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Board Rulings and Staff Opinions Interpreting Regulation K

3-730

EDGE AND AGREEMENT CORPORATIONS—Ownership of Shares by State Corporation

A state corporation may invest part of its capital in the stock of an Edge corporation, even though part of the stock of the corporation is owned by national banks. However, state incorporated foreign bank institutions operating pursuant to an agreement with the Board should not invest in the stock of Edge corporations in a greater amount than Edge corporations may be authorized by the Board to invest in the stock of other international financial corporations. STAFF OP. of Jan. 8, 1920.
Authority: 12 CFR 211.4(b).
3-731

EDGE AND AGREEMENT CORPORATIONS—Ownership of Shares by Federal Reserve Banks

The Federal Reserve Act does not permit Federal Reserve Banks to purchase debentures issued by Edge corporations or to make temporary advances to Edge corporations against the deposit of such debentures as collateral. STAFF OP. of April 19, 1920.
Authority: FRA § 25(a), 12 USC 611-631.
3-732

EDGE AND AGREEMENT CORPORATIONS—Permissible Activities

The power of corporations organized under section 25(a) of the Federal Reserve Act (the Edge Act) to purchase and own stock in other corporations is specifically limited to the purchase of obligations of the United States or any state thereof, with certain exceptions. These exceptions, contained in paragraph (c) of the act, provide that, with the consent of the Board, Edge corporations may invest in the stock or other certificates of ownership of any other corporation organized (1) under the provisions of the Edge Act; (2) under the laws of any foreign country or a colony or dependency thereof; or (3) under the laws of any state, dependency, or insular possession of the United States, if the corporation is not engaged in the general business of buying or selling goods or merchandise in the United States and is not transacting any business in the United States except business that is incidental to its international or foreign business. These provisions, which define the full extent to which Edge corporations may invest in the stock of other corporations, do not empower Edge corporations to purchase stock in a Joint Stock Land Bank. Such a corporation does not come within the specific classification of permissible investment corporations, nor would the purchase of such stock be within the spirit of the Edge Act, the purpose of which is to foster and promote foreign and international financial operations. STAFF OP. of Nov. 11, 1922.
Authority: FRA § 25(a), 12 USC 615; 12 CFR 211.4(e).
3-733

EDGE AND AGREEMENT CORPORATIONS—Purchase and Sale of Gold

Section 25(a) of the Federal Reserve Act authorizes Edge corporations “to purchase and sell coin, bullion, and exchange,” subject to applicable governmental restrictions. When a bank’s intended gold activities consist solely of international transactions, i.e., the purchase of gold abroad and its importation into the United States for licensed purposes, a section 25(a) corporation may engage in such activities under a Treasury license. STAFF OP. of June 12, 1968.
Authority: FRA § 25(a), 12 USC 616.
3-734

EDGE AND AGREEMENT CORPORATIONS—Purchase and Sale of Gold

No Edge corporation may “carry on any part of its business in the United States except such as, in the judgment of the Board . . .  , shall be incidental to its international or foreign business.” Occasional domestic purchase of gold under an Edge corporation’s Treasury license is permissible if the purchases do not exceed 15 percent of its aggregate gold purchases during any calendar quarter. STAFF OP. of Dec. 2, 1968.
Authority: FRA § 25(a), 12 USC 611.
3-735

EDGE AND AGREEMENT CORPORATIONS—Reserve Requirements; Letters of Credit

A letter of credit issued by a member bank to an Edge corporation to support a borrowing by one of the member bank’s customers from the Edge corporation does not constitute a deposit within the meaning of Regulation D (12 CFR 204), since the member bank does not thereby “obtain” any funds to be used in its banking business. STAFF OP. of Dec. 29, 1971.
Authority: 12 CFR 211.4(d).
3-736

EDGE AND AGREEMENT CORPORATIONS—Freight-Forwarding Services

Where a foreign company engages in freight-forwarding services as well as trade promotion and servicing activities, its activities are not “international or foreign banking or other international or foreign financial operations,” as required by section 25(a) of the Federal Reserve Act. STAFF OP. of June 28, 1974.
Authority: FRA § 25(a), 12 USC 611.
3-737

EDGE AND AGREEMENT CORPORATIONS—Ownership of Shares

The Edge Act requires that a majority of the shares of stock of an Edge corporation shall at all times be held by U.S. citizens or by corporations controlled by U.S. citizens. An exception to this requirement allows a foreign bank or a domestic bank controlled by a foreign bank to own a majority of the shares of stock of an Edge corporation, subject to any terms and conditions the Board may impose. In view of these specific provisions, a national bank owned by foreign individuals is prohibited from acquiring majority ownership of an Edge corporation, notwithstanding the amendments to the Edge Act in the International Banking Act of 1978. STAFF OP. of Jan. 23, 1980.
Authority: Edge Act, 12 USC 619.
3-737.1

