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U.S. Securities and Exchange Commission

Summary of Comments Concerning the Rule Proposal to Exempt Qualified Foreign Banks from the Insider Lending Prohibition of Exchange Act Section 13(k), as added by Sarbanes-Oxley Act Section 402

SEC Release No. 34-48481,
International Series Release No. 1272,
File No. S7-15-03

Prepared by:

Elliot B. Staffin
Office of International Corporate Finance
Division of Corporation Finance

I. LIST OF COMMENTERS

  A. Associations
    1. American Bankers Association and Bankers' Association for Finance and Trade
    2. Australian Bankers' Association
    3. Canadian Bankers Association
    4. European Banking Federation
    5. Institute of International Bankers
    6. Swiss Bankers Association
  B. Banks
    1. AIB Group
    2. Bank of Nova Scotia
    3. BMO Financial Group
    4. Canadian Imperial Bank of Commerce
    5. Deutsche Bank A.G.
    6. European Bank Group (ABN AMRO Holding N.V., Banco
Santander Central Hispano S.A., Deutsche Bank A.G.,
Lloyds TSB Group plc, The Royal Bank of Scotland Group plc,
and Sanpaolo IMI S.p.A.)
    7. HSBC Holdings plc
    8. ICICI Bank
    9. Mitsubishi Tokyo Financial Group, Inc.
    10. RBC Financial Group/Royal Bank of Canada
  C. Foreign Governments
    1. Department of Finance--Canada
  D. Law Firms
    1. Shearman & Sterling LLP
    2. Sullivan & Cromwell LLP
  E. Securities Exchanges
    1. New York Stock Exchange, Inc.

II. OVERVIEW

We received 20 comment letters regarding our proposed rule to exempt qualified foreign banks from the insider lending prohibition of Exchange Act Section 13(k), as added by Sarbanes-Oxley Act Section 402. Ten foreign banks and six bank associations1 submitted letters as did two law firms, one foreign government, and one securities exchange.

While all of the commenters supported a foreign bank exemption similar to the Section 402 exemption for domestic banks, only one commenter was completely non-critical of our proposal. The New York Stock Exchange ("NYSE") "applaud[ed] the SEC's continued efforts to apply the requirements of the Sarbanes-Oxley Act in a manner that shows significant and thoughtful effort to address the concerns expressed by foreign private issuers on potential conflicts with home country requirements."2 The NYSE further noted that these efforts were in line with the Commission's previous attempts to accommodate foreign private issuers under other sections of the Sarbanes-Oxley Act.

Another commenter, the American Bankers, was largely non-critical. It praised the proposal as "represent[ing] an important step toward achieving 'convergence' of international regulatory standards."3 However, it then expressed its understanding that "some foreign banking supervisors have in place requirements that are designed to achieve purposes similar to those of Regulation O, but may not meet all of the requirements of the proposed exemption." Without elaborating further, the American Bankers then suggested that the Commission provide for a procedure that would qualify a foreign bank for the insider lending exemption if the Commission determined that the home country insider lending restrictions were "adequate".4

The vast majority of commenters expressed pointed criticisms concerning various parts of the rule proposal. By far the most widely criticized aspect of the proposed exemption concerns the proposed condition that the laws of the foreign bank's home jurisdiction restrict insider lending in at least one of three ways. Several commenters opposed this condition because it would force numerous foreign jurisdictions to adopt or modify laws or rules imposing insider lending restrictions having a "minimum content" based on U.S. law.5 As an alternative, many commenters argued in favor of a condition permitting an insider loan if it in fact met one of the prescribed restrictions even if not embodied in home jurisdiction law.6

We also received numerous comments concerning the condition requiring a foreign bank either to have received a determination by the Federal Reserve Board that the bank was subject to comprehensive consolidated supervision ("CCS") in its home jurisdiction or be subject to a deposit insurance requirement there. While most commenters favored the alternative approach, most also urged us to modify this provision to enable a foreign bank to satisfy the CCS alternative as long as at least one bank from its home jurisdiction had received a favorable CCS determination by the Federal Reserve Board.7 Some commenters also suggested that we permit foreign banks that can satisfy the CCS condition to qualify for the insider lending exemption without having to meet any additional criteria.8

Another aspect of the proposed exemption that generated multiple comments concerns the provision conditioning an insider's loan on the approval of a majority of the board if loans to a particular insider in the aggregate would exceed a prescribed amount. Some commenters argued for the elimination of this condition altogether9 while others suggested that we at least significantly increase the threshold aggregate amount to reflect current real economic conditions.10

Several commenters criticized the scope of the proposed rule as too narrow on the grounds that it covers only loans by a foreign bank to its insiders or the insiders of its parent company. These commenters requested that we extend the scope of the insider lending exemption to cover loans by foreign banks to the insiders of their sister subsidiaries or affiliates that are issuers under the Sarbanes-Oxley Act.11 In addition, some commenters urged us to broaden the scope of the exemption to cover loans by a subsidiary of a foreign bank to the insiders of its parent company or affiliates.12

A few commenters requested that we revise the definition of "foreign bank" to make it more inclusive. For example, one commenter noted that certain German banks do not have the power to accept demand deposits although these institutions are regulated as banks in their home jurisdiction.13 A few commenters also suggested that we define the terms "director" and "executive officer" to conform to the definitions adopted in Regulation Blackout Trading Restriction ("Regulation BTR") under Sarbanes-Oxley Act Section 306.14 Others requested that we revise the definition of parent company to conform to comparable definitions under the Bank Holding Company Act and International Banking Act.15

