USA
Office of the Comptroller of the Currency (OCC)
Prefatory Notes
Throughout these responses, "limitation" is taken to refer narrowly to limits on the residence or citizenship of the parties to the transaction.
"Other banks" is taken to refer to other types of depository institutions, such as savings and loan associations, mutual savings banks, and credit unions, even though these institutions are not, strictly speaking, "banks."
"Non-bank financial firms" is taken to include finance companies, securities firms, insurance companies, and other non-bank providers of financial services.
"Other" is taken to refer to non-financial (i.e., industrial or commercial) firms.
Commodity Futures Trading Commission (CFTC)
General Comments
CFTC regulation is functional. We note again that the survey methodology identifies specific financial instruments (e.g., equities, debt, physical commodities, deposit accounts, commercial and consumer lending and other credit activities and currency operations), and the manner in which such instruments are offered and/or traded (e.g., initial, secondary). Under each section, questions inquiring whether derivatives are traded based on such instrument are asked. This methodology does not take into account the fact that derivatives, like equities, are themselves distinct financial instruments.
Although our answers follow the questionnaire's structure, it should be noted that in general, the regulatory structure reflected in the Commodity Exchange Act (CEA) does not impose different requirements based on the nature of the physical or intangible product underlying a particular futures contract. Rather, regulation under the CEA is functional, viewing derivatives as distinct instruments.
The term "commodities" under the CEA is not limited to physical commodities. We understand that the survey intends to encompass centralized locations for spot transactions involving physical commodities and that the term "commodities" is therefore intended to refer solely to physical commodities for purposes of the questionnaire. Please note, however, that for purposes of the CEA, the term "commodities" is broader in scope and refers to both physical commodities (except onions) and intangible interests. See section la(3) of the CEA which defines the term "commodity" to include in addition to certain enumerated physical commodities, "all other goods and articles, except onions . . . and all services, rights and interests in which contracts for future delivery are presently or in the future dealt in."
Responses limited to instruments addressed by the CEA and CFTC regulations. As mentioned in our letter, our answers are intended to address solely those instruments which are addressed by the CEA and Commodity Futures Trading Commission's (CFTC or Commission) regulations.
In this connection, section 2(a)(1)(B) of the CEA,(1) and related securities laws, allocate jurisdiction over certain derivative products between the CFTC and the SEC. The SEC has authority to regulate options on securities, on groups and indices of securities, on certificates of deposit and on foreign currencies when entered into on a national securities exchange.(2) The CFTC has exclusive jurisdiction over futures trading on "exempted securities,"(3) on groups or indices of securities,(4) over options on such futures,(5) and over foreign currency options not traded on a national securities exchange,(6) including over-the-counter currency transactions and transactions conducted on non-U.S. markets. Futures on individual securities, other than exempted securities, are prohibited.(7)
Questions 1 and 2
CFTC
There are no citizenship or residency requirements under the Commodity Exchange Act (CEA) or regulations thereunder (17 C.F.R. Part 1 et seq.) which condition the ability of a foreign person or entity to either trade in the U.S. futures markets or apply for registration under the CEA.
In general, a financial intermediary engaged in transactions involving futures and option contracts regulated by the CFTC will be deemed to be subject to CFTC jurisdiction if it meets one of the following four criteria: it is legally domiciled in the United States; it is physically present in the United States; it has consented to jurisdiction; or it is considered to be conducting business in the United States. A financial intermediary considered to be conducting business in the United States need not be physically present in the United States. No distinction is made between solicited and unsolicited business.
Under the CEA, a foreign firm considered to be doing business in the United States is accorded national treatment, including equality of competitive opportunity, and is treated no less advantageously than a domestic firm. See National Treatment Study (1994 Department of the Treasury), pp. 50-51.
Question 1
OCC
We can only address residency requirements as they apply to nationally chartered banking organizations. National banking law (12 U.S.C. 72) generally requires that at a minimum a majority of the directors of a national bank must be citizens of the United States, and at least two thirds must be local residents. This could be viewed as a residency requirement for national banks.
SEC
This SEC response is provided with respect to financial services within its jurisdiction.
Although there are a few SEC rules which incorporate concepts of residence, as a general matter, the SEC does not attempt to define requirements for residence, particularly with respect to individuals. To the extent that residence is relevant to federal securities law considerations with respect to organizations, the SEC would normally look to traditional U.S. business law concepts in determining the residence of an organization. Generally, an organization that is organized under U.S. federal law, or one of the laws of the 50 states or the District of Columbia, would be considered an organization resident or domiciled in the U.S. An organization organized under foreign law also may be considered resident in the U.S. if it has qualified as a foreign organization to do business in one or more of the above mentioned U.S. jurisdictions or, in fact, it is doing business in one of these jurisdictions.
