[Federal Register Volume 68, Number 180 (Wednesday, September 17, 2003)]
[Proposed Rules]
[Pages 54590-54598]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-23655]



[[Page 54589]]

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Part III





Securities and Exchange Commission





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17 CFR Parts 240 and 249



Foreign Bank Exemption From the Insider Lending Prohibition of Exchange 
Act Section 13(k); Proposed Rule

  Federal Register / Vol. 68, No. 180 / Wednesday, September 17, 2003 / 
Proposed Rules  

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SECURITIES AND EXCHANGE COMMISSION

17 CFR Parts 240 and 249

[Release No. 34-48481, International Series Release No. 1272; File No. 
S7-15-03]
RIN 3235-AI81


Foreign Bank Exemption From the Insider Lending Prohibition of 
Exchange Act Section 13(k)

AGENCY: Securities and Exchange Commission.

ACTION: Proposed rule.

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SUMMARY: We propose to exempt qualified foreign banks from the insider 
lending prohibition under Section 13(k) of the Securities Exchange Act 
of 1934, as added by Section 402 of the Sarbanes-Oxley Act. This 
section prohibits both domestic and foreign issuers from making or 
arranging for loans to their directors and executive officers unless 
the loans fall within the scope of specified exemptions. One of these 
exemptions permits certain insider lending by a bank or other 
depository institution that is insured under the Federal Deposit 
Insurance Act. Foreign banks whose securities are registered with the 
Securities and Exchange Commission are not eligible for the bank 
exemption under Section 13(k). The proposed rule would remedy this 
disparate treatment of foreign banks by exempting from Section 13(k)'s 
insider lending prohibition those foreign banks that meet specified 
criteria similar to those that qualify domestic banks for this 
statutory exemption.

DATES: Please submit your comments on or before October 17, 2003.

ADDRESSES: Send three copies of your comments to Jonathan G. Katz, 
Secretary, U.S. Securities and Exchange Commission, 450 Fifth Street, 
NW., Washington, DC 20549-0609. You also may submit your comments 
electronically to the following electronic mail address: [email protected]. Your comment letter should refer to File No. S7-15-
03; include this file number in the subject line if you use electronic 
mail. To help us process and review your comments more efficiently, 
comments should be sent by hard copy or e-mail, but not by both 
methods. We will make comment letters available for public inspection 
and copying in our Public Reference Room, 450 Fifth Street, NW., 
Washington, DC 20549. We will post electronically submitted comment 
letters on our Internet Web site (http://www.sec.gov).\1\
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    \1\ We do not edit personal, identifying information, such as 
names or electronic mail addresses, from electronic submissions. 
Submit only information you wish to make publicly available.

FOR FURTHER INFORMATION CONTACT: Elliot Staffin, Special Counsel, 
Office of International Corporate Finance, Division of Corporation 
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Finance at (202) 942-2990.

SUPPLEMENTARY INFORMATION: We propose to add Rule 13k-1 \2\ and amend 
Form 20-F \3\ under the Securities Exchange Act of 1934.\4\
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    \2\ Proposed 17 CFR 240.13k-1.
    \3\ 17 CFR 249.220f.
    \4\ 15 U.S.C. 78a et. seq. (``Exchange Act'').
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I. Background

    In the wake of well-publicized corporate scandals, Congress enacted 
Section 402 of the Sarbanes-Oxley Act \5\ in order to prevent 
corporations from issuing personal loans to their executives.\6\ This 
section added Section 13(k), entitled ``Prohibition on Personal Loans 
to Executives,'' to the Exchange Act.\7\ Section 13(k)(1) prohibits any 
issuer from directly or indirectly extending or maintaining credit, 
arranging for the extension of credit, or renewing an extension of 
credit ``in the form of a personal loan'' to or for any director or 
executive officer of that issuer.\8\ Because the Sarbanes-Oxley Act's 
definition of issuer draws no distinction between U.S. and non-U.S. 
companies, Section 402's insider lending prohibition applies to any 
domestic or foreign entity that has Exchange Act reporting obligations 
or that has filed a registration statement under the Securities Act of 
1933\9\ that, although not yet effective, has not been withdrawn.\10\
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    \5\ Pub. L. 107-204, 116 Stat. 745 (2002).
    \6\ See Senator Charles Schumer's remarks in 148 Cong. Rec. S. 
7350, 7360-7361 (July 25, 2002). See also Senator Carl Levin's 
letter, dated September 25, 2002, to Chairman Harvey Pitt, reprinted 
in 149 Cong. Rec. S. 2178, 2179-2180 (February 11, 2003).
    \7\ 15 U.S.C. 78m(k).
    \8\ 15 U.S.C. 78m(k)(1). Section 13(k)(1) further prohibits 
personal loans to an issuer's executive officers or directors by any 
subsidiary of that issuer.
    \9\ 15 U.S.C. 77a et seq. (``Securities Act'').
    \10\ Sarbanes-Oxley Act Section (2)(a)(7).
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    Four categories of personal loans are expressly exempt from Section 
402's prohibition:
    (1) any extension of credit existing before the Sarbanes-Oxley 
Act's enactment as long as no material modification or renewal of the 
extension of credit occurs on or after the date of enactment;\11\
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    \11\ Exchange Act Section 13(k)(1).
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    (2) specified home improvement and consumer credit loans if:
    [sbull] Made in the ordinary course of the issuer's consumer credit 
business,
    [sbull] of a type generally made available to the public by the 
issuer, and
    [sbull] on terms no more favorable than those offered to the 
public;
    (3) loans by a broker-dealer to its employees that:
    [sbull] Fulfill the three conditions of paragraph (2) above,
    [sbull] are made to buy, trade or carry securities other than the 
broker-dealer's securities, and
    [sbull] are permitted by applicable Federal Reserve System 
regulations;\12\ and
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    \12\ Exchange Act Section 13(k)(2) [15 U.S.C. 78m(k)(2)] 
establishes the exemptions for the specified home improvement and 
consumer credit loans as well as the broker-dealer loans.
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    (4) ``any loan made or maintained by an insured depository 
institution (as defined in section 3 of the Federal Deposit Insurance 
Act (12 U.S.C. 1813)), if the loan is subject to the insider lending 
restrictions of section 22(h) of the Federal Reserve Act (12 U.S.C. 
375b).''\13\
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    \13\ Exchange Act Section 13(k)(3) [15 U.S.C. 78m(k)(3)].
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    This last exemption applies only to an ``insured depository 
institution,'' which, as defined by the Federal Deposit Insurance Act 
(``FDIA''),\14\ is a bank or savings association that has insured its 
deposits with the Federal Deposit Insurance Corporation (``FDIC'').\15\ 
Although this Section 402 provision does not explicitly exclude foreign 
banks from the exemption, under current U.S. banking regulation a 
foreign bank cannot be an ``insured depository institution'' and, 
therefore, cannot qualify for the bank exemption. Since 1991, following 
enactment of the Foreign Bank Supervision Enhancement Act (``FBSEA''), 
a foreign bank that seeks to accept and maintain FDIC-insured retail 
deposits in the United States must establish a U.S. subsidiary, rather 
than a branch, agency or other entity, for that purpose.\16\ These U.S. 
subsidiaries of foreign banks, and the limited number of grandfathered 
U.S. branches of foreign banks that had obtained FDIC insurance prior 
to FBSEA's enactment,\17\ can engage in FDIC-insured, retail deposit 
activities and, thus, qualify as ``insured depository institutions.'' 
But the foreign banks that own the U.S. insured depository subsidiaries 
or operate the grandfathered insured depository branches are not 
themselves ``insured