EDGE AND AGREEMENT CORPORATIONS—Underwriting Life Insurance

The Board approved the application of an Edge corporation, a subsidiary of a U.S. bank, to retain the shares of its Australian insurance subsidiary after the subsidiary engages in the activity of underwriting life insurance in Australia. The Board relied on a commitment by the parent bank holding company to transfer the indirect ownership of the insurance subsidiary from the Edge to the parent holding company within two years after the insurance subsidiary began engaging in the activity of underwriting life insurance. The holding company now requests relief from this commitment, prompted by the Reserve Bank of Australia’s requirement that the U.S. bank’s proposed commercial banking subsidiary in Australia be the holding company for all of the parent holding company’s substantial interests in financial institutions in Australia.
For reasons of safety and soundness, the Board generally requires that nontraditional activities be conducted through the parent holding company. In view of the circumstances and the fact that the insurance subsidiary has commenced operations, however, the Edge may retain indirect ownership of the insurance subsidiary, rather than be required to divest its interests, to conform to the Reserve Bank of Australia’s requirements. In reaching this decision, the Board noted that the parent holding company organization commenced this activity in the expectation that ownership in that form would be possible. Permitting the parent to maintain ownership of the insurance subsidiary through the U.S. bank amounts to a grandfathering of the activities previously approved and not to a modification of the Board’s policy of requiring nonbanking activities to be held through the holding company rather than the bank. All other requirements, however, remain in effect (see 1985 Fed. Res. Bull. 269).
The Edge’s retention of the insurance subsidiary is subject to the condition that section 23A of the Federal Reserve Act shall apply to all covered transactions between the parent holding company’s banking subsidiaries and the insurance subsidiary. BD. RULING of Aug. 22, 1985.
Authority: FRA §§ 23A and 25(a), ¶ 8, 12 USC 371c and 615(c); 12 CFR 211.5(d).

EDGE AND AGREEMENT CORPORATIONS—Investments

See Investments.
3-738

EXPORT TRADING COMPANIES—Board Review of Proposed Investments in ETCs

A bank holding company proposes to establish an export trading company subsidiary (ETC subsidiary). The ETC subsidiary will, in turn, own 50 percent of a joint venture export trading company (ETC joint venture) with another export trading company (joint venture partner). The Board considered the notice and noted the following with regard to concentration of resources and decreased competition:
  • Investments by each organization in the ETC joint venture will be relatively small compared with the overall size of the investing organizations.
  • The ETC joint venture will engage exclusively in activities related to international trade.
  • The holding company and joint venture partner do not engage together in other joint venture activities.
  • The U.S. markets for export trade services generally are not concentrated, and barriers to entry are low.
  • The proposed joint venture will enter these markets de novo, which the Board generally regards as procompetitive.
Protections from conflicts of interest arising from the joint venture are provided by the Bank Export Services Act, Regulation K and the partnership agreement between the holding company and the joint venture partner. These protections include (1) the prohibition on preferential lending by the holding company to the ETCs, to customers of the ETCs, or to the parent of the joint venture partner and its affiliates and (2) the provisions of the partnership agreement requiring the maintenance of confidentiality of all business information of the ETC joint venture. The holding company’s bank (bank) also is prohibited by law from requiring, as a condition to the granting of credit, that a customer obtain some other product or service from the bank or the holding company (12 USC 1972). To prevent other potential conflicts of interest, the ETC subsidiary and ETC joint venture should avoid conditioning the provision of any credit, property, or service to a customer on the customer’s obtaining some other product or service from either the holding company or the organization of the joint venture parent.
The Board plans to adopt industry-wide capital standards for bank-affiliated export trading companies and will review the ETC subsidiary’s and ETC joint venture’s capital adequacy in connection with that review.
The Board did not disapprove the proposal to invest in the ETC subsidiary and the ETC joint venture. The holding company had also requested waivers of the quantitative limitations or collateral requirements of section 23A of the Federal Reserve Act regarding covered transactions between the bank and the ETC subsidiary and the ETC joint venture. The Board did not grant the waivers, but noted that—
  • it intends to review generally the quantitative limits of section 23A as they apply to the purchase of accounts receivable;
  • that a purchase of assets is not subject to the collateral requirements of section 23A; and
  • that the bank may lend to the ETCs or to the parent of the joint venture partner for the benefit of the ETC joint venture on the basis of the reduced collateral requirements established in section 211.33(b)(3) of Regulation K.
BD. RULING of Nov. 22, 1983.
Authority: BHCA § 4(c)(14), 12 USC 1843(c)(14); BHCA Amendments § 106(b), 12 USC 1972; FRA § 23A, 12 USC 371c; Bank Export Services Act, 96 Stat. 1235; 12 CFR 211.33(b)(3) and 211.34(a)(2).
3-740

“FOREIGN BANK”—Development Bank

A foreign development bank that does not accept deposits is not a “foreign bank” within the meaning of Regulation K. STAFF OP. of Sept. 30, 1963.
Authority: 12 CFR 211.2(f).
3-741

