INTERNATIONAL BANKING FOCUS

Transcription

1 IIB INTERNATIONAL BANKING FOCUS A Bimonthly Publication of the INSTITUTE OF INTERNATIONAL BANKERS Volume XXVI, Number 4 August 3, 2004 HIGHLIGHTS LEGISLATIVE & REGULATORY Page Institute Meets with Regulators on Proposed Guidance Relating to Complex Structured Finance Transactions, Following Up on Concerns Expressed in Comment Letter.2 SEC s Proposed Regulation B Includes Exemption for Regulation S Securities Offerings from the Push-Out Provisions of the Gramm-Leach-Bliley Act...3 Institute Urges Senate Banking Committee to Include Comptrollers Asset Pledge/CED Reform Amendment in Regulatory Relief Legislation....3 TAX Institute Submits Recommendations to OECD Regarding Attribution of Profits to Branches.4 Institute Continues Dialogue with Treasury and IRS Officials Regarding Important Tax Initiatives.5 Institute Participates in New York State Task Force Meeting to Discuss Revamping Taxation of Banks and Securities Firms....6 The Institute s mission is to help resolve the many special legislative, regulatory and tax issues confronting internationally headquartered financial institutions that engage in banking, securities and/or insurance activities in the United States. 299 Park Avenue, 17 th Floor, New York, N.Y Telephone: (212) Facsimile: (212) IIB@IIB.ORG Everett Schenk, Chairman Lawrence R. Uhlick, Executive Director

2 INSTITUTE MEETS WITH REGULATORS ON PROPOSED GUIDANCE RELATING TO COMPLEX STRUCTURED FINANCE TRANSACTIONS; SUBMITS COMMENT LETTER EXPRESSING CONCERNS The Institute met with the Federal Reserve and the Office of the Comptroller of the Currency on August 3 rd in Washington to follow up on concerns expressed in its July 19 th comment letter on proposed interagency guidance regarding risk management procedures and controls for complex structured finance transactions (CSFTs). While the Institute expressed support for uniform guidance in this area for institutions that are subject to examination and supervision by multiple federal regulators, the comment letter raised a number of concerns regarding the application of the guidance to the U.S. operations of international banks. (The Institute s comment letter is available at The interagency proposed guidance would apply to U.S. financial institutions, including the U.S. branches, agencies, subsidiary banks and subsidiary broker-dealers of international banks. In its comment letter, the Institute noted that the proposal was drafted largely with U.S.-incorporated and U.S.-headquartered financial institutions in mind and urged the agencies to more explicitly recognize that special considerations should be taken into account when assessing the internal control framework of U.S. branches and agencies of internationally-headquartered financial institutions. For example, the proposal describes the important role that a financial institution s board of directors plays in establishing the institution s risk management framework. In its comment letter, the Institute pointed out that U.S. branches and agencies of international banks are not separate corporate entities and therefore do not have boards of directors. Accordingly, the Institute s letter said, there is a distinction between the global risk management oversight role of an international bank s board of directors and the local risk management role of a U.S. branch or agency s senior management. bank s global policies and procedures, as informed by home country legal, regulatory and supervisory requirements. As a result, international banks may implement guidance regarding CSFTs in ways that differ in certain respects from the ways U.S.- headquartered institutions would implement the same guidance, without any material difference in the effectiveness of that implementation. These considerations apply not only to U.S. branches and agencies of international banks but also to their separately incorporated U.S. bank and broker-dealer subsidiaries, the Institute said in its letter. The Institute s comment letter also identified several other concerns that we share with domestically headquartered institutions and offered a number of suggestions to address them. More broadly, the Institute strongly urged the agencies to recognize that an international bank s U.S. risk management policies and procedures necessarily will need to be adapted to the 2

