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REPONSE OF TI OFFCE OF Cff COUNSEL

DIVSION OF INTM MAAGEM

Apri 21, 1998

Our Ref. No. 98-147

Safra Republic Holdigs, S.A.

File No. 812-7184

20, 1998 requests our concurrnce that cert wholly owned

Your letter of Apri

subsidiares of Safra Republic Holdings, S.A. ("Safra") ar foreign ban for puiposes of

Rule 3a-6 under the Investment Company Act of 1940 and may rely on the exclusion from

the deÍintion of investment company provided by that role.

Facts

You state that Safra is organied and regulated as a ban holding company under the

laws of Luxembourg. In addition, becuse Republic National Ban of New York

(uRNNYU), a U.S. ban, owns approxiately 49 percent of Safra's outstadig equity

shares, Safra also is subject to U.S. bang regulations with respect to capita adequacy and

lending liits, liitations on trasactions with its afilates, and cert rerting

requirements concerng itself and its subsidies.

You state that Safraprovides international commercial bang seivices to high net

worth individuals, parnerships, and closely held coiporations through wholly owned bang

subsidiares located in Switzerland, Luxembourg, Frace, Monaco, and Guernsey

(collectively, "Bang Subsidiares"). You state that the pricipal business of the Bang

Subsidiares is to accept deposits, the vast majority of which are time deposits with terms of

six months or less. You state that deposits reresent at least 90 percent of each Bang

Subsidiar's libilties.

1 You also state that the priar lendig activity of the Bang

Subsidiares is to provide creit to other ban through interban deposits, with such deposits

raging from 53 percent to 84 percent of each Bang Subsidi's tota assets. You

explai that interban deposits ar a form of commercial lending between ban, and that a

ban wishig to make an interban deposit typicay wil evaluate the other ban in much the

same way as it evaluates loan counteiparies. The amount of conventional loans underwritten

by each Bankg Subsidia rages from 2 percent to 14 percent of tota assets.2

lyou state that, as of June 30, 1997, the percentage of libilties reresented by depsits

for each Bang Subsidi is as follows: RNNY (Switzrlad) -- 90 %; RNNY

(Lxembourg) -- 93%; RNNY (Frace) -- 94%; RNNY (Monaco) -- 96%; and RNNY

(Guernsey) -- 93"%.

2you state that, as of June 30, 1997, for

each Bang Subsidi the percentage of

assets reresented by interban deposits and conventional loans, resptively, is as follows:

RNNY (Switzerlad) -- 59% and 12%; RNNY (Lxembourg) -- 53% and 14%; RNNY

(Frace) -- 58% and 14%; RNNY (Monaco) -- 69% and 2%; and RNNY (Guernsey) __

84% and 2%.

2

You state that Safra would lie to sponsor American Depository Receipts (" ADRs ")

for its common stock that would be listed for tradig on a securities exchange in the United

States. Because Safra holds securities issued by the Bang Subsidiaes, Safra's issuance of

the ADRs would rase issues under the Investment Company Act.

Analysis

Section 3(a)(1)(C) of the Investment Company Act dermes the term "investment

company" as any issuer that is engaged or proposes to engage in the business of investing,

reinvesting, ownig, holding or trading in securities, and owns or proposes to acquire

investment securities having a value exceeg 40 percent of the issuer's tota assets

(exclusive of Governent securities and cash items) on an unconsolidated basis. Section

(2) of that Act defines the term "investment securities" for puiposes of this section to

include al securities except (A) Governent securities, (B) securities issued by employees'

securities companes, and (C) securities issued by majority owned subsidies which (i) are

not investment companes and (n) are. not relying on the exclusions from the derintion of

3 (a)

investment company in Sections 3(c)(1) or 3

(c)

(7) of the Act.

Rule 3a-6 excludes from the derintion of investment company under the Investment

Company Act any foreign ban that meets the role's requirements.3 The role dermes a

foreign bank as a bang institution incoiporated or organed under the laws of a country

other than the United States, or a politica subdivision of a country other than the United

States, that is (A) regulated as a bang institution by that country's or subdivision's

governent or any agency of that governent, (B) engaged substatiay in commercial

bang activity, and (C) not operated for the puipose of evadig the provisions of the

Investment Company Act.

If each of the Bang Subsidiares meets the derintion of foreign ban in Rule 3a-6,

then each Bang Subsidiar would be excepted from the derintion of investment company.

The securities issued by the Bang Subsidiaes that ar held by Safra would not be

considere "investment securities" withi the meag of Section 3(a)(2) beuse the Bang

Subsidies are wholly owned subsidies that ar not investment companes and ar not

relying on the exclusions from the derintion of investment company in Sections 3(c)(1) or

3Although Section 3(c)(3) of the Investment Company Act excludes "ban" from the

derintion of in~estment company, the Bang Subsidies may not rely on that excetion

because the derintion of "ban" in Section 2(a)(5) of that Act does not include foreign

ban.