FOREIGN BANKING ORGANIZATIONS—Grandfather Privileges

Section 8(a) of the International Banking Act subjects a foreign bank that maintains a branch or agency in the United States to the restrictions on nonbanking activities contained in the Bank Holding Company Act. A foreign bank does not qualify for the grandfather privileges of section 8(c), even though its nonbanking activities were begun before July 26, 1978, if it did not have a branch or agency in the United States on September 17, 1978 and was not subject to the International Banking Act at the time of enactment. STAFF OP. of Sept. 17, 1979.
Authority: IBA § 8(a), 12 USC 3106; 12 CFR 211.23.
3-742

FOREIGN BANKING ORGANIZATIONS—Grandfather Privileges

A foreign bank’s conversion of a state branch or agency to a federal branch or agency would not jeopardize its grandfather rights under the International Banking Act so long as the conversion does not result in an increase in the bank’s domestic deposit-taking capabilities. STAFF OP. of Sept. 26, 1979.
Authority: IBA §5(a) and (b) and § 8(b) and (c), 12 USC 3103 and 3106.
3-743

FOREIGN BANKING ORGANIZATIONS—Reserve Requirements

The International Banking Act and its legislative history reflect a congressional intent to preempt state reserve requirements on branches and agencies of foreign banks. STAFF OP. of Sept. 26, 1979.
Authority: IBA, 12 USC 3101 et seq.
3-744

FOREIGN BANKING ORGANIZATIONS—Acceptance of Deposits from Outside Home State

The International Banking Act does not place any restrictions on the types of deposits that may be accepted by a foreign bank’s branch or banking subsidiary located in that foreign bank’s home state. Accordingly, such a branch or subsidiary bank could accept deposits from corporate entities or individuals residing outside that state. STAFF OP. of Feb. 4, 1980.
Authority: IBA § 5, 12 USC 3103.
3-744.1

FOREIGN BANKING ORGANIZATIONS—Eligibility for Exemptions

A company located outside the United States filed an application under section 3 of the Bank Holding Company Act (BHCA) to become a bank holding company by acquiring a bank located in Puerto Rico. The company asked whether, as a result of the acquisition, it would qualify for the exemptions afforded a qualifying foreign banking organization (QFBO) by section 211.23 of Regulation K. Section 211.23(b) sets out several tests for eligibility as a QFBO: (1) a company must be a “foreign banking organization,” (2) more than half of its worldwide business (disregarding its U.S. banking) must be banking, and (3) more than half of its banking business must be outside the United States. The bank would represent substantially all of the assets of the company; therefore, the company would meet the numerical tests of section 211.23(b) if the bank was deemed to be “outside the United States” for purposes of the QFBO requirements.
The BHCA specifically defines the term “bank” to include banks in Puerto Rico, but the definition does not include banks organized under the laws of foreign countries. The International Banking Act includes banks in Puerto Rico under the definition of “foreign banks.” The definition of “bank” used in the BHCA controls for purposes of determining eligibility for QFBO status, because (1) banks in Puerto Rico, unlike banks in foreign countries, are deemed to be domestic banks for purposes of the BHCA (including the prior-approval requirements of section 3) and (2) the QFBO exemptions were promulgated in order to implement sections 2(h) and 4(c)(9) of the BHCA. It is apparent that, by specifically including a bank chartered in Puerto Rico within the definition of “bank,” Congress intended to treat Puerto Rican banks as domestic banks for purposes of the requirements of, and exemptions available under, the BHCA. Moreover, the Board’s determination that a foreign institution must disregard its U.S. banking assets in meeting the numerical tests of section 211.23(b) of Regulation K is a stringent requirement designed to prevent an organization that is not primarily and substantially foreign (such as the company in this case), from bootstrapping itself into qualification for the section 2(h) and 4(c)(9) exemptions on the basis of its assets subject to U.S. jurisdiction.
For these reasons, the bank was not “outside the United States” for purposes of the QFBO requirements in Regulation K. The company therefore would not qualify as a QFBO. STAFF OP. of Aug. 29, 1983.
Authority: BHCA § 2(h), 3, and 4(c)(9), 12 USC 1841(h), 1842, and 1843(c)(9); IBA § 1(b)(7), 12 USC 3101(7); 12 CFR 211.23(a) and (b).
3-744.11

