[Federal Register Volume 69, Number 84 (Friday, April 30, 2004)]
[Rules and Regulations]
[Pages 24016-24025]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-9822]



[[Page 24015]]

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Part IV





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); Final Rule

  Federal Register / Vol. 69, No. 84 / Friday, April 30, 2004 / Rules 
and Regulations  

[[Page 24016]]


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SECURITIES AND EXCHANGE COMMISSION

17 CFR Parts 240 and 249

[Release No. 34-49616, International Series Release No. 1275; 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: Final rule.

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SUMMARY: We are adopting for qualified foreign banks an exemption 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 adopted rule will remedy this 
disparate treatment of foreign banks by exempting from section 13(k)'s 
insider lending prohibition those foreign banks that satisfy specified 
criteria similar to those that qualify domestic banks for the statutory 
exemption.

EFFECTIVE DATE: April 30, 2004, except that Form 20-F referenced in 
Sec.  249.220f is effective June 1, 2004.

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

SUPPLEMENTARY INFORMATION: We are adding new Rule 13k-1 \1\ and 
revising Form 20-F \2\ under the Securities Exchange Act of 1934.\3\
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    \1\ 17 CFR 240.13k-1.
    \2\ 17 CFR 249.220f.
    \3\ 15 U.S.C. 78a et seq.
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I. Executive Summary and Background

    In response to well-publicized corporate abuses, Congress enacted 
section 402 of the Sarbanes-Oxley Act \4\ in order to prevent 
corporations from granting personal loans to their executives.\5\ This 
section added section 13(k), entitled ``Prohibition on Personal Loans 
to Executives,'' to the Exchange Act.\6\ 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.\7\ 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\8\ that, although not yet effective, has not been withdrawn.\9\
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    \4\ Pub. L. 107-204, 116 Stat. 745 (2002).
    \5\ 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).
    \6\ 15 U.S.C. 78m(k).
    \7\ 15 U.S.C. 78m(k)(1). Section 13(k)(1)'s insider lending ban 
prohibits an issuer from ``arranging for'' or otherwise making a 
loan to any of its directors or executive officers ``including 
through any subsidiary'' of that issuer.
    \8\ 15 U.S.C. 77a et seq.
    \9\ Sarbanes-Oxley Act Section (2)(a)(7).
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A. Section 402's ``Insured Depository Institution'' Exemption and the 
Need for a Foreign Bank Exemption

    Four categories of personal loans are expressly exempt from section 
402's prohibition. One of these exemptions \10\ applies to ``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).''\11\ The Federal 
Deposit Insurance Act (``FDIA'')\12\ defines an ``insured depository 
institution'' as a bank or savings association that has insured its 
deposits with the Federal Deposit Insurance Corporation (``FDIC'').\13\
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    \10\ The other three exemptions apply to extensions of credit 
that existed before the Sarbanes-Oxley Act's enactment, specified 
home improvement and consumer credit loans, and specified loans by a 
broker-dealer to its employees. See Exchange Act Sections 13(k)(1) 
and 13(k)(2) [15 U.S.C. 78m(k)(2)].
    \11\ Exchange Act Section 13(k)(3) [15 U.S.C. 78m(k)(3)]. The 
Federal Reserve Board's Regulation O (12 CFR 215.1 et seq.) 
implements Federal Reserve Act Section 22(h).
    \12\ 12 U.S.C. 1811 et seq.
    \13\ 12 U.S.C. 1813(c)(2).
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    Although this section 402 provision does not explicitly exclude 
foreign banks from the exemption, under U.S. banking law, 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. depository institution 
subsidiary, rather than a branch, agency or other entity, for that 
purpose.\14\ These U.S. subsidiaries of foreign banks, and the limited 
number of grandfathered U.S. branches of foreign banks that obtained 
FDIC insurance prior to FBSEA's enactment,\15\ can engage in FDIC-
insured, retail deposit activities and, thus, qualify as ``insured 
depository institutions.'' \16\ But the foreign banks that own the U.S. 
insured depository subsidiaries or operate the grandfathered insured 
depository branches are not themselves ``insured depository 
institutions'' under the FDIA.
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    \14\ 12 U.S.C. 3104(d)(1).
    \15\ 12 U.S.C. 3104(d)(2).
    \16\ 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, their 
representatives have maintained that section 402 runs counter to the 
principle of ``national treatment,'' which has been a fundamental goal 
of federal banking legislation concerning foreign banks.\17\ 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.\18\ Foreign 
banks have stated that their inability to qualify for the ``insured 
depository'' exemption places them at a disadvantage compared to their 
U.S. counterparts. Foreign banks also have 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. Consequently, several foreign banks have 
urged the Commission to adopt an exemption for foreign banks from the 
Exchange Act's insider lending prohibition.
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    \17\ See, for example, U.S. General Accounting Office, ``Foreign 
Banks--Assessing Their Role in the U.S. Banking System'' (February 
1996) (``GAO Foreign Banks Report'') at p. 2.
    \18\ GAO Foreign Banks Report at p. 16.
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B. The Commission's Rule Proposal

    In response to these concerns, the Commission proposed an insider 
lending exemption for foreign banks that strove to strike an 
appropriate

[[Page 24017]]

balance among various approaches.\19\ Thus, we proposed a foreign bank 
exemption that would be consistent with the Sarbanes-Oxley Act by 
extending section 13(k)'s banking exemption to foreign banks only if 
they could satisfy specified criteria comparable to those required for 
domestic banks. Yet we also recognized that subjecting foreign banks to 
all of the Federal Reserve System's detailed requirements in the 
insider lending area would neither be necessary nor appropriate 
especially when many foreign banking regulators have well-developed 
regulatory schemes related to insider lending.
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    \19\ Release No. 34-48481 (September 11, 2003) [68 FR 54590] 
(``Proposing Release'').
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    The proposed rule established three conditions for the foreign bank 
exemption from insider lending:
    (1) the laws or regulations of the foreign bank's home jurisdiction 
must require the bank to insure its deposits, or the Federal Reserve 
Board must have determined that the 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);
    (2) the laws or regulations of the foreign bank's home jurisdiction 
must permit insider lending only if on comparable terms to loans made 
to unrelated parties or, if pursuant to a widely available employee 
benefit or compensation program, on terms comparable to other 
employees, or if expressly approved by the foreign bank's home 
jurisdiction bank supervisor; and
    (3) for any loan that, when aggregated with all other outstanding 
loans for a particular insider, exceeds $500,000, a majority of the 
foreign bank's board of directors has approved the loan in advance and 
the particular insider has abstained from participating in the vote 
regarding the loan.
    We also proposed to amend Item 7.B of Form 20-F to require a 
foreign bank to disclose the identity of and its relationship with a 
director, executive officer, or other related party required to be 
disclosed by this Item, to whom the foreign bank had issued a loan that 
failed to qualify for the abbreviated disclosure treatment under 
Instruction 2 of Item 7.B. We proposed this revision in order to make 
the disclosure requirements for foreign banks comparable to those for 
domestic banks.