3

3(c)(7). Thus, these securities would not be counted when determg whether Safra fals

withi the dermition of investment company set forth in Section 3(a)(1)(C).4

You believe that each Bang Subsidi meets the derintion of foreign ban in Rule

3a-6. You represent that each Bang Subsidiar is organ or incoiprated as a bang

institution in the country in which it operates, and that each Bang Subsidi is regulated

as a commercial ban by the governent of that countr. s You also reresent that no

Bang Subsidiar is being operated for the puipose of evadig the Investment Company

Act.

You ask for our concurrence that each Bang Subsidiar is "engaged substatialy in

commercial bang activity," which Rule 3a-6 dermes to mea "engaged regularly in, and

deriving a substatial portion of its business from, extendig commercial and other tyes of

credit, and accepting demand and other types of deposits, that ar customar for commercia

bans in the country in which the head offce of the bang institution is located." You

believe that each Bang Subsidia meets this requirement so long as time deposits are

considered to be "other tyes of deposits" and interban deposits are considered to be

extensions of "commercial and other tyes of creit. " You maita that time depsits

should be considered to be "other tyes of depsits" beause tie deposits are considered to

be "deposits" by the bang regulators in the countries in which the Bang Subsidiares

operate and under u.S. law.6 You also contend that interban depsits should be considered

to be an extension of "commercial and other tys of creit" beuse they are considered to

be extensions of credt by the bang regulators in the countres in which the Bang

Subsidiares operate and under U.S. law.7 Finaly, you state that accepting tie deposits

4you state that you are not askig for the stas position on whether Safra fals withi

the derintion of investment company set forth in Section 3(a)(1)(C). Therefore, we tae no

position on this matter.

SYou note, however, that RNNY (Monaco), lie other ban that operate in Monaco, is

supeivised by French bang regulators in accordace with the Fraco-Monegasque

Conventions. You reresent that, under Monegasque law, ban operatig in Monaco must

comply with French bang regulations. You therefore maita that RNNY (Monaco) is

regulated as a bang institution by Monaco's governent for puipses of Rule 3a-6. We

agree that RNNY (Monaco) is regulated in Monaco as a bang institution "by that

countr's or subdivision's governent or any agency" of that governent for puipses of

Rule 3a-6.

6For example, Section 3 of the Federa Depsit Insurace Act spifcay includes "tie

deposits" as a tye of deposit for puipses of that Act. See 12 U.S.C. § 1813(l)(1).

7For example, Section 23(a) of the Federa Reseive Act, which authoris the Federa

Reseive Board to regulate the "exposure" of one ban to another ban in order to

liit the

risks of ban faiures on other ban, dermes the term "exposure" to include "al extensions

4

and makg interban deposits ar customar bang activities in the countres in which the

Bang Subsidiares operate and in the United States.

Rule 3a-6 is intended to put foreign bans that sell securities in the United States on

an equal footing under the Investment Company Act with domestic ban that sell securities

in the United States without registerig as investment companes in reliance on Section

3 (c)

(3) of that Act. 8 On the basis of your reresentations that (1) tie depsits ar

considered to be deposits, and interban depsits ar considere to be extensions of cret,

both by the bang regulators in the countries in which the Bang Subsidiares operate and

under U. S. law, and (2) accepting time deposits and makg interban depsits are customar

bang activities in the countries in which the Bang Subsidies operate

and in the

United States, we agre that time deposits and interban deposits can be considere to be

. deposits and extensions of credit, respectively, for puipses of Rule 3a-6.

Based on the facts and representations set forth in your letter, we agr that each

Bang Subsidiar is "engaged substatialy in commercial bang activity. "9 We

therefore agree that the Bang Subsidiaes ar foreign ban for puiposes of Rule 3a-6 ànd

may rely on the exception from the derintion of investment company provided by that role.

Because this response is based on the facts and representations in your letter, you should note

that any Øüferent facts or representations might lead to a dierent coiiclusion.

'kJJ l!~~ ~

~1~~elle Ka~rl~an Plesset

Senior Counsel

of credit to the other depository institution, regardless of name or description, includig . . .

al depsits at the other depsitory institution." 12 U.S.C. § 371b-2(c)(1)(A)(i). In addition,

the Offce of the Comptrller of the Currncy taes the position that a depsit made by a

ban in an afilated ban would be considere a loan or extension of cret to the afilte

for puipses of Section 23A of the Federa Reseive Act, which sets forth restrctons on

trasactions with afiltes. See Extensions of Cret to Insiders and Trasactions with

Afilates (Iteipretative Appndi) (Oct. 2, 1996), 61 FI 54533, 54536 (Oct. 21, 1996).

8See Excetion From the Derintion of Investment Company for Foreign Ban and

Foreign Insurace Companes, Investment Company Act Release No. 18381 (Oct. 29, 1991),

56 F.R. 56294 (Nov. 4, 1991) (adoptig Rule 3a-6). See also supra note 3.

9Jn ths regard, we agr that each Bang Subsidi currntly meets the "engaged

substatiay" requirement of the role. See supra notes 1-2 and accmpanying text.

