Frequently Asked Questions about Regulation K
International Banking Operations
Staff of the Board of Governors of the Federal Reserve System has developed the following frequently asked questions (FAQs) to assist entities in complying with the Board's Regulation K. Except as noted below, these FAQs are staff interpretations and have not been approved by the Board of Governors. Staff may supplement or revise these FAQs as necessary or appropriate in the future. Any questions regarding these FAQs, or requests for modification, rescission, or waiver, should be submitted through the Board's Contact Us form.
Subpart A—International Operations of U.S. Banking Organizations
12 CFR 211.8 (Investments and activities abroad)
Q1: In what ways may a U.S. banking organization conduct operations abroad under Regulation K?
12 CFR 211.10 (Permissible activities abroad)
Q1: What is the scope of permissible data processing activity under Regulation K?
Q2: Are certain Islamic finance arrangements permissible under Regulation K?
Subpart B—Foreign Banking Organizations
12 CFR 211.23 (Nonbanking activities of foreign banking organizations)
12 CFR 211.24 (Approval of offices of foreign banks; procedures for applications; standards for approval; representative office activities and standards for approval; preservation of existing authority)
Subpart A—International Operations of U.S. Banking Organizations
12 CFR 211.8 (Investments and activities abroad)
Q1: In what ways may a U.S. banking organization conduct operations abroad under Regulation K?
A1: Operations abroad by U.S. bank holding companies and member banks must be conducted through certain forms prescribed in statute and regulation. In particular, investments by member banks in foreign subsidiaries must be made with the Board's consent (i) under section 25 of the Federal Reserve Act (12 U.S.C. § 601 et seq.) or (ii) through an Edge corporation subsidiary under section 25A of the Federal Reserve Act (12 U.S.C. § 611 et seq.). In addition, U.S. bank holding companies may acquire the shares of certain foreign subsidiaries under section 4(c)(13) of the Bank Holding Company Act of 1956 (BHC Act). 12 U.S.C. § 1843(c)(13). Regulation K implements these statutory provisions and, as a result, U.S. bank holding companies and member banks conduct operations abroad pursuant to requirements under Regulation K. Separately, financial holding companies may engage in activities abroad under section 4(k) of the BHC Act. 12 U.S.C. § 1843(k).
Direct investments by a member bank under Regulation K are limited to Edge and agreement corporations; foreign banks; holding companies for foreign banks; entities providing nominee, fiduciary, or incidental services to foreign branches; and certain subsidiaries of foreign branches with Board approval.
This is an official interpretation of the Board.
Source: 12 CFR 250.143 and 211.8(b).
Posted: 3/31/2021
Q2: What types of activities may an Edge or agreement corporation or foreign subsidiary of a U.S. banking organization conduct in the United States?
A2: An Edge or agreement corporation or foreign subsidiary of a U.S. banking organization may conduct activities in the United States that are incidental to its international or foreign business.
Under the sixth paragraph of section 25A of the Federal Reserve Act (12 U.S.C. § 615(c)), an Edge corporation may, with the prior consent of the Board, purchase and hold stock of a corporation that is "not engaged in the general business of buying or selling goods, wares, merchandise or commodities in the United States, and not transacting any business in the United States except such as in the judgment of the Board . . . may be incidental to its international or foreign business." Similarly, under the eighth paragraph of the same section (12 U.S.C. § 616), an Edge corporation may not "carry on any part of its business in the United States except such as in the judgment of the Board . . . may be incidental to its international or foreign business." Pursuant to the third paragraph of section 25 of the Federal Reserve Act (12 U.S.C. § 601) and paragraph 20 of section 9 of the Federal Reserve Act (12 U.S.C. § 335), a member bank may acquire and hold, directly or indirectly, stock or other evidences of ownership in a foreign bank as long as such foreign bank is "not engaged, directly or indirectly, in any activity in the United States except as, in the judgment of the Board . . . shall be incidental to the international or foreign business of such foreign bank." Finally, section 4(c)(13) of the BHC Act exempts from the nonbanking prohibitions of section 4 of the BHC Act "shares of, or activities conducted by, any company which does no business in the United States except as an incident to its international or foreign business." 12 U.S.C. § 1843(c)(13).
As the Board has indicated, the slight wording differences between the quoted portions of the above statutes were not intended by Congress to bear any meaningful significance. Accordingly, the Board has interpreted these provisions in the past as being synonymous.
The scope of activities that are considered incidental to international or foreign business are set forth in Regulation K. 12 CFR 211.6.
This is an official interpretation of the Board.
Source: FRRS 3-706.
Posted: 3/31/2021
Q3: Does a foreign subsidiary of a U.S. banking organization that issues bonds in foreign markets and transfers the proceeds to a domestic subsidiary engage in business in the United States?