[[Page 54591]]

depository institutions'' under the FDIA.\18\
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    \14\ 12 U.S.C. 1811 et seq.
    \15\ 12 U.S.C. 1813(c)(2).
    \16\ 12 U.S.C. 3104(d)(1).
    \17\ 12 U.S.C. 3104(d)(2).
    \18\ Most foreign banks with U.S. operations are engaged in 
wholesale banking activities in the United States, not in the retail 
deposit business. See U.S. General Accounting Office, ``Foreign 
Banks--Assessing Their Role in the U.S. Banking System,'' pp. 3, 5 
(February 1996) (``GAO Foreign Banks Report''). These U.S. 
operations of foreign banks have been extensive. For example, in 
calendar year 2002, there were $1.34 trillion in assets dedicated to 
the U.S. operations of foreign banks. During this year, only 68 
(12.4%) of the 547 U.S.-based entities owned or operated by foreign 
banks were FDIC-insured. See the Federal Reserve Bank's ``Report 
Regarding Structure Data for U.S. Offices of Foreign Banks as of 
December 31, 2002,'' which is available on the Federal Reserve 
Bank's Web site at http://www.federalreserve.gov/releases/iba. Of 
the 46 foreign banks that are currently Exchange Act reporting 
companies and, thus, subject to the Sarbanes-Oxley Act, only 10 have 
U.S.-based operations that are FDIC-insured.
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    Because foreign banks cannot meet the threshold criterion for the 
``insured depository'' exemption under Section 402, some foreign banks 
\19\ believe that Section 402 runs counter to the principle of 
``national treatment,'' which has been a fundamental goal of federal 
banking legislation concerning foreign banks.\20\ Federal banking law 
generally permits foreign financial institutions to operate in the 
United States without incurring either significant advantage or 
disadvantage compared with U.S. financial institutions.\21\ Foreign 
banks have commented that the inability of foreign banks to qualify for 
the ``insured depository'' exemption places them at a disadvantage 
compared to their U.S. counterparts. Foreign banks have also noted that 
many of them are already subject in their home jurisdictions to insider 
lending restrictions that are similar although not identical to those 
imposed by Federal Reserve rules.
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    \19\ The Commission has received several letters from foreign 
banks and their counsel discussing specific proposals relating to, 
and urging us to adopt, an insider lending exemption for foreign 
banks. We will make these letters publicly available along with 
comment letters that we will receive in response to this rule 
proposal.
    \20\ See, for example, the GAO Foreign Banks Report at 2.
    \21\ GAO Foreign Banks Report at 16.
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    Some foreign banks have further commented that, under foreign 
banking regulations, their directors and executive officers are 
prohibited from borrowing money from other banks and financial 
institutions. In addition, although not required by local regulations, 
some foreign banks, like some of their U.S. counterparts, have 
implemented policies that prohibit senior insiders from borrowing money 
from other banks for the purpose of enhancing oversight and 
surveillance of financial transactions by insiders. The combination of 
these prohibitions and the provisions of Section 402 would arguably 
effectively foreclose a director or executive officer of a foreign bank 
whose securities are registered with the Commission from borrowing 
money. Consequently, several foreign banks have urged the Commission to 
adopt an exemption for foreign banks from the Exchange Act's insider 
lending prohibition.
    When crafting this proposed foreign bank exemption, we have 
attempted to strike the appropriate balance among various approaches. 
Subjecting foreign banks to all of the Federal Reserve System's 
detailed requirements in this area does not seem necessary or 
appropriate, especially when many foreign banking regulators have well 
developed regulatory schemes related to insider lending. Thus, the 
proposed exemption is based on principles that underlie relevant U.S. 
banking regulations without applying certain of the specific 
requirements contained in those regulations. Yet we have also striven 
to be specific enough to ensure that the exemption is faithful to the 
principles of Section 402 while giving issuers adequate guidance 
regarding whether the exemption is available.
    Overlaying all of these concerns has been our strong commitment to 
implement fully the spirit of the Sarbanes-Oxley Act for all companies 
that are subject to the Act. We believe that our proposed foreign bank 
rules are consistent with the legislative intent underlying Section 
402. There is little legislative history to assist in discerning 
Congressional intent regarding Section 402. The legislative history 
that does exist reveals that Section 402 was introduced in an amendment 
to the Sarbanes-Oxley Act just prior to its passage on July 25, 2002 in 
order to curb corporate corruption by preventing corporations from 
making personal loans to their executives.\22\ While there is no 
discussion concerning the scope of the Section 402 exemptions, there 
also is nothing to indicate that Congress intended to treat foreign 
banks differently than domestic banks. The proposed foreign bank 
exemption would be consistent with the Sarbanes-Oxley Act by extending 
Section 13(k)'s banking exemption to foreign banks but only if they 
meet specified criteria comparable to those required for domestic 
banks.
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    \22\ See Senator Charles Schumer's remarks in 148 Cong. Rec. S. 
7350 at 7360-7361. See also Senator Carl Levin's letter to Chairman 
Harvey Pitt reprinted in 149 Cong. Rec. S 2178 at 2179-2180.
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II. Discussion

A. Overview of the Proposed Foreign Bank Exemption

    Proposed Rule 13k-1 would exempt from Section 13(k)(1)'s insider 
lending prohibition an issuer that is a foreign bank or the parent 
company of a foreign bank with respect to loans by the foreign bank to 
its insiders or the insiders of its parent company as long as:
    (1) either:
    (a) The laws or regulations of the foreign bank's home jurisdiction 
require the bank to insure its deposits; or
    (b) the Federal Reserve Board has determined that the foreign bank 
is subject to comprehensive supervision or regulation on a consolidated 
basis by its home jurisdiction supervisor under 12 CFR 211.24(c); and
    (2) the laws or regulations of the foreign bank's home jurisdiction 
restrict the foreign bank from making loans to its executive officers 
and directors or those of its parent company unless the foreign bank 
extends the loan:
    (a) on substantially the same terms as those prevailing at the time 
for comparable transactions by the foreign bank with other persons who 
are not executive officers, directors or employees of the foreign bank 
or its parent company; or
    (b) pursuant to a benefit or compensation program that is widely 
available to the employees of the foreign bank or its parent company 
and does not give preference to any of the executive officers or 
directors of the foreign bank or its parent company over any other 
employees of the foreign bank or its parent company; or
    (c) following the express approval of the loan by the foreign 
bank's home jurisdiction supervisor; and
    (3) for any loan that, when aggregated with the amount of all other 
outstanding loans to a particular executive officer or director, 
exceeds $500,000:
    (a) a majority of the foreign bank's board of directors has 
approved the loan in advance; and
    (b) the loan's intended recipient has abstained from participating 
in the vote regarding the loan.

