I n e lig ib le i n v e s t m e n t s a r e l i m i t e d t o a n i n v e s t o r ’s i n i ti a l e n tr y in to a f o r e ig n c o u n t r y , t h e e s t a b l i s h m e n t o r a c q u is itio n o f a n in itia l s u b sid ia ry b an k i n a f o r e ig n c o u n t r y , i n v e s t m e n t s in g e n e r a l p a r t n e r s h i p s o r u n l im it e d l i a b il i ty c o m p a n i e s , a n d a n a c q u i s i ti o n o f s h a re s o r a s s e ts o f a c o rp o ra tio n th a t is n o t a n a f f ilia te o f t h e i n v e s t o r . R e t e n t i o n o f s p e c i f i c a p p r o v a l a u th o r i ty o v e r e s t a b l i s h m e n t o f n e w f o r e ig n b a n k o f f ic e s a n d o u t w a r d e x p a n s i o n o f b a n k in g i n s t i t u t i o n s is c o n s i s t e n t w it h t h e m i n i m u m s t a n d a r d s fo r c o n s o l i d a t e d s u p e r v i s i o n o f th e B a s le C o m m i t t e e o n B a n k in g S u p e r v i s i o n . E x c l u s i o n o f t h e a c q u i s i t i o n s is in te n d e d to lim it th e e x p a n d e d a u t h o r i t y t o i n v e s t m e n t s in de novo s u b s i d i a r i e s ( in c l u d in g s u b s e q u e n t i n v e s t m e n t s in s u c h s u b s i d i a r ie s ) b y e x c l u d i n g t h e a c q u i s i t i o n o f g o in g c o n c e r n s ( u n l e s s a l r e a d y h e ld b y a n a f f i li a te ) . T h e r is k s a s s o c i a t e d w i t h s u c h a c q u is itio n s a re c o n s id e re d to b e g re a te r t h a n th e a m o u n t o f c a p i t a l i n v e s t e d ( e x t e n d i n g a l s o , f o r e x a m p l e , t o th e v a l u e o f t h e c o m p a n y ’s a s s e t s ) . T h e B o a r d se e k s c o m m e n t o n th e e x c lu s io n o f th e s e in v e s tm e n ts fro m th e e x p a n d e d g e n e r a l c o n s e n t a u t h o r i t y . In p a rtic u la r, th e B o a rd seek s c o m m e n t on w h e t h e r a d d i t i o n a l i n v e s t m e n t s in c o m p a n i e s a c q u i r e d a s g o in g c o n c e r n s a l s o s h o u l d b e e lig ib le fo r t h e e x p a n d e d a u th o rity . Post-Investment Notice Requirement T h e p r o p o s e d r u l e w o u l d r e q u ir e a n in v e s to r m a k in g u se o f th e e x p a n d e d a u th o rity to p ro v id e th e B o a rd w ith a p o s t-in v e s tm e n t n o tic e w ith in 1 0 d a y s o f m a k i n g t h e i n v e s t m e n t. T h e n o t i c e i n v e s t o r s m a k i n g i n v e s t m e n t s u n d e r th e w o u l d r e q u ir e p r o v i s i o n o f c e r t a i n e x p a n d e d g e n e ra l c o n s e n t a u th o rity m a y m i n i m a l i n f o r m a t i o n fo r p u r p o s e s o f a l s o m a k e a d d i t i o n a l i n v e s t m e n t s in s u b s i d i a r i e s a n d j o in t v e n t u r e s u n d e r s u p e r v i s i n g t h e b a n k in g o r g a n iz a t i o n s t h e s t a n d a r d s s e t o u t in t h e e x i s ti n g m a k in g u se o f th e e x p a n d e d a u th o rity , in c lu d in g a d e s c rip tio n o f th e g e n e r a l c o n s e n t a u th o r i ty . 