One commenter expressed its concern about imposing Section 402's insider lending prohibition on foreign governmental entities, such as state-owned banks, that have filed Schedule B registration statements under the Securities Act that have not yet gone effective but also have not yet been withdrawn. This commenter requested that we adopt a rule exempting these so-called "temporary" issuers under the Sarbanes-Oxley Act from Section 402's insider lending prohibition.16

Finally, a few commenters opposed our proposed revision to Form 20-F that would require a foreign bank to disclose the identity and office of any insider to whom it granted a loan that has become "problematic" during the periods examined. According to these commenters, the proposed revision would conflict with customer confidentiality and data protection laws of the foreign banks' home jurisidictions and, in any event, was not mandated by Section 402.17

III. COMMENTS REGARDING SPECIFIC PROPOSALS

A. Proposed First Condition--The Deposit Insurance/CCS Alternative

Thirteen parties commented on the proposed first condition for the insider lending exemption.18 This condition provides that either the laws of the foreign bank's home jurisdiction must require the bank to insure its deposits or the Federal Reserve Board must have determined that the foreign bank is subject to CCS in its home jurisdiction.19

Six of these commenters supported the alternative form of the first condition.20 For example, Shearman & Sterling stated:

" We very much support the proposal to permit foreign banks to rely in the alternative on deposit insurance/guarantee schemes and comprehensive supervision on a consolidated basis. Section 402 of the SO Act mentions specifically insured banks. The rationale of this provision is not that the deposit insurance as such has any relevance to the soundness of loans to directors and officers. The rationale of Section 402 of the SO Act is that FDIC insurance provides a common set of of prudential supervisory rules for substantially all banks in the United States. Section 402 of the SO Act refers to deposit insurance as a convenient reference to a common comprehensive supervisory system. Since the existence of a comprehensive system is the basis of the bank exception from the prohibition of Section 402 of the SO Act, it stands to reason that foreign banks that are subject (in the view of the Board of Governors) to a comprehensive system of supervision should be equally exempt from the prohibition of Section 402 of the SO Act. Consequently, it makes eminent sense and reflects the policy of Section 402 of the SO Act that Rule 13k-1 relies in the alternative on a home jurisdiction deposit insurance requirement or CSCB."21

The European Bank Group concurred:

"The Group agrees that the first condition of the proposed exemption--that a foreign bank must be subject either to CCS or a home country deposit insurance program--is comparable to the FDIC insurance requirement of the U.S. bank exemption. The home country deposit insurance requirement is directly comparable to the FDIC insurance requirement, and the CCS condition is a reasonable substitute for the only purpose the deposit insurance requirement could possibly serve--as a reliable indicator that a bank is subject to extensive supervision and regulation."22

Two of the commenters noted that there exists today a wide variety of deposit protection regimes in non-U.S. countries, including European countries, that perform the same function as deposit insurance in the United States. In order to ensure that foreign banks subject to these regimes are eligible for the Section 402 exemption, these commenters suggested that we revise the "deposit insurance" prong of the first condition to require that the laws or regulations of the foreign bank's home jurisdiction require the bank to insure its deposits "or to be subject to a deposit-guarantee or protection scheme."23

As currently drafted, the CCS prong of the first condition requires that the Federal Reserve Board has determined that a particular foreign bank is subject to CCS in its home jurisdiction. Eleven of the commenters supported revising the CCS alternative to make the insider lending exemption available to a foreign bank if either it or at least one other bank organized in the foreign bank's home jurisdiction has received a favorable CCS determination by the Federal Reserve Board.24 Several of these commenters noted that, as currently drafted, the proposed rule would render ineligible a foreign bank that had never applied to the Federal Reserve Board for permission to open a U.S. branch office, to acquire a U.S. banking subsidiary, or to be certified as a financial holding company even though the foreign bank was subject to the same comprehensive system of supervision in its home jurisdiction.25 Some commenters also noted that, in their experience, it is highly unlikely that the Federal Reserve Board would deny a finding of CCS for a foreign bank after it has already rendered a favorable CCS determination for another bank organized in the foreign bank's home jurisdiction.26 Accordingly, these commenters urged us to adopt a CCS alternative using a "CCS determination by country" standard. Some of the commenters also suggested that, as part of a revised CCS alternative, we require a foreign bank to certify or to conclude "in good faith" that it is subject to substantially the same regulation and supervision as the bank in its home jurisdiction that received the CCS determination.27

Four commenters explicitly supported revising the first condition to provide that if a foreign bank received a favorable CCS determination or derived from a jurisdiction that was home to another bank that had received a favorable CCS determination, the foreign bank could qualify for the Section 402 exemption without having to satisfy any additional conditions.28 These commenters noted that the Federal Reserve Board's CCS standard "is embodied in the Basel Committee's minimum standards of banking supervision," which are set forth in the Basel Committee's "Core Principles for Effective Bank Supervision," and which many countries have adopted.29 Since the "Core Principles" posit an insider lending restriction in Principle 10, according to these commenters, the Federal Reserve Board's CCS determination includes reviewing information regarding restrictions on a foreign bank's insider lending in its home jurisdiction. These commenters further noted that a favorable CCS determination signifies that a foreign bank's home jurisdiction banking laws are worthy of deference. The Commission's imposition of additional conditions for the Section 402 exemption on foreign banks organized in CCS jurisdictions would allegedly run counter to this deference.30