In most cases, the federal securities laws administered by the SEC recognize a principle of national treatment whereby no substantial distinction is made in applying legal requirements to residents and nonresidents who come within the laws' jurisdictional means; these are use of the mails, the facilities of a national securities exchange, and use of any means of transportation or communication in interstate commerce, which includes, but is not limited to commerce between a state or the District of Columbia and a territory or foreign country.
Question 2
OCC
Resident organizations generally are not treated differently from non-resident organizations based on percentage of foreign ownership and/or control.
SEC
This SEC response is provided with respect to financial services within its jurisdiction.
Residents are not treated differently based on citizenship status.
Question 8
SEC
Section 5 of the Securities Act of 1933 ("Securities Act") creates a statutory presumption in favor of registration of all securities transactions within the jurisdiction of the Act. Other sections of the Act exempt different types of securities and transactions. Section 4(2) provides that transactions by an issuer not involving any public offering are exempt from Section 5. The courts and the SEC have interpreted this statutory exemption narrowly in applying it to specific facts and circumstances. Generally Section 4(2): (i) precludes public solicitation or advertising; and (ii) contemplates purchases by a limited number of investors who are capable of evaluating the merits and risks of the investment, and are reasonably believed to be acquiring the securities for investment and not with a view to redistribution. Section 4(2) does not require any notification or filing with the SEC in order to claim the exemption.
Under the Securities Act, the SEC has also adopted Regulation D, a limited offering regulation intended to serve as a non-exclusive set of safe harbor exemptions from Section 5. One of these exemptions, Rule 506, provides a nonpublic offering exemption for private placements of securities: (i) made without general solicitation or advertising; (ii) to an unlimited number of accredited investors (as defined in Regulation D); (iii) and to not more than 35 non-accredited investors who, either alone or with their purchaser representative(s) (as defined) are capable of evaluating the merits and risks of the investment and are furnished with certain information required by Regulation D; (iv) whom the issuer reasonably believes are purchasing the securities for investment; and (v) who agree to the placement on the securities certificates of legends regarding restrictions on transfer. Rule 506's conditions also contemplate filing notification of the exemption with the SEC, although failure to do so will not necessarily cause loss of the exemption.
Question 10
SEC
An issuer may decide to seek an exchange listing for its securities or quotation of the securities on NASDAQ, an automated over-the-counter trading system operated by the National Association of Securities Dealers, Inc. ("NASD"), or it may simply elect to permit the securities to trade in less formal OTC markets. In the U.S., the NASD and each national securities exchange are registered with the SEC as self-regulatory organizations ("SROs"). All SRO rules, including listing and quotation requirements and trading rules for the marketplaces they operate, are subject to SEC approval. These rules vary among marketplaces. Issuers must satisfy a marketplace's listing or quotation rules in order to have their securities listed for trading or quotation in that marketplace.
Margin regulations are the responsibility of the Board of Governors of the Federal Reserve System (the "Fed"), although the SEC has authority to prosecute violations of margin rules. Generally, securities eligible for margin include securities listed on a national securities exchange, those quoted on the NASDAQ National Market System, or those included in a list published from time-to-time by the Fed.
Questions 12, 19, 26, 30, 33, 47, and 50
CFTC
A. Product Restrictions Applicable to All Permissible Transactions (On-Exchange and Off-Exchange)
Special procedures for stock index futures. Section 2(a)(1)(B) of the CEA states that the CFTC has exclusive jurisdiction over futures contracts involving any stock index or group (and over options on those futures contracts) and to establish the conditions and procedures that must be satisfied before an exchange may be designated by the CFTC as a contract market to trade those futures Section 2 (a) (1) (B) (iv) (II) of the CEA requires the CFTC to provide the SEC with a copy of an exchange's application for designation as a contract market with respect to any contract of sale (or option on such contract) for future delivery of a group or index of securities. The CFTC may not approve the application if the SEC determines that the contract fails to meet the minimum requirements set forth in Section 2 (a) (1) (B) (ii) of the CEA.
Prohibition of futures (and options on such futures) on municipal securities or individual security. Section 2 (a) (1) (B) (v) of the CEA prohibits futures trading on any municipal security or any security registered pursuant to the Securities Act of 1933 or the Securities Act of 1934.
Futures contracts (and options on such futures) based on "exempted securities" permitted. Section 2 (a) (1) (B) (v) authorizes futures contracts based on an exempted security under section 3 of the Securities Act of 1933 or section 3 (a) (12) of the Securities Exchange Act of 1934 (e.g., futures contracts permitted on treasury bonds, GNMA's, certificates of deposit, and commercial paper).
Special procedures for foreign stock index futures, futures contracts based on foreign government debt obligations, and foreign commodity options. Subject to certain restrictions, in general foreign exchange traded commodity futures contracts may be offered or sold to persons located in the United States (i.e., a U.S. customer) without application to the CFTC. Certain special procedures, as described below, are required for the offer or sale to persons located in the United States of: foreign stock index futures, futures contracts based on foreign government debt obligations, and foreign commodity options.