1 2 C F R in v e s tm e n t, th e te rm s a n d s o u rc e s o f 49352 Federal Register / Vol. 60, No. 185 / Monday, September 25, 1995 / Proposed Rules f u n d in g , t h e e n t i t i e s i n v o l v e d , a n d , w h e r e th e i n v e s t m e n t is t o r e d r e s s a l o s s , a d e s c r i p t i o n o f t h e r e a s o n s fo r t h e lo s s a n d th e s te p s ta k e n to a d d re s s th e p ro b le m . T h e B o a rd s o lic its c o m m e n t r e g a r d i n g t h i s r e q u ir e m e n t g e n e r a ll y , t h e i n f o r m a t i o n t o b e s u b m it t e d i n a n y s u c h n o t i c e , a n d w a y s in w h i c h s u c h a p o s t-in v e s tm e n t n o tic e m a y b e c o o rd in a te d w ith e x is tin g re p o rtin g r e q u ir e m e n ts . Sim ultaneous Review T h e p r o p o s a l w o u l d a m e n d th e B o a r d ’s c u r r e n t p r o c e d u r e s fo r p ro c e s s in g p rio r n o tic e s a n d a p p lic a tio n s u n d e r S u b p a rt A o f R e g u l a ti o n K . S p e c i f i c a l l y , u n d e r § 2 1 1 . 5 ( c ) ( 2 ) , t h e B o a r d h a s 4 5 d a y s to o b j e c t to a n y i n v e s t m e n t t h a t is th e s u b j e c t o f a p r i o r n o t i c e a n d th e 4 5 - d a y p e rio d c o m m e n c e s o n th e d a y th a t th e p r i o r n o t i c e is accepted b y t h e r e l e v a n t R e se rv e B a n k . T h e p ro p o s e d ru le w o u ld a m e n d t h e r e g u la t i o n t o p r o v i d e t h a t t h e 4 5 - d a y p e r i o d s t a r t s o n t h e d a te o f t h e R e s e r v e B a n k ’s receipt o f t h e p r i o r n o t i c e . T h i s c h a n g e is e x p e c t e d to a c c e le ra te th e p ro c e s s in g o f s u c h n o t i c e s , r e d u c e th e n u m b e r o f i n f o r m a t i o n r e q u e s ts t h a t a p p l i c a n t s m u s t a n s w e r , a n d m o r e g e n e r a ll y r e d u c e t h e r e g u la t o r y b u r d e n a s s o c i a t e d w it h s e q u e n ti a l r e v i e w . U n d e r t h e p r o p o s e d ru le , h o w e v e r, th e B o a rd w o u ld c o n t i n u e to h a v e t h e a b il it y t o m o d if y o r su s p e n d th e g e n e ra l c o n s e n t a n d p rio r n o tic e p ro c e d u re s . T h e B o a rd a lso p ro p o s e s to e x te n d th is tre a tm e n t to th e p ro c e s s in g o f a p p lic a tio n s u n d e r R e g u l a ti o n K . Request for Comment T h e B o a r d r e q u e s ts c o m m e n t s o n a ll a s p e c t s o f th e r u l e d i s c u s s e d a b o v e . In a d d i t i o n , c o m m e n t s a r e r e q u e s te d r e g a r d i n g o th e r w a y s in w h i c h t h e p r o v i s i o n s o f S u b p a r t A o f R e g u l a ti o n K m i g h t b e s t r e a m l i n e d o r r e n d e r e d le s s b u r d e n s o m e , e i t h e r J n t e r m s o f U .S . b a n k in g o r g a n iz a t i o n s t h a t m e e t s tro n g ly -c a p ita liz e d a n d w e ll-m a n a g e d s t a n d a r d s , o r m o r e g e n e r a ll y . Initial Regulatory Flexibility A n aly sis T h e R e g u la to r y F l e x i b i l i t y A c t (5 U .S .C . 