FOREIGN BANKING ORGANIZATIONS—Eligibility for Exemptions

A foreign-based bank holding company owns 30 percent of Company A, which in turn owns 33 percent of Company B. Companies A and B are both located abroad. Section 211.23(f)(5)(i) of Regulation K permits a qualifying banking organization to own shares of nonbanking foreign companies that engage in certain activities in the United States if, among other limitations, more than 50 percent of the foreign-company assets are located, and more than 50 percent of its revenues are derived from, outside the United States. Although, in 1982, more than 50 percent of Company B’s assets were located outside the United States, more than 50 percent of its consolidated revenues were derived from the United States.
The Board denied the holding company’s request that the assets and revenues test be applied to Company A, rather than Company B, on the basis that to do so would be inconsistent with the intent of section 2(h) of the Bank Holding Company Act, which grants a narrow exemption from the act’s nonbanking prohibitions for U.S. activities conducted by a foreign company that is principally engaged in business outside the United States. The Board did, however, approve the holding company’s application under section 4(c)(9) of the act and section 211.23(g) of Regulation K to retain Company B in light of the continued foreign character of Company B. The Board found the exemption would not be substantially at variance with the purposes of the act so long as—
  • more than 50 percent of Company B’s consolidated assets are located abroad, as required by section 211.23(f)(5)(i) of Regulation K;
  • the failure to meet the revenues portion of the test in section 211.23(f)(5)(ii) continues to be attributable to internal growth and external factors rather than expansion by acquisition in the U.S. markets; and
  • Company B’s direct or indirect activities in the United States continue to be limited mainly to marketing and servicing products manufactured abroad. BD. RULING of Oct. 20, 1983.
Authority: BHCA §§ 2(h) and 4(c)(9), 12 USC 1841(h) and 1843(c)(9); 12 CFR 211.23(f)(5)(i) and (ii); 12 CFR 211.23(g).
3-744.12

FOREIGN BANKING ORGANIZATIONS—Eligibility for Temporary Exemption

In connection with their proposed acquisition of the foreign parent company (the foreign company), two foreign banking organizations (the applicants) requested temporary authority to indirectly acquire up to 100 percent of the voting shares of a U.S. company and its subsidiaries. Each applicant operated a branch in the United States, was subject to the Bank Holding Company Act (BHCA), and was a “qualifying foreign banking organization” as defined in Regulation K. The activities conducted in the United States by the U.S. company (acting as agent in the private placement of securities, providing financial advisory services, engaging in real estate equity financing services) were permissible activities under section 4(c)(8) of the BHCA.
The applicants requested a temporary exemption to acquire the U.S. company under section 4(c)(9) of the BHCA until permanent approval under section 4(c)(8) could be obtained. Section 4(c)(9) allows the Board to grant exemptions to foreign banking organizations that conduct the greater part of their business outside the United States if the Board determines that the exemption would not be substantially at variance with the purposes of the BHCA and is in the public interest. Information provided by the applicant supported the essentially foreign character of the proposed transactions; the value of the assets of the U.S. company’s U.S. nonbanking subsidiaries the acquisition of which required approval under section 4(c)(8) represented approximately 0.1 percent of the value of the total assets to be acquired in the transaction. In addition, the applicants did not appear to gain any competitive advantage as a result of receiving temporary authority under section 4(c)(9).
In approving the application, the Board relied on the commitments made by the applicants, including the following:
  • 1.
    to file an application pursuant to section 4(c)(8) to retain the U.S. company as promptly as practicable and, in any event, within 90 days of the completion of the transaction
  • 2.
    to discontinue any U.S. activities of the foreign company and its subsidiaries that do not conform to the requirements of the BHCA (to the extent that such activities exist) as promptly as is practicable and, in any event, within the time specified by the Board
  • 3.
    to comply with additional commitments regarding the separation of the operations of one applicant’s grandfathered securities subsidiary and the U.S. company’s operations
BD. RULING of Sept. 7, 1993.
Authority: BHCA § 4(c)(9), 12 USC 1843(c)(9).
3-744.13

FOREIGN BANKING ORGANIZATIONS—Eligibility for Exemptions

Two asset-management subsidiaries of a qualifying foreign banking organization proposed to serve as trustee for foreign-based investment trusts that would invest in U.S. real estate. As part of this asset-management activity, the two subsidiaries would take title to U.S. real estate on behalf of the investment trusts and for the benefit of the investors in the trusts. The law of the foreign jurisdiction requires the two subsidiaries to obtain a banking license to serve as trustee for the investment trusts, and the two subsidiaries are subject to supervision and regulation by the bank supervisory authority in the foreign jurisdiction. Under the arrangement, the two subsidiaries are subject to fiduciary duties that closely resemble those of a trustee in the United States. Moreover, under the law of the foreign jurisdiction, the investment trusts would not be legal entities separate from the two subsidiaries. In addition, the foreign banking organization committed that neither it nor its subsidiaries or employee benefit plans would own any beneficial interests in the investment trusts.
The fiduciary exemptions in the Board’s Regulations K and Y (12 CFR 211.23(f)(4) and 225.22(d)(3)) would permit the two subsidiaries to take title to U.S. real estate on behalf of the investment trusts and for the benefit of the investors in the trusts. STAFF OP. of Nov. 24, 2004.
Authority: BHCA §§ 4(c)(4) and 4(c)(9), 12 USC 1843(c)(4) and 1843(c)(9); 12 CFR 211.23(f)(4) and 225.22(d)(3).
3-745