B. Definition of Foreign Bank

    The proposed rule would employ a definition of ``foreign bank'' 
that is similar to the definition under Regulation K of the Board of 
Governors of the Federal Reserve System (``Federal Reserve 
Board'').\23\ Under this

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definition, a foreign bank is an institution that is:
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    \23\ Codified at 12 CFR 211.1 et seq., Regulation K comprises 
the Federal Reserve Board's rules pertaining to international 
banking operations. Regulation K's definition of foreign bank is 
found at 12 CFR 211.2(j).
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    (1) incorporated or organized under the laws of a country other 
than the United States or a political subdivision of a country other 
than the United States;\24\
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    \24\ Under the Exchange Act, the term ``United States'' includes 
the District of Columbia, Puerto Rico, the Virgin Islands, and any 
other possession of the United States. See the definition of 
``State'' in Exchange Act Section 3(a)(16) [15 U.S.C. 78c(a)(16)]. 
The proposed rule would assume this statutory definition.
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    (2) regulated as a bank by that country's or subdivision's 
government; and
    (3) engaged substantially in the business of banking.\25\
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    \25\ See proposed 17 CFR 240.13k-1(a).
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    This definition would also include a provision explaining that, in 
order to be an institution engaged substantially in the business of 
banking, a foreign entity must receive deposits to a substantial extent 
in the regular course of its business, have the power to accept demand 
deposits, and extend commercial or other types of credit.\26\ Thus, 
this definition would exclude from the exemption foreign companies that 
are in the business of extending credit but, because they do not accept 
deposits in the home country, are subject to a less stringent 
regulatory regime there.
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    \26\ See proposed 17 CFR 240.13k-1(a)(3).
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Comment Solicited
    We solicit comment on the proposed definition of foreign bank as 
well as on all other aspects of the proposed rule. Here and throughout 
the release, when we solicit comment, we are interested in hearing from 
all interested parties, including members of the investing public, 
representatives of the foreign and domestic banking community, other 
foreign private issuers and domestic issuers. We are further interested 
in learning from all parties what aspects of the rule proposal they 
deem essential, what aspects they believe are preferred but not 
essential, and what aspects they believe should be modified.
    Regarding the proposed definition of foreign bank, should we 
exclude from the definition financial institutions that extend credit 
but do not customarily accept deposits in their home jurisdictions, as 
proposed? Are there other types or characteristics of foreign financial 
or lending institutions that should be included or excluded from the 
definition of foreign bank and, if so, why? Is it appropriate to look 
to Regulation K under the Federal Reserve Act for the proposed 
definition of foreign bank? Is there another regulation or law that 
would be more appropriate and, if so, why?

C. The Home Jurisdiction Deposit Insurance or CCS Condition

    Proposed Rule 13k-1(b)(1) would establish two alternative 
conditions. Under the first condition, a foreign bank would be eligible 
for the exemption if it were subject to a deposit insurance regime in 
its home jurisidiction. This condition would be consistent with the 
Sarbanes-Oxley Act by making it more likely that a qualifying foreign 
bank is subject in its home jurisdiction to a banking regulatory regime 
that generally addresses the risks that Section 402 was intended to 
guard against. Moreover, since domestic banks are currently subject to 
a deposit insurance requirement, adoption of a similar requirement for 
foreign banks would assist in ensuring that foreign banks are not 
viewed as advantaged over domestic banks when determining eligibility 
for the Section 13(k) exemption.
    While there appears to be some difference of opinion among foreign 
banking regulators and economists as to the role of an insurance scheme 
in ensuring an effective and sound banking regulatory regime,\27\ 
numerous countries have nevertheless adopted some form of a deposit 
insurance scheme, including approximately 34 European countries, 10 
African countries, 8 Asian countries, 4 Middle Eastern countries, and 
16 countries from North or South America.\28\ Therefore, our proposed 
home country deposit insurance requirement for foreign banks, if 
adopted, would likely be satisfied by most foreign banks.
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    \27\ See for example, U.S. GAO, ``Deposit Insurance: Overview of 
Six Foreign Systems'' (February 1991); and James R. Barth, ``Bank 
Regulation and Supervision: What Works Best?'', 11, n. 5 (January 
2002), a Basel Committee Working Paper available at http://www.bis.org/bcbs/events/b2ealev.pdf.
    \28\ See Federal Deposit Insurance Corporation, ``International 
Directory of Deposit Insurers'' (2000), which is available at http://www2.fdic.gov/iddi/intguide00.pdf; and Working Paper 99/54 for the 
International Monetary Fund, ``Deposit Insurance: A Survey of Actual 
and Best Practices,'' 30-34 (April 1999) (``IMF Working Paper'').
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    Moreover, we have phrased the deposit insurance requirement in 
general terms in recognition that there are differences among deposit 
insurance schemes in the foreign banks' home countries. In the interest 
of comity, we believe that deference to the foreign banking supervisor 
regarding the details of its deposit insurance scheme is appropriate.
    Proposed Rule 13k-1(b)(1)'s alternative condition would render a 
foreign bank eligible for the exemption if the Federal Reserve Board 
has determined that the foreign bank is subject to comprehensive 
supervision or regulation on a consolidated basis (``CCS'') by its home 
jurisdiction supervisor. CCS refers to a Federal banking regulatory 
requirement that provides that, before a foreign bank can establish a 
U.S. branch or agency or acquire a U.S. bank or commercial lending 
company, the Federal Reserve Board must determine that the foreign bank 
is subject to CCS in its home jurisdiction.\29\ In order to make this 
determination, among other considerations, the Board must find that the 
supervisor in the bank's home jurisdiction receives information on the 
bank's worldwide operations sufficient to assess the bank's overall 
financial condition and compliance with laws and regulations.\30\
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    \29\ See 12 U.S.C. 3105(d)(2)(A) and 12 CFR 211.24(c).
    \30\ When making this CCS determination, the Board must assess a 
number of factors, including the extent to which the home country 
supervisor:
    (1) Ensures that the foreign bank has adequate procedures for 
monitoring and controlling its activities worldwide;
    (2) obtains information on the condition of the foreign bank and 
its subsidiaries and offices outside the home country through 
regular reports of examination, audit reports, or otherwise;
    (3) obtains information on the dealings and relationships 
between the foreign bank and its affiliate companies;
    (4) receives from the foreign bank consolidated financial 
reports on a worldwide basis or comparable information that permits 
analysis of the foreign bank's financial condition on a worldwide, 
consolidated basis; and
    (5) evaluates prudential standards, such as capital adequacy and 
risk asset exposure, on a worldwide basis.
    12 CFR 211.24(c)(1)(ii).
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    We recommend establishing a favorable CCS determination as an 
alternative condition to a deposit insurance requirement primarily in 
order to accommodate foreign banks located in jurisdictions that lack a 
deposit insurance scheme yet have received a favorable CCS 
determination. This alternative would be consistent with Section 402 by 
rendering eligible for the bank exemption those foreign banks permitted 
to do business in the United States because the Board has found their 
home country banking laws and supervision to be sufficiently 
comprehensive.
    By requiring either a home country deposit insurance scheme or a 
favorable CCS determination, we would ensure that the insider lending 
exemption would apply only to qualified foreign banks and not to other 
foreign entities, such as insurance companies or pension funds, that 
may also be subject to oversight in their home countries. Moreover, by 
positing a home