6 0 1 et seq.) r e q u ir e s a n i n i ti a l r e g u la t o r y f l e x i b i li t y a n a l y s i s w i t h a n y n o t i c e o f p r o p o s e d r u l e m a k in g . A e n titie s c o n s is te n t w ith th e sp irit a n d p u r p o s e o f th e R e g u l a to r y F l e x i b i l i t y A c t. P a p e rw o rk Reduction A ct and Regulatory Burden a n d a s t a te m e n t o f th e o b j e c t iv e s o f, a n d t h e le g a l b a s is fo r , t h e p r o p o s e d r u l e a r e c o n t a i n e d in t h e s u p p l e m e n t a r y in fo rm a tio n a b o v e . T h e o v e ra ll e ffe ct o f * Definitions. * * * * (u ) Strongly capitalized m e a n s : (1 ) In r e l a t i o n t o a p a r e n t m e m b e r b a n k , t h a t t h e s t a n d a r d s s e t o u t in 1 2 C F R 2 0 8 .3 3 ( b ) ( 1 ) a r e s a t i s f i e d ; a n d S e c t i o n 3 0 2 o f t h e R ie g le C o m m u n i ty D e v e l o p m e n t a n d R e g u l a to r y I m p r o v e m e n t A c t o f 1 9 9 4 (P u b . L . 1 0 3 - (2 ) In r e l a t i o n t o a n E d g e o r A g re e m e n t co rp o ra tio n o r a b an k h o l d i n g c o m p a n y , t h a t it h a s a t o t a l ris k - 3 2 5 , 1 0 8 S ta t. 2 1 6 0 ) a l s o r e q u ir e s t h a t t h e f e d e r a l b a n k in g a g e n c i e s m u s t b a s e d c a p ita l ra tio o f 1 0 .0 p e rc e n t o r g re a te r. c o n s id e r th e a d m in is tra tiv e b u rd e n s a n d b e n e f it s o f a n y n e w r e g u l a t i o n t h a t im p o s e s a d d itio n a l re q u ire m e n ts o n in s u re d d e p o s ito ry in s titu tio n s . T h e it B o a r d d o e s n o t c o n s i d e r t h a t th e p ro p o s e d ru le w o u ld im p o s e a d d itio n a l r e q u ir e m e n ts o n i n s u r e d d e p o s i t o r y in s titu tio n s , n o r w o u ld it in c r e a s e th e r e g u la t o r y p a p e r w o r k b u r d e n o f b a n k in g o r g a n iz a t i o n s p u r s u a n t t o t h e p r o v i s i o n s o f th e P a p e rw o rk R e d u c tio n A c t (4 4 U .S .C . 3 5 0 1 et seq J . T o t h e c o n t r a r y , th e p r o p o s e d r u l e w o u l d r e d u c e r e g u la t o r y b u r d e n f o r U .S . b a n k in g o r g a n iz a t i o n s t h a t a r e s t r o n g l y c a p i t a l i z e d a n d w e ll m a n a g e d . T h e c u r r e n t a n n u a l b u r d e n fo r th e s e a p p lic a tio n a n d n o tific a tio n r e q u i r e m e n t s is e s t i m a t e d to b e 4 4 0 h o u rs . T h e p ro p o s e d a m e n d m e n ts c o u ld re d u c e th e b u rd e n e s tim a te b y as m u c h a s h a lf . A l th o u g h t h e p r o p o s a l w o u l d r e q u ir e U .S . b a n k in g o r g a n i z a t i o n s m a k in g i n v e s t m e n t s p u r s u a n t to t h e e x p a n d e d g e n e r a l c o n s e n t a u t h o r i t y t o file a n a b b r e v i a t e d p o s t - i n v e s t m e n t n o t i c e w it h t h e B o a r d , t h i s n o t i c e w o u l d t a k e th e p l a c e o f t h e r e q u i r e m e n t s r e l a t in g to p r i o r n o t i c e o r a p p l i c a t i o n to t h e B o a r d fo r p