Alert
Alert
By Rodney R. Peck,
03.03.14
This Alert describes the final regulations issued by the Federal Reserve Board (the “FRB”) on February 18, 2014, that radically modify the former requirements applicable to foreign banking organizations (“FBOs”) pursuant to the FRB’s Regulation K. The final rules (the “Final Rules”) impose various requirements on large FBOs that previously have been applied to large U.S. domestic bank holding companies and banks under the Dodd-Frank Act. In addition, however, the Final Rules also alter many of the former approaches to the regulation of FBOs in general, including the necessity for many FBOs to form “U.S. intermediate holding companies” for their U.S. operations.
Regardless of the category an FBO falls into, the Final Rules present significant additional compliance burdens.
Introduction
In December of 2012 the Federal Reserve Board issued for public comment a proposed comprehensive modification to the rules governing the operations of foreign banking organizations (“FBOs”) in the United States. Premised upon very broad interpretations of Sections 165 and 166 of the Dodd-Frank Act, the FRB proposed to create an enhanced prudential standards scheme to apply to FBOs—with a layering of increased structural and operational procedures and substantive compliance requirements based upon the amount of an FBO’s global and U.S.-based assets. Among other things, these proposed requirements addressed the following:
In a somewhat Orwellian rationale that argued that its actions adhered to decades of compliance with principles of national treatment, equality of cross-border competition, and deference to home country regulatory standards (when compatible with U.S. and international paradigms), the FRB proposed to require that even modest-sized FBOs be required to organize a U.S. intermediate holding company (an “IHC”), and place most U.S. assets (other than assets held in a branch, agency office or Section 2(h)(2) subsidiary) under the newly formed IHC as its top-tier U.S. subsidiary. Further, the IHC and its subsidiary operations would become subject to U.S. capital rules applicable to domestic bank holding companies. (Stated another way, even though the IHC might technically not qualify as a bank holding company, the FRB proposal would have required that the IHC comply with most bank holding company rules as if it were, in fact, a bank holding company.)
On February 18, 2014, the FRB adopted the Final Rules, which are summarized in this Alert—with particular emphasis on the changes made by the FRB. In addition, this Alert provides initial suggestions for analyzing the impact the Final Rules will have on a particular FBO’s U.S. operations, as well as the time frames within which compliance must be completed.1
Discussion and Analysis The Final Rules provide some small degree of relief for FBOs with smaller operations in the U.S. (based upon the amount of U.S. assets), while increasing the degree of regulatory oversight and complexity for an FBO with a substantial U.S. presence. This was accomplished by imposing increased compliance requirements on covered FBOs with U.S. assets of $50 billion or more, while permitting FBOs with smaller U.S. operations to comply in many respects with regulatory oversight as required by their respective home country supervisors—or to incorporate new U.S. requirements into existing management structures.2 The most significant point of this new this regulatory scheme is that most of the new—and onerous—FBO regulatory requirements will apply to larger FBOs with U.S. assets of $50 billion or more regardless of whether those assets are held on the books and records of the FBO’s U.S. branch or agency. This is because the Final Rules create what is effectively a “mirror image” of requirements that will subject larger FBOs to U.S. compliance requirements regardless of the structural scheme by which the FBO conducts its U.S. operations.3 For purposes of understanding the applicability of the Final Rules to a particular FBO, it is useful to divide the discussion into two general categories:
Each of these categories is discussed separately below, including the major compliance requirements imposed on that category (or subcategory) by the Final Rules.
Download: Final Federal Reserve Rules for Foreign Banking Organizations