FOREIGN BRANCHES—Joint Branches of Two or More National Banks

A branch is an integral part of the parent bank, and section 25 of the Federal Reserve Act, in authorizing each national bank to establish a foreign branch separately, cannot be construed to imply that two or more corporations, separate and distinct in law, may form a joint branch. STAFF OP. of Sept. 10, 1915.
Authority: FRA § 25, 12 USC 604a.
3-746

FOREIGN BRANCHES—Failure of National Bank

There is nothing in section 25 of the Federal Reserve Act to indicate that branches established in foreign countries are to have a separate existence and constitute separate corporations. On the contrary, the parent bank is merely to engage in certain foreign transactions through its foreign branch. In case of insolvency of a national bank, all claims against the estate of the bank are paid ratably except the claim of the United States for any deficiency in the security deposited as collateral for the circulating notes of the bank. Therefore, the creditors of a foreign branch of a national bank are general creditors of the parent bank and would be permitted to prove their claims in the same manner as local creditors. STAFF OP. of Feb. 8, 1917.
Authority: FRA § 25, 12 USC 604a.
3-747

FOREIGN BRANCHES—Specifics in Applications

Under the terms of section 25 of the Federal Reserve Act, an application of a national bank for Board permission to establish foreign branches is required to specify the name and amount of capital of the applying bank, the powers applied for, and the place or places where the banking or financial operations proposed are to be carried on. The Board cannot properly grant blanket authority to establish branches in foreign countries and dependencies or insular possessions of the United States. STAFF OP. of Sept. 5, 1919.
Authority: FRA § 25, 12 USC 604a.
3-748

FOREIGN BRANCHES—Reopening of Closed Branch

The closing of a foreign branch of a national bank is regarded as an abandonment of the branch and as a voluntary relinquishment by the national bank of the right granted to it by the Board. To reopen the branch, the bank must file a new application for permission of the Board. STAFF OP. of June 23, 1928.
Authority: FRA § 25, 12 USC 604a.
3-749

FOREIGN BRANCHES—Acquisition of Additional Building

When an additional building acquired in a foreign country is not to be a new foreign branch of a national bank, but is merely to be used to house certain of the operations of the present branch located there, it is not necessary for the bank to file another application with the Board to operate in the foreign country. STAFF OP. of April 30, 1930.
Authority: 12 CFR 211.3.
3-750

FOREIGN BRANCHES—Establishment of Creates Competition

The Board is reluctant to grant permission to establish a foreign branch of a national bank when the location of another banking office in the area under consideration might create competition that would not be conducive to the maintenance of sound banking conditions and practices. STAFF OP. of May 19, 1954.
Authority: 12 CFR 211.3(a).
3-751

FOREIGN BRANCHES—Violations of Johnson Act

Violations of the Johnson Act are felonies, and the interpretation of the act is, therefore, a matter for the attorney general. While the act refers to transactions within the United States, it is conceivable that the spirit, not the letter, of the law might be violated by transactions conducted by a U.S. bank through foreign branches that the bank could not transact in this country. Accordingly, if a national bank’s foreign branches have, since April 13, 1934 (the date of enactment of the Johnson Act), purchased any obligations issued since that time by a foreign government that at the time of the purchase was in default on its obligations to the United States, the confidential section of the report of examination should indicate whether any purchase of government obligations that might be subject to the Johnson Act appear to be normal banking custom of the community, or whether they might more properly be regarded as transactions for account of the head office and thus appear to be attempted evasions of the Johnson Act. STAFF OP. of Sept. 17, 1957.
Authority: Johnson Act, 18 USC 955.
3-752

FOREIGN BRANCHES—Requirements for Establishing

Although section 25 of the Federal Reserve Act requires national banks to obtain the prior approval of the Board before establishing a branch in the Cayman Islands or acquiring direct or indirect ownership of stock or other evidences of ownership in any bank chartered under the law of the Cayman Islands, the Board, itself, does not issue charters for any such branch or foreign bank. A national bank is organized pursuant to the National Bank Act, and its charter is issued and approved by the Comptroller of the Currency. When a national bank wants to establish a foreign branch in the Cayman Islands, it is not required to obtain a separate charter for that branch. However, a national bank must apply to the Board for permission to establish the branch, which, under the regulatory supervision of the Board, must be operated pursuant to Regulation M (see new Regulation K, section 211.3). In addition, a national bank establishing a foreign branch in the Cayman Islands must also obtain all necessary approvals or licenses from the administrator in council under the Banks and Trust Companies Regulation Law of the Cayman Islands before it may commence business there.
If a national bank seeks to acquire a direct or indirect interest in the stock or other evidences of ownership of a bank organized under the law of the Cayman Islands, any charter to be issued to such foreign bank is issued by the local foreign authorities. The Board must approve any investment by a national bank in a foreign bank organized under the law of the Cayman Islands. In addition, the Board may impose on the continued holding of such foreign bank stock by a national bank those conditions that it is within the Board’s statutory regulatory authority to impose. STAFF OP. of Nov. 14, 1973.
Authority: 12 USC 1 et seq.; FRA § 25, 12 USC 601; 12 CFR 211.3.
3-753

