Article XII Company
What Is an Article XII Company?
An Article XII company is a investment company chartered under the New York State Banking Law to finance international banking transactions. Article XII companies are generally owned by foreign banks and commonly participate in activities like internationally arranged commercial banks, like lending to overseas borrowers, foreign exchange (Forex) trading, and the issuance of letters of credit.
Understanding an Article XII Company
Companies chartered under Article XII are given the freedom to operate like banks without facing the very level of legal restraint and examination that other financial institutions (FI) in the United States typically need to persevere. These companies are not subject to registration under the Investment Company Act of 1940 and are defined by the New York State Department of Financial Services as: "particular non-depository lending institutions that have broad borrowing and lending powers and may invest in stocks and bonds."
Article XII companies can sell debt securities to the public without the oversight of the Securities and Exchange Commission (SEC). They are additionally able to offer different other banking services, despite the fact that there are limitations in place on deposits.
Article XII companies are not permitted to acknowledge deposits in New York State. A similar rule applies to the other United States too, except if endorsement is conceded by the New York State Banking Board.
Article XII companies are, nonetheless, permitted to acknowledge credit balances in the state of New York. These credit balances are not classified as deposits nor are the accounts wherein they are held classified as demand-deposit accounts. Thus, they are exempt from the Federal Reserve System's (FRS) reserve requirements.
Types of Article XII Company
Article XII investment companies change in nature. Some represent considerable authority in commercial or retail sales finance, while others are centered around domestic and international commercial and merchant banking.
Today, several foreign banks, as well as a number of domestic finance companies, like American Express Co. (AXP), Western Union Co. (WU), and General Electric Co. (GE), have Article XII status.
History of Article XII Companies
The first charter for an Article XII company was allowed to Banque Nationale de Paris, France's biggest bank, in 1919 to open the French-American Banking Corp. in New York. Four years later, in 1923, the second charter was issued, that opportunity to Schroder, owned by the Schroder Banking Group in London.
For a long time, the policy of the New York State's Banking Department was to permit foreign banks to lay out investment companies provided that there could have been no other practical means of entering the New York market. This makes sense of the presence of a considerable lot of the current Article XII companies, including French-American, Fiduciary Investment Corp., and Sterling Banking Corp.
From 1950 to 1975, the New York State Banking Department and the Federal Reserve Board (FRB) agreed that no new Article XII companies would be framed. All things being equal, it was decided that any new foreign candidates for Article XII status would be approached to look for agency or branch status. This would manage the cost of them a comparable organizational structure while permitting the Federal Reserve to firmly monitor their operations more.
In the late 1970s, the New York State Banking Department had a change of heart. With the economy faltering, and numerous international financial organizations inclining toward places like the Cayman Islands, London, and Zurich, a decision was taken to begin offering foreign banks broader financial powers once more, careful that doing so could assist with supporting employment and tax revenues.
- An Article XII company is an investment company chartered under the New York State Banking Law to finance international banking transactions.
- Companies chartered under Article XII are able to do numerous things that commercial banks in the United States are disallowed from doing.
- They commonly take part in activities like internationally situated commercial banks, like lending to overseas borrowers, foreign exchange (Forex) trading, and the issuance of letters of credit.
- They are not permitted to acknowledge deposits, yet they can hold credit balances and are exempt from the Federal Reserve System's (FRS) reserve requirements.