Foreign stock index futures. The CFTC's Office of the General Counsel must first issue a "no-action" letter (not objected to by the SEC) to allow the offer or sale of such contracts to a U.S. customer; staff traditionally examines such instruments under the criteria set forth in Section 2 (a) (l) (B) (ii) of the CEA. See 57 Fed. Reg. 3518 (January 30, 1992).
Foreign government debt obligations. Debt obligations of a foreign country must be designated as an exempted security by the U.S. Securities and Exchange Commission before a futures contract can be offered or sold to a U.S. person (obligation based on section 2 (a) (1) (B) (v)); and
Foreign option products. No foreign commodity option may be offered or sold to a U.S. customer unless such contract has been specifically approved by the CFTC. The CFTC recently proposed to eliminate the specific authorization requirement for foreign options.
B. Provisions Authorizing Over-the-Counter Transactions
See discussion "CFTC Provisions for Off-Exchange Transactions" in our responses to questions 13, 27, 34, 48, and 5l below for the scope of off-exchange transactions intended by a "yes, with limitations" response to the OTC portion of questions 12, 19, 26, 30, 33, 47, and 50.
Question 13
SEC
See response to question 10.
Question 22
SEC
See response to question 8.
Question 24
SEC
See response to question 10.
Question 27
SEC
See response to question 10.
Question 28
CTFC
The CFTC does not regulate cash commodities markets and therefore does not have the complete data to respond fully to questions 28-31 concerning physical commodities markets.
With respect to question 28, we are aware of some commodities that are available through centralized, organized markets: for example, livestock auction markets (subject to Department of Agriculture regulation); and spot markets for grain at the Minneapolis Grain Exchange (MGE) (an activity that the CFTC has not regulated; note that transactions in commodity futures and options at the MGE are regulated by the CFTC). However, we understand that in most instances, the purchase and sale of "physical" commodities is effected through transactions with wholesale dealers rather than through organized central markets. In this regard, more complete information may be available from the Department of Agriculture and Commerce Department.
USDA
Markets for physical delivery exist in the United States for all agricultural commodities produced here or imported. For most commodities the bulk of the trading is private, executed by telephone or direct personal contact between the buyer and seller or their agents. Public markets exist for many commodities, but trading volume on such markets generally has declined in recent decades. Examples of public markets include spot grain and butter markets at commodity exchanges, livestock auction markets, livestock terminal markets, fruit and vegetable terminal markets, some of which have auctions, tobacco auction markets, and a cheese auction market.
Questions 28-53
SEC
These questions are not applicable to the SEC.
Question 29
USDA
Yes, anyone who is financially able to meet his/her commitments can buy or sell on commodity markets.
Question 30
CFTC
Consistent with the survey's methodology, our response is limited to options on physical commodities. Foreign exchange-traded options on physical commodities that have been specifically authorized by the CFTC may be offered or sold to U.S. residents (see response to questions 12, 19, 26, 30, 33, 47, and 50). Certain off-exchange transactions are permissible provided that the transactions fall within one of the categories described below in our response to questions 13, 27, 34, 48, and 51 ("CFTC Provisions for Off-Exchange Transactions").
USDA
Yes. The U.S. government does not prohibit or regulate transactions on agricultural commodities by its citizens that occur in foreign countries.
Question 31
USDA
The U.S. dollar is used in all transactions on public markets and virtually all private transactions are in U.S. dollars.
Questions 13, 27, 34, 48, and 51
CFTC
Our response is applicable to all categories of derivatives trading subject to CFTC jurisdiction.
Subject to certain narrowly defined exceptions, and to the CFTC's authority to exempt certain transactions or categories of transactions from most provisions of the CEA, all transactions in commodity futures contracts and all commodity option transactions are required to occur on or subject to the rules of contract markets (exchanges) designated as such by the CFTC. Section 4(a) of the CEA.
CFTC Provisions for Off-Exchange Transactions. The futures regulatory framework was designed to assure that all futures transactions would, subject to certain narrowly defined exceptions and to the CFTC's authority in section 4 (c) of the CEA to exempt certain transactions or categories of transactions from most provisions of the CEA,(8) take place on regulated exchange markets through regulated intermediaries registered as futures commission merchants (FCMs) and subject to minimum capital and other requirements. All other forms of futures transactions are generally prohibited, with the exception of certain types of commercial option transactions. Thus, the futures regulatory framework generally does not contemplate issuer or dealer-initiated transactions in futures or commodity option products and generally renders unlawful futures and commodity option products that are effected other than on CFTC-designated exchanges.(9)
The CFTC's regulatory provisions applicable to OTC derivatives have developed as a series of exceptions to the exchange-trading requirement. These exceptions generally have been predicated on the rationale that the exempted transactions are: (1) unsuitable for exchange trading; and (2) entered into by parties who are engaged in a line of business involving the commodity that is the subject of the transaction, or who satisfy financial criteria designed to assure their competence to engage in such transactions without the full complement of regulatory protections. Generally, these exceptions from the exchange-trading requirement have also exempted the affected transactions from most other regulatory provisions.