r i o r a p p r o v a l t h a t w o u l d b e r e q u ir e d u n d e r e x i s t i n g R e g u l a ti o n K p r o c e d u r e s before a n y s u c h i n v e s t m e n t co u ld b e m ad e. List o f Subjects in 12 C FR Part 211 E x p o r t s , F e d e r a l R e s e r v e S y s te m , F o r e i g n b a n k in g , H o l d in g c o m p a n i e s , I n v e s t m e n t s , R e p o r ti n g a n d re c o rd k e e p in g re q u ire m e n ts . F o r t h e r e a s o n s s e t o u t in th e p re a m b le , th e B o a rd o f G o v e rn o rs p r o p o s e s to a m e n d 1 2 C F R P a r t 2 1 1 a s s e t f o r th b e lo w : PART 211—INTERNATIONAL BANKING OPERATIONS (REGULATION K) d e s c r i p t i o n o f th e r e a s o n s w h y th e a c t i o n b y t h e a g e n c y is b e in g c o n s i d e r e d §211.2 1. T h e a u th o rity c ita tio n fo r p a rt 2 1 1 is r e v i s e d t o r e a d a s f o l l o w s : Authority: 12 U.S.C. 221 e t s e q ., 1818, 1841 e t s e q ., 3101 e t s e q ., 3901 e t s e q . 2 . S e c t i o n 2 1 1 . 2 is a m e n d e d b y it it it it ( x ) Well managed m e a n s t h a t t h e E d g e o r A g r e e m e n t c o r p o r a t i o n , i ts p a r e n t m e m b e r b an k , if a n y , a n d th e b an k h o ld in g c o m p a n y h a v e e a c h re c e iv e d a c o m p o s i t e r a t i n g o f a t l e a s t 1 o r 2 , w it h n o c o m p o n e n t b e lo w 3 , a t i ts m o s t r e c e n t e x a m in a tio n o r re v ie w . 3 . S e c tio n 2 1 1 .5 is a m e n d e d b y : a . R e d e s ig n a ti n g p a r a g r a p h s ( c ) (2 ) a n d (3 ) a s p a r a g r a p h s (c ) (3 ) a n d (4 ) re s p e ctiv e ly ; b . B y a d d in g a n e w p a r a g r a p h ( c ) ( 2 ) ; and c . In n e w l y d e s ig n a te d p a ra g ra p h (c )(3 ), b y re m o v in g th e w o rd “ a c c e p t e d ” in t h e t h i r d s e n t e n c e a n d a d d i n g in i ts p l a c e t h e w o r d “ r e c e i v e d ” . T h e a d d itio n re a d s as fo llo w s: §211.5 * (c ) * Investments and activities abroad. * * * * * * * * * * * Additional general consent for de novo investments. N o t w i t h s t a n d i n g (2 )(i) th e a m o u n t lim ita tio n s o f p a ra g ra p h ( c ) ( 1 ) o f t h i s s e c t i o n , b u t s u b j e c t t o th e o t h e r l im i t a t i o n s o f t h i s s e c t i o n , t h e B o a r d g r a n ts a d d i t i o n a l g e n e r a l c o n s e n t a u t h o r i t y fo r i n v e s t m e n t s in a n o r g a n i z a t i o n b y a n i n v e s t o r t h a t is stro n g ly c a p ita liz e d a n d w e ll m a n a g e d if: (A ) T h e a c t i v i t i e s o f t h e o r g a n iz a t i o n a re lim ite d to a c tiv itie s in w h ic h a n a t i o n a l b a n k m a y e n g a g e d i r e c t l y o r in w h ic h a su b sid ia ry m a y e n g a g e u n d e r § 2 1 1 .5 ( d ) ; (B ) In t h e c a s e o f a n i n v e s t o r t h a t is a n E d g e c o rp o ra tio n th a t is n o t e n g a g e d i n b a n k in g o r a g r e e m e n t c o r p o r a t i o n , t h e t o t a l a m o u n t i n v e s t e d in s u c h o r g a n i z a t i o n (in