One commenter opposed relying on a favorable CCS determination, whether by bank or by country, as the sole criterion for determining a foreign bank's eligibility for the Section 402 exemption. This commenter noted that, even if the Commission adopted a "CCS determination by country" standard, the exemptive rule would exclude foreign banks deriving from countries whose banks have not established a U.S. branch or subsidiary after 1991.31

B. Proposed Second Condition--The Home Jurisdiction Insider Lending Restriction Requirement

Nineteen parties32 commented on the proposed second condition requiring a foreign bank to be subject to laws or rules in its home jurisdiction that restrict insider lending in one of three alternate ways.33 As discussed above, four of these commenters approved imposing a second condition concerning insider lending restrictions only on those foreign banks whose home jurisdictions have not been the subject of a favorable CCS determination.34

Eighteen of these commenters objected to a rule that would require the laws or regulations of a foreign bank's home jurisdiction to have a "minimum content" based on Regulation O or other U.S. law.35 Seventeen of these commenters explicitly requested that we revise the second condition to require that a foreign bank's insider loans comply in fact with at least one of the three alternatives regardless of whether the home jurisdiction's laws or rules imposed the insider lending restrictions.36 As one commenter noted:

"In our view, an international bank that makes an insider loan on market terms on a voluntary basis or pursuant to informal supervisory guidance should be entitled to an exemption from Section 402 on an equal basis with a U.S. or international bank that makes an insider loan on market terms because it is required by law to do so. The end result is the same--insider abuse is effectively prevented--when the applicable criteria are met in fact. If a particular insider loan is in fact on market terms, for example, it should be entitled to the exemption in Rule 13k-1 even if the bank's home country has not adopted insider lending restrictions as laws or regulations."37

Several Canadian parties have expressed their strong support for a revised second condition that would be satisfied if the particular insider loan met one of the stated restrictions.38 Although Canada's Bank Act has "robust" insider lending restrictions that generally subject most insider loans to "market terms and conditions" and statutory limits, the Act also permits a Canadian bank to grant loans to senior officers on terms more favorable than those offered to the public if approved by the bank's conduct review committee.39 This committee must be composed of directors independent of management a majority of whom are unaffiliated. According to these commenters, Canadian banks that granted such committee-approved loans would not be able to qualify for the Section 402 exemption under the proposed rule since the proposed second condition only permits an insider loan to be on non-market terms if, pursuant to home jurisdiction law, the bank issues the loan under an employee benefit plan that is widely available to other employees and on non-preferential terms or if the home jurisdiction bank supervisor has expressly approved the loan.40

While supporting a "compliance in fact" standard as an alternative to the proposed rule, two commenters also stated their preference for a second condition that merely would require a foreign bank's insider loans to comply with its home jurisdiction's insider lending restrictions regardless of their content.41 One commenter recommended revising the second condition to permit a foreign bank to qualify for the exemption if one or more of the stated insider lending restrictions are recognized and enforced by the home jurisdiction supervisor even if they are not codified in the home jurisdiction.42

Another commenter expressly supported the proposed provision that would permit foreign banks to make insider loans that have been specifically approved by their home jurisdiction bank supervisors.43

One commenter urged the Commission to adopt a provision that would wholly exempt from Section 13(k)'s prohibition insider loans by a foreign bank that when aggregated with all other outstanding loans to a particular insider did not exceed a certain threshold amount. This commenter suggested $200,000 as the de minimus or threshold amount. A foreign bank could rely on this de minimus provision as long as the insider loans were available to a wide range of employees and in compliance with home country insider lending restrictions.44

C. Proposed Third Condition--The Board Approval Requirement

Nine parties45 directly commented on the proposed third condition that would require the advance approval of a majority of a foreign bank's board of directors for any insider loan that, when aggregated with the amount of all other outstanding loans to a particular executive officer or director, exceeds $500,000.46 Four of these commenters urged the Commission to delete this requirement for all foreign banks47 while one commenter requested that we eliminate this requirement only for banks from CCS jurisdictions.48 As one commenter stated:

"...the Institute would urge the Commission not to impose a board approval requirement on international Banks in addition to the deposit insurance/CCS requirement. Home country practices regarding the role of board approvals in protecting against insider abuse vary, and particular countries may reasonably rely on measures other than board approval to protect against insider abuse."49

Another commenter opined that a board approval requirement is not necessary to achieve the Commission's purpose of eliminating the potential for insider abuse and would only increase the extraterritorial effect of the proposed rule.50 Similarly, a third commenter noted that many EU countries have established insider loan thresholds that trigger a board vote and that may be different than the proposed board approval requirement. According to this commenter, by adopting the board approval requirement, the Commission would be "unjustifiably export[ing] specific U.S. insider lending standards, not recognizing that other jurisdictions may address the safety and soundness issues related to insider lending in different ways."51