WILMER, CUTLER & PICKERING

2445 M STREET. N.W.

100 LIGHT STREET

WASHINGTON. D.C. 20037-1420

BALTIMORE. MD 21202

TELEPHONE 14101 9S6-28OO

FACSIMILE 141019S6-2828

DAVID M. BECKER

DIRECT LINE 12021 663-650B

TELEPHONE 12021 663-6000

FAC51MILE (2021663-6363

4 CARLTON GARDENS

LONDON SWIY 5AA

TELEPHONE 011 (441711872-1000

FACSIMILE 011 1441711839-3537

INTERNET DBECKERIiWILMERCOM

RUE DE LA LOI 15 WETSTRAAT

B- 1040 BRUSSELS

TELEPHONE 011 13221 285-4900

FACSIMILE 011 (322) 285-4949

FRIEDRICHSTRASSE 95

D- 10117 BERLIN .

TELEPHONE 01, 149301 2022-6400

FACSIMILE ALL (49301 2022-6500

April 20, 1998

Douglas J. Scheidt, Esquire

Associate Director & Chief Counsel

Division of Investment Management

Mail Stop 5-6

Securities and Exchange Commission

450 Fifth Street, N. W.

Washington, D.C. 20549

Subject:

Exemption of a Foreign Ban Sponsoring ADRs from the Provisions of

the Investment Company Act of 1940

We are writing on behalf of Safra Republic Holdings, S.A. ("SRH") concerng its

proposed sponsorship of American Depository Receipts (" ADRs") for its common stock.

The ADRs would be issued pursuant to an exemption from registration under the Securities

Act of 1933 and would be listed for trading on an American securities exchange. SRH is

organed under the laws of Luxembourg as a ban holding company, and is supeivised as

such by the Institut Monétaire Luxembourgeois ("IML"). Among other seivices, SRH

provides international commercial bang seivices to high net wort individuals,

parerships, and closely held coiporations though wholly owned bang subsidiaries

located in Switzerland, Luxembourg, France, Monaco, and Guerney (collectively, the

"Bang Subsidiaries"). Each of these Bang Subsidiaries is licensed and regulated as a

commercial ban in its countr of operation and is organed or incorporated under the law

of its countr of operation.

We are writing to request that the staff of the Division of Investment Mangement

concur with our view that each of these Bang Subsidiaries is "engaged substatially in

commercial bang," for the puroses of Rule 3a-6 under the Investment Company Act of

1940. As a result, the securities issued by the Bang Subsidiaries and held by SRH would

not be "investment securities" within the meang of Section 3

(a)

(2) of the Act and as

applied in determing whether SRH falls within the defmition of "investment company" set

fort in Section 3(a)(1)(C). We are not askig for the stafrs guidance on whether SRH falls

with the dermition set fort in Section 3(a)(1)(C).

BACKGROUN

A. History or Sarra Republic Holdings, S.A.

SRH was formed in the late 1980's to acquire the European bang subsidiaries of

Republic National Ban of New York, a U.S. ban organed under the National Ban Act!1

("Republic National Bank"). Republic National Ban intially owned 100% of the equity of

SRH. In 1988, SRH publicly offered additional shares in Europe and conducted a private

placement in the United States. As a result of this offering, Republic National Ban owns

approximately 49% of the outstading common stock of SRH. Approximately 30% of the

outstading common stock is held by public investors, principally outside of the United

States. The public holders of SRH's common stock include 16 institutions and five

individuals who are United States persons. The remaing 21 % is held by a private investor,

who is also the principal shareholder of Republic National Ban. SRH's common stock is

listed on the Swiss Electronic Stock Exchange, the Luxembourg Stock Exchange and is

traded over-the-counter in London on SEAQ (Stock Exchange Automated Quotation system).

B. Bankig Regulation and Bankig Activities or SRH

1. Bankig Regulation or SRH

Because Republic National Ban owns more than 25% of SRH's common stock, SRH

is regulated on a consolidated basis in accordance with United States bankg law and the

principles set forth by the Basle Committee in the "Concordat." Under commitments made

to the Federal Reserve Board, Republic National Ban and SRH are subject to quantitative

and qualitative limitations on transactions with affiliates. Furter, SRH is subject to United

States regulations on capital adequacy and lending limits. SRH is subject to supervision by

'the Federal Reserve Board and the Office of the Comptroller of the Currency. It is required

to provide United States ban regulators with periodic financial and management reports

concerng itself and each of the Banng Subsidiaries.

SRH is also subject to a comprehensive regulatory regime as a Luxembourg ban

holding company. IML regulationsY applicable to SRH and its Banng Subsidiar in

Luxembourg concern, among other things, solvency ratios, limitations on lending, and

customer identification and protection of ban secrecy. SRH must me audited year-end

consolidated rmancial statements and audited fmacial statements of each subsidiar in

addition to quarerly consolidated reports including a statement of condition, solvency ratio,

11

12 U.S.C. §1, et seq.

Y Pursuant to Luxembourg law, IML and the Minster of the Treasury issue

bang regulations based on EU Directives which govern reporting requirements,

supervision on a consolidated basis, credit loss provisionig and off-balance sheet items.

