INSTITUTE OF INTERNATIONAL BANKERS
299 PARK AVENUE, 17TH FLOOR, NEW YORK, N.Y. 10171
TELEPHONE: (212) 421-1611 FACSIMILE: (212) 421-1119
LAWRENCE R. UHLICK
EXECUTIVE DIRECTOR AND GENERAL COUNSEL
DIRECT E-MAIL: LUHLICK@IIB.ORG
October 17, 2003
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, DC 20549-0609
Attention: Jonathon G. Katz, Secretary
Re: Proposed Rule: Foreign Bank Exemption from the Insider Lending
Prohibition of Exchange Act Section 13(k) (File No. S7-15-03)
Ladies and Gentlemen:
We are submitting this letter in response to the request of the Securities and Exchange Commission (the "Commission") for comments on the Commission's proposed Rule 13k-1 (the "Proposed Rule"), as set forth in Release No. 34-48481 (the "Release").1 The Proposed Rule would exempt qualified foreign banks from the insider lending prohibition under Section 13(k) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), as added by Section 402 of the Sarbanes-Oxley Act.
The Institute of International Bankers (the "Institute") appreciates this opportunity to comment on the Proposed Rule. The Institute represents internationally headquartered financial institutions from over 40 countries. Many of the Institute's members have U.S.-listed securities and are subject to the insider lending prohibitions of Section 13(k). The Institute has made a number of submissions to the Commission and its staff beginning in August 2002 relating to Section 13(k) and our request that the Commission propose an exemption for international banks. We have also had several useful discussions with the Commission's staff regarding the effects of Section 13(k) on international banks, and we appreciate the staff's willingness to make these issues a priority among the many challenges the Commission faces in implementing the Sarbanes-Oxley Act.
Section 13(k) of the Exchange Act generally prohibits "issuers" from making or arranging for, directly or indirectly, personal loans to their directors and executive officers, subject to certain limited exceptions. For U.S. banks, Section 13(k) contains an important exemption for loans made by a bank or other depository institution whose deposits are insured by the Federal Deposit Insurance Corporation (the "FDIC") if the loan is subject to U.S. "insider lending restrictions" in Section 22(h) of the Federal Reserve Act (such as those set out in the Federal Reserve Board's Regulation O2). This exemption is not available to international banks or their uninsured U.S. branches and agencies. As a result, Section 13(k) places international bank issuers at a significant disadvantage to U.S. banking organizations. The Commission's proposed Rule 13k-1 seeks to remedy this disparate treatment by providing an exemption from Section 13(k)'s insider lending prohibition for international banks that meet certain conditions, some of which are modeled on requirements that apply to U.S. banks under Regulation O.
The Institute appreciates the Commission's attention to the national treatment issues raised by the disparate treatment of international banks under Section 13(k) and strongly supports the Commission's determination to address these issues in providing an exemption for international banks. As discussed in detail below, we respectfully suggest a number of revisions or clarifications with respect to the Proposed Rule to ensure national treatment for qualified international banks and to accord appropriate deference to home country bank supervision.
With respect to the scope of the proposed exemption, we suggest that several definitions in the Proposed Rule be revised and that two definitions be added to the final Rule 13k-1. First, we would urge the Commission to revise the definition of "foreign bank" in the Proposed Rule to conform to the definition of that term in the International Banking Act (the "IBA") and Subpart B of Regulation K. The Proposed Rule's definition of "foreign bank" is based on the definition in Subpart A of Regulation K, but the Institute would respectfully submit that the IBA and Subpart B of Regulation K are the more appropriate source for borrowing a definition of "foreign bank" for purposes of Section 13(k), and the definition in the IBA and Subpart B of Regulation K is in any event a superior definition for this purpose. We also suggest that the Proposed Rule be revised to ensure that loans by a foreign bank to insiders of affiliated issuers are covered by the exemption (i.e., in addition to loans by a foreign bank to insiders of its parent company, which would be covered under the Proposed Rule). Similarly, we suggest that the exemption be extended to cover loans made by subsidiaries of a foreign bank. In each case, these changes are necessary to ensure that the scope of the exemption in Rule 13k-1 is comparable to the scope of the statutory exemption for domestic banks in Section 13k. We would also respectfully urge the Commission to add definitions of "director" and "executive officer" to the final Rule 13k-1, basing such definitions on those adopted by the Commission in its rules implementing Section 306(a) of the Sarbanes-Oxley Act.
