[Federal Register Volume 61, Number 145 (Friday, July 26, 1996)]
[Rules and Regulations]
[Pages 39052-39053]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-19043]
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FEDERAL RESERVE SYSTEM
12 CFR Part 211
[Regulation K; Docket No. R-0916]
International Banking Operations
AGENCY: Board of Governors of the Federal Reserve System.
ACTION: Final rule.
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SUMMARY: This final rule amends Regulation K to implement a provision
of the Riegle-Neal Interstate Banking and Branching Efficiency Act of
1994 (the Interstate Act) that amended the International Banking Act of
1978 (the IBA) by adding a new subsection regarding the management of
shell branches of foreign banks by such banks' U.S. offices. The
provision prohibits foreign banks from using their U.S. branches or
agencies to manage types of activities through offshore offices that
could not be managed by a U.S. bank at its foreign branches or
subsidiaries. This prohibition applies with respect to those offshore
offices that are ``managed or controlled'' by a foreign bank's U.S.
branches or agencies.
EFFECTIVE DATE: August 28, 1996.
FOR FURTHER INFORMATION CONTACT: Sandra L. Richardson, Managing Senior
Counsel (202/452-6406), Janet S. Crossen, Senior Attorney (202/452-
3281), Legal Division; Michael G. Martinson, Assistant Director,
Division of Banking Supervision and Regulation (202/452-3640), Board of
Governors of the Federal Reserve System. For users of Telecommunication
Device for the Deaf (TDD) only, please contact Dorthea Thompson, (202/
452-3544), Board of Governors of the Federal Reserve System, 20th and C
Streets, N.W., Washington, DC 20551.
SUPPLEMENTARY INFORMATION: In the Interstate Act, Congress amended
section 7 of the IBA (12 U.S.C. 3105) to prevent a foreign bank from
using a U.S. branch or agency to manage types of activities at offshore
offices that are managed or controlled by the foreign bank's U.S.
branch or agency if those types of activities could not be managed by a
U.S. bank at its foreign branches or subsidiaries. The final rule
adopted by the Board to implement that provision tracks the language of
section 7(k) of the IBA and defines the term ``managed or controlled''
for purposes of the restrictions on activities set out in that section.
The definition of ``managed or controlled'' for this final rule is
consistent with the definition of that term adopted by the Federal
Financial Institutions Examination Council with respect to the
Supplement (FFIEC 002S) to the quarterly Report of Assets and
Liabilities of U.S. Branches and Agencies of Foreign Banks (FFIEC 002),
which is required to be filed by foreign banks with respect to their
offshore shell operations that are ``managed or controlled'' from the
United States. 57 FR 61907, Dec. 29, 1992. For purposes of the FFIEC
002S and the final rule, a non-U.S. office is considered to be
``managed or controlled'' by a U.S. branch or agency of a foreign bank
if a majority of the responsibility for business decisions, including
but not limited to decisions with regard to lending or asset management
or funding or liability management, or the responsibility for
recordkeeping in respect of assets or liabilities for that non-U.S.
office, resides at the U.S. branch or agency.
The final rule also specifies that the types of activities that a
branch or agency may manage through an office located outside of the
United States include the types of activities authorized to a U.S. bank
by state or federal charters, regulations issued by chartering or
regulatory authorities and other U.S. banking laws. Finally, the
proposed rule states that U.S. procedural or quantitative requirements
will not apply to non-U.S. offices of foreign banks.
On February 16, 1996, the Board requested public comment on a
proposed rule to implement section 7(k) of the IBA. 61 FR 6956, Feb.
23, 1996. The comment period ended on March 25, 1996. The Board
received two public comments on the proposal, one by a banking
organization and the other by a trade association. Both commenters
generally supported the proposal. Comments received addressed issues
relating to the definition of ``managed or controlled'' and application
of the rule to non-U.S. full-service offices. The Board has considered
the comments and has determined not to make any modifications to the
final rule from that which was proposed.
One commenter proposed that the Board should modify its definition
of ``managed or controlled'' so that a U.S. branch or agency would not
be subject to the regulation on the sole grounds that recordkeeping
with respect to the assets or liabilities of a non-U.S. office resides
at the U.S. branch or agency.
Alternatively, the commenter requested that if the Board determined
to retain the recordkeeping prong of the definition, the Board should
clarify that maintaining records at a U.S. branch or agency would not
result in the application of the regulation to offshore branches that
are managed by personnel outside the United States. The commenter noted
that many international banks maintain data processing centers and keep
other records in their U.S. offices in order to provide support
services for non-U.S. branches within the Western Hemisphere.
The Board has found that the presence of records in a U.S. branch
or agency relating to an offshore office often is evidence of
involvement in the management of such offshore office by the U.S.
branch or agency where the records reside. Eliminating responsibility
for recordkeeping as a separate prong of the definition of ``managed or
controlled'' could result in the significant potential for evasion of
the provision. Accordingly, the Board has determined not to modify the
definition as suggested by the commenter.