C. Comments Received

    In response to this rule proposal, we received 20 comment letters 
from representatives of numerous banks and banking associations, law 
firms, one foreign government, and one national securities 
exchange.\20\ While all of the commenters supported the adoption of a 
foreign bank exemption similar to the section 402 exemption for 
domestic banks, many expressed concern regarding several aspects of the 
proposed rule. The issues that generated the most discussion were:
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    \20\ We have posted these comment letters on our Web site at 
http://www.sec.gov/ rules/proposed/s71503.shtml. A comment summary 
is also available at http://www.sec.gov/rules/extra/s71503summary.htm.
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     The proposed scope of the exemption that would 
limit it to issuers that are foreign banks and their parent companies 
without exempting other foreign bank affiliates;
     The proposed alternative first condition that 
would require a foreign bank to have been the subject of a Federal 
Reserve Board determination under 12 CFR 211.24(c) even if another bank 
in the foreign bank's home jurisdiction has been the subject of such a 
determination;
     The proposed second condition that would require 
the laws or regulations of a foreign bank's home jurisdiction to impose 
the specified insider lending restriction with which the foreign bank's 
insider loan must comply; and
     The proposed third condition that would require 
a foreign bank's board of directors to approve an insider loan prior to 
its issuance if the loan would cause the aggregate outstanding amount 
loaned to that particular insider to exceed $500,000.
    Additional issues raised by some commenters included:
     The proposed definitions of foreign bank and 
parent company;
     The proposed deposit insurance requirement;
     A suggested revision by Canadian bank and 
governmental representatives regarding the insider lending restriction 
condition;
     A suggested exemption for certain Schedule B 
issuers; \21\ and
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    \21\ A foreign government is able to register securities under 
the Securities Act by filing a Schedule B registration statement. 
Schedule B is located at the conclusion of the Securities Act.
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     The proposed revision of Form 20-F Item 7.B.

D. Summary of the Final Rule and Amended Form 20-F

    In response to many of the commenters' concerns, we have revised 
both proposed Rule 13k-1 and the proposed amendment to Form 20-F Item 
7.B. These revisions include:
     Adopting a definition of ``foreign bank'' that 
is substantially similar to the definition under Subpart B of the 
Federal Reserve Board's Regulation K,\22\ which governs the operations 
of foreign banks in the United States;
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    \22\ 12 CFR 211.20 et seq.
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     Expanding the scope of the exemption to cover 
loans by a foreign bank to its insiders or those of its parent or other 
affiliate, which, under the existing Exchange Act definition of 
``affiliate,'' \23\ includes a foreign bank's directly and indirectly 
owned subsidiaries and its ``sister'' subsidiaries;
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    \23\ 17 CFR 240.12b-2.
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     Clarifying that the exemption applies to a loan 
by the subsidiary of a foreign bank to a director or executive officer 
of the foreign bank, its parent or other affiliate as long as the 
subsidiary is under the supervision or regulation of the bank 
supervisor in the foreign bank's home jurisdiction, the subsidiary's 
loan meets the requirements of the rule's ``insider lending 
restriction'' condition, and the foreign bank meets the requirements of 
the rule's first condition; \24\
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    \24\ Note 1 to Rule 13k-1(b) [17 CFR 240.13k-1(b)].
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     Revising the exemption's first condition to 
provide that the laws or regulations of the foreign bank's home 
jurisdiction must require the bank to insure its deposits or be subject 
to a deposit guarantee or protection scheme;
     Revising the exemption's alternative first 
condition to provide that the Federal Reserve Board must have 
determined that the foreign bank or another bank organized in the 
foreign bank's home jurisdiction is subject to comprehensive 
supervision or regulation on a consolidated basis by the bank 
supervisor in its home jurisdiction under 12 CFR 211.24(c); \25\
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    \25\ The final rule further provides that a foreign bank may 
rely on a Federal Reserve Board determination that another bank in 
the foreign bank's jurisdiction is subject to comprehensive 
supervision or regulation on a consolidated basis as long as the 
foreign bank is under substantially the same banking supervision or 
regulation in its home jurisdiction as the other bank. Note 2 to 
Rule 13k-1(b).
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     Revising the exemption's second condition to 
require the foreign bank loan to comply in fact with one of the three 
stated insider lending restrictions regardless of whether the laws or 
regulations of the foreign bank's home jurisdiction have imposed the 
restriction;
     Eliminating the proposed ``board approval'' 
condition in its entirety;
     Clarifying that, as used in Exchange Act section 
13(k)(1), ``issuer'' does not include a foreign government that files a 
registration statement under the Securities Act on Schedule B; and

[[Page 24018]]

     Adopting Form 20-F Item 7.B.2, as proposed, but 
adding an instruction explaining that if a reporting company has 
concluded that its home jurisdiction privacy laws, such as customer 
confidentiality and data protection laws, prevent its identifying the 
insider who received a foreign bank insider loan to which Instruction 2 
of Item 7.B does not apply, it must attach a legal opinion attesting to 
that conclusion as an exhibit and provide additional specified 
disclosure that does not identify the loan recipient.

II. Discussion

A. Definition of Foreign Bank

    We are adopting a definition of foreign bank to mean an 
institution, the home jurisdiction of which is other than the United 
States,\26\ that is regulated as a bank in its home jurisdiction, and 
that engages directly in the business of banking.\27\ We are further 
adopting a definition of ``engages directly in the business of 
banking'' to mean that an institution engages directly in banking 
activities that are usual for the business of banking in its home 
jurisdiction.\28\
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    \26\ 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)].
    \27\ 17 CFR 240.13k-1(a)(1).
    \28\ 17 CFR 240.13k-1(a)(3).
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    This adopted definition differs from the proposed definition,\29\ 
which would have required an institution to be engaged substantially in 
the business of banking. We proposed to define ``engaged substantially 
in the business of banking'' to mean engaged in receiving deposits to a 
substantial extent in the regular course of business, having the power 
to accept demand deposits, and extending commercial or other types of 
credit.
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    \29\ We are adopting unchanged from the proposed definition the 
first two prongs that require an institution to have its home 
jurisdiction outside the United States and to be regulated as a bank 
in its home jurisdiction. We also are adopting unchanged the 
definition of home jurisdiction to mean the country, political 
subdivision or other place in which a foreign bank is incorporated 
or organized. 17 CFR 240.13k-1(a)(2).
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    Some commenters objected to this proposed definition on the grounds 
that it would exclude certain types of lending institutions, such as 
credit card banks, which lack the power to accept demand deposits but 
which nevertheless are regulated as banks in their home jurisdictions. 
These commenters suggested that we base Rule 13k-1's definition of 
foreign bank on the more general definition of foreign bank found in 
Subpart B of the Federal Reserve Board's Regulation K, which governs 
the operations of foreign banks in the United States.\30\
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    \30\ See 12 CFR 211.21(n), which defines in part a foreign bank 
to mean ``an organization that is organized under the laws of a 
foreign country and that engages directly in the business of banking 
outside the United States.''
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    We agree with these commenters that a more general definition of 
foreign bank is necessary to accommodate the various types of foreign 
banks extant. A broader definition of foreign bank also would serve to 
ensure that the foreign bank exemption encompasses banks that are 
similar to those domestic banks that are eligible for the ``insured 
depository institution'' exemption under section 402.\31\ We also 
believe that, for the sake of regulatory simplicity, it is reasonable 
to adopt a foreign bank definition that is substantially similar to the 
definition upon which foreign banks have relied when seeking regulatory 
approval for their U.S.-based banking activities. The adopted 
definition of foreign bank and the related definition of ``engages 
directly in the business of banking'' are substantially similar to the 
Federal Reserve Board's definitions under Subpart B of Regulation 
K.\32\
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    \31\ Domestic credit card banks are typically ``insured 
depository institutions'' and subject to the Federal Reserve Board's 
insider lending provisions under Regulation O. These banks are 
therefore eligible for the exemption from the insider lending 
prohibition under Section 402.
    \32\ See 12 CFR 211.21(k), which defines ``engages directly in 
the business of banking outside the United States'' to mean that the 
``foreign bank engages directly in banking activities usual in 
connection with the business of banking in the countries where it is 
organized or operating.''
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B. Scope of the Exemption