3 SEC S PROPOSED REGULATION B INCLUDES EXEMPTION FOR REGULATION S SECURITIES OFFERINGS FROM THE PUSH-OUT PROVISIONS OF THE GRAMM-LEACH-BLILEY ACT On June 30 th, the Securities and Exchange Commission published in the Federal Register its proposed Regulation B, which sets forth various exemptions for banks from the definition of a broker under the Securities Exchange Act of 1934, as amended by the Gramm-Leach-Bliley Act. The GLB Act requires banks to push out their broker and dealer activities to a registered broker-dealer. The Institute has been engaged in ongoing discussions with the SEC regarding the push-out provisions that impact the private banking and investment advisory activities of our member institutions. As a result of these efforts, the proposed Regulation B includes as advocated by the Institute an exemption for Regulation S securities offerings from the push-out provisions of the GLB Act. (See the Institute s May 27, 2004 submission and related documents on the Institute s web site at Comments on the proposed Regulation B are due by September 1 st. The Proposed Reg S Exemption would exempt a bank from the definitions of broker and dealer under the Exchange Act for effecting, as agent or as riskless principal, transactions in which eligible securities are sold to a non-u.s. person who is outside the United States. The Proposed Reg S Exemption also would permit a bank to effect the resale of certain eligible securities (i) by or on behalf of a non-u.s. person to another non-u.s. person or to a registered broker-dealer, or (ii) by or on behalf of a registered broker-dealer to a non-u.s. person. Such resales would be subject to certain conditions and limitations. The proposed exemption would not permit banks to effect transactions involving U.S. persons other than U.S. registered brokerdealers. In its comment letter, the Institute expects to address certain technical aspects of the proposed Reg S exemption that may affect its scope. In a related development, the Institute submitted a letter to the SEC on July 27 th endorsing individual requests by our member institutions to rely on the proposed Regulation S exemption on an interim basis. A request for such interim relief was also included in the Institute s May 27 th submission. INSTITUTE URGES SENATE BANKING COMMITTEE TO INCLUDE COMPTROLLER S ASSET PLEDGE/CAPITAL EQUIVALENCY DEPOSIT REFORM AMENDMENT IN REGULATORY RELIEF LEGISLATION On June 22 nd, the Senate Banking Committee held a hearing on regulatory relief proposals, including the Comptroller of the Currency s proposed amendment on asset pledge/capital equivalency deposit (CED) reform. In a letter to Chairman Shelby, Ranking 3

4 Member Sarbanes and the other members of the Committee as part of the official record of the hearing, the Institute expressed strong support for the Comptroller s amendment and urged its inclusion in regulatory reform legislation. As previously reported, the Comptroller s amendment would eliminate the statutorily mandated 5% asset pledge/ced requirement for federal branches and agencies of international banks in favor of a risk-based approach under which the Comptroller would have discretionary authority to set the CED requirement at an appropriate level. Replacing the outdated, flat-rate requirement with a risk-based approach would give the Comptroller the same flexibility that most states use in applying their comparable asset pledge requirements. For example, as a result of the Institute s multi-year initiative on asset pledge reform, New York reduced its requirement to 1% for financially strong institutions, which is expected to cut by approximately 80% the $35 billion of collateral previously pledged by our member institutions with New York-licensed branches and agencies. The Comptroller s amendment had been included in regulatory relief legislation under consideration in the House of Representatives. However, despite widespread agreement on the need for CED reform, the provision was deleted from the final House bill that passed on March 18 th because of the controversy over the Comptroller s unrelated preemption rule. In its letter to the Senate Banking Committee, the Institute urged consideration of the CED provision on its own merits based on its sound regulatory and policy grounding and support. In view of the need for reform to eliminate the existing discriminatory treatment of federal branches, the Institute urges interested member institutions as well as national and regional banking associations and home country governmental authorities to express their support to the Congressional banking committees, the Treasury Department and the Federal Reserve for inclusion of a CED reform provision in regulatory relief legislation. INSTITUTE SUBMITS RECOMMENDATIONS TO OECD REGARDING ATTRIBUTION OF PROFITS TO BRANCHES The Institute submitted two documents to the OECD at the end of June addressing key aspects of the OECD s proposals regarding the manner in which international banks and dealers in securities, derivatives and currencies would be taxed in respect of their cross-border operations. These submissions may be found on the Institute s website at The first document was a joint submission with the European Banking Federation (FBE) containing a list of recommended changes to the Discussion Draft of the OECD s report on the attribution of profits to branches and other permanent establishments (PEs). The second document was a letter urging the OECD to develop a workable and practical solution to the problems that would be created by a literal and expansive application of the dependent agent PE concept (whereby a company is deemed to have a PE in another country if an affiliate in that country exercises discretionary authority on behalf of the company) to global trading activities by dealers in securities, derivatives and currencies. 4