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jurisdiction deposit insurance requirement as an alternative to a 
favorable CCS determination, we would enable foreign banks that have 
U.S. offices approved by the Federal Reserve Board under a standard 
other than CCS to qualify for the exemption.\31\ In addition, if we 
required only a favorable CCS determination, the proposed rule would 
deny the exemption to a foreign bank that has never applied to the 
Board for approval of a U.S. office even if the foreign bank's home 
country has promulgated insider lending restrictions similar to those 
under U.S. law and the bank otherwise meets our proposed requirements.
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    \31\ The Federal Reserve Board has approved several applications 
from foreign banks for U.S. branch or agency offices under a 
standard that does not require a CCS determination but only a 
finding that the home country supervisor is ``actively working to 
establish arrangements for the consolidated supervision'' of the 
bank and all other factors are consistent with approval. See 12 CFR 
211.24(c)(1)(iii). A less rigorous standard also exists for the 
Board's approval of a foreign bank's application for a U.S. 
``representative'' office. See 12 CFR 211.24(d)(2). The home country 
of a foreign bank that has received Board approval under either of 
these other standards may have adopted insider lending restrictions 
although its banking regulations may not yet fully meet CCS 
criteria. This foreign bank would not be eligible for the exemption 
from Exchange Act Section 13(k)'s insider lending prohibition if we 
were to adopt a rule that made a favorable CCS determination the 
sole criterion for the exemption.
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Comment Solicited

    We solicit comment on proposed Rule 13k-1(b)(1). Should we rely 
alternatively on a home jurisdiction deposit insurance requirement or a 
favorable CCS determination, as proposed? Should we use only a 
favorable CCS determination as the sole criterion? If so, would we be 
excluding banks from countries that appear to have a developed bank 
regulatory regime but have nevertheless not received a favorable CCS 
determination? Conversely, should we rely exclusively on a home 
jurisdiction deposit insurance requirement? If so, should we require 
that the home jurisdiction deposit insurance requirement meet certain 
specified criteria? Or are we correct in deferring to the home 
jurisdiction bank supervisor and positing only a general home 
jurisidiction deposit insurance requirement, as proposed? Are there 
other criteria that should be used, either as alternatives to those 
that have been proposed or as the sole criteria?
    We have based the proposed CCS determination alternative on the 
Federal Reserve Board's practice of determining whether, upon 
application to the Board, a specific bank is subject to CCS in its home 
jurisdiction. However, for the purpose of the proposed foreign bank 
exemption under Section 402, because most banks within a particular 
jurisidiction are likely to be similarly regulated, it may be 
appropriate to require that at least one bank in the foreign bank's 
home jurisidiction has been the subject of a favorable CCS 
determination. We solicit comment on whether the proposed exemption 
should be available to a foreign bank that has specifically received a 
favorable CCS determination, as proposed. Should we instead permit a 
foreign bank to qualify for the proposed exemption if its home 
jurisidiction is also the home jurisdiction of at least one bank that 
has received a favorable CCS determination?

D. The Home Jurisdiction Insider Lending Restriction Condition

    In addition to having to fulfill one of the two conditions set 
forth in proposed Rule 13k-1(b)(1), a foreign bank would also have to 
meet one of three alternate conditions in proposed Rule 13k-1(b)(2) in 
order to be eligible for the foreign bank exemption. The first two 
conditions are based on primary requirements of the Federal Reserve 
Act's insider lending restrictions.\32\ 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. Moreover, because Section 13(k) 
prohibits an issuer from making or arranging for an insider loan 
through a subsidiary,\33\ proposed Rule 13k-1(b)(2) would permit a 
foreign bank to make a loan to the executive officers or directors of 
its parent company \34\ only when the loan is on market terms to 
unrelated parties or, if pursuant to the parent company's employee 
benefit or compensation plan, on terms no more favorable to those 
offered to the parent company's 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.
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    \32\ The Federal Reserve Act's insider lending restrictions are 
set forth in Regulation O (12 CFR 215.1 et seq.) as well as in the 
Act itself at 12 U.S.C. 375a and 375b.
    \33\ Exchange Act Section 13(k)(1).
    \34\ Proposed Rule 13k-1(a)(4) would define the ``parent 
company'' of a foreign bank as a corporation or other organization 
that directly or indirectly owns more than 50 percent of the voting 
securities or equity of the foreign bank.
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    This second provision of proposed Rule 13k-1(b) would be consistent 
with Section 402 by conditioning the exemption on a foreign bank's 
adherence to one of the main insider lending restrictions of Regulation 
O. Since many jurisdictions have adopted insider lending restrictions 
similar to those of Regulation O,\35\ we do not believe that this 
proposed provision should pose an undue burden for many foreign banks.
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    \35\ The Basel Committee on Bank Supervision of the Bank for 
International Settlements (``Basel Committee'') has developed its 
``Core Principles for Effective Banking Supervision'' (``Core 
Principles'') and its ``Core Principles Methodology'' in order to 
provide the international financial community with a benchmark 
against which the effectiveness of bank supervisory regimes can be 
assessed.'' See Basel Committee, Core Principles Methodology, 3 
(1999). Principle 10 of the Core Principles Methodology provides 
that ``banking supervisors must have in place requirements that 
banks lend to related companies and individuals on an arms-length 
basis, that such extensions of credit are effectively monitored, and 
that other appropriate steps are taken to control or mitigate the 
risks.'' Core Principles Methodology at 25. According to the Basel 
Committee, ``the vast majority of countries have endorsed the Core 
Principles and have declared their intention to implement them.'' 
Core Principles at 1.
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    The proposed exemption would recognize that differences exist 
between and among Regulation O and bank insider lending regulatory 
regimes in foreign jurisdictions. For example, as proposed Rule 13k-
1(b)(2)'s last alternative condition reflects, some jurisdictions hinge 
the legality of a bank insider loan on its pre-approval by the home 
jurisdiction bank supervisor. Again in the interest of comity, we 
believe that some measure of deference to the home jurisdiction bank 
supervisor regarding the content of its insider lending restrictions is 
appropriate.
    We are aware that some foreign banks believe that a favorable CCS 
determination for its home jurisdiction should suffice to qualify a 
foreign bank for the exemption from insider lending.\36\ We have not 
based our proposed rule on this approach because whether a foreign bank 
is subject to insider lending restrictions in its home country is not a 
specific statutory or regulatory criterion that the Federal Reserve 
Board must consider when making its CCS determination. Consequently, in 
many instances, a favorable CCS determination does not reveal whether a 
foreign bank's home country has insider lending restrictions similar to 
those under Federal Reserve