- 2­

profit and loss account, and concentration of risks. The IML and its representatives have an

unrestricted right to examine the books and records of SRH. SRH is not regulated by the

IML as an investment company. As more fully discussed below, each of SRH's Bang

Subsidiaries is subject to extensive bang regulation in its country of origin. None of the

Bang Subsidiaries is regulated as investment companes.

2. _ Bankig Activities of SRH and the Bankig Subsidiaries

Through its wholly-owned Bang Subsidiaries, SRH provides international

commercial bang seivices to over 22,000 high net wort individuals, parnerships, and

closely held corporations from over 80 countries. The principal activity of SRH's Bang

Subsidiaries is gathering deposits. The Bang Subsidiaries traditionally have placed

principal emphasis on safety, soundness, and liquidity of deposits. As of June 30, 1997,

SRH had over 22,000 deposit customers representing $14.9 bilion~' in deposits. Deposits

are accepted at each of the Bang Subsidiaries; the majority are placed with the Bang

Subsidiaries in Switzerland, Luxembourg and France. Rates of interest paid on deposit

accounts are governed by local ban regulations. As of June 30, 1997, $2.012 bilion of

SRH's deposits had a maturity of one month or less and $10.95 billon had maturities of one

to thee months. Depositors include high net wort individuals and some governental and

quasi-governental

organations. Client deposits equaled 72.6% of SRH's total liabilties

on June 30, 1997. Deposits from bans and other fmancial institutions accounted for an

additional 12.8% of SRH's total liabilties.

In addition to accepting deposits, SRH's Banking Subsidiaries offer comprehensive

bang seivices, of which loans to customers is a significant component. As of June 30,

1997, SRH's tota loan, net of uneared income, equaled $1.995 billon, or 10.8% of its

total assets. SRH's lending activities include margin loans, extensions of credit in connection

with import and export financing, issuing and confiring letters of credits, issuing guarantees

and granting loans to ban, governents, governental agencies, companes and

individuals.

1/

SRH's primar lending activity is the extension of credit to other bans though

interban deposits, which SRH regards as a very conservative form of commercial lending.

Funds advanced to other ban are deposited in accounts in the name of the Bang

Subsidiaries at the other ban. Interban deposits allow the Bang Subsidiaries to ensure

liquidity, reduce credit risk and match the matuity and interest rate characteristics of their

deposit liabilties. For the six months ended June 30, 1997, interban deposits of $6.65

'J Unless otherwise noted, all moneta amounts discussed in ths memorandum

are denomited in United States dollars.

~ SRH generally avoids makg unsecured loans and has strict limits on loan

size regardless of collateralization.

-3­

billon (35.9% of total assets) produced $169 millon in interest income, 32.7% of SRH's

total gross interest income.

In addition to interest income from extensions of credit though lending

activity and interban deposits, SRH derives revenue from debt securities, as well as from

foreign exchange, off-balance sheet fmancial intruents, and other trading assets. SRH's

income from debt instruments is principally derived from U.S. Governent debt instrents

and debt instruents issued by OECD-member countries.2' For the six months ended June

30, 1997, these intrents generated 56.4% of SRH's total gross interest income and their

holdings accounted for 50.3% of its tota assets on June 30, 1997.2

Though non-bang subsidiaries SRH also offers investment funds and provides trst

services. These services do not account for a significant portion of SRH's revenues. For the

six months ended June 30, 1997, the funds generated $10.12 milion in fee income to SRH,

which equaled 1.7% of SRH's gross income.

C. Bankig Regulation and Bankig Activities of the Banking Subsidiaries

1. Republic National Bank of New York (Suisse)

Republic National Ban of New York (Suisse) (hereinafter, "RNBNY(Suisse)"),

SRH's Banng Subsidiar located in Switzerland, is subject to Switzerland's Bang Law

and its Implementing Ordinance. The primar objective of the Banng Law is the protection

of depositors. RNBNY(Suisse) is regulated by the Federal Bankng Commission and the

Swiss National Ban. Under the supeivision of these baning regulators, RNNY(Suisse) is

subject to regulations and restrictions governg capital adequacy, maintenance of reseive

requirements, extensions of credit, savings deposits and customer protection, reporting and

auditing, and prevention of ilegal money laundering, among other subjects. As of June 30,

1997, deposits totaed 90% of RNBNY(Suisse)'s liabilties. Seventy-one percent of

RNNY(Suisse)'s assets were related to extensions of credit, with conventionaloan

2/ On June 30, 1997, SRH owned U.S. Governent and agency securities wort

$4.87 bilion, which equaled 54.6% of its $8.92 bilion portfolio. Another 8.8% consisted of

OECD governent and agency securities and 10% consisted of Non-OECD governenta

securities. SRH also purchases coiporate bonds guaranteed by companes in the U.S. and

other jurisdictions, primarily OECD member countries, and bond guarantees issued by

interntional ban.

§,f SRH offers other seivices tailored to the needs of private bang clients. It

provides portfolio management services (over 90% on a non-discretionar basis) and the

execution of transactions in foreign exchange, precious metas, securities and banotes. It

also provides safekeeping, trst and other fiduciar seivices. As of June 30, 1997, client

portfolio management assets exceeded $15 bilion.

- 4­

comprising 12 % of its assets, and interban deposits accounting for another 59 %.