FOREIGN BRANCHES—Power to Guarantee Customer Debts

[Previous] Regulation M (see Regulation K §  211.3(b)) allows a foreign branch of a national bank—in connection with the transaction of the business of banking in the places where it would usually transact business—to guarantee customers’ debts or otherwise agree, for their benefit, to make payments on the occurrence of readily ascertainable events. The liability of agreeing to pay a specific sum of money to a third party upon that party’s determination that the bank’s customer (the debtor) had failed to perform his or her commitments under a specified contract is not conditioned upon the type of objective “readily ascertainable event” envisioned by the Board in footnote 3 of the regulation. That footnote states that such events include, but are not limited to, nonpayment of taxes, rentals, custom duties, or costs of transport and loss or nonconformance of shipping documents. STAFF OP. of Jan. 14, 1975.
Authority: FRA § 25, 12 USC 604a; 12 CFR 211.3(b).
3-753.1

FOREIGN BRANCHES—Representative Offices Not Branches

Domestic banks may establish and operate, outside the United States, offices of domestic operations subsidiaries to perform services such as would be provided domestically by a loan production office. Since foreign representative offices do not conduct a general banking business (that is, receive deposits, pay checks, or loan money) and are operated primarily to solicit business on behalf of the parent bank, they are not branches of the parent bank, and Board approval is not required for their establishment. STAFF OP. of March 14, 1977.
Authority: R.S. 5155, 12 USC 36(f); FRA § 25, 12 USC 601; BHCA § 4(c)(8), 12 USC 1843(c)(8); 12 CFR 250.141.
3-758

FOREIGN SUBSIDIARIES—Business Conducted in United States

Although a foreign organization may be a wholly owned subsidiary of a national bank, it is a separate and distinct corporation that is specifically forbidden by law from carrying on any business in the United States except business that the Board considers incidental to the organization’s international or foreign business. In the exercises of its powers, it is subject to regulations of the Board. In view of the statutory restrictions upon the establishment of branches by national banks, it is essential that the functions performed by the foreign organization alone, or in conjunction with those performed by employees of the national bank, not be such that the organization becomes a branch of the national bank in substance or in public appearance. STAFF OP. of Jan. 20, 1950.
Authority: 12 CFR 211.5.

FOREIGN SUBSIDIARIES—Investments in Combination with Parent

See 3-760.
3-759

INVESTMENTS—Convertible Loans to Foreign Obligors

If a corporation extends to foreign obligors loans that are either (1) partially convertible into the obligor’s common stock or (2) accompanied by an option on a specified amount of the obligor’s common stock, and if the corporation may exercise the option or conversion privilege at its sole discretion, it must obtain Board consent before exercising the privilege. Since such a conversion or stock option feature would be strictly incidental to the extension of the loan, Board consent is not required at the time the loan is extended. STAFF OP. of March 26, 1956.
Authority: 12 CFR 211.4.
3-760

INVESTMENTS—By Foreign Subsidiaries and Parent; Limitations

A foreign subsidiary may not make loans to, and investments in, any one person or government in amounts which, combined with loans made to that person or government by the parent corporation, would be in excess of the amount that the parent corporation would be permitted to loan or invest. That is, the limitations are applicable to the combined loans and investments of the parent and subsidiary. STAFF OP. of Dec. 10, 1959.
Authority: FRA § 25(a), 12 USC 611-631.
3-761

INVESTMENTS—Debts Previously Contracted

The ninth paragraph of section 25(a) of the Federal Reserve Act provides, in part, that “[n]othing contained herein shall prevent corporations organized hereunder from purchasing and holding stock in any corporation where such purchase shall be necessary to prevent a loss upon a debt previously contracted in good faith.” If a bank has extended credit to a foreign company that subsequently defaulted on the loan, a refinancing of the defaulted obligations secured by a mortgage on foreign property is permissible, even if, because the foreign law requires a mortgage holder to be a resident, the bank organizes a foreign corporation to hold the mortgage as trustee for itself. STAFF OP. of Aug. 3, 1966.
Authority: FRA § 25(a), 12 USC 615; 12 CFR 211.5(e).
3-762

INVESTMENTS—Through Bank Premise Companies

Bank premise companies should not be used to purchase foreign bank stock. STAFF OP. of June 22, 1967.
Authority: 12 CFR 211.5.
3-763