The CFTC has not created for such transactions an alternate regulatory structure tailored to the OTC market.[Footnote omitted.] Thus, the CFTC's long-standing trade options exemption and swaps,(10) and energy contract exemptions restrict participation in exempted transactions to entities and persons who satisfy commercial, institutional and/or asset-based standards The exemptions extend not only to the exchange-trading requirement but also to virtually all other regulatory requirements. Such exemptions were granted pursuant to section 4(c) of the CEA which requires the Commission to make a determination that the exemption was in the public interest and would not adversely affect the integrity of exchange markets. The swaps and energy contract exemptions also contain requirements relating to the structure and operation of the transactions that are intended to further distinguish them from exchange-traded contracts.
OTC derivative products contemplated by the CFTC regulatory framework are discussed below.
Statutory Exclusion of Forward Contracts. One type of OTC derivative product, the forward contract, is expressly excluded from CFTC jurisdiction and thus is essentially unregulated.(11) Forward contracts are commercial, merchandising transactions in physical commodities in which delivery of the commodity is contemplated and routinely occurs but is deferred for commercial purposes. Forward contracts are privately negotiated, principal-to-principal transactions between commercial parties whose business activities involve the commodity underlying the transaction. The forward contract exclusion has been a part of the federal statutory framework since the inception of futures regulation and was intended to assure that the regulatory structure would not interfere with transactions in the commercial merchandising chain. The policies reflected in the forward contract exclusion have been relied upon, in part, for the CFTC's exemptions for swaps and energy contracts.
Trade Options. Trade options are exempted by CFTC rules from the general prohibition against off-exchange futures and commodity options transactions. They are off-exchange commodity options offered and sold to commercial counterparties whose business involves the commodity (or by-products thereof) that is the subject of the transaction and who enter into the transactions for purposes related to that business. Rule 32.4(a) permits the sale of off-exchange commodity options in circumstances in which the offeror "has a reasonable basis to believe that the option is offered to a producer, processor or commercial user of, or a merchant handling, the commodity which is the subject of the commodity option transaction" and that such commercial party is offered or enters into the transaction "solely for purposes related to its business as such."(12) Trade option transactions are subject to prohibitions against fraud, certain types of representations, and unreasonable failures to secure prompt execution of commodity option orders by persons receiving such orders. Currently, trade options on agricultural commodities are prohibited.
Swaps. Pursuant to exemptive authority granted under the FTPA and now set forth in Section 4(c) of the CEA, the CFTC recently adopted exemptive rules which provide a safe harbor from most CFTC regulatory requirements for swap transactions meeting specified criteria.(13) The exemption is limited to swap agreements entered into by "eligible swap participants," which include various categories of institutional and commercial entities and natural persons with substantial assets. Eligible swap participants include, for example. banks; investment companies; corporations or other entities which have total assets exceeding $10,000,000, or net worth exceeding $1,000,000 and are entering into the swap transaction in connection with the conduct of their business; employee benefit plans subject to ERISA [Employee Retirement Income Security Act of 1974] with total assets exceeding $5,000,000; broker-dealers; futures commission merchants; and natural persons with total assets exceeding $10,000,000.
In addition to restricting the categories of participants eligible to participate in exempt transactions, the CFTC's swaps exemptive rules impose restrictions upon the design and execution of the transactions that distinguish them from exchange traded futures contracts. To qualify for exemption: the swap may not be part of a fungible class of agreements that are standardized as to their material economic terms; the creditworthiness of any party having an actual or potential obligation under the swap agreement must be a material consideration in entering into or determining the terms of the swap agreement; and the swap agreement may not be entered into or traded on a multilateral transaction execution facility (a physical or electronic transaction execution facility in which participants can simultaneously effect transactions and bind both parties).