With respect to the "comprehensive consolidated supervision" ("CCS") condition of the exemption, we believe that an international bank should be able to meet the condition if it is from a jurisdiction where at least one other international bank has been determined by the Federal Reserve Board to be subject to CCS and the international bank is supervised on substantially the same terms and conditions as the bank that received the CCS determination. Requiring that an issuer itself have received a CCS determination will lead to arbitrary results given the nature of the bank regulatory process required to obtain a CCS determination, and will unfairly deny the benefits of the exemption to certain issuers that are subject to the same home country supervision as other issuers that qualify for the exemption.
The Institute continues to believe that specific U.S.-based insider lending restrictions should not be applied to international banks that satisfy the CCS/deposit insurance condition in the proposed exemption. However, to the extent an insider lending restrictions condition is retained in the final Rule 13k-1, we would request that the Commission make clear that insider loans will satisfy the condition if they in fact meet the insider lending requirements specified in the Proposed Rule (i.e., if they are made on arm's length terms, made pursuant to employee benefit plans that do not discriminate in favor of executive officers, or made pursuant to home country supervisory approval). In the Institute's view, any requirement that the specific insider lending requirement be embodied in an international bank's home country laws or regulations would unnecessarily discriminate against international banks from jurisdictions that have elected not to adopt insider lending standards in the form of laws or regulations.
We also suggest that that the Commission not adopt a board approval requirement that would apply in addition to the CCS/deposit insurance condition. For international banks that satisfy the CCS/deposit insurance condition, we believe it would be more appropriate to defer to home country supervisory practices with respect to the role of board approvals in preventing insider abuse. If a board approval requirement is retained, however, we suggest that it permit delegation of approval authority to a committee of the board and that the threshold be raised to $2 million.
Finally, we recommend that the Commission not include additional 20-F disclosure requirements in the final rule. Such requirements are not required by Section 402 or any other provision of the Sarbanes-Oxley Act, and we would respectfully submit that no compelling reason exists to alter the existing standards that the Commission has adopted for foreign private issuers in this context.
Scope of the Proposed Rule
Definition of "Foreign Bank"
The Proposed Rule would apply to loans by "foreign banks," a term that is defined as an institution (i) the home jurisdiction of which is other than the United States; (ii) that is regulated as a bank in its home jurisdiction; and (iii) that is engaged substantially in the business of banking. "Engaged substantially in the business of banking" is defined as (i) receiving deposits to a substantial extent in the regular course of business; (ii) having the power to accept demand deposits; and (iii) extending commercial or other types of credit.
For the reasons outlined below, the Institute respectfully suggests that the Commission adopt a broader definition of "foreign bank" modeled on the definition commonly used in U.S. banking regulations in similar contexts. At a minimum, we would urge that the Commission remove the specific requirement that a foreign bank have the power to accept demand deposits in order to qualify for the exemption.
As explained in the Release, the Proposed Rule's definition of "foreign bank" is based, with some modifications, on a definition of "foreign bank" in the Federal Reserve Board's Regulation K.3 In fact, there are two definitions of "foreign bank" in Regulation K, each of which serves a different purpose. The Commission's definition of "foreign bank" in the Proposed Rule is based on the definition that appears in Subpart A of Regulation K. Subpart A implements the Federal Reserve Act and the BHCA as they relate to the non-U.S. activities of U.S. banking organizations. For example, Subpart A regulates the ability of certain U.S. banks to acquire foreign bank subsidiaries.