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regulations if at all.\37\ In addition, because Section 402 conditions 
the bank exemption on compliance with Regulation O, it is consistent to 
condition the foreign bank exemption on requirements comparable to 
those under Regulation O.
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    \36\ For example, the Institute of International Bankers has 
requested that we adopt a rule that would exempt a foreign bank 
under Section 402 if it derives from a country that the Federal 
Reserve Board has determined provides CCS over its banking 
institutions or if it is subject in its home jurisdiction to insider 
lending regulations modeled on the core principles of Regulation O. 
We will make a copy of this letter publicly available.
    \37\ While some of the Board's CCS determinations mention the 
presence of home country insider lending restrictions as one factor 
to be considered among others, others fail to discuss this factor at 
all.
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Comment Solicited
    We solicit comment on proposed Rule 13k-1(b)(2). Should we require 
a foreign bank to be subject to at least one of the three prescribed 
insider lending restrictions in its home jurisdiction in addition to 
being from a jurisdiction that has enacted a deposit insurance 
requirement or has received a favorable CCS determination, as proposed? 
Should being subject to one of the three prescribed insider lending 
restrictions in its home jurisdiction be the sole criterion for 
determining whether a foreign bank is eligible for the insider lending 
exemption? Or should being from a jurisdiction that has received a 
favorable CCS determination suffice to qualify a foreign bank for the 
exemption?
    If we should require a foreign bank to be subject to insider 
lending restrictions in its home jurisdiction, should we limit the 
alternatives to those set forth in the first two prongs of proposed 
Rule 13k-1(b)(2)? Should we require a foreign bank to be subject to 
insider lending restrictions that are substantially similar to other 
insider lending provisions of Regulation O in addition to the two 
proposed restrictions? Should we permit a foreign bank to make insider 
loans that comply with Regulation O requirements even if the foreign 
bank's home jurisdiction has not yet enacted these requirements as laws 
or rules?
    Should we condition the Section 13(k) exemption for a foreign 
bank's loans to the executive officers or directors of its parent 
company, as proposed? If so, should we define a foreign bank's ``parent 
company'' as a corporation or other organization that directly or 
indirectly owns more than 50 percent of the voting securities or equity 
of the foreign bank, as proposed? Should the percentage of ownership be 
higher or lower and, if so, why? For example, should we base our 
definition on the definition of ``subsidiary'' under the Bank Holding 
Company Act,\38\ which is referenced in Regulation O,\39\ and which in 
part defines the subsidiary of a bank holding company as any company 25 
percent or more of whose voting shares are directly or indirectly owned 
or controlled by such bank holding company? Are there other indices of 
ownership or control that the definition of a foreign bank's ``parent 
company'' should include?
---------------------------------------------------------------------------

    \38\ 12 U.S.C. 1841(d).
    \39\ See 12 C.F.R. 215.2(a) and (o).
---------------------------------------------------------------------------

    Should we permit a foreign bank to qualify for the exemption if its 
insider loans are subject to prior approval by the bank supervisor in 
its home jurisdiction, as proposed? Should we subject a foreign bank 
only generally to insider lending restrictions in its home jurisdiction 
without specifying the content of the restrictions? Are there other 
criteria that should be used, either as alternatives to those that have 
been proposed or as sole criteria? For example, should we exempt from 
the proposed insider lending conditions insider loans of a foreign bank 
that are of a de minimis amount and that are exempt from insider 
lending restrictions in its home jurisdiction? Would this type of 
exemption be consistent with insider lending restrictions applicable to 
U.S. banks?

E. The Prior Board of Directors Approval Condition

    Proposed Rule 13k-1(b)(3) would require prior approval by a 
majority of the foreign bank's board of directors of any insider loan 
in an amount that, when aggregated with all other outstanding loans to 
a particular executive officer or director, exceeds $500,000. The 
proposed rule would also require the intended loan recipient to abstain 
from the vote on the loan. Domestic banks are subject to a similar 
requirement under federal banking law.\40\
---------------------------------------------------------------------------

    \40\ See, for example, 12 CFR 215.4(b) of Regulation O, which 
imposes similar board approval and insider abstention conditions for 
insider loans by member banks that exceed in the aggregate per 
insider the higher of $25,000 or 5 percent of the member bank's 
unimpaired capital and unimpaired surplus. This provision further 
provides that in no event may a member bank extend credit to an 
insider that in the aggregate exceeds $500,000 per insider without 
complying with the board approval and insider abstention 
requirements.
---------------------------------------------------------------------------

    We understand that some foreign banks may have a two-tier board 
system, with one tier designated as the management board and the other 
tier designated as the supervisory or non-management board. We propose 
that, for these banks, majority approval of the insider loan by either 
board will suffice to satisfy the prior board approval requirement of 
proposed Rule 13k-1(b)(3) as long as the individual receiving the loan 
has abstained from participating in the board's voting.
    We have not included some of the other detailed conditions required 
by Regulation O in the proposed foreign bank exemption. For example, 
Regulation O sets limits on the aggregate amount of credit that a 
subject bank may extend to any one insider as well as to all insiders. 
These limits are measured as a percentage of the bank's unimpaired 
capital and unimpaired surplus.\41\ The primary purpose of these 
limitations appears to be to ensure the safety and structural soundness 
of the U.S. banking system rather than to address the investor 
protection and corporate governance concerns underlying the federal 
securities laws. Accordingly, and because foreign jurisdictions can 
legitimately reach different conclusions regarding the necessary 
features of a safe and sound banking system, we have not included 
similar limitations in our proposed rule.
---------------------------------------------------------------------------

    \41\ See 12 CFR 215.4(c) and (d) of Regulation O.
---------------------------------------------------------------------------

Comment Solicited
    We solicit comment on proposed Rule 13k-1(b)(3). Should we require 
prior board approval for an insider loan that, when aggregated with all 
other loans to that insider, exceeds a certain amount? If so, should 
the amount be $500,000, as proposed? Should it be an amount less than 
or greater than $500,000 and, if so, why? Should we require that more 
than a majority of the board approve such a loan? For example, should 
we require a two-thirds vote or a unanimous vote of approval by the 
board?
    For a foreign bank that has a two-tier board, should majority 
approval of the insider loan by either board suffice to satisfy the 
prior board approval requirement, as proposed? Should we instead 
require majority approval by the non-management, supervisory board?
    Should proposed Rule 13k-1(b)(3) require the prior approval either 
of a foreign bank's board or its home jurisdiction bank supervisor? Are 
there other types of insider loans that should be the subject of a 
prior board or bank regulator approval requirement? For example, should 
we impose limitations on the amount that a foreign bank's directors and 
executive officers can borrow either on an individual basis or in the 
aggregate under proposed Rule 13k-1? Should we impose conditions based 
on specified net capital ratios?