The CFTC swaps exemption does not exempt swaps from all statutory anti-fraud and manipulation prohibitions.(14) However, in all other respects the exemption allows swaps transactions to occur free of the regulatory framework applicable to futures exchanges and intermediaries. No prescriptive, affirmative requirements as to the conduct of the transactions, other than the participant, design and execution criteria of the exemptive rules apply to qualifying swaps.(15)
Hybrids. Pursuant to Section 4(c), the Commission also amended its Part 34 rules, "Regulation of Hybrid Instruments," effeccive February 22, 1993.(16) Under the revised rules, a hybrid is defined as a financial instrument that combines characteristics of commodity futures or option contracts, or both, with equity, debt or depository instruments. If the sum of the values of an instrument's commodity-dependent components (as defined in the rule), is less than the value of the instrument's commodity-independent component, and the instrument meets certain other criteria of the rule, it is exempt from CFTC regulation. The Commission limited the availability of the Part 34 exemption to hybrid instruments that are iesued or sold: (1) subject to applicable federal or state securities or banking laws; and (2) to persons permitted under such laws to purchase or enter into the hybrid instrument.(17) The exemption is based on the concept that a hybrid instrument should be subject to regulation in accordance with its dominant component, the limited nature of the hybrid instrument's exposure to price movements in the underlying commodity, and the applicability of other regulatory frameworks. In adopting revised Part 34 in January 1993, the Commission stated that parties could continue to rely upon its previously issued Statutory Interpretation Concerning Certain Hybrid Instruments, for existing as well as new hybrid instruments.(18)
Energy Contracts. By order issued April 13, 1993,(19) the CFTC exempted certain contracts for the deferred purchase or sale of specified energy products from regulation under the CEA. The order applies to contracts for the deferred purchase or sale of crude oil, condensates, natural gas, natural gas liquids, or their derivatives that are used primarily as an energy source. The contracts must be entered into between commercial parcicipants meeting specified requirements. These requirements relate to, among other things: the capacity to make or take delivery; and regulated status, minimum net worth or total assets, which evidence the commercial status of the parties and distinguish the exempted transactions from those required to be effected on approved exchanges. Under the order, qualifying contracts are exempted from all provisions of the CEA except Section 2 (a) (1) (B), the so-called "jurisdictional accord" between the CFTC and SEC, and the provisions prohibiting price manipulation.
Foreign Currency Transactions. Foreign currency transactions are subject to varying types of regulation under the CEA, depending on the context in which they occur and the nature of the counterparties. Spot (or "cash") foreign currency transactions and forward contracts on foreign currencies are excluded from regulation under the CEA, as are all other spot and forward transactions. Foreign currency futures and option transactions are subject to the CEA exchange-trading requirement and all other applicable requirements except to the extent that foreign currency options may be traded on national securities exchanges subject to SEC regulation(20) or are exempted by CFTC rule. Two CFTC regulatory exemptions are potentially available with respect to foreign currency options: the trade option exemption, which is limited to options offered to commercial users; and the swaps exemption, which includes within the definition of swap agreement for purposes of the rule an agreement which is a "currency option."(21)
Discussion of the regulatory treatment of foreign currency transactions is further complicated by the so-called "Treasury Amendment,"(22) a CEA provision which states that the CEA shall not be deemed to apply to, among other things, "transactions in foreign currency, unless they involve a sale for future delivery conducted on a board of trade." The scope of this provision has been subject to considerable debate and litigation. Its legislative history suggests chat the statutory provision was intended to preclude CEA regulation of the interbank market, which was described as a market subject to bank regulatory oversight, in which transactions generally occurred between banks and "other sophisticated institutional participants."(23) This "market" was believed to be "more properly supervised by the bank regulatory agencies."(24) The CFTC has interpreted the Treasury Amendment to be inapplicable to transactions involving members of the general public, but not all courts have agreed with that view.(25)
See "The Report of the Commodity Futures Trading Commission: OTC Derivative Markets and Their Regulation" (October 1993 ) .
Question 33
CTFC
Section l (a) (3) of the CEA excludes onions from the definition of commodity.
Question 35
OCC
Commercial banks and other depository institutions may accept demand and time deposits without limitation. Non-bank financial firms and other non-bank institutions are not authorized to accept demand and time deposits as those terms are defined in banking law. However, non-bank financial firms offer products that are functionally very similar to deposits. For example, securities firms offer transaction accounts that have most of the characteristics of bank checking accounts, and that are cleared through the banking payments systems.
Question 36
OCC
Commercial banks, other depository institutions, and non-bank finance companies can and do extend commercial and consumer loans. Not all such products are offered by all institutions, but that is a matter of business choice rather than legal authority.
Non-financial firms also extend commercial and consumer loans, but they generally do so through financial subsidiaries. Examples include the financing subsidiaries of the major automobile manufacturers.
Question 37
OCC
Commercial banks, other depository institutions, and non-bank financial companies can and do extend commercial and consumer mortgages. Non-financial firms generally do not extend mortgages, although that is a matter of business choice rather than legal authority.
Question 38
OCC
Commercial banks, other depository institutions, non-bank financial companies, and non-financial firms all can and do extend commercial leases.
Question 39
OCC
Commercial banks, other depository institutions, non-bank financial companies, and non-financial firms all can and do extend one or more of these products.
Question 40
OCC
Yes, generally without limitation.