The Board, however, believes that additional guidance may be
helpful to assist foreign banks in determining whether maintaining
records at U.S. branches or agencies for an offshore branch would
render them subject to the regulation. In this regard, the Board
[[Page 39053]]
considers that the phrase ``responsibility for recordkeeping'' entails
formal responsibility for the maintenance of records relating to the
offshore operations. Simple data processing activities such as
compiling and sorting data entries that were originated, approved and
confirmed by personnel outside the United States and routing and
distributing such processed data to destinations outside the United
States would ordinarily not constitute ``responsibility for
recordkeeping.'' If the U.S. branch or agency, however, originates the
underlying information or utilizes the information for making business
decisions or for the purpose of notifying or confirming transactions
with customers, such activities could no longer be considered merely
data processing. In addition, the Board considers that a U.S. branch or
agency would have responsibility for recordkeeping within the meaning
of the rule if it is the sole full-service office at which such records
are maintained. Foreign banks that maintain records in the United
States but do not believe they have ``responsibility for
recordkeeping'' may consult with Board staff for guidance in
determining whether they fall within the scope of the rule.
One commenter also recommended that the Board modify the regulation
to make clear that it applies to offshore shell offices rather than
offshore offices generally. The Board notes that the preamble to the
proposed rule stated that the restrictions in that rule generally would
not apply with respect to offshore branches that are full-service
facilities managed or controlled by staff located at the offshore
office or at locations other than in the United States. In addition,
the title of the proposed rule, which is identical to the title of the
statutory provision, refers to ``shell'' branches. In view of the
foregoing, the Board has determined that no modification to the rule is
necessary.
As the Board noted in the preamble to the proposed rule, section
7(k) of the IBA does not confer upon foreign banks any right to manage
activities at an offshore office from a U.S. office. The Board will
continue to monitor relationships between the U.S. and offshore offices
of foreign banks in the supervisory process in order to determine
whether such activities are consistent with considerations relating to
the safety and soundness of the U.S. operations of the foreign bank and
its affiliates and compliance with law.
Paperwork Reduction Act
In accordance with section 3506 of the Paperwork Reduction Act of
1995 (44 U.S.C. Ch. 35; 5 CFR 1320 Appendix A.1), the Board reviewed
the rule under the authority delegated to the Board by the Office of
Management and Budget. No collections of information pursuant to the
Paperwork Reduction Act are contained in the rule.
Regulatory Flexibility Act Analysis
Pursuant to section 605(b) of the Regulatory Flexibility Act (5
U.S.C. 601-612), the Board certifies that the this final rule will not
have a significant economic impact on a substantial number of small
entities.
List of Subjects in 12 CFR Part 211
Exports, Federal Reserve System, Foreign banking, Holding
companies, Investments, Reporting and recordkeeping requirements.
For the reasons set out in the preamble, the Board of Governors
amends 12 CFR Part 211 as set forth below.
PART 211--INTERNATIONAL BANKING OPERATIONS (REGULATION K)
1. The authority citation for 12 CFR Part 211 continues to read as
follows:
Authority: 12 U.S.C. 221 et seq., 1818, 1841 et seq., 3101 et
seq., 3901 et seq.
2. Section 211.20 is amended by removing ``and'' at the end of
paragraph (b)(8), by removing the period at the end of paragraph (b)(9)
and adding ``; and'' in its place, and by adding a new paragraph
(b)(10) to read as follows:
Sec. 211.20 Authority, purpose, and scope.
* * * * *
(b) * * *
(10) The management of shell branches (12 U.S.C. 3105(k)).
* * * * *
3. Section 211.24 is amended by adding a new paragraph (g) to read
as follows:
Sec. 211.24 Approval of offices of foreign banks; procedures for
applications; standards for approval; representative office activities
and standards for approval; preservation of existing authority.
* * * * *
(g) Management of shell branches. (1) A state-licensed branch or
agency shall not manage, through an office of the foreign bank which is
located outside the United States and is managed or controlled by such
state-licensed branch or agency, any type of activity that a bank
organized under the laws of the United States or any State is not
permitted to manage at any branch or subsidiary of such bank which is
located outside the United States.
(2) For purposes of this paragraph (g), an office of a foreign bank
located outside the United States is ``managed or controlled'' by a
state-licensed branch or agency if a majority of the responsibility for
business decisions, including but not limited to decisions with regard
to lending or asset management or funding or liability management, or
the responsibility for recordkeeping in respect of assets or
liabilities for that non-U.S. office, resides at the state-licensed
branch or agency.
(3) The types of activities that a state-licensed branch or agency
may manage through an office located outside the United States that it
manages or controls include the types of activities authorized to a
U.S. bank by state or federal charters, regulations issued by
chartering or regulatory authorities, and other U.S. banking laws,
including the Federal Reserve Act, and the implementing regulations,
but U.S. procedural or quantitative requirements that may be applicable
to the conduct of such activities by U.S. banks shall not apply.
By order of the Board of Governors of the Federal Reserve
System, July 17, 1996.
William W. Wiles,
Secretary of the Board.
[FR Doc. 96-19043 Filed 7-25-96; 8:45 am]
BILLING CODE 6210-01-P