F. Disclosure Considerations

    Currently, domestic and foreign banks are subject to substantially 
similar disclosure requirements regarding insider loans under the 
federal securities laws. As long as a bank does not disclose the loans 
as nonaccrual, past due, restructured or potential

[[Page 54595]]

problems under Industry Guide 3\42\ (``problematic loans''), its 
disclosure may consist of a statement, if true, that the loans in 
question:
---------------------------------------------------------------------------

    \42\ Industry Guide 3 provides statistical disclosure 
requirements for bank holding companies.
---------------------------------------------------------------------------

    (A) Were made in the ordinary course of business;
    (B) were made on substantially the same terms, including interest 
rates and collateral, as those prevailing at the time for comparable 
transactions with other persons; and
    (C) did not involve more than the normal risk of collectibility or 
present other unfavorable features.\43\
---------------------------------------------------------------------------

    \43\ Instruction 2 to Form 20-F Item 7.B (for foreign banks) and 
Instruction 3 to Regulation S-K Item 404(c) (for domestic banks).
---------------------------------------------------------------------------

    This minimal disclosure requirement for ordinary, non-problematic 
insider bank loans is consistent with the exemption that domestic banks 
currently have under Exchange Act Section 13(k) and with the similar 
exemptive treatment that we propose for foreign banks. Accordingly, we 
do not recommend changing this requirement at this time.
    For an insider loan failing to meet any of the above conditions, 
both a foreign and domestic bank must 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.\44\ However, 
unlike the comparable instructions for domestic issuers, the Form 20-F 
instructions do not explicitly require a foreign issuer to identify the 
insider that has received a problematic loan and the insider's 
relationship to the issuer. Accordingly, we propose to revise the Form 
20-F instructions to require a foreign bank to disclose the identity of 
any director, executive officer or other related party otherwise 
required to be disclosed by the Form who has received a loan to which 
the non-problematic loan instruction does not apply, and to describe 
the nature of the relationship of the loan recipient with the foreign 
bank. As a result, the same disclosure standards regarding problematic 
loans to insiders would apply to both domestic banks and foreign banks 
other than the few Canadian banks that are subject to the 
Multijurisdictional Disclosure System (``MJDS'').
---------------------------------------------------------------------------

    \44\ Form 20-F Item 7.B.2 and Regulation S-K Item 404(c).
---------------------------------------------------------------------------

    The proposed rules would not affect the disclosure requirements for 
Form 40-F, the MJDS form used by qualified Canadian issuers to file 
their Exchange Act annual reports and registration statements.\45\ We 
are not proposing to amend Form 40-F since its content, like the 
content of all of the other MJDS forms, is determined primarily by the 
applicable Canadian securities administrator.
---------------------------------------------------------------------------

    \45\ 17 CFR 249.240f.
---------------------------------------------------------------------------

Comment Solicited
    We solicit comment on the adequacy of the disclosure requirements 
for insider loans by domestic and foreign banks. Should we require more 
detailed disclosure regarding non-problematic bank loans to insiders as 
a condition of eligibility for the Section 13(k) bank exemption for 
domestic and foreign banks? For example, should we require domestic and 
foreign banks to disclose the aggregate amount and average interest 
rate of their non-problematic loans to each insider? If not, should we 
at least require foreign banks to disclose the identity of an insider 
that has received a problematic loan and the insider's relationship to 
the foreign issuer, as proposed? Should we require Canadian banks that 
file on Form 40-F to provide this information about problematic loans 
to insiders as well?

G. Proposed Effective Date

    We propose that the effective date for proposed Rule 13k-1, if 
adopted, will be the date of its publication in the Federal Register. 
Because of the exemptive nature of the proposed rule, we do not believe 
that a transition period is necessary to enable foreign issuers and 
other interested parties to prepare for the new rule. We further 
propose that the proposed Form 20-F amendment, if adopted, will be 30 
days from the date of its publication in the Federal Register. Because 
of the expected minimal revised disclosure resulting from the proposed 
Form 20-F amendment, we believe that a one month transition period is 
ample time to enable foreign issuers and others to prepare for the 
revised form.
Comment Solicited
    Are there practical difficulties if the proposed Rule 13k-1 does 
not become effective on the date that the adopted rule is published in 
the Federal Register? Similarly, are there practical difficulties if 
the proposed Form 20-F amendment become effective on a date that is 
later than 30 days after its publication in the Federal Register? If 
you disagree with the proposed effective dates, when should the 
proposed rule and form amendment become effective, and why?

III. Paperwork Reduction Act Analysis

    This rule proposal contains ``collection of information'' 
requirements within the meaning of the Paperwork Reduction Act of 1995 
(``PRA'').\46\ We are submitting our proposal to the Office of 
Management and Budget (``OMB'') for review in accordance with the 
PRA.\47\ The title of the affected collection of information is Form 
20-F (OMB Control No. 3235-0288). An agency may not conduct or sponsor, 
and a person is not required to respond to, a collection of information 
such as Form 20-F unless it displays a currently valid OMB control 
number. The disclosure will be mandatory.
---------------------------------------------------------------------------

    \46\ 44 U.S.C. 3501 et seq.
    \47\ 44 U.S.C. 3507(d) and 5 CFR 1320.11.
---------------------------------------------------------------------------

    Form 20-F sets forth the disclosure requirements for a foreign 
private issuer's annual report and registration statement under the 
Exchange Act as well as many of the disclosure requirements for a 
foreign private issuer's registration statements under the Securities 
Act. The Commission adopted Form 20-F pursuant to the Exchange Act and 
the Securities Act in order to ensure that investors are informed about 
foreign private issuers that have registered securities with the 
Commission. The hours and costs associated with preparing, filing and 
sending Form 20-F constitute reporting and cost burdens imposed by this 
collection of information. We have based our estimate of the effect 
that the proposed Form 20-F amendment would have on this collection of 
information primarily on our review of the most recently completed PRA 
submission for Form 20-F, on the form's requirements, and on actual 
filings of Form 20-F.
    We estimate that currently foreign private issuers file 1,194 Form 
20-Fs each year. We also estimate that foreign private issuers incur 
25% of the burden required to produce the Form 20-Fs resulting in 
769,825 annual burden hours incurred by foreign private issuers out of 
a total of 3,079,300 annual burden hours. Thus, we estimate that 2579 
total burden hours per response are currently required to prepare the 
Form 20-F. We further estimate that outside firms, including legal 
counsel, accountants and other advisors, account for 75% of the burden 
required to produce the Form 20-Fs at an average cost of $300 per hour 
for a total annual cost of $690,500,680.
    We estimate that currently 41 foreign banks file annual reports on 
Form 20-F.\48\ We further estimate that

[[Page 54596]]

approximately 10% of reporting foreign banks have problematic insider 
loans that must be disclosed under Item 7.B. of Form 20-F. We expect 
that, if adopted, the proposed amendment would cause 4 foreign private 
issuers to incur additional burden hours and costs related to providing 
expanded disclosure concerning problematic loans to insiders. We 
estimate that for each of the Form 20-Fs affected, there would occur 
one additional burden hour pertaining to these expanded disclosure 
requirements for a total of 4 additional burden hours. We expect that 
foreign private issuers would incur 25% of these additional burden 
hours (1 hour). We further expect that outside firms would incur 75% of 
the additional burden hours (3 hours) at an average cost of $300 per 
hour for a total of $900 in additional annual costs.
---------------------------------------------------------------------------

    \48\ Only 41 of the 46 foreign bank reporting companies filed 
their most recent annual report on Form 20-F. Each of the other five 
filed their annual report on Form 40-F, the MJDS form for qualified 
Canadian issuers. As previously discussed, we are not proposing to 
amend Form 40-F. Accordingly, the estimated burden hour and cost 
estimates for Form 40-F under the PRA remain unaffected by this 
proposed rulemaking.
---------------------------------------------------------------------------

