Seal of the Board of Governors of the Federal Reserve System BOARD OF GOVERNORS

WASHINGTON, D. C.  20551
SR 02-3
February 7, 2002


SUBJECT:   Revisions to Procedures for Processing Applications and Prior Notifications under Regulation K Resulting From Recent Revisions to Regulation K

                      On November 26, 2001, significant revisions to Regulation K came into effect that generally streamline applications requirements and, in certain instances, reduce filing requirements.  The primary revision that affects the applications function is the adoption of new 12-day and 30-day prior notice procedures with respect to foreign activities by U.S. banking organizations.  Prior to the revisions, these types of proposals were generally processed using a 45-day prior notice or 60-day specific consent procedure. 

                      The purpose of this letter is to provide a general description of the procedural changes contained in the revised Regulation K.  In addition, this letter establishes procedures for processing the new 12-day and 30-day prior notifications and revises existing processing procedures to be more consistent with procedures for other types of applications, including those filed under Regulation Y.1

                      Attachment A contains revised processing guidelines for prior notifications and applications filed under Regulation K.  The new processing guidelines allow requests for additional information to be made on an as-needed basis and do not establish a rigid timeline for these requests.  However, Reserve Bank staff should be aware of the new shortened time periods and the need to request information in a timely fashion in order to meet the new deadlines.  The guidelines suggest that, in 30-day cases, additional information should be requested within 8 business days and that, in 12-day cases, additional information should be requested within 5 business days.  In the case of 12-day prior notices, Reserve Bank staff is requested to fax a copy of the notice and control sheet to the Clearing Unit upon receipt in order to ensure timely processing.  The shortened time periods, combined with potential mail delays, significantly increase the need for Reserve Bank staff to promptly forward copies of filings to the Clearing Unit. 

Summary of Changes to Subpart A of Regulation K

                      Establishment of foreign branches.  The processing procedure for a member bank to establish a branch in the first and second foreign country has been changed from specific consent (60-day processing track) to 30-day prior notice.  Further, member banks that operate branches in two or more foreign countries may now establish an additional foreign branch after providing 12 business days prior notice to the Board.  Prior to the revisions, proposals to establish additional foreign branches were processed on a 45-day prior notice track.  Proposals to establish a subsidiary of a foreign branch, or to engage in activities in a foreign branch that are not listed in section 211.4 of Regulation K, continue to require the specific consent of the Board (60-day processing track).

                      Investments in Foreign Organizations.  The revisions to Regulation K significantly expand the general consent authority for well-capitalized and well-managed investors.  The new general consent limits are summarized in Attachment B.  The new limits are tied to the capital of the investor and vary depending on whether the investment is to be made in a subsidiary or a joint venture, or is a portfolio investment, and whether the investment is being made by a bank holding company, member bank, or Edge or agreement corporation.2  For investors that do not meet the well-capitalized and well-managed criteria, the general consent limit in most instances is $25 million.  There are also aggregate limits on the amount of investments that may be made using the general consent procedures over a 12-month period.3

                      For proposals to make foreign investments that exceed the general consent limits, the prior notification period has been shortened from 45 days to 30 days.  Investments that do not qualify for the general consent or prior notice procedures continue to require the specific consent of the Board (60-day processing track). 

                      An organization's first foreign investment under Regulation K continues to require the specific consent of the Board.  If the first foreign investment would otherwise qualify under general consent procedures, approval is delegable to the responsible Reserve Bank.

                      For investments that exceed the general consent limits and are intended to be made over a period exceeding 12 months, the revised Regulation K provides for a preclearance process for a long-range investment plan.  Approval of preclearance requests is delegated to the Director of the Division of Banking Supervision and Regulation.  Such requests would generally be acted on within 60 days of receipt. 

                      Edge and Agreement Corporations.  Proposals to establish an Edge or agreement corporation continue to be subject to the specific consent procedures (60-day processing track).  Additionally, the revised Regulation K implements a statutory provision that allows member banks to invest more than 10 percent and up to 20 percent of capital and surplus in the stock of Edge and agreement corporations.  Such proposals are delegable to the responsible Reserve Bank if no issues are raised and provided that the member bank's total investment, including the retained earnings of the Edge and agreement corporation subsidiaries, does not exceed 20 percent of the bank's capital and surplus or would not exceed that level as a result of the proposal.  It is expected that such proposals would continue to be accepted for Board action in order to ensure consistent treatment and review, as well as to ensure that the proposals do not raise issues that should be presented to the Board.  Applications that are determined to have no issues would be delegated back to the responsible Reserve Bank for approval action.

                      Securities Activities.  The revisions to Regulation K substantially liberalized equity underwriting authority.  For well-capitalized and well-managed investors, the equity underwriting limit has been increased from an effective $60 million limit on uncovered exposures to a limit tied solely to a percentage of the investor's tier 1 capital (15 percent of the tier 1 capital of the bank holding company for underwriting through holding company subsidiaries or, for subsidiaries of Edge corporations, the lesser of three percent of the tier 1 capital of the bank or 15 percent of the tier 1 capital of the Edge).  For investors that do not meet the well-capitalized and well-managed standard, existing dollar limits are retained.  Processing procedures for proposals to engage in equity underwriting were changed from specific consent (60-day processing track) to 30-day prior notice.  The bulk of the review for these types of proposals would generally be performed by supervisory staff responsible for the applicant organization as part of the overall appraisal of the applicant's policies, procedures, and controls.

