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.

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.

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.

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.

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.

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.

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.

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.

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.

See Investments.

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:

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.

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.

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.

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.

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.

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.

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.

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.

BD. RULING of Sept. 7, 1993.

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.

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.

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.

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.

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.

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.

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.

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.

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.

[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.

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.

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.

See 3-760.

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.

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.

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.

Bank premise companies should not be used to purchase foreign bank stock. STAFF OP. of June 22, 1967.

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.

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.

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.

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.

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.

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.

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.

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.

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.