Question 41
OCC
Yes, generally without limitation.
Question 42
OCC
Both local currency and foreign currencies may be used.
Question 43
OCC
Deposits are sold directly by one bank to another in an over-the-counter market, and they are also intermediated through deposit brokers.
Loans and credits, mortgages, and leases are traded in secondary market in several ways: through over-the-counter sales of whole loans, through syndications and participations, and through securitization.
Question 44
OCC
We would characterize all of these secondary markets as over-the-counter.
Question 45
OCC
Since the secondary markets are all over-the-counter, national banking laws and regulations do not distinguish between them. However, the OCC has supervisory policies directed at these secondary market activities.
Question 53
CFTC
See discussion concerning "foreign currency transactions" in response to questions 13, 27, 34, 48, and 51.
Question 54
OCC
Yes, generally without limitations. As noted earlier, at least half of the directors of a national bank must be citizens of the United States, and at least two thirds must be local residents. This requirement applies equally to residents and non-residents seeking to establish or acquire a national bank.
Questions 54-57
SEC
The SEC responses checked with respect to these questions relate only to financial services within the SEC's jurisdiction.
Question 58
CFTC
- Futures commission merchant (buying and selling of derivatives );
- Introducing brokers (solicit customers but do not handle customer funds);
- Commodity trading advisors; and
- Commodity pool operators.
SEC
This SEC response is provided with respect to financial services within its jurisdiction.
- Investment banking/underwriting
- All other broker-dealer operations
- Investment advice and asset management
FOLLOWING PAGES CONTAIN OCC, SEC, and USDA responses as reference only. Do not translate.
OCC
Question 1
We can only address residency requirements as they apply to nationally chartered banking organizations. National banking law (12 U.S.C. 72) generally requires that at a minimum a majority of the directors of a national bank must be citizens of the United States, and at least two thirds must be local residents. This could be viewed as a residency requirement for national banks.
Question 2
Resident organizations generally are not treated differently from non-resident organizations based on percentage of foreign ownership and/or control.
Question 35
Commercial banks and other depository institutions may accept demand and time deposits without limitation. Non-bank financial firms and other non-bank institutions are not authorized to accept demand and time deposits as those terms are defined in banking law. However, non-bank financial firms offer products that are functionally very similar to deposits. For example, securities firms offer transaction accounts that have most of the characteristics of bank checking accounts, and that are cleared through the banking payments systems.
Question 36
Commercial banks, other depository institutions, and non-bank finance companies can and do extend commercial and consumer loans. Not all such products are offered by all institutions, but that is a matter of business choice rather than legal authority.
Non-financial firms also extend commercial and consumer loans, but they generally do so through financial subsidiaries. Examples include the financing subsidiaries of the major automobile manufacturers.
Question 37
Commercial banks, other depository institutions, and non-bank financial companies can and do extend commercial and consumer mortgages. Non-financial firms generally do not extend mortgages, although that is a matter of business choice rather than legal authority.
Question 38
Commercial banks, other depository institutions, non-bank financial companies, and non-financial firms all can and do extend commercial leases.
Question 39
Commercial banks, other depository institutions, non-bank financial companies, and non-financial firms all can and do extend one or more of these products.
Question 40
Yes, generally without limitation.
Question 41
Yes, generally without limitation.
Question 42
Both local currency and foreign currencies may be used.
Question 43
Deposits are sold directly by one bank to another in an over-the-counter market, and they are also intermediated through deposit brokers.
Loans and credits, mortgages, and leases are traded in secondary market in several ways: through over-the-counter sales of whole loans, through syndications and participations, and through securitization.
Question 44
We would characterize all of these secondary markets as over-the-counter.
Question 45
Since the secondary markets are all over-the-counter, national banking laws and regulations do not distinguish between them. However, the OCC has supervisory policies directed at these secondary market activities
Question 54
Yes, generally without limitations. As noted earlier, at least half of the directors of a national bank must be citizens of the United States, and at least two thirds must be local residents. This requirement applies equally to residents and non-residents seeking to establish or acquire a national bank.
U.S. Securities and Exchange Commission (SEC)
Question 1
This SEC response is provided with respect to financial services within its jurisdiction.
Although there are a few SEC rules which incorporate concepts of residence, as a general matter, the SEC does not attempt to define requirements for residence, particularly with respect to individuals. To the extent that residence is relevant to federal securities law considerations with respect to organizations, the SEC would normally look to traditional U.S. business law concepts in determining the residence of an organization. Generally, an organization that is organized under U.S. federal law, or one of the laws of the 50 states or the District of Columbia, would be considered an organization resident or domiciled in the U.S. An organization organized under foreign law also may be considered resident in the U.S. if it has qualified as a foreign organization to do business in one or more of the above mentioned U.S. jurisdictions or, in fact, it is doing business in one of these jurisdictions.