                      Equity dealing authority is also liberalized.  Equity dealing activities are now subject to a limit of $40 million (an increase from $30 million) on net long positions in a single issuer.4  No distinction in limits is made between well-capitalized and well-managed investors and investors that do not meet the well-capitalized and well-managed criteria.  In order to take advantage of the higher limit, an investor must provide 30-day prior notice.  The revised Regulation K also contains a provision for allowing organizations to use internal hedging models to net and offset positions in a security in calculating compliance with the single issuer dealing limit.  Proposals to use the netting authority under Regulation K also require 30-day prior notice.  As with equity underwriting, the bulk of the review for these types of proposals would generally be performed by supervisory staff responsible for the applicant organization as part of the overall appraisal of the applicant's policies, procedures, and controls.

                      Advisory Opinions.  New section 211.11 of Regulation K provides a procedure for requesting an advisory opinion regarding the scope of activities permissible under the regulation.  The request for an advisory opinion should be submitted in writing.  A response to the request will usually be provided within 45 days after the record on the request has been determined to be complete. 

Summary of Changes to Subpart B of Regulation K

                      The revised Regulation K provides for expanded use of the 45-day prior notice procedure for foreign banks to establish additional offices in the United States.  Any foreign bank that has been determined to be subject to comprehensive consolidated supervision may establish additional branches, agencies, commercial lending company subsidiaries, and representative offices pursuant to the 45-day prior notice procedure.  Additionally, a foreign bank that is subject to the provisions of the Bank Holding Company Act, but has not received a comprehensive consolidated supervision determination, is permitted to use the 45-day notice procedure to establish a representative office.5  Finally, any foreign bank that has received approval to establish a representative office may establish additional representative offices using the 45-day prior notice procedure.

                      General consent procedures can now be used by banking organizations that are subject to the Bank Holding Company Act and that have received a comprehensive consolidated supervision determination in connection with the establishment of a representative office.

Anti-Money Laundering Compliance

                      The Federal Reserve has a longstanding practice of considering an applicant's compliance with applicable anti-money laundering laws and regulations, including pertinent examination findings by other regulators where the application involves, for example, a national or state nonmember bank or a foreign banking organization.  The importance of efforts to combat money laundering were recently underscored by enactment of the USA Patriot Act that, among other matters, requires consideration of anti-money laundering compliance in connection with certain applications filed under the Bank Merger Act or section 3 of the Bank Holding Company Act.  Although these provisions do not apply to applications filed under subparts A and B of Regulation K, the Board nonetheless will continue its practice of taking into account the applicant's anti-money laundering compliance record in acting on Regulation K proposals.

                      This letter and its attachments are to be distributed to Reserve Bank staff responsible for processing applications under Regulation K and such staff are advised to become familiar with the revised regulation.  If there are any questions, please contact Betsy Howes-Bean, Project Manager Applications Section, at (202) 452-3096 or Betsy Cross, Deputy Associate Director, at (202) 452-2574.

Richard Spillenkothen



Attachment A (282 KB PDF) New Procedures for Processing Prior Notifications and Applications under Regulation K
Attachment B (45 KB PDF) General Consent Limits Under Subpart A of Regulation K

Superseded:  SR letter 95-44



  1. In June 2001, the Board approved broad delegation of authority to the Director of the Division of Banking Supervision and Regulation and the General Counsel to act on proposals under Regulation K that do not raise significant issues or otherwise require consideration by the Board.  It is anticipated that most proposals under Regulation K that formerly were processed for Board action will be processed as Division Director delegated matters.  Return to text

  2. An investment in a foreign bank is ineligible for the general consent procedures if after the investment the foreign bank would be an affiliate of a member bank and the foreign bank is located in a country in which the member bank and its affiliates have no banking presence.  Return  to text

  3. Only investments made subsequent to November 30, 2001, will be considered in determining compliance with the rolling 12-month aggregate general consent limit.  Return to text

  4. For purposes of determining compliance with the single issuer limits, the revised Regulation K distinguishes between customer-driven equity derivatives activities and other equity dealing activities such as market making and proprietary equities activities.  Customer-driven equity derivatives activities are allowable under the "commercial banking" activity of section 211.10(a)(1) of Regulation K and are not included in calculating compliance with the single issuer equity dealing limit except that any residual (unhedged) position must be carried over and included in the limit.  Return to text

  5. In such cases, it is possible that the foreign bank has not yet been subject to the namecheck process. It is anticipated that name checks would be initiated in the context of the 45-day prior notice, but completion of the name check process would not always be necessary to complete processing of the notice.  Return to text

SR letters | 2002