    As adopted, Rule 13k-1 exempts an issuer that is a foreign bank or 
the parent or other affiliate of a foreign bank from section 13(k)'s 
prohibition of extending, maintaining, arranging for, or renewing 
credit in the form of a personal loan to or for any of its directors or 
executive officers with respect to a loan by the foreign bank as long 
as the specified criteria are satisfied under the rule.\33\ Because we 
are applying the general definition of affiliate under the Exchange Act 
for this rule,\34\ the scope of the foreign bank exemption is broad 
enough to encompass loans by a foreign bank to the insiders of an 
issuer that is the foreign bank's directly or indirectly owned 
subsidiary or a subsidiary of its parent company (the foreign bank's 
``sister'' subsidiary.) \35\
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    \33\ 17 CFR 240.13k-1(b).
    \34\ Under 17 CFR 240.12b-2, the term ``affiliate'' means ``a 
person that directly, or indirectly through one or more 
intermediaries, controls, or is controlled by, or is under common 
control with, the person specified.''
    \35\ Rule 13k-1(a)(4) [17 CFR 240.13k-1(a)(4)] also adopts the 
definitions of ``parent'' and ``subsidiary'' under 17 CFR 240.12b-2, 
both of which depend upon the definition of affiliate. Consequently, 
we are not adopting the proposed definition of parent that would 
have required a company to own or control a majority of a company's 
voting shares. Issuers should consult precedent under the federal 
securities laws when determining whether a particular entity can be 
a parent company if it directly or indirectly owns or controls less 
than 50 percent of a company's voting shares.
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    The proposed foreign bank exemption applied only to an issuer that 
was a foreign bank or its parent company. Some commenters maintained 
that many home jurisdictions of foreign banks also permit loans by a 
supervised bank to the insiders of its own subsidiaries or sister 
affiliates. These commenters further noted that the ``insured 
depository institution'' exemption generally would apply to loans made 
by a domestic bank to the insiders of its affiliates.
    We agree with these commenters that expansion of the foreign bank 
exemption's scope is necessary to accommodate the insider lending 
practices of foreign banks organized in jurisdictions that permit loans 
to insiders of the foreign bank's affiliates. As long as an issuer 
satisfies all of the specified criteria under Rule 13k-1, we believe it 
is appropriate to permit a foreign bank to lend to the insiders of its 
affiliates.
    Expanding the foreign bank exemption's scope is also necessary to 
achieve comparability with the scope of the ``insured depository 
institution'' exemption relied upon by domestic banks. This latter 
exemption is available only to insured depository institutions that are 
subject to the Federal Reserve Board's insider lending restrictions. 
Codified as Regulation O, these insider lending restrictions apply to 
loans by an insured depository institution to its insiders and the 
insiders of its parent holding company and any other subsidiary of the 
parent holding company.\36\ Moreover, Regulation O does not restrict an 
insured depository institution from making loans to insiders of its 
subsidiaries except to the extent that a subsidiary's insider is also 
an insider of the insured depository institution.\37\
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    \36\ See 12 CFR 215.1(b). Although Regulation O applies by its 
terms only to national and state member banks, the federal banking 
laws also make all insured state nonmember banks and savings 
associations subject to the insider lending restrictions of 
Regulation O. See 12 U.S.C. 1828(j)(2) and 1468(b).
    \37\ See the Federal Reserve Board's adopting release regarding 
certain amendments to Regulation O at 57 FR 22417, 22421 (May 28, 
1992).

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[[Page 24019]]

    Some commenters requested on similar grounds that we extend the 
exemption to permit a foreign bank's subsidiary, such as a mortgage 
lender, to lend to the insiders of the foreign bank, its parent company 
or other affiliates. We agree that the foreign bank exemption should 
cover loans by a foreign bank's subsidiary to the insiders of the 
foreign bank, its parent or other affiliates but only if the subsidiary 
is under the supervision or regulation of the bank supervisor in the 
foreign bank's home jurisdiction, the subsidiary's loan meets the 
requirements of Rule 13k-1's ``insider lending restriction'' condition, 
and the foreign bank satisfies the rule's first condition.\38\ This 
treatment is consistent with the treatment of subsidiaries of ``insured 
depository institutions'' under the existing domestic bank exemption 
under section 402.\39\
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    \38\ See Note 1 to 17 CFR 240.13k-1(b).
    \39\ Because Regulation O defines a member bank to include any 
of its subsidiaries, Regulation O applies to loans by an insured 
depository institution's subsidiary, such as a mortgage lender, to 
insiders of the insured depository institution, its parent or other 
affiliate. See 12 CFR 215.2(j). Because the subsidiary is also 
treated as an ``insured depository institution'' that is subject to 
Regulation O, it is therefore eligible for the Section 402 
exemption.
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C. The First Condition--the Home Jurisdiction Deposit Protection or CCS 
Requirement