A different definition of "foreign bank" appears in Subpart B of Regulation K. Subpart B implements the IBA and the BHCA as they relate to the U.S. activities of foreign banking organizations. For example, Subpart B of Regulation K regulates the ability of foreign banks to establish U.S. banking offices, acquire companies engaged in business in the United States, etc. The Subpart B definition, which largely tracks the statutory definition in the IBA,4 defines "foreign bank" as "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." For this purpose, a foreign bank "engages directly in the business of banking outside the United States" if it "engages directly in banking activities usual in connection with the business of banking where it is organized or operating."5
In the Institute's view, the definition of "foreign bank" in Subpart B of Regulation K would be more appropriate to define the universe of foreign banks eligible for the Commission's proposed exemption from Section 13(k). Subpart B defines, for purposes of U.S. banking laws and regulations, the universe of foreign banks that are subject to Federal Reserve Board application requirements and substantive regulation. In addition, it is Subpart B that defines the standards used to determine whether a foreign bank is subject to CCS, one of the alternative criteria the Commission included in the Proposed Rule to determine eligibility for the proposed foreign bank exemption. It would be an anomalous result 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). Such a result also would be inconsistent with the Commission's intention to "render eligible for the bank exemption those foreign banks permitted to do business in the United States" following a CCS determination.6
In addition, the definition of "foreign bank" in the Proposed Rule would include a narrower range of types of banking organizations than the definition of "insured depository institution" that defines the scope of the statutory exemption in Section 13(k) for U.S. banks and thrifts. For example, certain U.S. banks operate as limited-purpose credit card banks under the BHCA and do not have the power to accept demand deposits.7 Such banks are, nonetheless, "insured depository 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. The Institute respectfully suggests that using a broader definition of "foreign bank" modeled on the IBA and Subpart B of Regulation K would ensure that international banks receive comparable treatment, consistent with the intent of the Proposed Rule.
Parent Companies and Affiliates of a Foreign Bank
The insider lending prohibition in Section 13(k) applies to loans made or arranged for by an issuer "directly or indirectly, including through a subsidiary." Under the Proposed Rule, however, it appears that an issuer would be eligible for the Rule 13k-1 exemption only if the issuer is a foreign bank or the parent company of a foreign bank and the loan is made by such foreign bank. To the extent an extension of credit is made by a foreign bank that is a commonly-controlled affiliate of an issuer (i.e., a "sister" affiliate to the issuer) to the issuer's insiders, and the circumstances are such that the loan could be considered to have been "arranged for" indirectly by the issuer, such a loan could be subject to the prohibitions of Section 13(k).8 Under the Proposed Rule, however, such a loan may not be eligible for the banking exemption because the issuer would not be the foreign bank that made the loan or the parent of the foreign bank that made the loan.
The Release indicates that the Commission extended the scope of the exemption to parent companies of foreign banks in order to capture indirect extensions of credit through subsidiaries. It would be consistent with the Commission's rationale in this regard to make indirect loans through affiliates eligible for the exemption as well. If a loan is made by a foreign bank that complies with the various criteria of the Proposed Rule, the loan should be entitled to the exemption regardless of whether the foreign bank is a subsidiary of the issuer or a commonly-controlled affiliate of the issuer.
In addition, comparable loans by U.S. banks to affiliated issuers would be exempt under the statutory exemption in Section 13(k). Take, for example, a U.S. issuer that is affiliated with a U.S. insured depository institution by virtue of sharing a common parent holding company. Loans by the insured depository institution to the issuer's officers and directors would be exempt under Section 13(k) because such loans are subject to Regulation O.9 Similarly situated foreign banks should be entitled to the Commission's proposed regulatory exemption, consistent with the intent of the Proposed Rule to provide comparable treatment for foreign banks.
As a related matter, the Institute would urge the Commission to revise its proposed definition of "parent company" to align it more closely with the definitions of comparable terms in Regulation O (and the BHCA and the IBA). Under applicable banking law definitions, the parent-subsidiary relationship reaches ownership or control of 25 percent or more of any class of voting securities, control of election of a majority of directors and ability to exercise a "controlling influence."10 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 statutory exemption in Section 13(k).