Six commenters requested that, at the very least, the Commission revise the proposed third condition to increase the aggregate amount per insider that would trigger the board approval requirement.52 These commenters noted that the proposed $500,000 threshold amount is based on a Regulation O limit that was established in 1983 and has not been increased since to take inflation into account.53 Three commenters suggested specific increased threshold amounts.54 One commenter suggested a threshold amount of $1,000,000 per insider for loans for purposes other than the purchase of residential property and $3,000,000 per insider for residential property loans.55 The other two commenters suggested a threshold amount per insider of $2,000,000 regardless of the purpose of the loan.56 In addition, one of the commenters also suggested in the alternative a standard that would require board approval if the amount of the loan, when aggregated with other outstanding debt of the insider, would exceed 75 percent of the insider's total net worth. As this commenter explained:

". . .This approach has the advantage of causing boards of directors or the appropriate delegatees to be informed of the indebtedness of their insiders before any substantial loans are made to them. Moreover, rather than fixing an arbitrary trigger for board approval, the approval requirement would depend on the creditworthiness of the insider and his or her ability to shoulder additional debt."57

Four of the commenters suggested that we base the threshold amount to the amount specified in Regulation O.58 This would ensure that when the Federal Reserve Board eventually increases the threshold amount to account for inflation, foreign banks would immediately be able to take advantage of the larger amount under the Section 402 exemption without having to wait for the Commission formally to amend its rule.59 Five of the commenters requested that we revise the proposed third condition to permit a foreign bank's board to delegate the approval function to a committee.60 This would accommodate foreign banks from Canada and elsewhere that by law or custom authorize insider lending if approved by a board delegated committee such as a "conduct review committee."61 One commenter recommended that, as part of a revised "board approval" condition, we require a board delegated committee to be composed of independent directors. This revision would serve to protect investors against insider abuse, which is the ultimate goal of Section 402, as well as reflect the laws of particular countries, such as Canada.62 Another commenter suggested that we more generally permit a foreign bank's board to delegate authority to approve insider loans as long as the procedure followed complied with home jurisdiction laws, regulations or "published supervisory guidance."63 Three of the commenters further stated that the revised third condition should require any director with an interest in the insider loan to abstain from participating in the committee's consideration of the loan.64

Three parties expressly commented on the Commission's proposed treatment of board approval for a foreign bank's insider loans when the bank has a two-tier system, with one tier designated as the management board and the other tier designated as the supervisory or non-management board. These commenters supported permitting majority approval of an insider loan by either board to satisfy the prior board approval requirement, as proposed.65

D. Proposed Definitions of "Foreign Bank" and "Parent Company" and Suggested Definitions for "Director" and "Executive Officer"

Two parties directly commented on our proposed definitions of "foreign bank" and "parent company."66 Both parties criticized the proposed definition of "foreign bank" as too narrow because it requires an institution in its home jurisdiction to be "engaged substantially in the business of banking," which is defined as receiving deposits to a substantial extent in the regular course of business, having the power to accept demand deposits and extending commercial or other types of credit.67 According to these commenters, the proposed definition would fail to include within its scope a foreign organized institution that lacks the power to or does not receive demand deposits although it is regulated as a bank in its home jurisdiction. As one commenter explained:

". . .certain U.S. banks operate as limited-purpose credit card banks under the BHCA68 and do not have the power to accept demand deposits. Such banks, are nonetheless, "insured depositary institutions" and are thus eligible for the U.S. bank exemption in Section 13(k). Under the Commission's proposed definition of "foreign bank," a non-U.S. bank engaged in comparable activities would not qualify for the exemption under the Proposed Rule."69

A second commenter stated its general agreement with the Commission that the group of foreign banks exempted from Section 402 must be comparable to the group of U.S. banks currently exempted from this provision of the Sarbanes-Oxley Act. This commenter also noted that the Bank Holding Company Act defines in part a foreign bank "as an institution which both accepts demand deposits and is engaged in the business of making commercial loans."70 However, this commenter further stated:

"There are many foreign banks that are licensed and regulated as banks but that do not receive deposits or take deposits only to a minor extent as a convenience for their corporate customers. In many foreign bank regulatory systems, the power to take deposits and the actual taking of deposits are not of significance for the application of banking laws and regulations or for the scope of supervision by bank regulatory agencies."71

This commenter then noted that some German banks that operate as state development banks would not meet the proposed definition of "foreign bank," and thus not qualify for the proposed exemption, although they are "licensed as banks and are subject to the same regulations and supervision as commercial banks in Germany."72

Both commenters urged the Commission to adopt a definition of "foreign bank" that is modeled on or similar to the definition posited in 12 CFR §211.21(n).73 According to this definition, a foreign bank is "an organization that is organized under the laws of a foreign country and that engages directly in the business of banking outside the United States." Moreover, according to a related definition, a foreign bank engages directly in the business of banking outside the United States "if the foreign bank engages directly in banking activities usual in connection with the business of banking in the countries where it is organized or operating."74

These provisions are part of Subpart B of Regulation K, which primarily concerns limitations on a foreign bank's interstate banking activities in the United States under the International Banking Act ("IBA"), including how a foreign bank may open a branch office or acquire a subsidiary in the United States.75 According to one commenter, "[i]t would be anomalous if an internationally headquartered bank were considered a "foreign bank" under the IBA and Subpart B of Regulation K, and thus required to obtain a CCS determination from the Federal Reserve Board in order to establish a U.S. banking office, but at the same time was not eligible for the exemption in Rule 13k-1 from Section 13(k)."76 By modeling our definition of "foreign bank" on the above Subpart B provisions, according to these commenters, the Commission would broaden the scope of the foreign bank exemption as well as avoid a confusing proliferation of definitions.77