    As adopted, the foreign bank exemption's first condition mandates 
that either:
     The laws or regulations of the foreign bank's 
home jurisdiction require the bank to insure its deposits or be subject 
to a deposit guarantee or protection scheme; or
     The Board of Governors of the Federal Reserve 
System has determined that the foreign bank or another bank organized 
in the foreign bank's home jurisdiction is subject to comprehensive 
supervision or regulation on a consolidated basis by the bank 
supervisor in its home jurisdiction under 12 CFR 211.24(c) 
(``comprehensive consolidated supervision'' or ``CCS'').\40\
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    \40\ 17 CFR 240.13k-1(b)(1).
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    The adopted first condition retains the alternative form of the 
proposed rule, which most commenters favored. This condition is 
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. However, the adopted first 
condition differs in two respects from the proposed rule.
1. The ``Deposit Guarantee or Protection Scheme'' Revision
    We have revised the ``deposit insurance'' prong to accommodate 
foreign banks whose home jurisdictions require them to be subject to 
deposit guarantee or protection schemes rather than deposit insurance 
requirements. We recognize that foreign jurisdictions can differ 
legitimately on the details of their bank deposit protection programs. 
Some jurisdictions with well-developed bank regulation and supervision 
have elected to adopt deposit guarantee or protection schemes rather 
than deposit insurance requirements. We agree with those commenters who 
noted that a deposit guarantee or protection scheme condition would 
serve the same purpose as a deposit insurance condition--to help ensure 
that a foreign bank is subject to a certain level of regulation as a 
bank in its home jurisdiction.
2. ``The CCS Determination'' Revision
    We have revised the ``CCS determination'' prong to require that 
either the foreign bank or another bank in the foreign bank's home 
jurisdiction must be the subject of a CCS determination. This revision 
is in response to numerous commenters who maintained that, because the 
proposed rule required a foreign bank to be the subject of a CCS 
determination by the Federal Reserve Board, it would deny the exemption 
to a foreign bank organized in the same jurisdiction as another bank 
that has received a favorable CCS determination simply because the 
foreign bank never applied for Federal Reserve Board approval for which 
a CCS determination is necessary.\41\
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    \41\ The Federal Reserve Board generally is required to make a 
CCS determination when a foreign bank seeks to open a U.S. banking 
office, acquire a U.S. bank, or become certified as a financial 
holding company. See 12 CFR 211.24(c), 12 CFR 225.13(a)(4), and 12 
CFR 225.92(c) and (e).
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    The adopted rule clarifies that in order for a foreign bank to rely 
on the CCS determination of another bank in its home jurisdiction, it 
must be under substantially the same banking supervision or regulation 
as the other bank in the home jurisdiction.\42\ Although we are not 
requiring, as some commenters suggested, that a foreign bank provide a 
legal opinion or certification as an exhibit to its Form 20-F annual 
report attesting to its being subject to the same banking supervision 
or regulation as the other bank, we do expect that a foreign bank or 
affiliate issuer will undergo a good faith assessment regarding whether 
the foreign bank is under substantially the same supervision or 
regulation as another bank in its home jurisdiction before relying on 
the foreign bank exemption.
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    \42\ See Note (2) to Rule 13k-1(b).
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    Extending the foreign bank exemption's application in this fashion 
finds support in numerous Federal Reserve Board decisions in which the 
Board has based its CCS determination primarily on a finding that the 
foreign bank applicant is subject to supervision or regulation by its 
home jurisdiction bank supervisor on substantially the same terms and 
conditions as another bank that has already received a favorable CCS 
determination.\43\ This revision is also consistent with section 402 
since it would render eligible for the foreign bank exemption only 
banks whose home jurisdiction laws and supervision already have been 
deemed by the Board to be sufficiently comprehensive to justify 
permitting another foreign bank to conduct business in the United 
States.
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    \43\ See, for example, the Federal Reserve Board Order 
Concerning HSH Nordbank AG, Hamburg/Kiel, Germany, 89 Federal 
Reserve Bulletin No. 7 (July 2003) at p. 344.
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D. The Second Condition--the Home Jurisdiction ``Insider Lending 
Restriction'' Requirement

    As adopted, the foreign bank exemption's second condition requires 
that any loan by the foreign bank to its directors or executive 
officers or to those of its parent or other affiliate:
     Is 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, its parent or other affiliate; or
     Is pursuant to a benefit or compensation program 
that is widely available to the employees of the foreign bank, its 
parent or other affiliate and does not give preference to any of the 
executive officers or directors of the foreign bank, its parent or 
other affiliate over any other employees of the foreign bank, its 
parent or other affiliate; or
     Has received the express approval of the bank 
supervisor in the foreign bank's home jurisdiction.\44\
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    \44\ 17 CFR 240.13k-1(b)(2).
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1. The ``Compliance In Fact'' Revision
    In response to several commenters, we have revised the proposed 
second condition to eliminate the requirement that a home country's 
laws or regulations must impose the specified insider lending 
restrictions. We agree with those commenters who noted that such a 
requirement would produce an extraterritorial effect that is 
unnecessary

[[Page 24020]]

to achieve the rule's purpose--to establish an exemption from insider 
lending for foreign banks that satisfy criteria similar to those 
required for domestic banks under section 402. Accordingly, the rule's 
second condition requires only that a foreign bank loan complies in 
fact with one of the specified criteria, which we are adopting as 
proposed.
    The adopted second condition is consistent with section 402 since 
the first two criteria are based on primary insider lending 
restrictions under Regulation O.\45\ We are adopting the third criteria 
in recognition that some jurisdictions hinge the legality of a bank 
insider loan on its pre-approval by the home jurisdiction bank 
supervisor. 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.
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    \45\ See 12 CFR 215.4(a)(1) and (2).
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2. Other Second Condition Comments
    Some commenters requested that we revise the rule to eliminate the 
second condition for an issuer that could satisfy the ``CCS 
determination'' prong of the first condition. We have not adopted this 
suggestion because, as we stated in the proposing release, the 
governing Federal Reserve Board rules do not list the presence of 
insider lending restrictions as a factor for determining whether a 
foreign bank is subject to CCS in its home jurisdiction.\46\ The Board 
decisions that do mention the presence of home jurisdiction insider 
lending restrictions do not discuss them in any detail.
---------------------------------------------------------------------------

    \46\ See 12 CFR 211.24(c)(1)(B)(ii), which provides that when 
making a CCS determination, ``the Board shall determine whether the 
foreign bank is regulated in such a manner that its home country 
supervisor receives sufficient information on the worldwide 
operations of the foreign bank (including the relationships of the 
bank to any affiliate) to assess the foreign bank's overall 
financial condition and compliance with law and regulation.'' 
Although information regarding a foreign bank's dealings with 
affiliates is one factor that the Board must consider when 
conducting a CCS determination, the definition of ``affiliate'' 
includes companies only, such as a foreign bank's parent company and 
sister subsidiaries, and not insiders of these companies. See, for 
example, 12 CFR 211.21(a).
---------------------------------------------------------------------------

    Our goal has been to adopt an insider lending exemption for foreign 
banks that are subject to insider lending restrictions similar to those 
imposed on domestic banks under Regulation O. Since the existence of 
home jurisdiction insider lending restrictions has not historically 
been dispositive in a CCS determination, we believe that an ``insider 
lending restriction'' condition for the foreign bank exemption is 
essential.
    We also received a request from Canadian commenters to adopt a rule 
that, as is the case under Canadian law, would permit a foreign bank to 
make a loan to senior management on preferential terms as long as the 
conduct review committee of the bank's board of directors approved the 
loan. We have declined this request since it would contravene Congress' 
intent in adopting section 402, which was to preclude loans to 
executives even if approved by a company's board of directors. 
Moreover, since Regulation O does not posit board approval as the sole 
criterion for permitting a domestic bank to make an insider loan, we do 
not believe it to be a suitable criterion for the foreign bank 
exemption.