Loans by Subsidiaries
Under the terms of the Proposed Rule, it appears that the exemption would apply only to loans made by the "foreign bank" itself, and not also to loans made by any of the foreign bank's subsidiaries. The Institute respectfully suggests that the rule be amended to include loans made by subsidiaries of foreign banks. Under Basel Committee CCS standards, subsidiaries of foreign banks are generally subject to the same comprehensive supervision as the foreign bank itself. In addition, such a change is important to ensure parity with the treatment of loans by subsidiaries of U.S. banks. Take, for example, a national bank with a wholly-owned mortgage lender subsidiary. The mortgage lender, which is treated as an "operating subsidiary" of the national bank under applicable banking laws and regulations,11 is subject to the same insider lending restrictions under Regulation O as the parent national bank.12 As a result, mortgage loans by the national bank's operating subsidiary to directors and executive officers of the national bank (or the national bank's parent holding company or other affiliates) would be exempt under the statutory exemption in Section 13(k). Under the Proposed Rule, it appears that a comparable loan by a foreign bank's mortgage lender subsidiary may not qualify for the foreign bank exemption. By extending the exemption to loans made by subsidiaries of foreign banks, the Commission will ensure that foreign banks are accorded treatment comparable to that of U.S. banks under Regulation O.
Definition of Directors and Executive Officers
Like Section 402 itself, the Proposed Rule does not define the terms "director" or "executive officer." Section 3(a)(7) of the Exchange Act defines the term "director" to mean "any director of a corporation or any person performing similar functions with respect to any organization, whether incorporated or unincorporated." Exchange Act Rule 3b-7 defines the term "executive officer" of an SEC registrant to mean the registrant's president; any vice president in charge of a principal business unit, division or functions; any other officer who performs a policy making function; or any other person (including an officer of a subsidiary of the registrant) who performs similar policy making functions for the registrant.
In adopting its new Regulation Blackout Trading Restriction ("Regulation BTR") earlier this year, the Commission considered the appropriate definitions of the terms "director" and "executive officer" as used Section 306(a) of the Sarbanes-Oxley Act.13 Section 306(a) relates to insider trades during pension fund blackout periods and uses the same terms as Section 402 to describe the insiders of potential concern-directors and executive officers. In the context of that rulemaking, the Commission adopted specific definitions of "director" and "executive officer" for foreign private issuers that were different than the corresponding definitions for U.S. domestic issuers. For domestic issuers, the Commission relied on the existing definition of "director" in Exchange Act Section 3(a)(7) and elected to use an existing definition of "executive officer" in Exchange Act Rule 16a-1(f). For foreign private issuers, in contrast, the Commission adopted new definitions.14 Rule 100(c)(2) of Regulation BTR defines the term "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." Rule 100(h)(2) of 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."
In the proposing release for Regulation BTR, the Commission suggested that for foreign private issuers, it was appropriate to specifically identify the directors and officers subject to Section 306(a)'s trading prohibitions rather than relying on definitions in the Exchange Act and the Commission's Exchange Act regulations. The Commission noted that this would assist foreign issuers in identifying the individuals subject to the rule, and observed that the boards of foreign issuers frequently include individuals to whom the rule was not intended and would not appropriately apply.15
We would respectfully suggest that these same reasons support adoption of similar definitions of "directors" and "executive officers" for foreign private issuers for purposes of Section 402 of the Sarbanes-Oxley Act and Rule 13k-1. Sections 306(a) and 402 share a common policy rationale-prevention of insider abuse-and Congress defined the group of insiders subject to the prohibitions of Sections 306(a) and 402 similarly, referring to "directors and executive officers" in both sections. In the Institute's view, the analysis underlying the Commission's determination to adopt narrower definitions for foreign private issuers in the context of Section 306(a) holds equally true in the context of Section 402. We therefore respectfully suggest that the Commission add similar definitions of these terms to the Proposed Rule (or add a cross-reference to the definitions in Rule 100(c)(2) and (h)(2) of Regulation BTR). Alternatively, the Commission could indicate in the release accompanying the final Rule 13k-1 that it interprets the terms "director" and "executive officer" in Section 13(k) for foreign private issuers as congruent with the definitions set forth in Regulation BTR for foreign private issuers.16
The Home Country Deposit Insurance or CCS Condition
The first of the three conditions required for a foreign bank to qualify for the Commission's exemption under the Proposed Rule would be met if either (i) the laws or regulations of the foreign bank's home jurisdiction require the bank to insure its deposits;17 or (ii) the Federal Reserve Board has determined that the foreign bank is subject to CCS by the bank supervisor in the foreign bank's home jurisdiction.18 The Institute strongly supports the Commission's approach of providing these two tests as alternative means of fulfilling the first condition for the exemption.