INVESTMENTS—By Edge Corporations

Edge corporations are organized for the purpose of engaging in international or foreign banking or other international or foreign financial operations. An Edge corporation’s acquisition of control of a corporation engaged in nonfinancial activities, such as manufacturing, would generally not be appropriate. If a proposed acquisition of a corporation is basically a financing transaction, through, for example, medium-term loans, such acquisition would be appropriate; however, representatives of the Edge corporation and/or its subsidiaries must not constitute a controlling portion of the acquired corporation’s board of directors. Neither the Edge corporation nor its subsidiaries may exercise any operating or management control of the acquired corporation. Finally, the Edge corporation must, at its head office, maintain adequate evidence that it has met these conditions. STAFF OP. of Nov. 6, 1969.
Authority: FRA § 25(a), 12 USC 615; 12 CFR 211.5.
3-764

INVESTMENTS—By Edge Corporation

Edge corporations may acquire stock of certain companies “not engaged in the general business of buying or selling goods, wares, merchandise, or commodities in the United States, and not transacting any business in the United States which is not incidental to its international or foreign business” (FRA § 25(a)). The U.S. activities of a wholly owned subsidiary of such a company must be attributed to the company itself. The following proposed activities of a subsidiary would not cause the parent company to be an impermissible investment for an Edge corporation.
The subsidiary helps the parent’s foreign clients evaluate and make sales arrangements in the United States but does not buy or sell any goods in the United States for its own account or for the account of its customers. The parent’s indirect activities through its subsidiary consist primarily of contacting potential U.S. buyers of goods produced by the parent’s foreign customers and negotiating purchase contracts on behalf of its foreign customers. The foreign producer sells directly to the buyer and receives payment directly. Through its subsidiary, the parent also services contracts entered into by its customers and thus performs in the United States such additional activities as monitoring contract compliance and obtaining custom-entry bonds and performs other servicing abroad. All of these services would be provided either to the parent’s existing foreign clients or to foreign companies that it would propose to finance in the near future. Such service is therefore incidental to the parent company’s international or foreign business. STAFF OP. of Oct. 22, 1975.
Authority: FRA § 25(a), 12 USC 615.
3-765

INVESTMENTS—By Edge Corporation in Foreign Company

Edge corporations are prohibited from purchasing and holding stock in foreign companies that are engaged in United States activities unless the activities are incidental to the corporation’s international or foreign business. The Board concluded that an Edge corporation would be prohibited from acquiring shares of a Canadian corporation whose domestic subsidiary is primarily engaged in the business of buying and selling U.S. real estate because this business would not be incidental to its foreign or international activities. BD. RULING of Dec. 16, 1977.
Authority: FRA § 25(a), 12 USC 611 et seq.; 12 CFR 211.5(b)(5)(i)(C).
3-766

INVESTMENTS—Foreign Corporation with Representative Office

A foreign corporation’s U.S. activities include (1) maintenance of a U.S. office where senior management is located and where credit applications are reviewed; (2) visits by representatives of the corporation to coordinate present and future foreign sales that are or may be financed by the corporation; and (3) coordination of the corporation’s non-U.S. marketing efforts from the United States. The corporation’s U.S. office is technically not a representative office in view of the participation by that office’s personnel in credit decisions. However, the activities of that office are so limited in scope and similar to those of a representative office that no regulatory or supervisory purpose would be served in prohibiting investment in this foreign corporation by those subject to the investment provisions of Regulation K. STAFF OP. of Feb. 9, 1981.
Authority: 12 CFR 211.2(e) and 211.5(c)(1).
3-767

INVESTMENTS—Foreign Life Insurance Company and Pension Fund Administrator

A bank holding company proposes to acquire shares of a pension fund administrator and of a life insurance company, both in Santiago, Chile. The pension fund administrator is one of several that manage the pension benefits for workers, which are mandated by Chilean law. It receives contributions from Chilean workers who choose to participate in the pension fund that it administers. The amounts of contributions are established by law as a percentage of the workers’ monthly income. Part of the contributions go into the pension fund and a smaller portion is used to purchase life and disability insurance from a company with which the fund administrator contracts to provide coverage for its participants. If the insurance company fails, the fund administrator remains contingently liable for a certain percentage of the insurance risk. For this reason, the pension fund administrator is considered to be engaged in the business of underwriting life and disability insurance. The holding company proposes to purchase the insurance company that now provides coverage for pension fund participants, continuing the contract with the insurance company.
The activities related to pension fund administration are permissible under Regulation K. The proposed underwriting activities may be considered usual in connection with the business of banking or other financial operations in Chile. The Board considered the following factors in making its decision. A number of Chilean banks engage in insurance-underwriting activities through subsidiaries and related companies. Under the holding company proposal and the Chilean pension system, there is an integral relationship between the insurance-underwriting activity and the activities of the pension fund administrator. The holding company has committed to limit its insurance-underwriting activities to those connected with the life and disability insurance required of workers under Chilean law. Finally, the proposed acquisitions are consistent with Chilean law, as indicated by the fact that they are required to be approved by a commission established for that purpose by the Chilean government.
The amounts of the insurance to be written are small, with an average disability claim and survivor-benefit claim of $30,000 and $15,000, respectively. In addition, the holding company will obtain substantial reinsurance for the insurance company for death or disability resulting from catastrophic events and for the pension fund administrator in connection with the contingent liability it retains. Because the pension fund administrator retains contingent liability on some of the life and disability insurance coverage it sells, control of the management and financial practices of the insurance company that provides the coverage enables the holding company to control the underwriting risk more effectively. The Board also relied on the holding company’s commitment to hold the Chilean companies through the holding company. As a result, the provisions of section 23A of the Federal Reserve Act restricting transactions between a bank and its affiliates will apply to transactions between the holding company and the insurance company and the pension fund administrator. The Board thus determined that in light of all the factors, including that the growth of the companies would be carefully monitored, the proposed acquisitions would not present excessive risk to the holding company. BD. RULING of Dec. 24, 1986.
Authority: 12 CFR 211.5(c)(3) and (d); BHCA § 4(c)(13), 12 USC 1843(c)(13); FRA § 23A, 12 USC 371c.
3-768