A3: No. The transfer of foreign bond issuance proceeds by a foreign subsidiary of a U.S. banking organization to a domestic subsidiary of the banking organization does not constitute transacting business in the United States. This interpretation applies only to a situation where a foreign subsidiary, acting on behalf of its parent organization, issues debt obligations abroad for the sole and express purpose of supplying funds to its parent organization. To meet this test, three conditions must be satisfied: (i) the foreign subsidiary must be wholly owned (except for director's qualifying shares, if any) by its U.S. parent organization(s); (ii) the proceeds repatriated should be no greater in amount than the amount of debt issued abroad; and (iii) the proceeds should be repatriated on approximately the same terms and conditions as the obligations issued by the foreign subsidiary.
This answer reflects an interpretation approved by the Board.
Source: FRRS 3-706.
Posted: 3/31/2021
12 CFR 211.10 (Permissible activities abroad)
Q1: What is the scope of permissible data processing activity under Regulation K?
A1: The scope of permissible data processing activity under Regulation K is the same as that which is permissible under Regulation Y.
This answer reflects an interpretation approved by the Board.
Source: 12 CFR 211.604.
Posted: 3/31/2021
Q2: Are certain Islamic finance arrangements permissible under Regulation K?
A2: Engaging in purchase or repurchase arrangements involving goods that are the functional equivalent of extensions of credit is an activity that is permissible as usual in connection with the transaction of the business of banking or other financial operations and is consistent with the supervisory purposes of the Federal Reserve Act, provided that (i) the goods are acquired with an irrevocable commitment from the customer to purchase or repurchase the goods involved and (ii) there is an irrevocable waiver of any customer recourse to the seller of the goods. Conducting this activity, subject to these conditions, would be permissible in countries where this activity is usual in connection with the business of banking.
Source: Letter from Jennifer J. Johnson, Associate Secretary of the Board, to Nancy P. Jacklin (December 15, 1989), available here.
Posted: 3/31/2021
Subpart B—Foreign Banking Organizations
12 CFR 211.23 (Nonbanking activities of foreign banking organizations)
Q1: Does the issuance of commercial paper in the United States by the domestic operations of a foreign bank require prior notice to the Board or Board approval?
A1: No. The use by a foreign bank of a special purpose vehicle, the sole activities of which would be the issuance of commercial paper in the United States and the lending of the proceeds of the commercial paper to the domestic operations of the foreign bank, would be a permissible activity under section 4(c)(1)(C) of the BHC Act. 12 U.S.C. § 1843(c)(1)(C).
Source: Letter from Kathleen M. O'Day, Associate General Counsel of the Board, to Stephen D. Wayne, Esq. (March 4, 1996), available here.
Posted: 3/31/2021
Q2: What is the scope of permissible securities underwriting activities of foreign banking organizations in the United States?
A2: A foreign banking organization that is subject to the BHC Act may engage in securities underwriting activities in the United States only if it has been authorized under section 4 of the BHC Act. 12 U.S.C. § 1843. Underwriting of securities to be distributed in the United States is an activity conducted in the United States, regardless of the location at which the underwriting risk is assumed and the underwriting fees are booked. Consequently, any foreign banking organization that wishes to engage in such activity must either be a financial holding company or have authority to engage in underwriting activity under section 4(c)(8) of the BHC Act (so-called "section 20 authority"). 12 U.S.C. § 1843(c)(8).
This answer reflects an interpretation approved by the Board.
Source: 12 CFR 211.605.
Posted: 3/31/2021
Q3: Does the use by a foreign banking organization of U.S. offices or subsidiaries to place or accept orders on an exchange for customers constitute engaging in business in the United States?
A3: Yes. U.S. offices and subsidiaries of a foreign banking organization that participate in placing orders on domestic exchanges or accepting orders for placement on a foreign exchange are engaging in business in the United States.
Source: Letter from Michael Bradfield, General Counsel of the Board, to A. P. Richard Carden (April 20, 1982), available here.
Posted: 3/31/2021
Q4: May subsidiaries of foreign banking organizations use the fiduciary exemption in Regulation K to hold title to U.S. real estate in connection with the bank's service as trustee of foreign-based investment trusts?
A4: Yes, in certain circumstances. The fiduciary exemption in section 211.23(f)(4) of Regulation K would permit subsidiaries of a foreign banking organization to hold title to U.S. real estate in connection with the foreign bank's service as trustee of foreign-based investment trusts, sold only to non-U.S. persons, that invest in U.S. real estate. 12 CFR 211.23(f)(4).
Source: Letter from Scott G. Alvarez, General Counsel of the Board, to Winthrop N. Brown, Esq. (November 24, 2004), available here.
Posted: 3/31/2021
12 CFR 211.24 (Approval of offices of foreign banks; procedures for applications; standards for approval; representative office activities and standards for approval; preservation of existing authority)
Q1: Is Board approval required for the conversion of (i) a federally licensed agency to a state-licensed agency or (ii) a state-licensed agency to a federally licensed agency?
A1: No. Board approval under Regulation K is not required for the conversion of an agency from a federal agency to a state agency, or from a state agency to a federal agency. These conversions are not a change in the status of an office and are not, consequently, an establishment of an office for the purposes of Regulation K.
Source: Letter from Sandra L. Richardson, Managing Senior Counsel at the Board, to John A. Pullen (December 6, 1996), available here.
Posted: 3/31/2021