CCS Determinations on a Country Basis
With respect to the CCS requirement, the Institute strongly encourages the Commission to revise the condition so that it is determined on a country basis. In the Institute's view, an international bank should be able to satisfy the CCS requirement if any one or more international banks from its home country had been determined by the Federal Reserve Board to be subject to CCS and the international bank is supervised on substantially the same terms and conditions. As the Commission noted in the Release, a CCS determination with respect to a foreign bank indicates that the Federal Reserve Board "has found [the bank's] home country banking laws and supervision to be sufficiently comprehensive," and "most banks within a particular jurisdiction are likely to be similarly regulated." As noted above, since 1991 CCS determinations are made when a foreign bank applies to establish (or expand) U.S. banking operations. Under current regulations, CCS determinations are generally also made when a foreign bank seeks to become an FHC under the GLBA. The fact that a particular foreign bank may or may not have obtained a CCS determination depends solely on whether it has, within relevant time periods, been required to obtain such a determination under applicable banking laws and regulations. There is no procedure currently available for an international bank to obtain a CCS determination without being required to do so under applicable banking statutory and regulatory standards (i.e., there is no procedure for "advisory" CCS determinations).
In the Institute's view, denying an international bank from a CCS jurisdiction the benefit of the exemption solely because it had not had occasion to file a relevant application with the Federal Reserve Board or become certified as an FHC would be an unreasonable result. It would mean that an international bank that had not obtained a CCS determination, but was subject to the same home country regulation and supervision (including with respect to insider lending) as another international bank that had obtained such a determination, would not be eligible for the exemption under the Proposed Rule. We believe that such an arbitrary outcome would be inconsistent with the purposes of Section 13(k) and the Proposed Rule and would be affirmatively unfair to those banking institutions that would fail to qualify for the foreign bank exemption on those grounds.
The Home Country Insider Lending Restrictions Condition
The second condition for a loan to qualify for exemption under the Proposed Rule appears to require that a loan be made pursuant to home country laws or regulations that prohibit insider loans unless they are (1) on market terms; (2) made pursuant to a benefit or compensation program that is widely available to the employees of the foreign bank or its parent and does not give preference to executive officers or directors over employees; or (3) made following the express approval of the loan by the bank supervisor in the foreign bank's home jurisdiction. While the language of the Proposed Rule and most of the Release indicates that these criteria must be required by law or regulation in the home jurisdiction, some portions of the Release seem to suggest that the condition would be met if the loan actually satisfied any of the three requirements (e.g., if the loan, as a matter of fact, was on market terms).19
While the Institute continues to believe that compliance with specific Regulation O-based insider lending restrictions should not be required for international banks from CCS jurisdictions,20 the Institute would strongly encourage the Commission at a minimum to revise the text of the Proposed Rule to make clear that compliance with such standards should be sufficient without regard to whether home country laws or regulations make such standards mandatory. Home country practices with respect to the manner in which bank supervisory standards are embodied in laws or regulations or other documents vary, and Rule 13k-1 should not effectively dictate to other countries' legislatures and banking authorities how to address insider lending restrictions. Some jurisdictions, for example, may require insider loans to be on market terms under applicable supervisory guidance, which may be more or less formal and may or may not be made binding by a separate "regulation" within the meaning of the Proposed Rule. In other jurisdictions, banking supervisors may rely on institutions to make loans to insiders on market terms on a voluntary basis but would criticize an institution in an examination if it failed to do so.