These two commenters also opposed defining "parent company of a foreign bank" as a corporation or other organization that directly or indirectly owns more than 50 percent of the voting securities or the equity of the foreign bank.78 Both commenters urged the Commission to adopt a definition of parent company that is based on the definitions of "subsidiary" and "control" under the BHCA and Regulation O.79 Under these definitions, a parent-subsidiary relationship exists when a bank holding company directly or indirectly owns, controls or has the power to vote 25 percent or more of a company's voting shares.80 As one commenter stated:

"...We would thus suggest that the definition of "parent company" in the Proposed Rule be revised to change "50 percent of the voting securities or the equity of the foreign bank" to "25 percent of any class of voting securities or of the equity of the foreign bank." Revising the definition of "parent company" in this way will ensure that a loan to an insider of a holding company issuer that owns 30% of the foreign bank that makes the loan would be eligible for the exemption under Rule 13k-1, just as a comparable loan by a U.S. bank would be exempt under the stautory exemption in Section 13(k)."81

Two parties82 directly requested that the Commission adopt definitions of "director" and "executive officer" for foreign private issuers under the Section 402 insider lending exemption based on the corresponding definitions adopted for foreign private issuers under Regulation BTR.83 Regulation BTR defines "director" for foreign private issuers as a director, as defined in Exchange Act Section 3(a)(7), who is a "management employee" of the issuer.84 Regulation BTR defines "executive officer" for foreign private issuers as "the principal executive officer or officers, the principal financial officer or officers and the principal accounting officer or officers" of the issuer.85 In contrast, for domestic issuers, Regulation BTR defines "director" based on the definition set forth in Exchange Act Section (3)(a)(7) and "executive officer" based on the definition set forth in Exchange Act Rule 16a-1(f).

As noted by one commenter, the Commission decided to adopt a different set of definitions for foreign private issuers under Regulation BTR because foreign private issuers are not subject to Section 16. Moreover, some foreign private issuers have lower-level employee representatives on their board of directors. Accordingly, the Commission determined that it was appropriate to identify specifically the directors and executive officers of foreign private issuers that would be subject to Regulation BTR.86

Noting that both Sarbanes-Oxley Act Sections 306 and 402 share a common policy rationale--prevention of insider abuse--these commenters maintained that the same need to define with "clarity" who is a director or executive officer exists under Section 402 as much as it did under Section 306. Accordingly, these commenters requested that we adopt "narrower" definitions of "director" and "executive officer" for foreign private issuers under Section 402 that are the same or similar to the definitions adopted in Regulation BTR under Section 306.87

E. Request to Expand the Scope of the Exemption to Include a Foreign Bank's Subsidiaries and Sister Affiliates

Five commenters specifically commented on the scope of the proposed exemption, which covers loans by a foreign bank issuer to its insiders or loans by a foreign bank subsidiary to the insiders of its parent company issuer.88 These commenters requested that we expand the scope of the exemption in various ways to include insider lending involving the subsidiaries or commonly controlled, "sister" affiliates of a foreign bank.

Four commenters urged that we extend the exemption to permit a subsidiary of a foreign bank to lend to the insiders of the foreign bank or the foreign bank's parent company.89 Two of these commenters implicitly limited such an extension to subsidiaries of foreign banks in jurisdictions that have been the subject of favorable CCS determinations. According to these commenters, because under Basel Committee CCS standards, subsidiaries of foreign banks are generally subject to the same comprehensive supervision as the foreign bank itself,90 "there should be no reason why such lending should not be permitted as if made directly by the foreign bank."91 Moreover, according to one commenter, such an expansion of the exemption was necessary in order to achieve parity with domestic banks. This commenter gave as an example a domestic "national" bank with a wholly owned operating subsidiary that was a mortgage lender. According to this commenter, since Regulation O applied to the operating subsidiary's loans to its insiders or to those of the national bank, the Commission should extend comparable treatment to the subsidiary of a foreign bank.92

Another commenter stated that "it is currently unclear whether domestic US bank subsidiaries are covered by Regulation O and therefore eligible for the exemption provided in Section 13(k) of the Exchange Act."93 This commenter urged the Commission to clarify the treatment of domestic bank subsidiaries under Section 13(k) and grant comparable treatment to foreign bank subsidiaries.

Three commenters explicitly requested that the Commission expand the exemption's scope to permit a foreign bank to issue loans to the insiders of its subsidiary that is an issuer under the Sarbanes-Oxley Act.94 Two of the commenters essentially maintained that because Regulation O applied to a domestic bank's loans to the insiders of its non-bank subsidiary, and because Section 402 exempts "any loan" by a U.S. bank that is subject to Regulation O, a domestic bank's loans to the insiders of its subsidiary that is an issuer under the Sarbanes-Oxley Act would qualify for the exemption. Accordingly, these commenters urged the Commission to extend comparable treatment to foreign banks and their subsidiaries as well.95

