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F E D E R A L R E S E R V E BAN K O F N EW Y O R K T Circular No. 5 7 9 6 ~l April 1, 1966 J L PRESIDENT’S BALANCE OF PAYMENTS PROGRAM Revision of Guideline No. 3 on Foreign Lending and Investment Activities of Nonbank Financial Institutions To All Banks and Other Financial Institutions in the Second Federal Reserve D istrict: Effective today, the Board of Governors of the Federal Reserve System has changed the treatment of certain foreign equity securities under its 1966 Guideline No. 3 of the voluntary foreign credit restraint program for nonbank financial institutions. The 1966 guidelines for banks and nonbank financial institutions are set forth in our Circular No. 5732, dated December 3, 1965. Following is the Board’s statement, amending Guideline No. 3: The guidelines fo r 1966 on the foreign lending and investment activities o f nonbank financial insti tutions, issued last December 3, request (in Guideline No. 3) that long-term loans and investments in developed countries (other than Canada and Japan) be limited to not more than 105 per cent of the amounts held as of September 30, 1965. W ithin this developed countries category, moreover, institutions are requested to avoid any net increase of long-term investments in continental W estern Europe. In administering the voluntary foreign credit restraint program, we have viewed these guidelines as applying to (among other assets) any net acquisitions of the long-term securities o f foreign-dom iciled com panies, regardless of whether the securities are acquired from foreign sources or from other U. S. investors. It has come to our attention, however, that this interpretation may be having unintentionally harmful effects on domestic markets for the large pool o f foreign equity securities already owned by and traded among U. S. investors. The intent of the voluntary program is to restrain capital outflows for the purpose o f im proving our n ation ’s balance of payments, and not to inhibit the marketability of foreign equities already held by U. S. investors. Therefore, we are amending the treatment under Guideline No. 3 o f the affected securities, namely, Am erican-owned equity securities o f companies in developed countries other than Canada and Japan. The conditions under which transactions in such securities may take place without regard to the guidelines are specified b elow ; we are confident that the safeguards provided for will prevent outflows of capital as a result o f the change. 1. Institutions may acquire the equity securities of companies domiciled in developed countries (other than Canada and Japan, where there are no restrictions) without regard to the guidelines, p ro vided that evidence in writing is obtained showing that such stock was held by a U. S. investor as of March 31, 1966. 2. Institutions that have made net purchases of such equity securities in the period from Septem ber 30, 1965 to March 31, 1966, may consider these purchases to have been exempt from guideline ceilings, provided that the shares were acquired with interest equalization tax certificates of American ownership attached. 3. Institutions wishing to sell such equity securities to other U. S. investors may do so, except that to the extent transactions in these securities reduce total holdings below the base date amount (Septem ber 30, 1965), that amount will be reduced by the size o f the net liquidation. 4. Institutions taking advantage of these special provisions will be asked to report supplementary data on transactions in foreign equities for the purpose o f adjusting base date holdings and deter m ining com pliance with this aspect o f the guidelines. The first such report— to accompany the regular report on Form F R 392 to the Reserve Bank o f your District— will be requested for the quarter ended June 30. Our Foreign Department (Telephone Extension 1000) will be pleased to confer with you on any problems that may arise under the guidelines. Additional copies of this circular will be furnished upon request. A lfred H ayes, President.
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