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.
In any event, and in response to the Commission's question on this point in the Release, the Institute believes that the Commission should not incorporate any additional insider lending restrictions from Regulation O into Rule 13k-1 beyond those already identified in the Proposed Rule. Any such additional restrictions would only compound the intrusion of Rule 13k-1 into matters that are more appropriately left to home country bank supervisory authorities, and such restrictions are not necessary to implement the legislative purpose of Section 13(k).
The Board Approval Condition
The third condition in the Proposed Rule would require that a majority of a foreign bank's board of directors approve in advance any loan that, when aggregated with all other loans to a particular director or executive officer, would exceed U.S. $500,000. The Proposed Rule also would require that the intended loan recipient abstain from voting on the loan. The Release clarifies that if a foreign issuer has a two-tier board structure, where one tier is a supervisory board and the other a management board, majority approval of either board will suffice.
For the reasons noted above regarding the other insider lending conditions in the Proposed Rule, 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. Deferring to home country supervisory standards within the bounds of the Federal Reserve Board's CCS determinations and the group of institutions that operate under home country deposit insurance schemes would be more consistent with international bank supervisory standards than imposing a U.S.-based board of directors approval requirement.
Flexibility for Home Country Board Structures
The Institute supports the Commission's proposal to permit banks with dual board structures to obtain approval for permissible insider loans from the bank's supervisory board or its management board. The Institute believes that the Commission's proposal in this regard is an appropriate accommodation of the dual board structures that are prevalent outside the United States.
The Institute would further suggest, however, that the Proposed Rule be revised to permit an international bank's board to delegate authority to approve insider loans to a committee of the board to the extent that such a procedure complied with home country standards set forth in laws, regulations or published supervisory guidance. This proposed revision would represent an accommodation to home country practices similar to the one included for dual board structures in the Proposed Rule and would provide needed flexibility for international banks that rely on committees to approve insider loans. As the Release acknowledges, the board structures of foreign issuers frequently differ from those in the United States. Home country banking and corporate laws and regulations that require board approval for certain actions such as insider loans may permit committees to approve such actions under delegated authority. In order to accommodate variations in corporate governance structures and home country banking laws and practices, we believe that it would be appropriate to allow the board of a foreign bank to delegate its approval to a committee of the board.21
The $500,000 Threshold
The Institute would respectfully suggest that the Commission raise the threshold for obtaining board approval significantly above $500,000. As noted in the Release, this condition is based on Regulation O requirements that apply to U.S. banks. It is noteworthy that the $500,000 limit in Regulation O was established in 1983 and has not been increased to take inflation into account. In the 20 years since the $500,000 limit was established, prices for housing (one of the main purposes for which banks extend loans to employees on favorable terms) have increased by more than 300% in places such as the United Kingdom and New York.22 The Institute would suggest that a more appropriate threshold for purposes of Rule 13k-1 would be at least $2 million.23 To the extent that the $500,000 limit is justified by any competitive equality concerns vis-à-vis domestic banking organizations, the Institute would strongly support a corresponding revision to Regulation O to raise the limit for domestic banks.
Proposed Amendment to 20-F Disclosure Requirements Regarding Insider Loans
The Proposed Rule would also amend Form 20-F to require foreign bank issuers to provide additional disclosure regarding certain loans to insiders. For related party loans that are considered "problematic,"24 Item 7.B of Form 20-F currently requires the issuer to disclose the largest amount outstanding during the period covered, the amount outstanding as of the latest practicable date, the nature of the loan and the transaction in which it was incurred, and the interest rate on the loan. The Proposed Rule would further require that for problematic loans by a foreign bank (as defined in the Proposed Rule), its parent or subsidiaries, the loan recipient's identity and the bank's relationship with the recipient must also be disclosed.