2. Republic National Bank of New York (Luxembourg)

Like SRH, Republic National Ban of New York (Luxembourg) (hereinafter,

"RNBNY(Luxembourg)") is subject to bang regulation by the IML. As noted above,

applicable IML regulations concern, among other things, solvency ratios, limtations on

lending, and customer identification and protection of ban secrecy. While the IML also

supeivises investment companies, RNBNY(Luxembourg) is regulated as a ban, rather than

an investment company. As of June 30, 1997, deposits totaled 93 % of

RNNY(Luxembourg)'s liabilties. Sixty-seven percent of RNBNY(Luxembourg)'s assets

were related to extensions of credit, with conventional loan comprising 14% of its assets,

and interban deposits accounting for another 53 % .

3. Republic National Bank of New York (France)

Republic National Ban of New York (France) (hereinafter, "RNBNY(France)") is

subject to the Law 84-46 of Januar 24, 1984 and regulated by the Comité de la

Réglementation Bancaire, the Comité des Etablissements de Crédit and the Commission

Bancaire.1 As a French ban, RNBNY(France) is subject to regulations and requirements

relating to minimum capital requirements, operating stadards, accounting and reporting

requirements, prudential ratios, and credit operations. As of June 30, 1997, deposits totaled

94% of RNBNY(France)'s liabilties. Seventy-two percent of RNBNY(France)'s assets were

related to extensions of credit, with conventional loans comprising 14% of its assets, and

interban deposits accounting for another 58 % .

4. Republic National Bank of New York (Monaco)

In addition to being subject to the French bang regulators described above,

Republic National Ban of New York (Monaco) (hereinafter, "RNBNY(Monaco)") must me

anual reports with the Budget and Treasury Deparent of the Monegasque governent.

As of June 30, 1997, 96% of RNBNY(Monaco)'s liabilties consisted of deposits. Seventyone percent of RNBNY (Monaco)' s assets were related to extensions of credit, with

conventiona loan comprising 2 % of its assets, and interban deposits accounting for another

69%.

5. Republic National Bank of New York (Guernsey)

11 Significantly, RNBNY(France) is not regulated by the Commission des

Opérations de Bourse, the primar regulator of collective investment schemes (known as

organsmes de placement collectif en valeurs mobilères) in France.

-5­

Republic National Ban of New York (Guernsey) (hereinafter, "RNNY(Guernsey)")

is regulated by the Guernsey Pinancial Services Commissions ("GPSC") and the Bang

Supervision Law 1994, which is modeled on the United Kigdom Bang Act 1987. The

primar purpose of the Bang Supervision Law is the protection of depositors, and the

GPSC has endorsed the views of the Basle Commttee. Principal regulations involve capita

adequacy requirements and the fiing of audited anual accounts. As of June 30, 1997,

lending activities

deposits totaed 93.% of RNBNY(Guerney)'s liabilties. Conventional

comprised 2 % of its assets, while interban deposits accounted for another 84 % for a total

commitment of 86% of RNBNY(Guerney)'s tota assets to the extension of credit.

DISCUSSION

A. The Investment Company Act

The Investment Company Act is the principal statute by which

investment

companes in the United States are regulated. The analysis of whether a entity is subject to

the Act begin with section 3(a), which contains two broad prima facie defmitions of

"investment company": section 3(a)(1)(A) and section 3(a)(1)(C).~ Section 3(a)(1)(C) of the

Investment Company Act provides a defmition of investment company that is intended to

cover so-called "inadvertent investment companes." Section 3(a)(1)(C) applies to issuers

that: (1) are engaged in the business (whether or not primarily); (2) of investing,

reinvesting, owning, holding, or trading in securities; and (3) that own or propose to acquire

"investment securities" having a value exceeding 40 per cent of the issuer's total assets

(exclusive of Governent securities and cash items) on an unconsolidated basis. As

applicable, "investment securities" include all securities other than Governent securities and

securities issued by majority-owned subsidiaries that are not, themselves, investment

companies.

In the context of foreign ban, Rule 3a-6 under the Investment Company Act

provides that a "foreign ban," even if it might otherwise fit within the statutory derintion

of "investment company," is not an "investment company for purposes of the Act." For

purposes relevant here, Rule 3a-6(b)(1)(I) defmes a "foreign ban" to mean a bang

§/ Section 3(a)(1)(B) encompasses a largely extinct tye of issuer conducting.

business relating to. "face-amount certifcates of the intallment type" and is not relevant to

ths memorandum. In the context of holding companes such as SRH, the Commssion has

recognied that such companes typically do not fall within the section 3(a)(1)(A) defmition

of investment company. United Asset Management Corp., SEC No-Action Letter, 1981 WL

26656 (Nov. 2, 1981); accord, e.g., Centex Corporation, SEC No-Action Letter, 1986 WL

67464 (Nov. 20, 1986).

- 6­

intitution2' incorporated or organed under the laws of a country other than the United

States that is:

(A) Regulated as such by that countr's government or any agency

thereof;

(B) _ Engaged substatially in commercial bang activity; and

(C) Not operated for the purpose of evading the provisions of the

Company Act.