    Thus, we estimate that the proposed amendment would increase the 
annual burden incurred by foreign private issuers in the preparation of 
Form 20-F to 769,826 burden hours. We further estimate that the 
proposed amendment would increase the total annual burden associated 
with Form 20-F preparation to 3,079,304 burden hours, but would leave 
the average number of burden hours per response unaffected at 2579 
hours. We further estimate that the proposed amendment would increase 
the total annual costs attributed to the preparation of Form 20-F by 
outside firms to $690,501,580.
Comment Solicited
    We solicit comment on the expected effects of the proposed Form 20-
F amendment under the PRA. In particular, we solicit comment on the 
accuracy of our additional burden hour and cost estimates expected to 
result from the proposed amendment. We further solicit comment in order 
to:
    [sbull] Evaluate whether the proposed collection of information is 
necessary for the proper performance of the functions of the 
Commission, including whether the information will have practical 
utility;
    [sbull] Determine whether there are ways to enhance the quality, 
utility, and clarity of the information to be collected;
    [sbull] Evaluate whether there are ways to minimize the burden of 
the collection of information on those who respond, including through 
the use of automated collection techniques or other forms of 
information technology; and
    [sbull] Evaluate whether the proposed amendment will have any 
effects on any other collections of information not previously 
identified in this section.
    Any member of the public may direct to us any comments concerning 
these burden and cost estimates and any suggestions for reducing the 
burdens and costs. Persons who desire to submit comments on the 
collection of information requirements should direct their comments to 
the OMB, Attention: Desk Officer for the Securities and Exchange 
Commission, Office of Information and Regulatory Affairs, Washington, 
DC 20503, and send a copy of the comments to Jonathan G. Katz, 
Secretary, Securities and Exchange Commission, 450 Fifth Street, NW., 
Washington, DC 20549-0609, with reference to File No. S7-15-03. 
Requests for materials submitted to the OMB by us with regard to these 
collections of information should be in writing, refer to File No. S7-
15-03, and be submitted to the Securities and Exchange Commission, 
Records Management, Office of Filings and Information Services, 450 
Fifth Street, NW., Washington, DC 20549. Because the OMB is required to 
make a decision concerning the collections of information between 30 
and 60 days after publication, your comments are best assured of having 
their full effect if the OMB receives them within 30 days of 
publication.

IV. Cost-Benefit Analysis

    For several years, U.S. investors have sought to diversify their 
holdings by investing in the securities of foreign issuers, including 
foreign banks. At the same time, foreign issuers, including foreign 
banks, have sought opportunities to raise capital and effect other 
securities-related transactions in the United States. Proposed Rule 
13k-1 would benefit both U.S. investors and foreign bank issuers by 
removing a regulatory impediment that, if left unchecked, could 
discourage foreign banks from entering or remaining in U.S. capital 
markets.
    U.S. investors would benefit from proposed Rule 13k-1 to the extent 
that the proposed rule encourages a foreign bank to maintain or achieve 
its Exchange Act reporting status. A foreign bank would benefit from 
proposed Rule 13k-1 by being able, like its domestic counterpart, to 
provide qualified personal loans to its executive officers and 
directors while an Exchange Act reporting company.
    More particularly, if a foreign bank's home jurisdiction has 
enacted insider lending restrictions similar to those under Regulation 
O, the foreign bank would benefit from proposed Rule 13k-1 by not 
having to fulfill two sets of insider lending rules. If a foreign 
bank's home jurisdiction has enacted insider lending rules that are 
less restrictive than those imposed under Regulation O but that 
nevertheless qualify under proposed Rule 13k-1(b)(2) because they 
require the prior approval of the home jurisdiction bank supervisor for 
specified insider loans, the foreign bank would benefit to the extent 
that the cost savings resulting from being subject to the less 
restrictive home jurisdiction insider lending rules exceed the cost of 
obtaining the approval of its home jurisdiction bank supervisor for the 
specified insider loan.
    We expect that some foreign bank issuers will incur additional 
costs attempting to meet proposed Rule 13k-1(b)(3)'s condition 
requiring the prior approval by a majority of a foreign bank's board of 
directors of a loan to an executive officer or director that, in the 
aggregate, would exceed $500,000 for that particular insider. We also 
expect that some foreign issuers will incur additional costs from our 
proposed amendment of Form 20-F that would require a foreign issuer to 
disclose the identity of a director, executive officer or other related 
party who has received a problematic loan and to describe the nature of 
the loan recipient's relationship to the lending issuer. However, 
because currently only 10% of the 41 foreign depository institutions 
that file Form 20-F annual reports disclose problematic loans with 
insiders, and because of the brevity of disclosure required to meet the 
proposed requirement, we do not expect the resulting costs to be unduly 
burdensome. In any event, we believe that any ensuing costs would be 
justified by the benefits of foreign banks being able to make loans to 
their directors and executive officers on conditions comparable to 
those afforded to domestic banks subject to Regulation O.
Comment Solicited
    We solicit comment on the costs and benefits for foreign and 
domestic issuers of proposed Rule 13k-1 and the proposed amendment of 
Form 20-F. We request your views on the costs and benefits described 
above as well as on any other costs and benefits that could result from 
adoption of the proposed rule and form amendment for foreign and 
domestic issuers. We also request

[[Page 54597]]

data to quantify the costs and value of the benefits identified.

V. Consideration of Impact on the Economy, Burden on Competition and 
Promotion of Efficiency, Competition and Capital Formation Analysis

    For purposes of the Small Business Regulatory Enforcement Fairness 
Act of 1996 (``SBREFA''),\49\ we solicit data to determine whether the 
proposals constitute a ``major'' rule. Under SBREFA, a rule is 
considered ``major'' where, if adopted, it results or is likely to 
result in:
---------------------------------------------------------------------------

    \49\ Pub. L. No. 104-121, Title II, 110 Stat. 857 (1996) 
(codified in various sections of 5 U.S.C., 15 U.S.C. and as a note 
to 5 U.S.C. 601).
---------------------------------------------------------------------------

    [sbull] An annual effect on the economy of $100 million or more 
(either in the form of an increase or a decrease);
    [sbull] a major increase in costs or prices for consumers or 
individual industries; or
    [sbull] significant adverse effects on competition, investment or 
innovation.
    We request comment on the potential impact of the proposals on the 
economy on an annual basis. Commenters are requested to provide 
empirical data and other factual support for their views if possible.
    When adopting rules under the Exchange Act, Section 23(a)(2) of the 
Exchange Act \50\ requires us to consider the impact that any new rule 
would have on competition. In addition, Section 23(a)(2) prohibits us 
from adopting any rule that would impose a burden on competition not 
necessary or appropriate in furtherance of the purposes of the Exchange 
Act. Furthermore, when engaging in rulemaking that requires the 
Commission to consider or determine whether an action is necessary or 
appropriate in the public interest, Section 3(f) of the Exchange Act 
\51\ requires the Commission to consider whether the action will 
promote efficiency, competition and capital formation.
---------------------------------------------------------------------------

    \50\ 15 U.S.C. 78w(a)(2).
    \51\ 15 U.S.C. 78c(f).
---------------------------------------------------------------------------

    We expect that proposed Rule 13k-1 will have a beneficial effect on 
competition in U.S. capital markets by eliminating or significantly 
reducing the burden imposed by Sarbanes-Oxley Section 402's insider 
lending prohibition on most foreign bank issuers. In so doing, proposed 
Rule 13k-1 should encourage foreign banks to continue or achieve their 
status as Exchange Act reporting companies. Such encouragement could 
facilitate increased competition among U.S. capital market participants 
for the securities of foreign and domestic bank reporting companies to 
the ultimate benefit of investors.
    We request comment on whether proposed Rule 13k-1 and the proposed 
amendment to Form 20-F, if adopted, would impose a burden on 
competition or promote efficiency, competition, and capital formation 
as discussed above or in any other way. Commenters are requested to 
provide empirical data and other factual support for their views if 
possible.