In most cases, the federal securities laws administered by the SEC recognize a principle of national treatment whereby no substantial distinction is made in applying legal requirements to residents and nonresidents who come within the laws' jurisdictional means; these are use of the mails, the facilities of a national securities exchange, and use of any means of transportation or communication in interstate commerce, which includes, but is not limited to commerce between a state or the District of Columbia and a territory or foreign country.
Question 2.
This SEC response is provided with respect to financial services within its jurisdiction.
Residents are not treated differently based on citizenship status.
Question 8
Section 5 of the Securities Act of 1933 ("Securities Act") creates a statutory presumption in favor of registration of all securities transactions within the jurisdiction of the Act. Other sections of the Act exempt different types of securities and transactions. Section 4(2) provides that transactions by an issuer not involving any public offering are exempt from Section 5. The courts and the SEC have interpreted this statutory exemption narrowly in applying it to specific facts and circumstances. Generally Section 4(2): (i) precludes public solicitation or advertising; and (ii) contemplates purchases by a limited number of investors who are capable of evaluating the merits and risks of the investment, and are reasonably believed to be acquiring the securities for investment and not with a view to redistribution. Section 4(2) does not require any notification or filing with the SEC in order to claim the exemption.
Under the Securities Act, the SEC has also adopted Regulation D, a limited offering regulation intended to serve as a non-exclusive set of safe harbor exemptions from Section 5. One of these exemptions, Rule 506, provides a nonpublic offering exemption for private placements of securities: (i) made without general solicitation or advertising; (ii) to an unlimited number of accredited investors (as defined in Regulation D); (iii) and to not more than 35 non-accredited investors who, either alone or with their purchaser representative(s) (as defined) are capable of evaluating the merits and risks of the investment and are furnished with certain information required by Regulation D; (iv) whom the issuer reasonably believes are purchasing the securities for investment; and (v) who agree to the placement on the securities certificates of legends regarding restrictions on transfer. Rule 506's conditions also contemplate filing notification of the exemption with the SEC, although failure to do so will not necessarily cause loss of the exemption.
Question 10
An issuer may decide to seek an exchange listing for its securities or quotation of the securities on NASDAQ, an automated over-the-counter trading system operated by the National Association of Securities Dealers, Inc. ("NASD"), or it may simply elect to permit the securities to trade in less formal OTC markets. In the U.S., the NASD and each national securities exchange are registered with the SEC as self-regulatory organizations ("SROs"). All SRO rules, including listing and quotation requirements and trading rules for the marketplaces they operate, are subject to SEC approval. These rules vary among marketplaces. Issuers must satisfy a marketplace's listing or quotation rules in order to have their securities listed for trading or quotation in that marketplace.
Margin regulations are the responsibility of the Board of Governors of the Federal Reserve System (the "Fed"), although the SEC has authority to prosecute violations of margin rules. Generally, securities eligible for margin include securities listed on a national securities exchange, those quoted on the NASDAQ National Market System, or those included in a list published from time-to-time by the Fed.
Question 13
See response to question 10.
Question 22
See response to question 8.
Question 24
See response to question 10.
Question 27
See response to question 10.
Questions 28-53
These questions are not applicable to the SEC.
Questions 54-57
The SEC responses checked with respect to these questions relate only to financial services within the SEC's jurisdiction.
Question 58
This SEC response is provided with respect to financial services within its jurisdiction.
Investment banking/underwriting
All other broker-dealer operations
Investment advice and asset management
United States Department of Agriculture (USDA)
Question 28
Markets for physical delivery exist in the United States for all agricultural commodities produced here or imported. For most commodities the bulk of the trading is private, executed by telephone or direct personal contact between the buyer and seller or their agents. Public markets exist for many commodities, but trading volume on such markets generally has declined in recent decades. Examples of public markets include spot grain and butter markets at commodity exchanges, livestock auction markets, livestock terminal markets, fruit and vegetable terminal markets, some of which have auctions, tobacco auction markets, and a cheese auction market.
Question 29
Yes, anyone who is financially able to meet his/her commitments can buy or sell on commodity markets.
Question 30
Yes. The U.S. government does not prohibit or regulate transactions on agricultural commodities by its citizens that occur in foreign countries.
Question 31
The U.S. dollar is used in all transactions on public markets and virtually all private transactions are in U.S. dollars.
1. 7 U.S.C. 2a.
2. Securities Exchange Act of 1934 (the "1934 Act") 9(g), 15 U.S.C. 78i.
3. CEA 2 (a) (1) (A) (i) and 2 (a) (1) (B) (v), 7 U.S.C. 2i and 2a(v).
4. CEA S (a) (1) (B) (ii), 7 U.S.C. 2a (ii).
5. Id.
6. Section 4c(f) of the CEA provides that the CEA is inapplicable "to any transaction in an option on foreign currency traded on a national securities exchange." 7 U.S.C. 6c(f).