We respectfully suggest that the Commission remove this additional disclosure requirement from the Proposed Rule. Neither Section 402 nor any other provisions in Title IV of the Sarbanes-Oxley Act (which supplements disclosure requirements in many other areas) mandates or suggests additional disclosure by foreign banks. Absent a congressional mandate or compelling evidence that current disclosure requirements are inadequate, we believe there is insufficient cause to change the existing requirements. The disclosure required of foreign issuers on Form 20-F has traditionally differed in certain respects from that required of U.S. issuers in order to accommodate the diverse practices in other jurisdictions and avoid conflicts with home country requirements. Public disclosure of personal information has often been particularly troublesome for foreign issuers, and consideration of that difficulty is reflected in the current formulation of Item 7.B.2's requirements regarding related party loans. A similar accommodation of foreign privacy concerns is reflected in Item 6.B.1 of Form 20-F, which requires individual disclosure of executive compensation only where such information is already publicly available or disclosure is required by the issuer's home jurisdiction. We respectfully suggest that the current disclosure requirements be retained in order to preserve the existing balance between providing information necessary to investors and accommodation of non-U.S. legal requirements and practices.
* * *
We appreciate this opportunity to comment on the Proposed Rule. Please contact the undersigned or Edward Greene (011-44-20-7614-2254) or Derek Bush (202-974-1526) of Cleary, Gottlieb, Steen & Hamilton with any questions regarding this letter or if we can provide any further assistance.
Very truly yours,
Lawrence R. Uhlick
Executive Director and
|1|| 68 Fed. Reg. 54590 (Sept. 17, 2003).
|2|| 12 C.F.R. Part 215 ("Regulation O").
|3|| 12 C.F.R. Part 211 ("Regulation K"). See 12 C.F.R. § 211.2(j).
|4|| See 12 U.S.C. § 3101(7).
|5|| See 12 C.F.R. § 211.21(k)-(n). The IBA definition continues: "For the purposes of this chapter, the term `foreign bank' includes, without limitation, foreign commercial banks, foreign merchant banks, and other foreign institutions that engage in banking activities usual in connection with the business of banking in the countries where such foreign institutions are organized or operating."
|6|| See 68 Fed. Reg. at 54,592.
|7|| See 12 U.S.C. § 1841(c)(2)(F).
|8|| If 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. For example, the concept of "indirect" ownership or control under the BHCA relates to ownership or control through subsidiaries, not through commonly-controlled affiliates. See 12 U.S.C. § 1841(g). A similar concept could be adapted to Section 13(k).
|9|| See 12 C.F.R. § 215.4 (general requirements for loans to insiders of the bank and its affiliates).
|10|| See, e.g., BHCA § 2(a), 12 U.S.C. § 1841(a).
|11|| See generally 12 C.F.R. § 5.34.
|12|| See 12 C.F.R. § 5.34(e)(3)
|13|| See Release No. 34-46778 (Nov. 6, 2002) (proposed rule); Release No. 34-47225 (Jan. 22, 2003) (final rule). Although Section 306(a) of the Sarbanes-Oxley Act is not codified as part of the Exchange Act, Regulation BTR was promulgated under the Exchange Act.
|14|| See Rule 100(c)(2) and (h)(2) of Regulation BTR.
|15|| See SEC Release No. 34-46778 (Nov. 6, 2002) (proposing release):
Because foreign private issuers are not subject to Section 16 of the Exchange Act, we believe that is appropriate to specifically enumerate the directors and executive officers of a foreign private issuer who would be subject to Section 306(a) and proposed Regulation BTR rather than relying on a Section 16 definition. This would assist foreign private issuers in identifying the individuals who would be subject to Section 306(a) and proposed Regulation BTR. In addition, many foreign private issuers have lower-level employee representatives on their board of directors, and we do not believe that Section 306(a) and proposed Regulation BTR should be extended to these individuals or to other non-employee directors or foreign companies.