E. Elimination of the Proposed Third Condition--the ``Board Approval'' 
Requirement

    The proposed rule's third condition would have required the advance 
approval of a majority of a foreign bank's board of directors for any 
insider loan that, when aggregated with the amount of all other 
outstanding loans to a particular director or executive officer, 
exceeds $500,000.\47\ Several commenters objected to the proposed third 
condition on the grounds that it would increase the rule's burden on 
foreign banks without being necessary to further the rule's intended 
purpose of preventing insider abuse. These commenters further asserted 
that the $500,000 aggregate limit was outdated since it was based on a 
Regulation O provision that had not been increased to account for 
inflation since its adoption in 1983. Given these concerns, and because 
the board approval condition does not appear to be necessary to further 
the rule's purpose of protecting against improper insider lending, we 
have eliminated the proposed third condition in its entirety.
---------------------------------------------------------------------------

    \47\ The proposed third condition would also have required the 
intended loan recipient to abstain from the required board vote. We 
based this proposed third condition on similar Regulation O 
requirements. See 12 CFR 215.4(b)(1) and (2).
---------------------------------------------------------------------------

F. Exemption for Foreign Governments That File Securities Act 
Registration Statements On Schedule B

    We are adopting an exemption from section 402's insider lending 
prohibition for foreign governments that file Securities Act 
registration statements on Schedule B.\48\ We have implemented this 
exemption by providing that, as used in Exchange Act section 13(k)(1), 
the term ``issuer'' does not include a foreign government that files a 
registration statement under the Securities Act on Schedule B.\49\ As 
foreign governments typically do not have ``directors or executive 
officers,'' section 402's prohibition against making loans to such 
individuals is simply not meaningful to the vast majority of Schedule B 
filers.
---------------------------------------------------------------------------

    \48\ 17 CFR 240.13k-1(c). This provision references the 
definition of foreign government in 17 CFR 230.405, according to 
which the term ``foreign government'' means the government of any 
foreign country or of any political subdivision of a foreign 
country.
    \49\ In a number of situations, the staff has not objected to 
certain foreign government-owned or controlled banks registering 
debt securities on Schedule B. See, for example Bank of Greece No-
Action Letter (June 2, 1993); Kreditanstalt f[uuml]r Wiederaufbau 
No-Action Letter (September 21, 1987). We are not directing the 
staff to change its practice.
---------------------------------------------------------------------------

    Moreover, a commenter has noted its belief that, because of serious 
comity concerns, section 402's insider lending prohibition should not 
apply to Schedule B filers.\50\ The Commission has historically treated 
foreign governments differently than other registrants under the 
federal securities laws because of a broad range of concerns that 
include traditional comity issues as well as concerns about the 
practical applicability of various disclosure requirements to foreign 
governments. Because of these concerns, we have not generally applied 
the rules adopted for domestic and foreign private issuers under the 
Sarbanes-Oxley Act to foreign government issuers.
---------------------------------------------------------------------------

    \50\ See the Shearman & Sterling LLP letter (October 8, 2003) at 
p. A-1, n.2. This commenter specifically requested that we exempt 
those issuers that have filed a Schedule B registration statement 
for unlisted debt securities, which has not yet gone effective and 
which has not been withdrawn. Because Exchange Act section 15(d) (15 
U.S.C. 78o(d)) does not apply to foreign governments, this issuer 
would not have any Exchange Act reporting obligations once the 
registration statement became effective. Accordingly, the pre-
effective period is the only time that section 402's insider lending 
prohibition would apply to this issuer. We agree with this commenter 
that applying section 402's prohibition in this situation would be 
unfair, would provide no meaningful protection, and does not appear 
to advance Congress' objective in adopting section 402. We also 
believe, however, that because of broader concerns, the exemption 
should apply to any foreign governmental entity that files a 
Schedule B registration statement.
---------------------------------------------------------------------------

    For example, we exempted foreign governments from the listed issuer 
audit committee requirements under section 301 of the Sarbanes-Oxley 
Act.\51\ In doing so, we noted that the exemption encompassed all 
registrants that are eligible to file Securities Act registration 
statements on Schedule B.\52\ We believe

[[Page 24021]]

that this same exemptive treatment is appropriate for foreign 
government issuers under section 402. Accordingly, the adopted rule 
exempts from section 402's insider lending prohibition a foreign 
government that files a Securities Act registration statement on 
Schedule B, whether the securities are listed or unlisted.
---------------------------------------------------------------------------

    \51\ See 17 CFR 240.10A-3(c)(6)(iii). Sarbanes-Oxley Act Section 
301 added Exchange Act Section 10A(m)(1) [15 U.S.C. 78j-1(m)(1).]
    \52\ See Release No. 33-8220, n. 159 (April 9, 2003) (68 FR 
18788).
---------------------------------------------------------------------------

G. Revision of Form 20-F

    We are adopting the proposed amendment to Item 7.B.2 of Form 20-F, 
which provides that if a company, its parent or any of its subsidiaries 
is a foreign bank that has granted a loan to which Instruction 2 of 
this item does not apply,\53\ it must identify the director, senior 
management member, or other related party required to be described by 
this item \54\ who received the loan, and must describe the nature of 
the loan recipient's relationship to the foreign bank. The purpose of 
this amendment is to ensure that substantially the same disclosure 
standards apply to domestic and foreign bank insider loans that no 
longer qualify for abbreviated disclosure treatment.\55\
---------------------------------------------------------------------------

    \53\ Instruction 2 permits a company to provide specified 
abbreviated disclosure about bank loans that ``are not disclosed as 
nonaccrual, past due, restructured or potential problems under 
Industry Guide 3 * * *''
    \54\ For example, Form 20-F Item 7.B.2 requires disclosure 
regarding loans made to a close family member of a company's 
director or senior management member.
    \55\ The form amendment does not apply to the few Canadian banks 
that are subject to the Multijurisdictional Disclosure System and 
file their Exchange Act annual reports and registration statements 
on Form 40-F (17 CFR 249.240f). We have not similarly amended Form 
40-F because, as we explained in the proposing release, Form 40-F's 
content is determined primarily by the applicable Canadian 
securities administrator.
---------------------------------------------------------------------------

    Some commenters objected to this amendment on the grounds that it 
would conflict with the privacy laws of some foreign countries 
regarding customer confidentiality and data protection. In response to 
these commenters, we are adopting new Instruction 3 to Item 7.B, which 
provides that if a company, its parent or any of its subsidiaries is a 
foreign bank that is unable to provide the additional required 
disclosure concerning an insider loan because it has concluded that 
such disclosure would conflict with privacy laws, such as customer 
confidentiality and data protection laws, of its home jurisdiction, it 
must provide a legal opinion attesting to that conclusion as an 
exhibit.\56\ In addition, the company must disclose in the Form 20-F 
that:
---------------------------------------------------------------------------

    \56\ We have also provided a corresponding exhibit instruction 
for this Item 7.B legal opinion. See amended paragraph 14 of 
Instructions as to Exhibits.
---------------------------------------------------------------------------

     An unnamed director, senior management member, 
or other related party for which disclosure is required by Item 7.B.2, 
has been the recipient of a loan to which Instruction 2 of this Item 
does not apply;
     the company's home jurisdiction's privacy laws 
prevent the disclosure of the name of this loan recipient; and
     this loan recipient is unable to waive or has 
otherwise not waived application of these privacy laws.