Four commenters specifically requested that the Commission expand the exemption's scope to permit a foreign bank to lend to the insiders of a commonly controlled, "sister" subsidiary.96 These parties essentially argued that, since Regulation O restricts a subject bank's lending to its insiders or to those of its affiliates, and since the Section 402 exemption applies to any loan that is subject to Regulation O, a domestic bank's loan to the insiders of a sister subsidiary would be exempt under Section 402. Consequently, foreign banks and their sister subsidiaries should receive comparable treatment.97 One of these commenters also argued that, at least for foreign banks organized in CCS jurisdictions, the Section 402 exemption should permit a sister subsidiary to lend to the insiders of a foreign bank or its parent company "as if made directly by the foreign bank."98

However, one of the commenters also noted that whether the exemption would apply to an issuer that is the sister subsidiary of a bank, whether domestic or foreign, would depend on whether "the circumstances are such that the loan could be considered to have been "arranged for" indirectly by the issuer."99 This commenter further stated that "[i]f it is the Commission's judgment that loans by an affiliate would not fall within 13(k)'s prohibition against "indirectly" arranging insider loans, this distinction should be clarified in the final rule."100 This commenter then noted that under the BHCA, indirect ownership or control by a bank company occurs through its subsidiaries and not through commonly-controlled affiliates.101

F. Request to Exempt Certain Schedule B Filers from Exchange Act Section 13(k)

One commenter observed that some foreign banks, such as German state development banks, are typically wholly or majority-owned by their sovereign state. Accordingly, these banks typically register their state-guaranteed debt securities on Schedule B. Since Exchange Act Section 15(d) does not apply to Schedule B registration statements, a Schedule B registrant that has not registered its debt securities under Section 12 is not subject to any Exchange Act reporting obligations once the Schedule B registration statement goes effective. However, because the Sarbanes-Oxley Act applies to any "issuer," which is defined to include a filer of a Securities Act registration statement that has not yet gone effective but has not been withdrawn, Exchange Act Section 13(k)'s insider lending prohibition applies to such a Schedule B registrant during this pre-effectiveness period. This is so despite the fact that, upon effectiveness of the Schedule B, the state-owned bank will have no Exchange Act reporting obligations and, hence, will not be subject to Exchange Act Section 13(k).

This commenter expressed its belief that Congress could not have intended this "temporary" imposition of Sarbanes-Oxley's insider lending prohibition on state-owned foreign bank issuers since it would mean that the only time such issuers are subject to this insider lending prohibition is during the pre-effectiveness period when such issuers have not sold the Schedule B securities and when the investing public has no stake in them. Moreover, absent Sarbanes-Oxley's definition of "issuer," upon effectiveness of their Schedule B registration statements, these state-owned foreign bank registrants of unlisted debt would not be subject to any insider lending restrictions other than those imposed by their home jurisdictions. Accordingly, this commenter requested that upon adoption of the final rule, we clarify that these Schedule B registrants are not subject to Section 13(k)'s insider lending prohibition during the pre-effectiveness period.

G. Proposed Revision of Form 20-F

Four commenters expressly opposed the proposed revision to Form 20-F Item 7.B that would require a foreign bank to disclose the identity of and its relationship with a director or executive officer to whom the foreign bank had issued a loan that had since become "problematic."102 According to these commenters, neither Exchange Act Section 13(k) nor Regulation O require the proposed additional disclosure.103 Moreover, these commenters contended that the proposed additional disclosure requirement would conflict with the laws and norms of many foreign countries, such as EU members, that protect customer confidentiality and data protection.104 These commenters also noted that by granting exemptions or accommodations to foreign issuers in other areas of disclosure, the Commission has recognized that legitimate differences exist between U.S. and foreign laws and customs. These commenters requested that the Commission make another accommodation by deleting the proposed revision to Form 20-F Item 7.B.105

One of the commenters suggested that, if we should adopt the proposed additional disclosure requirement, we also should adopt a provision exempting such disclosure for loans falling below a specified threshold. This commenter recommended "tying such threshold to the same level that would require board approval of credit extensions to insiders."106

_____________________
1 The American Bankers Association ("American Bankers") and the Bankers' Association for Finance and Trade ("BAFT") submitted a joint comment letter. Since BAFT is an affiliate of the American Bankers, the two groups are being treated as a single commenter.
2 NYSE letter, dated October 22, 2003, at p. 2.
3 American Bankers letter, dated October 17, 2003, at p. 1.
4 American Bankers letter at p. 2.
5 See, for example, the European Bank Group letter, dated October 17, 2003, at p. 9.