o n e t r a n s a c t i o n o r a s e rie s o f tra n s a c tio n s ) d o e s n o t e x c e e d t h e l e s s e r o f t h e i n v e s t o r ’s 2 0 p e r c e n t o f th e T ie r 1 c a p ita l o r 2 p e r c e n t o f th e T ie r 1 c a p ita l o f th e p a re n t m e m b e r b a n k ; (C ) In th e c a s e o f a b a n k h o l d in g c o m p a n y o r m e m b e r b a n k i n v e s t o r , th e to ta l a m o u n t in v e s te d in s u c h o r g a n i z a t i o n (in o n e t r a n s a c t i o n o r a s e rie s o f tra n s a c tio n s ) d ir e c tly o r th e p ro p o s e d ru le w o u ld b e to re d u c e r e d e s i g n a t in g p a r a g r a p h s (u ) a n d (v ) a s in d ir e c tly d o es n o t e x c e e d 2 p e rc e n t o f r e g u la t o r y b u r d e n . T h e r u l e s h o u l d n o t h a v e a s i g n if ic a n t e c o n o m i c i m p a c t o n p a r a g r a p h s (v ) t h r o u g h ( w ) , r e s p e c t i v e l y , a n d b y a d d in g n e w ^ a r a g r a p h s (u ) a n d t h e i n v e s t o r ’s T i e r 1 c a p i t a l ; (D ) A l l i n v e s t m e n t s m a d e b y a n E d g e a s u b s t a n t i a l n u m b e r o f s m a ll b u s i n e s s (x ) c o r p o r a t i o n n o t e n g a g e d i n b a n k in g o r to re a d as fo llo w s: Federal Register / Vol. 60, No. 185 / Monday, September 25, 1995 / Proposed Rules a n a g r e e m e n t c o r p o r a t i o n d u r in g th e p re v io u s 1 2 -m o n th p e rio d u n d e r r e s p e c t i v e r e s p o n s ib il i ti e s o f t h e p a r t ie s t o t h e jo in t v e n t u r e ; p a ra g ra p h (c )(1 ) a n d (c )(2 ) o f th is s e c t i o n , w h e n a g g r e g a te d w i t h th e p ro p o s e d in v e s tm e n t, w o u ld n o t e x c e e d (C ) A d e s c r i p t i o n o f th e t e r m s a n d s o u r c e s o f f u n d s fo r t h e t r a n s a c t i o n a n d p r o j e c t i o n s fo r t h e o r g a n iz a t i o n in w h i c h t h e i n v e s t m e n t is m a d e fo r t h e fir s t y e a r fo llo w in g t h e i n v e s t m e n t ; a n d (D ) In th e c a s e o f a d d i ti o n a l in v e s tm e n ts , a n e x p la n a tio n o f th e r e a s o n s fo r th e i n v e s t m e n t a n d , w h e r e t h e i n v e s t m e n t is m a d e in a n th e le s s e r o f 5 0 p e rc e n t o f th e to ta l c a p ita l o f th e E d g e o r a g re e m e n t c o r p o ra tio n , o r 5 p e rc e n t o f th e to ta l c a p ita l o f th e p a re n t m e m b e r b a n k ; (E ) A l l i n v e s t m e n t s m a d e b y a m e m b e r b a n k o r a b a n k h o l d in g c o m p a n y d u r in g t h e p r e v i o u s 1 2 - m o n t h p e r i o d u n d e r p a r a g r a p h ( c ) ( 1 ) a n d ( c )( 2 ) o f t h i s s e c t i o n w i t h o u t p r o v id in g p r i o r n o t i c e t o o r o b ta in in g t h e c o n s e n t o f t h e B o a r d , w h e n a g g r e g a te d w i t h th e p ro p o s e d in v e s tm e n t, w o u ld n o t e x c e e d 5 p e r c e n t o f i ts t o t a l c a p i t a l ; a n d (F ) B o t h b e f o r e a n d i m m e d i a t e l y a f te r th e p r o p o s e d i n v e s