H. Effective Date

    We solicited comment on the proposed effective dates for Rule 13k-1 
and the Form 20-F amendment, but received no comments on this issue. 
Therefore, the effective date of Rule 13k-1 will be the date of its 
publication in the Federal Register, as proposed. Because of the 
exemptive nature of Rule 13k-1, the fact that it relieves a restriction 
precluding loans to directors and executive officers, and for good 
cause, we do not believe that a transition period is necessary to 
enable foreign bank issuers and other interested parties to prepare for 
the new rule.\57\ The date of the Form 20-F amendment will be 30 days 
from the date of its publication in the Federal Register, as proposed.
---------------------------------------------------------------------------

    \57\ 5 U.S.C. 553(d)(1).
---------------------------------------------------------------------------

III. Paperwork Reduction Act Analysis

    The final rule amendment contains ``collection of information'' 
requirements within the meaning of the Paperwork Reduction Act of 1995 
(``PRA'').\58\ The title of the affected collection of information is 
Form 20-F. 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 
is mandatory and will not be kept confidential, except that, as noted 
below, some confidential information need not be disclosed if a legal 
opinion and additional, explanatory disclosure is provided.
---------------------------------------------------------------------------

    \58\ 44 U.S.C. 3501 et seq.
---------------------------------------------------------------------------

    Form 20-F (OMB Control No. 3235-0288) 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 published a notice requesting comment on the collection of 
information requirements in the Proposing Release and submitted these 
requirements to the Office of Management and Budget (``OMB'') for 
review in accordance with the PRA.\59\ As discussed in Part II above, 
we received several comment letters regarding the rule proposal. We 
have revised both proposed Rule 13k-1 and the amendment to Form 20-F in 
response to these comments.
---------------------------------------------------------------------------

    \59\ 44 U.S.C. 3507(d) and 5 CFR 1320.11.
---------------------------------------------------------------------------

    In particular, we are adopting the amendment to Item 7.B.2 of Form 
20-F as proposed, which requires a foreign bank to identify, and 
describe its relationship with, an insider to which it issued a loan 
that does not qualify for ``abbreviated disclosure'' treatment under 
Instruction 2 of Item 7.B. However, we are also adopting new 
Instruction 3 to Item 7.B, which exempts a foreign bank from this 
additional disclosure requirement as long as it provides a legal 
opinion attesting to its conclusion that privacy laws of the foreign 
bank's home jurisdiction preclude providing the additional disclosure. 
As a further condition, a foreign bank must disclose in the Form 20-F 
the fact that an insider has been the recipient of a loan to which 
Instruction 2 of Item 7.B does not apply, its home jurisdiction's 
privacy laws prevent the disclosure of the insider's name, and the 
insider is unable to or otherwise has not waived application of these 
privacy laws.
    We are slightly revising our previous burden estimates regarding 
Form 20-F because of this revision. We have based our estimate of the 
effects that the final rule will have on Form 20-F primarily on our 
review of actual filings of this form, on the form's requirements, and 
on the most recently completed PRA submission for this form.
    As a result of the adopted amendment to Form 20-F, we have 
increased by 1 hour our estimate in the Proposing Release of the total 
annual burden hours incurred by registrants themselves in the 
preparation of Form 20-F to 769,827 hours (from the previously 
estimated 769,826 hours). We also have increased by $675 the total 
annual costs attributed to the preparation of Form 20-F by outside 
firms to $690,502,255 (from the previously estimated $690,501,580).

[[Page 24022]]

    We have derived these estimates from the following assumptions. 
First, we continue to estimate that foreign private issuers file 1,194 
Forms 20-F each year resulting in a total of 3,079,304 annual burden 
hours. We also continue to estimate that 41 foreign banks file annual 
reports on Form 20-F. We further continue to estimate that 
approximately 10% of reporting foreign banks (4 foreign banks) will 
have insider loans that do not qualify for abbreviated disclosure 
treatment and, therefore, must be disclosed under Item 7.B.2 of Form 
20-F.
    However, we also expect that 25% of the foreign private issuers 
affected by the Form 20-F amendment (1 foreign private issuer) will 
incur 3 additional burden hours resulting from having to provide the 
legal opinion and additional disclosure required by newly adopted 
Instruction 3 to Item 7.B. We expect that foreign private issuers 
themselves will incur 25% of the additional burden required by the Form 
20-F amendment (approximately 1 additional hour) resulting in 769,827 
annual burden hours incurred by foreign private issuers (increased from 
the previously estimated 769,826 hours). We further estimate that 
outside firms, including legal counsel and other advisors, will account 
for 75% of the additional burden required by the revised Form 20-F 
amendment at an average cost of $300 per hour for a total additional 
cost of $675 and a total annual cost of $690,502,255 (from the 
previously estimated $690,501,580). While we estimate that the Form 20-
F amendment will result in a total of 3,079,307 annual burden hours 
(increased from the previously estimated 3,079,304 hours) required to 
prepare the Form 20-F, we expect that the number of total burden hours 
per response will remain at 2,579 hours.\60\
---------------------------------------------------------------------------

    \60\ Because Securities Act Form F-4 (OMB Control No. 3235-0325) 
(17 CFR 239.34) and Form F-1 (OMB Control No. 3235-0258) (17 CFR 
239.31) require the disclosure of information specified in Form 20-F 
Item 7.B, the Form 20-F amendment will potentially affect Forms F-4 
and F-1 registrants. However, based on our review of Form F-4 and F-
1 registration statements filed by foreign bank issuers during the 
three most recently completed years, we expect that the Form 20-F 
amendment will not have a material effect on these collections of 
information for the following reasons. First, during 2001 through 
2003, the 46 reporting foreign banks filed only 7 Form F-4 
registration statements and 2 Form F-1 registration statements. 5 of 
the 7 Form F-4 registrants incoporated by reference their most 
recent Form 20-F annual report and, therefore, did not repeat the 
Item 7.B disclosure in their Securities Act registration statements. 
Securities Act registrants that are able to incorporate by reference 
should not sustain any additional effect from the Form 20-F 
amendment since no additional analysis and disclosure is required 
for the Securities Act registration statement other than what is 
required for the Form 20-F. Second, none of the remaining Forms F-4 
and F-1 registrants disclosed any insider loans that would have 
triggered the additional disclosure requirements mandated by the 
Form 20-F amendment. Accordingly, since none of these Securities Act 
registrants would have been affected by the Form 20-F amendment, we 
do not anticipate that this amendment will have a material effect on 
foreign bank issuers filing registration statements under the 
Securities Act.
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IV. Cost-Benefit Analysis

    In the Proposing Release, we solicited comment on the expected 
costs and benefits of proposed Rule 13k-1 and the proposed Form 20-F 
amendment. We also requested data to quantify the costs and value of 
the benefits identified. In response most commenters expressed support 
for the Commission's attempt to remedy the disparate treatment of 
foreign banks under Section 402 by crafting an insider lending 
exemption for foreign banks that satisfy criteria comparable to those 
that qualify domestic banks for the statutory exemption. However, 
several commenters also maintained that various aspects of the rule 
proposal would impose costs on foreign banks and their affiliates that 
were excessive or unnecessary to achieve the rule's purpose.
    Although none of the commenters provided quantitative data to 
support their views, we have revised both the proposed rule and form 
amendment in response to several of the commenters' concerns. We expect 
that the adopted Rule 13k-1 and the Form 20-F amendment will result in 
the following benefits and costs.