6 See, for example, the Sullivan & Cromwell letter, dated October 17, 2003, at pp. 8-9.

7 See, for example, the Shearman & Sterling letter, dated October 15, 2003, at p. 5 and the Institute of International Bankers letter ("IIB"), dated October 17, 2003, at p. 8.
8 See, for example, the Sullivan & Cromwell letter at p. 7.
9 See, for example, the European Banking Federation ("FBE") letter, dated October 17, 2003, at p. 3.
10 See, for example, the European Bank Group letter at p. 10.
11 See, for example, the Sullivan & Cromwell letter at pp. 9-10.
12 See, for example, the Swiss Bankers Association ("Swiss Bankers") letter, dated October 17, 2003, at p. 10.
13 See the Shearman & Sterling letter at p. 2.
14 See, for example, the IIB letter at pp. 6-7. We neither proposed nor solicited comment on definitions for "director" and "executive officer" under the proposed exemption.
15 See, for example, the Shearman & Sterling letter at p. 7.
16 See the Shearman & Sterling letter at pp. 7-8 and the accompanying Exhibit A.
17 See, for example, the Deutsche Bank letter, dated October 17, 2003, at p. 3.
18 The thirteen commenters were the Australian Bankers Association ("Australian Bankers"), Bank of Nova Scotia, the Canadian Imperial Bank of Commerce ("CIBC"), the European Bank Group, the FBE, HSBC Holdings plc ("HSBC"), ICICI Bank, the IIB, Mitsubishi Tokyo Financial Group, Inc. ("Mitsubishi"), RBC Financial Group ("RBC"), Shearman & Sterling, Sullivan & Cromwell, and Swiss Bankers.
19 See proposed Exchange Act Rule 13k-1(b)(1).
20 The six supporting commenters were the European Bank Group, HSBC, ICICI Bank, the IIB, RBC (supporting the IIB's comments), and Shearman & Sterling. ICICI Bank stated that while it preferred substituting the first condition with a requirement that a foreign bank "be subject to comprehensive home country supervision and regulation," to the extent that the Commission believes that CCS or deposit insurance are appropriate tests, ICICI Bank "strongly agrees with the SEC that the conditions of CCS and Deposit Insurance should be alternative conditions as currently proposed." ICICI Bank letter at p. 2.
21 Shearman & Sterling letter at p. 6.
22 European Bank Group letter at p. 3.
23 Shearman & Sterling letter at pp. 4-5. See also the AIB Group ("AIB") letter, dated October 16, 2003, at p. 2. Both of these commenters note that the relevant EU directive, 94/19/EC, refers to deposit guarantee schemes rather than deposit insurance requirements.
24 The eleven commenters were the Australian Bankers, Bank of Nova Scotia, European Bank Group, the FBE, ICICI Bank, the IIB, Mitsubishi, RBC, Shearman & Sterling, Sullivan & Cromwell, and Swiss Bankers. The Australian Bankers, Bank of Nova Scotia, Mitsubishi, and RBC each supported the comments of Sullivan & Cromwell. Bank of Nova Scotia and RBC also supported the comments of the IIB.
25 See, for example, the European Bank Group letter at pp. 4-5, the IIB letter at pp. 8-9, the Shearman & Sterling letter at pp. 5-6, and the Sullivan & Cromwell letter at pp. 10-11.
26 See the Shearman & Sterling letter at p. 5 and the Sullivan & Cromwell letter at p. 10.
27 See the European Bank Group letter at p. 5 and the Sullivan & Cromwell letter at pp. 10-11. In addition, the ICICI supported the European Bank Group's comments and the Australian Bankers, Bank of Nova Scotia, Mitsubishi, and RBC each supported the comments of Sullivan & Cromwell.
28 The four commenters were the CIBC, IIB, Sullivan & Cromwell, and Swiss Bankers.
29 See the Swiss Bankers letter at pp. 3-4.
30 See the Swiss Bankers letter at p. 4 and the CIBC letter at pp. 2-3.
31 See the Shearman & Sterling letter at p. 6.
32 The 19 commenters were the AIB, American Bankers, Australian Bankers, Bank of Nova Scotia, BMO Financial Group ("BMO"), Canada Department of Finance, Canadian Bankers Association ("Canadian Bankers'), CIBC, Deutsche Bank, European Bank Group, FBE, HSBC, ICICI Bank, IIB, Mitsubishi, RBC, Shearman & Sterling, Sullivan & Cromwell, and Swiss Bankers.
33 See proposed Exchange Act Rule 13k-1(b)(2).
34 This group of commenters is potentially larger since Australian Bankers, Bank of Nova Scotia, Mitsubishi, and RBC each generally supported the comments of Sullivan & Cromwell.
35 Another commenter, American Bankers, supported the second proposed condition but urged the Commission to adopt a procedure that would permit a foreign bank to qualify for the insider lending exemption if the Commission determined that the insider lending restrictions imposed by the foreign bank's home country were "adequate." See the American Bankers letter at p. 2.
36 The seventeen commenters were the AIB, Australian Bankers, Bank of Nova Scotia, BMO, Canada Department of Finance, Canadian Bankers, CIBC, Deutsche Bank, European Bank Group, FBE, HSBC, ICICI Bank, IIB, Mitsubishi, RBC, Shearman & Sterling, and Sullivan & Cromwell.
37 IIB letter at p. 10.
38 These commenters were the Bank of Nova Scotia, BMO, Canadian Bankers, CIBC, Department of Finance--Canada, and RBC.
39 See the Department of Finance--Canada letter at pp. 1-2 and CIBC's letter at p. 2.
40 See proposed Exchange Act Rule 13k-1(b)(2)(ii) and (iii).
41 See the European Bank Group letter at pp. 6-9 and the BMO letter at p. 2.