The Commission has specifically contemplated that holding companes of foreign ban

excluded by rule 3a-6 generally can rely on the asset test in section 3(a)(1)(C) to determe

their status under the Investment Company Act -- and ordinarily would not fall with the

derintion in section 3(a)(1)(A).l1

B. Application of the Investment Company Act to SRH and the Bankig Subsidiaries

In our view, the Baning Subsidiaries are excepted from the defmition of investment

company by Rule 3a-6. As noted above, each SRH's Ban Subsidiaries is regulated by the

governent in the country in which it operates as a commercial ban.ll None of the

Banng Subsidiaries is regulated as an investment ban or inve'stment company. The

Bang Subsidiaries have not been operated for the purpose of evading the provisions of the

Investment Company Act. Each has been operating its bankg businesses in foreign

countries for years. The only issue, then, is whether the Bank Subsidiaries can be said to be

21 Although "bans" are excepted from the defmition of investment company by

Section 3(c)(3) of the Company Act, neither SRH nor its subsidiaries is a "ban" for

puiposes of Section 3(c)(3) because the term is limited by Section 2(a)(5) to entities that are

. organed under the laws of the United States, members of the Federal Reserve System, or

that, among other things, do business under the laws of any state or the United States.

lQ Exception From the Definition of Investment Company for Foreign Bank and

Foreign Insurance Companies, Investment Company Act Release No. 18381 (Nov.

4, 1991).

HI Rule 3a-6(B)(1)(i)(A) specifies that a "foreign ban" is one organed under

the laws of a foreign countr and regulated as such by "that country's or subdivision's

governent or any agency thereof." (Emphasis added.) As noted, RNBNY Monaco is

reguated by French bang authorities. The regulation of Monégasque ban by French

bang authorities results from the Franco-Monégasque Conventions, which are agreements

between the two countries. Under Monégasque law, Monégasque ban are required to

comply with French bang regulations. Accordingly, RNBNY Monaco is regulated as a

ban by Monaco's governent with the meang of Rule 3a-6.

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"engaged substatially in commercial bang."lY

The term "engaged substatially in commercial bang activity" is dermed by Rule

3a-6(b)(2) to mean:

engaged regularly in, and deriving a substatial portion of its business

from, extending commercial and other tyes of credit, and accepting

demand and other tyes of deposits, that are customar for commercial

bans in the country in which the head office of the bang intitution

is located.

While "substantial" as used in Rule 3a-6 is not dermed, it plainly means something less than

"principal" or "primar." Rule 3a-6 is descended, largely without change, from former

Commission Rule 6c-9. As originally proposed in 1986, Rule 6c-9 would have dermed

"foreign ban" as an entity "primarily engaged in accepting demand deposits and makg

commercial loan. "lll

In response to criticism by commenters that this definition was too restrictive, the

Commission determined to revise the dermition "so that it imposes no requirements as to the

primar activities engaged in by the entity seekig to use the rule. "111 The Commission also

broadened the definition of "engaged substatially in commercial bang activity" to include

the acceptance of "demand and other" deposits and the extension of "commercial and other"

credit. The Commission gave no explanation for this latter change.

In 1991, the Commission rescinded Rule 6c-9 and promulgated Rule 3a-6. This rule

caried forward most of the substace of the earlier rule and permitted foreign ban to issue

equity as well as debt securities in reliance on the rule. The Commission made no change to

gi When a holding company owns securities issued by non-investment company

subsidiaries, the staff of the Commission has stated_ that "it appears that (the holding

company) would not be an investment company as dermed in section 3(a)(1) because its

primar business would be ownig or holding securities rather than 'investing, reinvesting,

or trading' in them, compare (sic) 'investing, reinvesting, ownig, holding or trading' in

Section 3(a)(3)...."'United Asset Management Corp., SEC No-Action Letter, 1981 WL

26656 (Nov. 2, 1981); accord, e.g., Centex Corporation, SEC No-Action Letter, 1986 WL

67464 (Nov. 20, 1986).

ill See Exemption From the Investment Company Act of 1940 for the Ofer or Sale

of Debt Securities and Non-Voting Preferred Stock by Foreign Banks or Foreign Bank

Holding Companies, Investment Company Act Release No. 16093 (Oct. 29, 1987) ("Rule 6c­

9 Adopting Release")(emphasis added).

HI

Id.

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the dermition of "engaged substatially in commercial bang activity." The Commission

reaffirmed that the overarching purpose of the rule was

to put foreign bank selling securities in the United States on an

equal footing under the Act with ban in like circumstaces

organed under the laws of the United States.lll

1. SRH's Bankig Subsidiaries Are "Engaged In the Business

of Commercial Bankg"

a. SRH's Bankg Subsidiaries Derive A Substantial Amount of

Their Business From Accepting Demand and Other Deposits

The principal business of SRH's Bang Subsidiaries is to accept demand and other

deposits. Relatively few of these deposits are demand deposits, although the vast majority

are for 6 months or less. Both the demand and time deposits are plainy "deposits" within

the meaning of Rule 3a-6. Rule 3a-6 describes involvement in "commercial bang

activity" as including the acceptance of "demand and other deposits." The demand deposits

accepted by the Bang Subsidiaries are explicitly covered by the rule.

