[Federal Register Volume 64, Number 210 (Monday, November 1, 1999)]
[Rules and Regulations]
[Pages 58780-58782]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-28380]


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FEDERAL RESERVE SYSTEM

12 CFR Part 211

[Regulation K; Docket No. R-1048]


International Banking Operations

AGENCY: Board of Governors of the Federal Reserve System.

ACTION: Interpretation.

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SUMMARY: The Board of Governors of the Federal Reserve System has 
issued an interpretation concerning the scope of the data processing 
provision of Regulation K. The interpretation clarifies that a banking 
organization may not engage in a broader range of data processing 
activities outside the United States under Regulation K than is 
permissible under Regulation Y, without the Board's approval.

EFFECTIVE DATE: November 1, 1999.

FOR FURTHER INFORMATION CONTACT: Kathleen M. O'Day, Associate General 
Counsel (202/452-3786), or Jonathan D. Stoloff, Counsel (202/452-3269), 
Legal Division. For the hearing impaired only, Telecommunication Device 
for the Deaf (TDD), Diane Jenkins (202/452-3544), Board of Governors of 
the Federal Reserve System, 20th and C Streets, NW, Washington, D.C. 
20551.

SUPPLEMENTARY INFORMATION: Regulation K provides that a bank holding 
company or Edge corporation may control a foreign company that engages 
in

[[Page 58781]]

activities usually in connection with the transaction of banking or 
other financial operations abroad. 12 CFR 211. Section 211.5(d)(10) of 
Regulation K states:

    ``Permissible activities. The Board has determined that the 
following activities are usual in connection with the transaction of 
banking or other financial operations abroad: Data processing''.

    Section 211.5(d)(10) of Regulation K was adopted in 1979. 12 CFR 
211 (1980). It was intended to incorporate into the regulation earlier 
decisions that had allowed an Edge corporation to engage in somewhat 
broader data processing activities abroad than were permitted 
domestically, although the activity was intended to consist 
predominately of processing financial information. At that time, 
Regulation Y significantly restricted the ability of a bank holding 
company to engage in data processing activities in the United States. 
Since 1979, the provision of Regulation Y that encompasses data 
processing has been amended several times and in some respects can be 
considered a broader grant of authority than under Regulation K (for 
example, with respect to the manufacture of hardware, the provision of 
software, and related activities). Regulation Y also now specifically 
authorizes a company to derive up to 30 percent of its revenues from 
processing non-financial data. 12 CFR 225.28(b)(14).
    The Board has never specifically considered the scope of activities 
permitted by section 211.5(d)(10) of Regulation K. A recent prior 
notice received under Regulation K raised the issue of the scope of 
this provision. A bank holding company proposed to acquire a foreign 
data processing company that engaged in a small amount of data 
processing and related activities that did not otherwise qualify under 
the standards set out in Regulation Y. The bank holding company assumed 
there were no restrictions on its ability to engage in any type of data 
processing or related activities under Regulation K.
    Given the potential for misinterpretation of the data processing 
provision of Regulation K, the Board believes it would be appropriate 
to clarify the situation and issue this interpretation.
    Prior to the issuance of Regulation K in 1979, the Board approved 
applications to engage in data processing activities abroad. At the 
time, Regulation Y authorized only ``(i) providing bookkeeping or data 
processing services for the internal operations of the holding company 
and its subsidiaries and (ii) storing and processing other banking, 
financial, or related economic data, such as performing payroll, 
accounts receivable or payable, or billing services.'' 1
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    \1\ 12 CFR 222.4(a)(8) (1971). At the time, the Board also 
authorized limited incidental activities pursuant to section 222.123 
of Regulation Y; however, the Board noted that the authority to 
engage in data processing was ``not intended to permit holding 
companies to engage in automated data processing activities by 
developing programs either upon their own initiative or upon 
request, unless the data involved are financially oriented.'' 12 CFR 
222.123 (1971).
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    Initially, the Board authorized data processing services abroad 
subject to the same limitations in Regulation Y. Subsequently, the 
Board authorized a limited expansion of data processing services abroad 
beyond that permissible under Regulation Y. The Board approved this 
expansion with the expectation that, as indicated in the application 
materials, data processing activities overseas would primarily be 
financial in nature.
    The Board subsequently codified the data processing authority under 
Regulation K in 1979. This authority was based upon the conditions the 
Board had customarily imposed on such activities. Accordingly, the 
scope of data processing under Regulation K continued to be somewhat 
broader than that permitted under Regulation Y.
    As noted above, during this period Regulation Y did not permit any 
nonfinancial data processing for non-affiliates, other than as an 
incidental activity on a very limited basis. In the revisions to 
Regulation Y in the 1980s and 1990s, however, the Board substantially 
expanded the scope of domestic data processing and related activities, 
which now include data transmission services, manufacture of certain 
hardware, provision of software, and the ability to derive up to 30 
percent of their data processing revenues from nonfinancial data 
processing activities. Regulation K does not specifically describe 
these activities. The Board wishes to clarify that such activities are 
authorized under Regulation K and that the scope of the data processing 
activity permissible under Regulation K is coextensive with those 
activities permitted under section 225.28(b)(14) of Regulation Y, as 
amended. If a banking organization wishes to engage outside the United 
States in data processing or related activities beyond those permitted 
in Regulation Y, it should apply to the Board under Regulation K.