42 See the Swiss Bankers letter at p. 7.
43 See the European Bank Group letter at p. 10.
44 See the ICICI Bank letter at pp. 4-6.
45 The nine parties were the AIB, Bank of Nova Scotia, Canadian Bankers, European Bank Group, FBE, HSBC, IIB, Swiss Bankers, and Sullivan & Cromwell. In addition, the Australian Bankers, Mitsubishi and RBC indirectly commented on this issue by generally supporting Sullivan & Cromwell's comments.
46 See proposed Exchange Act Rule 13k-1(b)(3). The proposed third condition would also require the intended recipient to abstain from the required board vote.
47 The four commenters were the AIB, FBE, IIB and Sullivan & Cromwell.
48 See the Swiss Bankers letter at p. 7.
49 IIB letter at p. 10.
50 Sullivan & Cromwell letter at p. 11.
51 FBE letter at p. 3.
52 The six commenters were the AIB, Bank of Nova Scotia, Canadian Bankers, European Bank Group, IIB, and Swiss Bankers.
53 See, for example, the IIB letter at p. 11 and the European Bank Group letter at p. 10.
54 These commenters were the AIB, IIB and Swiss Bankers.
55 See the AIB letter at p. 3.
56 See the IIB letter at p. 11 and the Swiss Bankers letter at p. 8.
57 Swiss Bankers letter at pp. 8-9.
58 The four commenters were the Bank of Nova Scotia, Canadian Bankers, European Bank Group, and IIB. The proposed $500,000 threshold amount is based on Section 215.4(b)(2) of Regulation O.
59 See, for example, the Canadian Bankers letter at p. 3 and the European Bank Group letter at p. 10.
60 The five commenters were the Bank of Nova Scotia, Canadian Bankers, IIB, Swiss Bankers, and HSBC.
61 See the Canadian Bankers letter at p. 2 and the Sullivan & Cromwell letter at pp. 4-5.
62 According to the Canadian Bankers, in Canada, by legislative mandate, a bank's conduct review committee must be comprised of a majority of unaffiliated directors. See the Canadian Bankers letter at p. 2.
63 See the IIB letter at p. 11.
64 See the Canadian Bankers letter at p. 2, the HSBC letter at p. 4, and the Swiss Bankers letter at p. 8.
65 See the European Bank Group letter at p. 11, the IIB letter at p. 11, and the Swiss Bankers letter at p. 8.
66 The two commenters were the IIB and Shearman & Sterling.
67 See proposed Exchange Act Rule 13k-1(a)(1) and (3). The proposed definition of foreign bank also requires an institution to have a home jurisidiction other than the United States and to be regulated as a bank in its home jurisdiction.
68 BHCA stands for the Bank Holding Company Act.
69 The IIB letter at p. 4.
70 The Shearman & Sterling letter at p. 4, citing 12 U.S.C. §1813(h).
71 The Shearman & Sterling letter at pp. 1-2.
72 See the Shearman & Sterling letter at p. 2, n.1 and n. 2.
73 See the IIB letter at pp. 4-5 and the Shearman & Sterling letter at p. 4.
74 12 CFR §211.21(k).
75 See 12 CFR §211.20(b).
76 The IIB letter at p. 4.
77 See, for example, the Shearman & Sterling letter at p. 4.
78 Proposed Exchange Act Rule 13k-1(a)(4).
79 See the IIB letter at pp. 5-6 and the Shearman & Sterling letter at p. 7.
80 See 12 U.S.C. §1841(a)(2) and (d) and 12 CFR §215.2(c) and (o). Under these definitions, a parent company-subsidiary relationship also exists when a bank holding company controls in any manner the election of a majority of a company's directors or when a bank holding company has the power directly or indirectly to exercise a controlling influence over the management or policies of a company.
81 IIB letter at pp. 5-6.
82 The two parties were HSBC and the IIB.
83 Regulation BTR is discussed in SEC Release No. 34-47225 (January 22, 2003) and codified at 17 CFR §§245.100 et seq. This regulation was enacted pursuant to Sarbanes-Oxley Act Section 306(a), which concerns insider trades during pension fund blackout periods.
84 See 17 CFR 245.100(c)(2).
85 See 17 CFR §245.100(h)(2).
86 See the IIB letter at p. 7, n. 15, quoting the Regulation BTR proposing release, SEC Release No. 34-46778 (November 6, 2002).
87 See the HSBC letter at pp. 4-5 and the IIB letter at pp. 7-8.
88 The five commenters were the Bank of Nova Scotia, Canadian Bankers, IIB, Sullivan & Cromwell, and Swiss Bankers.
89 The four commenters were the Bank of Nova Scotia, Canadian Bankers, IIB, and Swiss Bankers.
90 See the IIB letter at p. 6.
91 Swiss Bankers letter at p. 10.
92 See the IIB letter at p. 6.
93 Canadian Bankers letter at p. 3.
94 The three commenters were the Bank of Nova Scotia, Sullivan & Cromwell, and Swiss Bankers.
95 See the Sullivan & Cromwell letter at pp. 9-10 and the Swiss Bankers letter at p. 11.
96 The four commenters were the Bank of Nova Scotia, IIB, Sullivan & Cromwell and Swiss Bankers.
97 See the IIB letter at p. 5, the Sullivan & Cromwell letter at pp. 9-10 and the Swiss Bankers letter at p. 10.
98 See the Swiss Bankers letter at p. 10.
99 See the IIB letter at p. 5.
100 The IIB letter at p. 5, n. 8.
101 See 12 U.S.C. §1841(g), cited in the IIB letter, supra.
102 The four commenters were Deutsche Bank, the FBE, IIB, and Swiss Bankers.
103 See the Deutsche Bank letter at p. 3 and the FBE letter at p. 3.
104 See the FBE letter at pp. 3-4 and the Swiss Bankers letter at p. 9.
105 See, for example, the IIB letter at p. 12.
106 Swiss Bankers letter at p. 10.

 

http://www.sec.gov/rules/extra/s71503summary.htm


Modified: 02/25/2004