A. Expected Benefits

    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. Rule 13k-1 will 
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 will benefit from Rule 13k-1 to the extent that this 
rule encourages a foreign bank to maintain or achieve its Exchange Act 
reporting status. A foreign bank will benefit from 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. In addition, if a foreign bank is subject in its 
home jurisdiction to insider lending restrictions that are 
substantially similar to those under Rule 13k-1, the foreign bank will 
benefit by not having to comply with a separate set of insider lending 
restrictions.
    Investors will benefit from the Form 20-F amendment by having 
access to similar information about a foreign bank issuer's insider 
loans that do not qualify for abbreviated disclosure treatment as is 
available for comparable domestic bank insider loans. Foreign bank 
issuers whose home jurisdictions' privacy laws preclude disclosure of 
an insider loan recipient's identity will benefit from the Form 20-F 
amendment to the extent that the benefit of being able to keep this 
insider information confidential exceeds the cost of having to provide 
the legal opinion and other disclosure required by the Form 20-F 
amendment.

B. Expected Costs

    Investors could incur costs resulting from Rule 13k-1 if some 
foreign bank issuers decide to terminate their participation in, or 
refrain from entering, U.S. capital markets because they perceive the 
costs associated with complying with the adopted rule to be too high. 
Investors could also incur costs resulting from the diminution in value 
of a foreign bank issuer's securities if the rule encourages a foreign 
bank to make a material insider loan that eventually becomes 
problematic.
    We expect that a foreign bank issuer will incur costs if its home 
jurisdiction insider lending rules are less restrictive than those 
imposed by Rule 13k-1. These costs will include attorney and other 
professional fees incurred as a foreign bank issuer ensures that it is 
in compliance with Rule 13k-1 in addition to its own set of insider 
lending rules. Based on the following assumptions, we estimate that, in 
the aggregate, foreign bank issuers will annually incur costs relating 
to 264 hours of work performed by their internal staff as well as costs 
of $237,600 relating to work performed by outside firms as a result of 
Rule 13k-1:
     There are currently 46 foreign banks that are 
Exchange Act reporting companies; \61\
---------------------------------------------------------------------------

    \61\ 41 of these foreign bank issuers file Form 20-F annual 
reports and 5 file Form 40-F annual reports.
---------------------------------------------------------------------------

     14 of these foreign banks (30%) are subject to 
insider lending restrictions in their home jurisdictions that are 
substantially similar to at least one of the insider lending 
restrictions under Rule 13k-1;

[[Page 24023]]

     These 14 foreign banks will not incur any 
significant compliance costs resulting from Rule 13k-1;
     32 of these foreign banks (70%) are subject to 
insider lending rules in their home jurisdictions that are less strict 
than the insider lending restrictions under Rule 13k-1;
     Each of these 32 foreign bank issuers will lend 
to an average of 11 of its or its affiliates' directors or executive 
officers (a total of 352 insiders) per year; \62\
---------------------------------------------------------------------------

    \62\ We have derived this average from a review of the most 
recent Form 20-F and 40-F annual reports filed by these foreign 
banks.
---------------------------------------------------------------------------

     These 32 foreign banks will incur 3 additional 
hours of work for each insider loan in order to ensure that it complies 
with Rule 13k-1 (a total of 1056 hours for the 352 insider loans);
     Each of the 32 foreign bank issuers will rely on 
its own internal staff to perform 25% of the additional work (264 
hours) and hire outside legal counsel or other professional staff to 
perform 75% of the additional work (792 hours); and
     The outside staff will charge a rate of $300/
hour to perform the 792 hours of additional work (for a total of 
$237,600).
    We expect that, as a result of the adopted amendment of Form 20-F 
Item 7.B, foreign bank issuers will incur in the aggregate 
approximately an additional two hours of work for their internal staff 
and an additional $1,575 of work for outside firms when preparing the 
Form 20-F.\63\ This Form 20-F amendment requires a foreign bank issuer 
to disclose the identity of its director, executive officer or other 
related party who has received a loan that does not qualify for 
abbreviated disclosure treatment under Instruction 2 to Item 7.B, and 
to describe the nature of the loan recipient's relationship to the 
foreign bank issuer. This amendment exempts a foreign bank issuer from 
providing the additional disclosure as long as it attaches a legal 
opinion attesting to its conclusion that its home jurisdiction privacy 
laws preclude providing the additional disclosure, and as long as the 
foreign bank issuer provides specified, non-confidential disclosure 
regarding the insider loan.
---------------------------------------------------------------------------

    \63\ We have derived these expected costs by adding the 
additional burden estimated to result from adoption of the Form 20-F 
Item 7.B.2 amendment, as set forth in the Paperwork Reduction Act 
section of the Proposing Release (1 burden hour of work for internal 
staff and $900 of work for outside firms), with the additional 
burden estimated to result from adoption of Instruction 3 to Item 
7.B, as set forth in Part III of this Release (1 burden hour of work 
for internal staff and $675 of work for outside firms).
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V. Promotion of Efficiency, Competition and Capital Formation Analysis

    Section 23(a)(2) of the Exchange Act \64\ requires the Commission, 
when adopting rules under the Exchange Act, to consider the anti-
competitive effects of any rules it adopts. Furthermore, section 2(b) 
of the Securities Act \65\ and section 3(f) of the Exchange Act \66\ 
require the Commission, when engaging in rulemaking that requires it to 
consider or determine whether an action is necessary or appropriate in 
the public interest, to consider whether the action will promote 
efficiency, competition and capital formation.
---------------------------------------------------------------------------

    \64\ 15 U.S.C. 78w(a)(2).
    \65\ 15 U.S.C. 77b(b).
    \66\ 15 U.S.C. 78c(f).
---------------------------------------------------------------------------

    In the Proposing Release, we considered proposed Rule 13k-1 and the 
proposed amendment to Form 20-F in light of the standards set forth in 
the above statutory sections. We solicited comment on whether, if 
adopted, proposed Rule 13k-1 and the proposed Form 20-F amendment would 
result in any anti-competitive effects or promote efficiency, 
competition and capital formation. We further encouraged commenters to 
provide empirical data or other facts to support their views on any 
anti-competitive effects or any burdens on efficiency, competition or 
capital formation that might result from adoption of proposed Rule 13k-
1 and the proposed Form 20-F amendment.
    Although no commenter submitted empirical data to support its 
views, some commenters maintained that various aspects of the proposed 
rule and Form 20-F amendment would unfairly burden foreign banks and 
place them at a competitive disadvantage with their domestic 
counterparts. In response to these concerns, we have revised the rule 
proposal to eliminate or reduce unnecessary burdens on foreign banks 
that could produce anti-competitive effects. These revisions include:
     Expanding the scope of the foreign bank 
exemption so that, similar to the domestic bank exemption, it covers 
loans by a foreign bank to the insiders of its affiliates;
     Expanding the definition of foreign bank so that 
it includes types of banks comparable to those eligible for the 
domestic bank exemption;
     Permitting a foreign bank to satisfy the ``CCS 
determination'' condition if it is under substantially the same 
supervision as another bank organized in its home jurisdiction that has 
received a CCS determination by the Federal Reserve Board;
     Making a foreign bank eligible for the foreign 
bank exemption if it complies in fact with one of the specified insider 
lending restrictions even if not required by its home jurisdiction's 
laws or regulations; and
     Permitting a foreign bank issuer to keep 
confidential the identity of an insider recipient of a loan that no 
longer qualifies for ``abbreviated disclosure'' treatment under Form 
20-F Item 7.B.2 if the issuer has concluded that such disclosure would 
conflict with its home jurisdiction's privacy laws as long as the 
issuer submits a legal opinion attesting to that conclusion and 
provides some additional corresponding disclosure in the Form 20-F.
    These and other revisions should enable adopted Rule 13k-1 to have 
a beneficial effect on competition in U.S. capital markets by 
eliminating or significantly reducing the burden imposed by section 
402's insider lending prohibition on most foreign bank issuers. 
Moreover, the adopted Form 20-F amendment should provide investors with 
comparable information about problematic insider loans by foreign and 
domestic bank issuers while reducing the burden of the additional 
disclosure requirement for those foreign bank issuers that face genuine 
conflicts with their home jurisdiction laws.
    Consequently, adopted Rule 13k-1 and the adopted Form 20-F 
amendment 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.

