Alert September 09, 2008

FRB Exempts Foreign Government Controlled Entities from BHC Act

In a letter dated August 5, 2008 (the “Letter”), the FRB used its discretionary authority under Section 4(c)(9) of the Bank Holding Company Act (the “BHC Act”) to exempt from the standard activity limitations and reporting requirements of the BHC Act two entities wholly-owned by the Chinese government.  The entities would own Chinese banks with branches in the United States, and thus without the exemption would be subject to the BHC Act as if they were bank holding companies.

The Letter states that in several circumstances the FRB has recognized that there are significant policy issues with imposing the BHC Act on foreign governments.  The FRB has not deemed foreign governments themselves “companies” for purposes of the BHC Act, but has determined that that foreign-owned companies can be “companies” for those purposes.

Accordingly, the Letter determined that the Chinese subsidiaries are companies for purposes of the BHC Act.  However, pursuant to Section 4(c)(9), the FRB determined that it would be in the public interest and not substantially at variance with the purposes of the BHC Act to exempt them from its nonbanking restrictions.  The FRB imposed a number of conditions on the exemption, however, including limiting transactions between the US branches of the banks controlled by those entities and other companies controlled by them, prohibiting the entities from generally acquiring a securities or insurance company in the United States, and limiting their ability to directly or indirectly make investments in US banks or Edge corporations above defined thresholds.