INVESTMENTS—By a Foreign Mutual Insurance Company; Control

An Australian mutual insurance company proposes to increase its investment in an Australian bank. The bank operates branches in the United States and is therefore subject to the Bank Holding Company Act of 1956 by virtue of section 8 of the International Banking Act of 1978. The bank does not own or control a subsidiary bank in the United States. In 1991, the bank and the insurance company entered into an arrangement under which the two organizations would market some of each other’s products and services and would engage in some joint-venture activities in Australia and New Zealand. There is no plan for a merger.
In connection with this arrangement, the insurance company acquired 10 percent of the voting shares of the bank and now proposes to purchase an additional 5 percent. It also proposes to place two directors on the 16-member board of the bank. Australian law prohibits an ownership interest of greater than 10 percent by any one shareholder in a bank, except that the Australian Treasury may permit a shareholding of up to 15 percent if it finds that the holding would not be contrary to the public interest. Under this standard, the Australian Treasury has authorized the insurance company to own 15 percent of the bank. The bank has stated that, after the investment, the insurance company would not be in a position to control or exercise a controlling influence over the bank or its management or policies. In this regard, the Reserve Bank of Australia views the insurance company’s increased investment in the bank as consistent with the Reserve Bank’s policy that no single shareholder may be in a position to exercise an undue measure of control or influence over the policies or operations of the Australian bank.
Ownership of 15 percent of a company’s shares and the existence of director interlocks could raise control questions under the BHC Act. In this case, the Board does not object to the increased investment, provided the insurance company does not now or in the future control the bank or exercise a controlling influence over the management or policies of the bank, for the following reasons. First, Australian law created a strong presumption that the insurance company could not control the bank. In addition, the two directors placed on the bank’s board by the insurance company would not serve on the board’s executive committee and there would be no management interlocks between the two companies. Second, the bank committed that its U.S. offices and affiliates would not lend to any future U.S. operations of the insurance company and that any U.S. operations of the two organizations would be kept separate; any other transactions between the two in the United States would be arm’s-length transactions, and there would be no cross-selling or marketing of each other’s products or services in the United States. BD. RULING of March 6, 1992.
Authority: BHCA, 12 USC 1841 et seq.; IBA § 8, 12 USC 3106.
3-770

LENDING LIMITS—Loans to Foreign Banks or Companies

Except for loans by a member bank that is a subsidiary of registered bank holding company, section 23A of the Federal Reserve Act applies only to majority-controlled affiliates and hence would not apply to loans by U.S. banks to foreign banks or companies. STAFF OP. of Dec. 2, 1970.
Authority: FRA § 23A, 12 USC 371c; 12 CFR 211.6(c).
3-771

SUPERVISION—Willful Violations; Withholding of Information

In cases of willful violations of law, the Board of Governors will fully avail itself of legal remedies against the offending organizations. Furthermore, the Board would view with the gravest concern any evidence of willful withholding of information or deliberate lack of cooperation in providing information needed for the supervision of an Edge corporation. STAFF OP. of April 1, 1977.
Authority: 12 CFR 211.7.
3-772

SUPERVISION—Applicability of Financial Recordkeeping and Reporting Regulations to Edge and Agreement Corporations

The Bank Secrecy Act and the accompanying Financial Recordkeeping and Reporting Regulations are applicable to Edge and agreement corporations. These corporations fall within the description of certain “businesses” covered by the act, that is, businesses “transferring funds or credits domestically or internationally” or businesses “dealing in foreign currencies or credits.” Consequently, those corporations must submit such information and reports which may be required pursuant to the act and the accompanying regulations. STAFF OP. of Aug. 10, 1977.
Authority: Bank Secrecy Act, 31 USC 1051 et seq.; 31 CFR 103.
Supplementary Information