The time deposits are "other deposits" within the meang of the rule. They are

funds deposited by customers with the Bang Subsidiaries for specified terms and at rates

of interest agreed to between them and the Bang Subsidiaries. Accepting time deposits is

a customar bang activity in each of the countries in which the Bang Subsidiaries

operate and in the United States. While the funds are on deposit, the Bang Subsidiaries

maintain accounts showing the amounts owed to each customer. Pursuant to the agreements,

at the end of the specified term the Bang Subsidiaries are obligated to return the funds to

the clients plus the interest.

ISI Id. In the release proposing amendments to Rule 6c-9, the Commission also

stated it wanted to expand the rule to exempt entities that do not, in effect, fuction as

investment companes and are already regulated by an appropriate regulatory authority.

Exemption from the Investment Company Act of 1940 for the Ofer and Sale of Securities by

Foreign Bank, Investment Company Act Release No. 17682 (Aug. 17, 1990). The

Commission furter noted that the

expanion was designed to cover entities with which it was

already familar though the exemptive process. The Commission recognied, however, that

different countries have different regulatory schemes and defmitions of the range of permtted

ban activities. In the subsequent release adopting Rule 3a-6 in place of the proposed

amendments to Rule 6c-9, the Commission expressed reluctace to exempt foreign rmancial

intitutions which were sufficiently dissimar to the primarily commercial ban with which

it was familar without the furter analysis provided by exemptive applications. Adopting

Release at * 4 & n.15.

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The liabilties consisting of the obligations to pay the funds to the clients at the

expiration of the designated term are caried on the rmancial statements of the Bang

Subsidiaries as "deposits." These rmancial statements are certified by independent auditors

and are submitted to the bang authorities in the countries in which the Bang

Subsidiaries are located. The time deposits are thus customarily viewed as "deposits" by the

regulatory authorities in the countries in which the Bang Subsidiaries are located.

-

These liabilties are also recognied as "deposits" by bang regulators in the United

States. "Deposit" has an extremely broad dermition under United States bang law.

Under the Federal Deposit Insurance Act, "deposit" is dermed to include virally any

liabilty for money owed by a ban to a person. See 12 U.S.C. § 1813 (a)(l), which sets

fort the applicable dermition. The Federal Reserve Board, in Regulation D of its

regulations, dermes "deposit" in equally sweeping terms. See 12 C.F.R. § 204.2(a)(1).

Each of the Bang Subsidiaries caried deposits equal to at least 90% of its

liabilties as of June 30, 1997. Specifically, the percentage of liabilties represented by

deposits are as follows: RNBNY(Suisse)--90 %; RNBNY(Luxembourg)--93 %;

RNBNY(France)--94%; RNBNY(Monaco)--96%; and RNBNY(Guemsey)--93%.W Clearly,

SRH's Bankg Subsidiaries derive a substantial amount of business from accepting demand

and other deposits.

b. SRH's Bankig Subsidiaries Derive a Substantial Amount of

Their Business From Extending Commercial And Other

Types of Credit

Because of SRH' s conservative approach in regard to risk, a high percentage of the .

assets

of the Bang Subsidiaries are interban deposits as opposed to other types of

at least twothirds of the assets of each Baning Subsidiar consist of extensions of credit in the form of

commercial

loans. As noted earlier, for the six months ended June 30, 1997,

loan and interban deposits. Specifically, the percentage of assets represented by

conventional

lending activities and interban deposits are as follows: RNNY(Suisse)--71 %;

RNBNY(Luxembourg)--67 %; RNBNY (France)--72 %; RNBNY(Monaco )--71 %; and

RNBNY(Guemsey)--86%. If interban deposits are considered under Rule 3a-6 as an "other

tye" of credit, each of the Bang Subsidiaries can plainy be said to be "deriving a

substatial portion of its business from, extending commercial and other tyes of credit. "11/

161 On a consolidated basis, SRH held $12.24 bilion in deposits as of June 30,

liabilties.

1997. These constituted 72.6% of SRH's tota

11/ On a consolidated basis, SRH's assets include $1.995 bilion in loan, which

constitute 10.8% of its total assets. Most of these loan are with SRH's individual customers.

These, of course, are no less "commercial" than loan to non-natual persons.

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By dermition, only bans make interban deposits. In economic reality, interban

deposits are merely specialized forms of

extensions of credit to the accepting ban and are

indistinguishable from other forms of lending. And in fact, from a risk management

stadpoint, the Bang Subsidiaries treat interban deposits just as they do other forms of

extension of credit. As a matter of general practice, commercial ban, including the

Bang Subsidiaries, evaluate the ban with which they places deposits in much the same

way they evaluate Joan counteiparies. Interban deposits are managed by each Bang

Subsidiar's treasurer within established guidelines set by SRH that tae into account credit

risks, maturity and currency risks. Makg interban deposits is a customar bang

activity in each of the countries in which the Bang Subsidiaries operate and in the United

States. Interban deposits are regarded as extensions of credit by the bang regulators of

the countries in which the Bang Subsidiaries operate.