VI. Regulatory Flexibility Act Certification

    Under section 605(b) of the Regulatory Flexibility Act,\67\ we 
certified that, when adopted, proposed Rule 13k-1 and the proposed 
amendment to Form 20-F under the Exchange Act would not have a 
significant economic impact on a substantial number of small entities. 
We included this certification in Part VI of the Proposing Release. 
While we encouraged written comments regarding this certification, none 
of the commenters responded to this request.
---------------------------------------------------------------------------

    \67\ 5 U.S.C. 605(b).

---------------------------------------------------------------------------

[[Page 24024]]

VII. Statutory Basis and Text of Rule Amendments

    We are adopting new Exchange Act Rule 13k-1 and the amendment to 
Form 20-F under the authority in sections 6, 7, 10 and 19 of the 
Securities Act,\68\ sections 3(b), 12, 13, 23 and 36 of the Exchange 
Act,\69\ and section 3(a) of the Sarbanes-Oxley Act of 2002.
---------------------------------------------------------------------------

    \68\ 15 U.S.C. 77f, 77g, 77h, 77j, and 77s.
    \69\ 15 U.S.C. 78c, 78l, 78m, 78w, and 78mm.
---------------------------------------------------------------------------

Text of Rule Amendments

List of Subjects

17 CFR Parts 240 and 249

    Reporting and recordkeeping requirements, Securities.

0
In accordance with the foregoing, we are amending Title 17, Chapter II 
of the Code of Federal Regulations as follows.

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

0
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, and 7201 et seq.; and 18 U.S.C. 1350, unless 
otherwise noted.
* * * * *

0
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 engages directly 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) Engages directly in the business of banking means that an 
institution engages directly in banking activities that are usual for 
the business of banking in its home jurisdiction.
    (4) Affiliate, parent and subsidiary have the same meaning as under 
17 CFR 240.12b-2.
    (b) An issuer that is a foreign bank or the parent or other 
affiliate of a foreign bank is exempt from the prohibition of 
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 be subject to a deposit 
guarantee or protection scheme; or
    (ii) The Board of Governors of the Federal Reserve System has 
determined that the foreign bank or another bank organized in the 
foreign bank's home jurisdiction is subject to comprehensive 
supervision or regulation on a consolidated basis by the bank 
supervisor in its home jurisdiction under 12 CFR 211.24(c); and
    (2) The loan by the foreign bank to any of its directors or 
executive officers or those of its parent or other affiliate:
    (i) Is 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, its parent or other affiliate; or
    (ii) Is pursuant to a benefit or compensation program that is 
widely available to the employees of the foreign bank, its parent or 
other affiliate and does not give preference to any of the executive 
officers or directors of the foreign bank, its parent or other 
affiliate over any other employees of the foreign bank, its parent or 
other affiliate; or
    (iii) Has received express approval by the bank supervisor in the 
foreign bank's home jurisdiction.

    Notes to paragraph (b):
    1. The exemption provided in paragraph (b) of this section 
applies to a loan by the subsidiary of a foreign bank to a director 
or executive officer of the foreign bank, its parent or other 
affiliate as long as the subsidiary is under the supervision or 
regulation of the bank supervisor in the foreign bank's home 
jurisdiction, the subsidiary's loan meets the requirements of 
paragraph (b)(2) of this section, and the foreign bank meets the 
requirements of paragraph (b)(1) of this section.
    2. For the purpose of paragraph (b)(1)(ii) of this section, a 
foreign bank may rely on a determination by the Board of Governors 
of the Federal Reserve System that another bank in the foreign 
bank's home jurisdiction is subject to comprehensive supervision or 
regulation on a consolidated basis by the bank supervisor under 12 
CFR 211.24(c) as long as the foreign bank is under substantially the 
same banking supervision or regulation as the other bank in their 
home jurisdiction.

    (c) As used in paragraph (1) of section 13(k) of the Act (15 U.S.C. 
78m(k)(1)), issuer does not include a foreign government, as defined 
under 17 CFR 230.405, that files a registration statement under the 
Securities Act of 1933 (15 U.S.C. 77a et seq.) on Schedule B.

PART 249--FORMS, SECURITIES EXCHANGE ACT OF 1934

0
3. The authority citation for Part 249 continues to read in part as 
follows:

    Authority: 15 U.S.C. 78a et seq. and 7201 et seq.; and 18 U.S.C. 
1350, unless otherwise noted.
* * * * *

0
4. Amend Form 20-F (referenced in Sec.  249.220f) by revising paragraph 
2 of Item 7.B of Part 1, adding new paragraph 3 to Instructions to Item 
7.B of Part 1, renumbering paragraph 14 as paragraph 15 of Instructions 
as to Exhibits, and adding new paragraph 14 of Instructions as to 
Exhibits 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: 2579.

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, its parent or any of its 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, senior management member, or 
other related party required to be described by this Item who received 
the loan, and describe the nature of the loan

[[Page 24025]]

recipient's relationship to the foreign bank.
* * * * *

Instructions to Item 7.B

* * * * *
    3. In response to Item 7.B.2, if you are unable to identify the 
recipient of a foreign bank loan to which Instruction 2 of this Item 
does not apply because you have concluded that such disclosure would 
conflict with privacy laws, such as customer confidentiality and data 
protection laws, of your home jurisdiction, you must provide a legal 
opinion attesting to that conclusion as an exhibit. You must also 
disclose that:
    (A) an unnamed director, senior management member, or other related 
party for which disclosure is required by this Item, has been the 
recipient of a loan to which Instruction 2 of this Item does not apply;
    (B) your home jurisdiction's privacy laws prevent the disclosure of 
the name of this loan recipient; and
    (C) this loan recipient is unable to waive or has otherwise not 
waived application of these privacy laws.
* * * * *

Instructions as to Exhibits

* * * * *
    14. The legal opinion required by Instruction 3 of Item 7.B of this 
Form.
* * * * *

    By the Commission.

    Dated: April 26, 2004.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 04-9822 Filed 4-29-04; 8:45 am]
BILLING CODE 8010-01-P