7. CEA 2(a) (1)(B) (v), 7 U.S.C. 2a(v).
8. The Commission has adopted rules pursuant to section 4(c) of the CEA to exempt certain contract market transactions from specified requirements of the CEA. 60 FR 51323 (October 2, 1995).
9. CFTC rules recognize a limited category of "dealer options," confined to offerors who were in the business of granting options on a physical commodity and in the business of buying, selling, producing or otherwise using the commodity on which such options are offered as of May 1, 1978, and who comply with the requirements of CFTC rules. The CEA permits the Commission to establish a somewhat broader framework for dealer options but the Commission has not yet done so. At the present time, no dealer options are being offered. The CEA also recognizes instruments known as "leverage contracts,"which are long-term (ten years or longer) contracts involving metals and foreign currencies offered and sold on an off-exchange basis by leverage transaction merchants acting as principals to customers who make margin payments and are assessed carrying charges. At the present time, no leverage contracts are being offered.
10. See 17 C.F.R. 35.1 (b) (1), defining "swap agreement."
11. See CEA Section la(11), 7 U.S.C. la(11).
12. 17 C.F.R. 32.4(a).
13. 17 C.F.R. Part 35.
14. The swaps exemption is also subject to CEA Section 2 (a) (1) (B), 7 U.S.C. 2a which relates to, among other things, the allocation of regulatory responsibility for stock index futures contracts and options between the CFTC and the SEC and imposes certain interagency requirements with respect to approval of stock index futures trading.
15. Although the CFTC's swaps exemptive provision preserves the applicability of statutory anti-fraud and manipulation prohibitions, these prohibitions are limited to specified types of conduct involving futures contracts or the cash market. There is no statutory or regulatory anti-fraud provision expressly designed to cover swaps. For example, CEA 4b, the general anti-fraud provision applicable to futures contracts, prohibits, among other things, any person from cheating, defrauding or attempting to cheat or defraud any person "in or in connection with any order to make, or the making of, any contract of sale of any commodity for future delivery...for or on behalf of any other person." Liability under this provision thus would arise from a swap transaction only to the extent that a futures contract under the CEA were shown to be involved.
16. 58 Fed. Reg. 5580 (January 22, 1993).
17. Further,
(i) [a]n issuer must receive full payment of the hybrid inscrument's purchase price, and a purchaser or holder of a hybrid instrument may not be required to make additional out-of pocket payments the issuer during the life of the instrument or at maturity; and
(ii) [t]he instrument is not marketed as a futures contract or a commodity option, or, except to the extent necessary to describe the functioning of the instrument or to comply with applicable disclosure requirements, as having the characteristics of a futures contract or a commodity option; and
(iii) [t]he instrument does not provide for settlement in the form of a delivery instrument that is specified as such in the rules of a designated contract market.
17 C.F.R. 34.3(a)(3).
18. 58 Fed. Reg. at 5581 n.2.
Treatment under the interpretation is limited to such hybrid instruments that are bona fide debt, preferred equity or depository instruments and that: (1) are indexed to a commodity on no greater than a one-to-one basis; (2) limit the maximum loss on the instrument; (3) have a significant commodity-independent yield; (4) do not have a commodity component that is severable from the debt, preferred equity or depository instrument; (5) do not call for delivery of a commodity by means of an instrument specified in the rules of a designated contract market; and (6) are not marketed as being or having the characteristics of a futures contract or commodity option.
57 Fed. Reg. 53618, 53619 (November 12, 1992).
19. Fed. Reg. 21,286 (April 20, 1993).
20. Foreign currency options traded on CETC-regulated exchanges are subject to the CFTC's regulatory framework to the same extent as all other futures and exchange-traded commodity options;foreign currency options traded on national securities exchanges are regulated by the SEC. CEA 4c (f), 7 U. S . C. 6c (f); 15 U.S.C. 78i(g).
21. 17 C.F.R. 32.4(a); 17 C.F.R. 35.1(b) (1) (i).
22. CEA 2 (a) (1) (A) (ii); 7 U.S.C. 2(ii).
23. S. Rep. No. 93-1131, 93d Cong. 2d Sess. 23 (1974).
24. Id.
25. See, e.g., CFTC v. Dunn and Delta Consultants, 58 F.3d 50 (2d Cir., June 23, 1995) and CFTC v. Frankwell Bullion Ltd., No. C-94-2166, 1995 U.S. Dist. (N.D. Ca1. August 14, 1995); and Salomon Forex Inc. v. Tauber, No. 92-1406 (4th Cir. October 18, 1993), and CFTC v. Standard Forex, Inc. 93-0088 (E.D.N.Y. August 9, 1993).