October 17, 2003
Mr. Jonathan G. Katz
Dear Mr. Katz:
Re: Proposed Foreign Bank Exemption Rule (File No. S7-15-03)
On behalf of the six Canadian banks that are subject to the Exchange Act, the Canadian Bankers Association (CBA) would like to endorse the steps taken by US authorities to restore investor confidence in companies listed on the US markets. We would also like to express our appreciation of the SEC's efforts to ensure that the foreign banks are given equal treatment under the Section 402 insider-lending rule, through the SEC's proposed foreign bank exemption.
Unfortunately, as currently drafted, the proposed exemption will still result in the disparate treatment of many foreign banks. Canadian banks will not be able to qualify for the exemption without legislative change, despite already being subject to robust statutory insider-lending restrictions. With the aim of ensuring that both foreign and domestic banks are equally able to avail themselves of the exemption provided under the proposal, we have outlined the limitations of the proposed rule and made recommendations for addressing them.
Requirement for Legislative Change
Proposed Rule 13k-1 would exempt from the Section 13(k)(1) insider lending prohibition, an issuer that is a foreign bank or the parent company of a foreign bank with respect to loans by the foreign bank to its insiders or the insiders of its parent company as long as three conditions are met.
The first condition requires that either the laws or regulations of the foreign bank's home jurisdiction require the bank to insure its deposits or the Federal Reserve Board has determined that the foreign bank is subject to comprehensive supervision or regulation by its home jurisdiction supervisor. The six Canadian Banks meet this condition as they are required to insure their deposits.
The third condition, which requires that loans over US$500,000 be approved in advance by the board of directors with any interested director abstaining, can be met by the Canadian banks.
The second condition, which requires that the laws or regulations of the foreign bank's home jurisdiction restrict the foreign bank from making loans to its executive officers and directors unless certain specified criteria are met such as requiring the loans to (i) be made on market terms, (ii) pursuant to a widely available benefit or compensation program that does not favour management, or (iii) following the express approval of the loan by the foreign bank's home jurisdiction supervisor, cannot be met.
Canadian banks cannot meet this second condition without legislative change at the federal level. The Bank Act (Canada), which currently contains robust restrictions on insider lending, does not contain these express conditions and it is unlikely that such required legislative change will be forthcoming in the near future.
We recommend that foreign banks be permitted to qualify for the exemption if they comply with conditions 1 and 3 of the proposed rule, and any of the three requirements of the second condition, without the requirement that the laws of the home jurisdiction mandate these three requirements. We are unclear of the value to requiring the home jurisdiction to enact laws or regulations to provide the same regulatory regime that exists in the US. Requiring foreign banks to comply with the components of the US proposed rule in order to avail themselves of the exemption should be sufficient. The SEC has enforcement powers that may be exercised if the foreign bank extends credit in violation of Section 13(k)(1) without the benefit of an exemption. If the impetus for requiring the home jurisdiction laws to limit loans by the three criteria of the second condition is to shift the onus of enforcement to the foreign regulators, it sets a significant precedent which when extended to its logical conclusion would require all foreign jurisdictions to enact all other Exchange Act provisions as a pre-requisite to issuers from those jurisdictions participating in the US capital markets.
Review of Loans by Board of Directors
The third condition that requires that full board approval of loans over US$500,000 is overly burdensome for boards of directors with the ever increasing duties and responsibilities and it would seem that an independent committee of the board of directors could serve the same function and provide the same degree of investor protection. In Canada, loans to related parties are allowed for executive officers if approved in advance by a bank's conduct review committee, which, by legislative mandate, must be comprised of a majority of unaffiliated directors.
We recommend that the board approval be amended to require approval of a committee of the board of directors comprised of independent directors, with any interested director abstaining from voting. This will permit the board to identify the appropriate committee, such as the conduct review committee or the audit committee.
We understand that the US$500,000 threshold in the third condition was implemented for US domestic banks in 1983 through Regulation O and that this threshold has been included in the proposed rule to provide some parity with US domestic banks who must comply with Regulation O. To the extent that the threshold in Regulation O may be changed in the future, foreign banks will again be at a disadvantage while the SEC formulates an amendment to the rule to change the threshold in the rule.
We recommend that the US$500,000 threshold be tied specifically to Regulation O such that any change in the Regulation O threshold translates into an automatic change in the proposed rule threshold without the requirement of the SEC to formally amend the rule.
Definition of "Foreign Bank"
The definition of "foreign bank" does not include wholly-owned subsidiaries. The six Canadian banks have a number of regulated subsidiaries that previously routinely extended credit to their customer base, including some customers that are related parties. While Subsection 13(k) of the Exchange Act appears to prohibit loans by the issuer and its subsidiaries, the proposed rule does not extend the exemption to these same subsidiaries.
As 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, we request that the Commission consider future clarifications on this point, ensuring equal treatment is provided under the foreign bank exemption.
We recommend that the exemption be extended to cover bank subsidiaries.
Exemption for Regulated Brokers and Dealers
Section 13(k)(2) of the Exchange Act exempts an extension of credit by a broker or dealer that is registered under Section 15 of the Exchange Act to an employee of the broker or dealer. The same exemption has not been expressly made available to the Canadian bank owned brokers or dealers, which are required by law to be registered under the securities legislation of the provinces in which they carry on business.
We recommend that the exemption available to US brokers or dealers be made available for foreign brokers and dealers who are regulated in their home jurisdictions.
Thank you for considering our concerns regarding this matter. Please do not hesitate to contact me if you require any further information or assistance.
cc: Nick Le Pan, The Superintendent of Financial Institutions, OSFI