VI. Regulatory Flexibility Act Certification

    The Securities and Exchange Commission hereby certifies, pursuant 
to 5 U.S.C. 605(b), that proposed Rule 13k-1 under the Securities 
Exchange Act of 1934 (``Exchange Act'') and the proposed amendment to 
Form 20-F under the Exchange Act, if adopted, would not have a 
significant economic impact on a substantial number of small entities 
for purposes of the Regulatory Flexibility Act. The reason for this 
certification is as follows.
    Proposed Rule 13k-1 would exempt from the insider lending 
prohibition of Exchange Act Section 13(k) a foreign bank that meets 
specified criteria similar to the criteria that a domestic bank must 
meet in order to qualify for the exemption from the insider lending 
prohibition under Exchange Act Section 13(k)(3). This proposed rule 
would, thus, directly affect only foreign issuers and not domestic 
companies since Exchange Act Section 13(k) already exempts qualified 
domestic banks from the insider lending prohibition. Similarly, the 
proposed amendment to Form 20-F would only affect foreign issuers since 
only foreign issuers are permitted to use this form.
    Based on an analysis of the language and legislative history of the 
Regulatory Flexibility Act, Congress did not intend that the Act apply 
to foreign issuers. Accordingly, the entities directly affected by the 
proposed rule and form amendment will fall outside the scope of the 
Act. For this reason, proposed Exchange Act Rule 13k-1 and the proposed 
amendment to Form 20-F should not have a significant economic impact on 
a substantial number of small entities.
    We encourage written comments regarding this certification. We 
request in particular that commenters describe the nature of any impact 
on small entities and provide empirical data to support the extent of 
the impact.

VII. Statutory Basis of Proposed Amendment

    We are proposing Exchange Act Rule 13k-1 and the proposed amendment 
to Form 20-F under the authority in Sections 6, 7, 10 and 19 of the 
Securities Act, Sections 3(b), 12, 13, 23 and 36 of the Exchange Act, 
and Section 3(a) of the Sarbanes-Oxley Act of 2002.

Text of the Proposed Amendment

List of Subjects in 17 CFR Parts 240 and 249

    Reporting and recordkeeping requirements, Securities.
    In accordance with the foregoing, we propose to amend Title 17, 
Chapter II of the Code of Federal Regulations as follows.

PART 240--GENERAL RULES AND REGULATIONS, SECURITIES EXCHANGE ACT OF 
1934

    1. The authority citation for part 240 continues to read in part as 
follows:

    Authority: 15 U.S.C. 77c, 77d, 77g, 77j, 77s, 77z-2, 77z-3, 
77eee, 77ggg, 77nnn, 77sss, 77ttt, 78c, 78d, 78e, 78f, 78g, 78i, 
78j, 78j-1, 78k, 78k-1, 78l, 78m, 78n, 78o, 78p, 78q, 78s, 78u-5, 
78w, 78x, 78ll, 78mm, 79q, 79t, 80a-20, 80a-23, 80a-29, 80a-37, 80b-
3, 80b-4, 80b-11, 7202, 7241, 7262, and 7263; and 18 U.S.C. 1350, 
unless otherwise noted.
* * * * *
    2. Add Sec.  240.13k-1 to read as follows:


Sec.  240.13k-1  Foreign bank exemption from the insider lending 
prohibition under section 13(k).

    (a) For the purpose of this section:
    (1) Foreign bank means 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.
    (2) Home jurisdiction means the country, political subdivision or 
other place in which a foreign bank is incorporated or organized.
    (3) Engaged substantially in the business of banking means engaged 
in:
    (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.
    (4) Parent company of a foreign bank means a corporation or other 
organization that directly or indirectly owns more than 50 percent of 
the voting securities or the equity of the foreign bank.
    (b) An issuer that is a foreign bank or the parent company of a 
foreign bank is exempt from the prohibition of

[[Page 54598]]

extending, maintaining, arranging for, or renewing credit in the form 
of a personal loan to or for any of its directors or executive officers 
under section 13(k) of the Act (15 U.S.C. 78m(k)) with respect to any 
such loan made by the foreign bank as long as:
    (1) Either:
    (i) The laws or regulations of the foreign bank's home jurisdiction 
require the bank to insure its deposits; or
    (ii) The Board of Governors of the Federal Reserve System has 
determined that the foreign bank is subject to comprehensive 
supervision or regulation on a consolidated basis by the bank 
supervisor in the foreign bank's home jurisdiction under 12 CFR 
211.24(c); and
    (2) The laws or regulations of the foreign bank's home jurisdiction 
restrict the foreign bank from making loans to its executive officers 
and directors or those of its parent company unless the foreign bank is 
permitted to and does extend the loan:
    (i) On substantially the same terms as those prevailing at the time 
for comparable transactions by the foreign bank with other persons who 
are not executive officers, directors or employees of the foreign bank 
or its parent company; or
    (ii) Pursuant to a benefit or compensation program that is widely 
available to the employees of the foreign bank or its parent company 
and does not give preference to any of the executive officers or 
directors of the foreign bank or its parent company over any other 
employees of the foreign bank or its parent company; or
    (iii) Following the express approval of the loan by the bank 
supervisor in the foreign bank's home jurisdiction; and
    (3) For any loan that, when aggregated with the amount of all other 
outstanding loans to a particular executive officer or director, 
exceeds $500,000:
    (i) A majority of the foreign bank's board of directors has 
approved the loan in advance; and
    (ii) The loan's intended recipient has abstained from participating 
in the vote regarding the loan.
    3. Amend Form 20-F (referenced in Sec.  249.220f) by revising 
paragraph 2 of Item 7.B of Part 1 to read as follows:

    Note: The text of Form 20-F does not, and the amendment will 
not, appear in the Code of Federal Regulations.

    OMB APPROVAL:
    OMB Number: 3235-0288.
    Expires: March 31, 2006.
    Estimated average burden hours per response 2,579.

United States Securities and Exchange Commission, Washington, DC 20549

FORM 20-F
* * * * *

PART 1
* * * * *
    Item 7. Major Shareholders and Related Party Transactions
* * * * *
    B. Related party transactions.
* * * * *
    2. The amount of outstanding loans (including guarantees of any 
kind) made by the company or any of its parent or subsidiaries to or 
for the benefit of any of the persons listed above. The information 
given should include 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. In addition, if the company, its parent 
or any of its subsidiaries is a foreign bank (as defined in 17 CFR 
240.13k-1) that has made a loan to which Instruction 2 of this Item 
does not apply, identify the director, executive officer or other 
related party required to be described by this Item who received the 
loan, and describe the nature of the loan recipient's relationship to 
the foreign bank.
* * * * *

    Dated: September 11, 2003.

    By the Commission.
J. Lynn Taylor,
Assistant Secretary.
[FR Doc. 03-23655 Filed 9-16-03; 8:45 am]
BILLING CODE 8010-01-P