The final release adopted the proposed definitions without change and noted that commenters had supported the Commission's proposal to specifically identify the directors and officers subject to Section 306(a)'s trading prohibition. See Release No. 34-47225 (Jan. 22, 2003) (final release).
|16|| Adopting specific definitions of "director" and "executive officer" for foreign private issuers for purposes of Section 13(k) would of course not dictate how those terms are defined for domestic issuers, an issue beyond the scope of this comment letter. We do note that at least one of the Commission's rationales for defining "executive officer" for domestic issuers in Regulation BTR by reference to Exchange Act Rule 16a-1(f)-coordination of trading policies and compliance monitoring under Section 16 of the Exchange Act-would not necessarily apply under Section 402; as a result, it would appear that the definition of "executive officer" in Exchange Act Rule 3b-7 may be better suited to U.S. domestic issuers than the definition in Exchange Act Rule 16a-1(f) in the context of Section 402.
|17|| It is our understanding that the Proposed Rule would not require all of a foreign bank's deposits to be insured to meet the deposit insurance test, any more than all deposits of FDIC-insured depository institutions benefit from FDIC insurance. For example, deposits at non-U.S. branches of U.S. banks generally are not FDIC-insured, and FDIC deposit insurance generally applies only up to a maximum of $100,000 per depositor. For larger institutions, it is not uncommon for between 50% and 60% of an institution's deposits to be insured by the FDIC.
|18|| Since 1991, the Federal Reserve Board has been required to make a CCS determination when it approves an application by a foreign bank to establish a banking office or acquire a banking subsidiary in the United States, and under current standards the Federal Reserve Board generally makes a CCS determination when a foreign banking organization is certified as a financial holding company ("FHC") under the Gramm-Leach-Bliley Act ("GLBA").
|19|| See, e.g., 68 Fed. Reg. 54590, 54593 (Sept. 17, 2003) ("These conditions would require a foreign bank's loan to an executive officer or director to be either on market terms to unrelated parties or, if pursuant to an employee benefit or compensation plan, on terms no more beneficial to those offered to its other employees. ... Alternatively, a foreign bank insider loan could also qualify for the Section 13(k) exemption if it has received the prior approval of the foreign bank's home jurisdiction supervisor.").
|20|| As we have argued in prior submissions, deference to home country bank supervisory requirements with respect to insider lending for jurisdictions in which the Federal Reserve Board has made a CCS determination would be consistent with longstanding U.S. and international bank regulatory policy. Insider lending restrictions are an essential element of the "core principles" of bank supervision required under the Basel Committee's international bank supervisory framework (and as to which the Basel Committee framework defers to home country supervision).
In the Release, the Commission notes that it refrained from including some provisions of Regulation O in the Proposed Rule because their primary purpose is to ensure the safety and soundness of the banking system, and banking supervisors in other jurisdictions may legitimately take different approaches to that issue. The Institute respectfully suggests that all Regulation O requirements, including those contained in the Proposed Rule, share that same primary purpose - ensuring safety and soundness - and thus the decision about whether to impose any specific Regulation O requirement should be left to the discretion of home country banking supervisors for international banks that meet the CCS/deposit insurance condition.
|21|| In this respect, we would note that the Commission has afforded flexibility to foreign issuers in other rulemakings under the Sarbanes-Oxley Act in recognition of differing corporate governance practices and requirements. See, e.g., SEC Release No. 33-8220 (April 9, 2003) (providing foreign private issuers flexibility in audit committee requirements "to address commenters' concerns regarding the specific areas in which foreign corporate governance arrangements differ significantly from general practices among U.S. corporations").
|22|| See Office of the Deputy Prime Minister, Housing Prices Since 1930 (indicating a 366% increase in average house prices in the United Kingdom from 1981 to 2001); Office of Federal Housing Enterprise Oversight, House Price Index (quoting a 361% increase in housing prices in New York, NY from 1983 to 2003).
|23|| At a minimum, we would suggest that the Proposed Rule be revised to cross-refer to the applicable threshold in Regulation O to accommodate possible increases in the threshold by the Federal Reserve Board.
|24|| The more detailed disclosure requirements are triggered by loans that would be considered nonaccrual, past due, restructured or potential problem loans under the Commission's Industry Guide 3: Statistical Disclosure by Bank Holding Companies. See Instruction 2 to Item 7.B.2 of Form 20-F.