List of Subjects in 12 CFR Part 211

    Exports, Federal Reserve System, Foreign banking, Holding 
companies, Investments, Reporting and recordkeeping requirements.

Authority and Issuance

    For the reasons set forth in the preamble, the Board amends 
Regulation K, 12 CFR part 211 as follows:

PART 211--INTERNATIONAL BANKING OPERATIONS (REGULATION K)

    1. The authority citation for part 211 continues to read as 
follows:

    Authority: 12 U.S.C. 221 et seq., 1818, 1835a, 1841 et seq., 
3101 et seq., and 3901 et seq.

    2. Part 211 is amended by adding a new Sec. 211.604 to read as 
follows:


Sec. 211.604.  Data processing activities.

    (a) Introduction. As a result of a recent proposal by a bank 
holding company to engage in data processing activities abroad, the 
Board has considered the scope of permissible data processing 
activities under Regulation K (12 CFR part 211). This question has 
arisen as a result of the fact that Sec. 211.5(d)(10) of Regulation K 
does not specifically indicate the scope of data processing as a 
permissible activity abroad.
    (b) Scope of data processing activities. (1) Prior to 1979, the 
Board authorized specific banking organizations to engage in data 
processing activities abroad with the expectation that such activity 
would be primarily related to financial activities. When Regulation K 
was issued in 1979, data processing was included as a permissible 
activity abroad. Although the regulation did not provide specific 
guidance on the scope of this authority, the Board has considered such 
authority to be coextensive with the authority granted in specific 
cases prior to the issuance of Regulation K, which relied on the fact 
that most of the activity would relate to financial data. Regulation K 
does not address related activities such as the manufacture of hardware 
or the provision of software or related or incidental services.
    (2) In 1979, when the activity was included in Regulation K for the 
first time, the data processing authority in Regulation K was somewhat 
broader than that permissible in the United States under Regulation Y 
(12 CFR part 225) at that time, as the Regulation K authority permitted 
limited non-financial data processing. In 1979, Regulation Y authorized 
only financial data processing activities for third parties, with very 
limited exceptions. By 1997, however, the scope of data processing 
activities under Regulation Y was expanded such that bank holding

[[Page 58782]]

companies are permitted to derive up to 30 percent of their data 
processing revenues from processing data that is not financial, 
banking, or economic. Moreover, in other respects, the Regulation Y 
provision is broader than the data processing provision in Regulation 
K.
    (3) In light of the fact that the permissible scope of data 
processing activities under Regulation Y is now equal to, and in some 
respects, broader than the activity originally authorized under 
Regulation K, the Board believes that Sec. 211.5(d)(10) should be read 
to encompass all of the activities permissible under Sec. 225.28(b)(14) 
of Regulation Y. In addition, the limitations of that section would 
also apply to Sec. 211.5(d)(10).
    (c) Applications. If a U.S. banking organization wishes to engage 
abroad in data processing or data transmission activities beyond those 
described in Regulation Y, it must apply for the Board's prior consent 
under Sec. 211.5(d)(20) of Regulation K. In addition, if any investor 
has commenced activities beyond those permitted under 
Sec. 225.28(b)(14) of Regulation Y in reliance on Regulation K, it 
should consult with staff of the Board to determine whether such 
activities have been properly authorized under Regulation K.

    By order of the Board of Governors, October 26, 1999.
Robert deV. Frierson,
Associate Secretary of the Board.
[FR Doc. 99-28380 Filed 10-29-99; 8:45 am]
BILLING CODE 6210-01-P