Recordkeeping Provisions Associated with Changes in Foreign Investments Made Pursuant to Regulation K

BOARD OF GOVERNORS
OF THE
FEDERAL RESERVE SYSTEM
WASHINGTON, D. C. 20551
DIVISION OF BANKING
SUPERVISION AND REGULATION

SR 02-2
February 7, 2002
TO THE OFFICER IN CHARGE OF SUPERVISION AND EXAMINATION
STAFF AT EACH FEDERAL RESERVE BANK AND TO EACH
INTERNATIONALLY ACTIVE DOMESTIC BANKING
ORGANIZATION SUPERVISED BY THE FEDERAL RESERVE
SUBJECT:

Guidance on Monitoring Compliance with the
Restrictions on Foreign Investments Contained in
Regulation K and Guidance for Internationally
Active Domestic Banking Organizations on
Recordkeeping Requirements Regarding Foreign
Investments

The Federal Reserve has revised its reporting requirements with respect
to foreign investments made by U.S. banking organizations pursuant to Subpart A of
Regulation K. The Federal Reserve has replaced the FR 2064 report with the new
FR Y-10, Report of Changes in Organizational Structure, and with new internal
recordkeeping requirements for internationally active domestic banking
organizations. The purpose of this letter is to provide guidance to both examiners and
banking organizations regarding the new reporting requirements. In particular, this
letter provides guidance to examiners on what should be reviewed during on-site
examinations of internationally active domestic banking organizations. It also
provides guidance on internal recordkeeping that is expected from domestic banking
organizations going forward.
Background
Effective September 1, 2001, the Federal Reserve eliminated the
collection of the FR 2064 report. This report historically was used by the Board to
monitor international investments made by U.S. banking organizations and to fulfill
the Board's supervisory responsibilities pursuant to Sections 211.8 - 211.10 of
Regulation K (as per the final rule implementing Regulation K published in the
Federal Register on October 26, 2001, and effective on November 26, 2001).1 The
FR 2064 report was the Federal Reserve's primary tool to monitor compliance with
relevant sections of the Federal Reserve Act and Regulation K, including the general
consent provisions of Regulation K.2 The report collected information on changes in
international investments made by member banks, Edge and agreement corporations,
and bank holding companies. The report also was the only source of cost information
for the Board regarding investments made under the general consent provisions of
Regulation K. In 1995, the general consent authority was significantly expanded. As
a consequence, greater importance was placed on monitoring the level of international
investments in order to ensure compliance with relevant banking laws and regulations,
and to ensure that banking organizations do not expose themselves to undue risk. In
October 2001, the Board approved significant additional liberalizations in the
Regulation K general consent authority, further increasing the importance of

monitoring international investments.
Although the FR 2064 report has been eliminated, examiners have a
continuing need to monitor compliance with the Federal Reserve Act and
Sections 211.8 - 211.10 of the revised Regulation K. Information previously collected
in the FR 2064 report is now being collected partly through the new FR Y-10 and the
FR Y-6 reports, and partly through a requirement that banking organizations maintain
records of comparable information. Within 30 days of the transaction, banking
organizations are required to report changes in investments (both foreign and
domestic) on the FR Y-10 report. Investments of less than 25 percent of the voting
shares of a foreign nonbanking company are not captured by the new FR Y-10
report.3 However, on an annual basis using the FR Y-6 report, banking organizations
are required to report all investments, including those between 5 and 25 percent of
voting shares.4 Structure and geographical information relating to foreign investments
is now reported on the FR Y-10 and FR Y-6 for ongoing monitoring. During the
examination process, examiners are expected to review investment amounts and
activities.
Examiner Guidance
Generally, the portion of the examination dealing with Regulation K
compliance should focus on confirming that investments made pursuant to the general
consent provisions meet the restrictions on investment amount and activities contained
in Sections 211.8 - 211.10 of Regulation K. Investments made under the general
consent provisions of Regulation K can be sizeable and, thus, can pose significant risk
to the banking organization. Examiners should keep in mind that the Board has the
authority to rescind an organization's general consent investment privileges for
various reasons, including safety and soundness concerns and noncompliance with the
existing requirements of Regulation K.
Recordkeeping Requirements
Although the FR 2064 report will no longer be collected, internationally
active U.S. banking organizations are still expected to maintain adequate internal
records to allow examiners to review compliance with the investment provisions of
Regulation K. For each investment made under Subpart A of Regulation K, records
should be maintained regarding the type of investment, for example, equity (voting
shares, nonvoting shares, partnerships, interests conferring ownership rights,
participating loans), binding commitments, capital contributions, and subordinated
debt; the amount of the investment; the percentage ownership; activities conducted by
the company and the legal authority for such activities; and whether the investment
was made under general consent, prior notice, or specific consent authority. With
respect to investments made under general consent authority, information also must be
maintained that demonstrates compliance with the various limits set out in
Section 211.9 of Regulation K.
Information maintained by the banking organization should be made
available to examination staff during the course of on-site examinations and pursuant
to other supervisory requests. At this time, the Federal Reserve is not requiring that
such information be maintained in a specific form. Regardless of form, recordkeeping
must be adequate to permit examiners to determine compliance. Examiners are
expected to review a sample of these investments to determine the accuracy of the

organization's records and compliance with the regulation.
This letter should be disseminated to internationally active U.S. banking
organizations in your District, as well as the appropriate members of your Reserve
Bank's examination staff. Should you have any questions regarding the guidance,
please contact Betsy Cross, Deputy Associate Director, at (202) 452-2574.

Richard Spillenkothen
Director

Note:
1. These Sections previously were designated as Section 211.5 of
Regulation K. Return to text
2. The Board has granted its general consent to U.S. banking organizations to
make foreign investments without prior notice to the Board if the investment
meets certain criteria. The criteria relate to whether the investment is in a
subsidiary or a joint venture, or is a portfolio investment, and whether the
investor is a bank holding company, a member bank, or an Edge or agreement
corporation. Return to text
3. Regulation K authorizes portfolio investments in less than 20 percent of the
shares of a foreign company regardless of the activities engaged in by that
company. Under the new reporting regime, portfolio investments within the
general consent limits will only be required to be reported on an annual basis on
the FR Y-6 report. Return to text
4. Investments representing less than 5 percent ownership are not required to be
reported. Return to text
SR letters | 2002
Home | Banking information and regulation
Accessibility | Contact Us
Last update: February 8, 2002