United States bang law treats interban deposits as extensions of credit. To take a

recent example, in 1991 Congress made a variety of changes to the bang laws though the

enactment of the Federal Deposit Insurance Corporation Improvement Act, 105 Stat. 2236

(1991). Section 308(a) of that statute added a new Section 23(a) to the Federal Reseive Act,

12 U.S.C. § 221 et seq. That provision, codified at 12 U.S.C. § 371b-2, was designed to

minize the risk of snowballng ban failures by granting to the Federal Reserve Board

broad authority to regulate the "exposure" of one ban to another. Significantly, Congress

dermed "exposure" to include thee classes of transactions, one of which is-­

"all extensions of credit to the other depository institution, regardless of

name or description, including . . . all deposits at the other depository

institution." 12 U.S.C. 371b-2(c)(1)(A)(i)(emphasis added))!!

The legislative history of the provision confirms that Congress intended,' in the words of the

Senate Bang Committee, to minize the risk arising when banks "extend credit

representing significant portions of their capital to one another.".!

Similarly, Section 23A of the Federal Reserve Act, 12 U.S.C. § 371c, govern

tranactions that constitute a "loan or extension of credit" between affiliated ban and grants

the Office of the Comptroller of the Currency to regulate those tranactions. In 1996, the

OCC promulgated new rules to cover afÏiiated tranactions. In an interpretative appendix to

the rules, the OCC specifically found that "(t)he OCC considers a deposit-made by a ban in

18! Notably, holdings of securities of other ban formed a discrete category of

exposure, rather than being considered an extension of credit. ¡d. at §371b-2(c)(1)(B) and

(C).

.!

S. Rep. No. 167, 102nd Cong., 1st Sess., at 118.

- 11 ­

an affiiated ban to be a loan or extension of credit under" 12 U.S.C. 371c.20/

Most recently, the Internal Revenue Service re-proposed rules that would treat

interban deposits as loans for purposes of a lending test used to determine whether a foreign

corporation's income is derived from the active business of banng or from the kids of

passive investments made by investment funds.ll' Prior to 1986, u.s. investors in foreign

investment companes were not taxed on undistributed income retained by a foreign

investment company. In contrast, investors in domestic investment companes generally were

taed on all of the fund's income, distributed or not. Congress decided to eliminate this tax

advantage of investing in foreign funds by enacting the Passive Foreign Investment Company

("PFIC") Rules.ll These rules apply to shareholders of a foreign coiporation if at least 75 %

of the corporation's income is passive or at least 50% of its assets produce passive income.

For the purposes of applying these tests, Congress specified that income derived from the

active conduct of a bang business by a United States licensed ban would not constitute

passive income.

The IRS has subsequently provided guidance and proposed regulations that provide

similar treatment for foreign ban that are not licensed in the United States.ll/ Among other

requirements, to qualify as "foreign bans," entities must accept a substatial amount of

deposits and "regularly make loan to customers in the ordinar course of its trade or

business. "M/ These requirements are driven by the IRS' belief that Congress intended that

the bang exception should apply "only to corporations that conform to a traditionalU.S.

baning modeL. "ld/ Significantly, the IRS's recent proposal specifically concludes that "the

IRS and Treasury determined that interbank deposits were made and accepted in the ordinary

course of a bang business, and therefore should be treated as such for purposes" of the

'l/ See, e.g., Extensions of Credit to Insiders and Transactions With Affliates, 61

F.R. 54533, 54536 (OCC Oct. 21, 1996).

ll/ General Rules for Makg and Maintaing Qualified Electing Fund Elections,

IRS Notice of Proposed Rulemakg, 63 F.R. 39 (Jan. 2, 1998). The proposed rules are

attched.

2J See id.; Exceptions to Passive Income Characterization for Certin Foreign

Ban and Securities Dealers, IRS Notice of Proposed Rulemakg, 60 F .R. 20922 (Apr.

28, 1995).

'1/

Id.

24/ Exceptions to Passive Income Characterization for Certin Foreign Ban and

Securities Dealers, IRS Notice of Proposed Rulemakg, 60 F.R. 20922 (Apr. 28, 1995).

?:

Id.

- 12­

Internal Revenue Code.£Q1

In sum, while inteipreting an exception analogous to the ban exception in the

Investment Company Act, the IRS has come to the conclusion that interban deposits should

purposes of distinguishing foreign ban from foreign corporations

that are essentially investment companies. Similarly, interban deposits should be considered

extensions of "col1ercial and other types of credit" for purposes of Rule 3a-6.

be considered loans for

*

*

*

*

*

Based on the foregoing, we respectfully request that the Staff concur with our view

that each of these Bang Subsidiaries is "engaged substatially in commercial bang," for

the puroses of Rule 3a-6 under the Investment Company Act and is thus excepted from the

derintion of "lnvestment company. "

Sincerely,

.'. :/ 'P=A/

!.~ (¿

L. - LvL- - '''\./ .

David M. B~c~br

ariane K. SmÝthe

Janet M. Grossnickle

1:

63 F.R. at 39.

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