5 The result of the OECD s deliberations in the coming months will likely have a profound impact on the worldwide tax position of banks and dealers in securities, derivatives and currencies. To the extent banks and dealers share the concerns that have been expressed about the OECD s proposal, it is imperative that those institutions and their representative associations express their concerns to their respective tax authorities and to the OECD. These documents, and especially the joint submission of the Institute and the FBE, reflect a considerable amount of input from U.S. and head office tax personnel at member banks and outside professional advisers. While spearheaded and drafted by the Institute and the FBE, the joint submission was the product of extensive consultations among representatives of the various banking associations, and represents the industry s broadly held consensus views. Other banking associations undertook to send letters to the OECD and their own government s tax authorities supporting the joint submission. The joint submission makes three principal points, among other recommendations: 1. It is essential that the approach adopted by the OECD ensure that for each bank, capital is attributed using a single method, uniformly and consistently, around the world. based on the key entrepreneurial risk-taking ( KERT ) functions (i.e., to the location(s) of the traders/bankers who made the decision to acquire the assets and who are responsible for riskmanaging the assets) rather than using a more administrable rule. 3. The Discussion Draft s treatment of global trading through dependent agent PEs should be revised to provide that (a) the host jurisdiction will tax only one entity i.e., the associated enterprise ( AE ) that acts as the dependent agent enterprise (but not the PE that is deemed to exist as a result of the activities of the dependent agent AE), and (b) the host jurisdiction will apply arm s length transfer pricing methods, using a functional analysis, to ensure that the full amount of profit or loss allocable to the host jurisdiction is reported by the dependent agent AE. This last point was the focus of the second submission made by the Institute. 2. The OECD should reconsider its decision to attribute the ownership of assets INSTITUTE CONTINUES DIALOGUE WITH TEASURY AND IRS OFFICIALS REGARDING IMPORTANT TAX INITIATIVES The Institute met with the Treasury Department and the IRS in Washington on June 4 th to discuss various areas of concern to the Institute. In addition, IRS Associate Chief Counsel (International) Hal Hicks addressed the Institute s June tax seminar in New York, an occasion which afforded another opportunity to exchange views on important subjects. The main topic of the June 4 th meeting with Treasury was the OECD s Discussion Draft of its report regarding the attribution of profits to branches and PEs, and in particular the three principal points of the list of recommendations that the Institute and the FBE set forth in their joint submission to the OECD (see previous article). 5

6 At the IRS that afternoon, the Institute and the IRS continued their dialogue regarding the proposed global dealing regulations concerning the allocation of profit and loss from cross-border operations in securities, derivatives and currencies by banks and securities and derivatives firms. The discussion focused on the treatment of dependent agent PEs and KERT functions (see previous article). Subsequently, at the Institute s tax seminar, Mr. Hicks indicated that the IRS would be reproposing the global dealing regulations, in view of the number of changes and the passage of time since their original proposal in The IRS plans on reissuing the proposed regulations later this fall, in addition to related guidance projects concerning transfer pricing issues (in particular, final regulations on transfer pricing of services), which will also be relevant to international banks and securities firms). Also of significance to member banks, Mr. Hicks affirmed the IRS intention to make its Pre- Filing Agreement (PFA) program available to resolve practical issues regarding the determination of an international bank s deductible interest expense under Treasury regulation section , including the computation of the actual ratio and other issues affecting branches (such as home office allocations). Once the PFA program is expanded to these areas, banks that felt compelled to use the fixed ratio under section because of the uncertainties and exposures under the actual ratio may be able to obtain clarity and shift to the more favorable actual ratio. INSTITUTE PARTICIPATES IN NEW YORK STATE TASK FORCE MEETING TO DISCUSS REVAMPING TAXATION OF BANKS AND SECURITIES FIRMS As reported in the March issue of Focus, after a hiatus of several years, the New York State and City Tax Departments have resumed their efforts to overhaul their tax rules so that all components of the financial services sector (banks, investment banks, securities broker/dealers and insurance companies) are subject to the same franchise (corporate income) tax. The tax authorities are proposing to extend the existing rules, including the Gramm-Leach-Bliley transition rules, through 2005, and are hoping that the new regime will come into effect beginning in Currently, banks and many of their affiliates are subject to a separate tax regime (Article 32) from securities firms and industrial and service companies, which are subject to Article 9-A. The New York tax authorities are proposing to combine the two regimes, and essentially to subject banks to a modified form of the existing basic corporate tax regime. There will be many trade-offs, both positive and negative to financial institutions as a result of this overhaul, if and when it is implemented. A key issue will be the treatment of investment capital, which currently is subject to favorable tax rules in the case of non-bank institutions, although interest expense allocable to such investment capital is not generally deductible. On June 29 th, Institute representatives attended a meeting in Albany of the New York State and City Financial Modernization Task Force to discuss the Tax Departments proposals in this regard. Significantly, the Tax Departments propose to treat the income and expense from securities repos and lending transactions as business income and expense rather than as income and expense that is attributable to investment capital. 6

7 New York State Tax Commissioner Eristoff acknowledged that the Tax Department s proposal was controversial, but emphasized that he was seeking to open a dialogue with the industry. He also suggested that the State and City may seek to challenge what they consider to be aggressive taxpayer positions regarding the classification of securities repos and lending transactions as being subject to the investment capital rules rather than the business capital rules. The financial industry will be meeting to develop its position, and expects to have further discussions with the Tax Departments in the Fall International Banking Focus by Institute of International Bankers 7