t m e n t t h e i n v e s t o r , i ts p a r e n t m e m b e r b a n k , i f a n y , a n d th e b a n k h o l d in g c o m p a n y a r e s tr o n g ly c a p i t a l i z e d a n d w e ll m a n a g e d . (ii) Determining aggregate investm ent lim its. F o r p u r p o s e s o f d e te r m i n i n g c o m p l i a n c e w i t h t h e a g g r e g a te i n v e s t m e n t l im it s s e t o u t i n p a r a g r a p h ( c ) ( 2 ) ( i ) (D ) a n d (E ) o f t h i s s e c t i o n , a n i n v e s t m e n t b y a n i n v e s t o r in a s u b s i d i a r y s h a ll b e c o u n t e d o n l y o n c e n o tw ith s ta n d in g th a t s u c h su b sid ia ry m a y , w it h i n 1 2 m o n t h s o f t h e d a te o f m a k in g t h e i n v e s t m e n t , d o w n s tr e a m a ll o r a n y p a r t o f s u c h i n v e s t m e n t to a n o t h e r s u b s id ia r y . (iii) A ddition al investm ents. A n in v e s to r th a t m a k e s in v e s tm e n ts u n d e r p a ra g ra p h (c )(2 )(i) o f th is s e c tio n m a y a l s o m a k e a d d i ti o n a l i n v e s t m e n t s in a n o r g a n iz a t i o n u n d e r t h e s t a n d a r d s s e t f o r th i n p a r a g r a p h s ( c ) ( 1 ) ( h ) , ( c ) ( l ) ( i i i ) a n d ( c )(l)(iv ) o f th is s e c tio n . (iv ) Ineligible investm ents. T h e f o l l o w i n g i n v e s t m e n t s a r e n o t e lig ib le fo r t h e g e n e r a l c o n s e n t u n d e r p a r a g r a p h (c )(2 )(i) o f th is s e c tio n : (A ) T h e i n i ti a l e n tr y i n t o a fo r e ig n co u n try ; (B ) T h e e s t a b l i s h m e n t o r a c q u i s i ti o n o f a n i n i t i a l s u b s i d i a r y b a n k in a fo r e ig n c o u n try ; , (C ) I n v e s t m e n ts i n g e n e r a l p a r t n e r s h i p s o r u n l i m i t e d lia b ility c o m p a n ie s ; an d (D ) A n a c q u i s i t i o n o f s h a r e s o r a s s e ts o f a n o r g a n iz a t i o n t h a t is n o t a n a ff ilia te o f th e in v e sto r. (v ) Post-investm ent notice. W i th in 1 0 b u s i n e s s d a y s o f m a k in g t h e i n v e s t m e n t, t h e i n v e s t o r s h a ll p r o v i d e t h e B o a r d w i t h a n o t i c e s e t ti n g o u t a l l m a t e r ia l i n f o r m a t i o n r e l a t in g t o t h e i n v e s t m e n t, in clu d in g : (A ) A d e s c r i p t i o n o f t h e i n v e s t m e n t a n d th e a c tiv itie s to b e c o n d u c te d ; (B ) T h e i d e n ti t y o f a l l e n ti ti e s i n v o l v e d in t h e i n v e s t m e n t , i n c l u d i n g a n y d o w n s t r e a m i n v e s t m e n t , a n d , i f th e i n v e s t m e n t i s i n a j o in t v e n t u r e , th e o r g a n iz a t i o n t h a t i n c u r r e d a l o s s in t h e l a s t y e a r , a d e s c r i p t i o n o f t h e r e a s o n s fo r th e lo s s a n d th e ste p s ta k e n to a d d re ss th e p ro b le m . * * * ★ it By order of the Board of Governors of the Federal Reserve System, September 20, 1995. W illiam W . Wiles, S e c re ta ry o f th e B oard. [FR Doc. 95-23670 Filed 9 -2 2 -9 5 ; 8:45 a.m.] BILLING CODE 6210-01-P 49353
@FedFRASER