What Is an Article XII Company?

An Article XII company is an investment company chartered under the New York State Banking Law to finance international banking transactions. Article XII companies are usually owned by foreign banks and typically engage in activities similar to internationally oriented commercial banks, such as lending to overseas borrowers, foreign exchange (Forex) trading, and the issuance of letters of credit.

Key Takeaways

  • An Article XII company is an investment company chartered under the New York State Banking Law to finance international banking transactions.
  • They typically engage in activities similar to internationally oriented commercial banks, such as lending to overseas borrowers, foreign exchange (Forex) trading, and the issuance of letters of credit.
  • Companies chartered under Article XII are able to do many things that commercial banks in the United States are prohibited from doing.
  • They are not permitted to accept deposits, but they can hold credit balances and are exempt from the Federal Reserve System's (FRS) reserve requirements.

Understanding an Article XII Company

Companies chartered under Article XII are given the freedom to operate like banks without facing the same level of legal restraint and scrutiny that other financial institutions (FI) in the United States usually have to endure. 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: "specialized 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 also able to offer various other banking services, although there are restrictions in place on deposits.

Article XII companies are not permitted to accept deposits in New York State. The same rule applies to the rest of the United States as well, unless approval is granted by the New York State Banking Board.

Article XII companies are, however, allowed to accept credit balances in the state of New York. These credit balances are not classified as deposits nor are the accounts in which they are held classified as demand-deposit accounts. For this reason, they are exempt from the Federal Reserve System's (FRS) reserve requirements.

Types of Article XII Company

Article XII investment companies vary in nature. Some specialize in commercial or retail sales finance, while others are focused on domestic and international commercial and merchant banking.

A handful of these companies are also owned by securities firms, serving as holding companies for banking subsidiaries located in the European Union (EU)

Today, several foreign banks, as well as a number of domestic finance companies, such as 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 granted to Banque Nationale de Paris, France's largest bank, in 1919 in order to open the French-American Banking Corp. in New York. Four years later, in 1923, the second charter was issued, that time to Schroder, owned by the Schroder Banking Group in London.

For many years, the policy of the New York State's Banking Department was to allow foreign banks to establish investment companies only if there were no other practical means of entering the New York market. This explains the existence of many 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 formed. Instead, it was decided that any new foreign applicants for Article XII status would be asked to seek agency or branch status. This would afford them a similar organizational structure, while allowing the Federal Reserve to monitor their operations more tightly.

In the late 1970s, the New York State Banking Department had a change of heart. With the economy wavering, and many international financial businesses gravitating toward places such as the Cayman Islands, London, and Zurich, a decision was taken to start offering foreign banks broader financial powers again, mindful that doing so could help to boost employment and tax revenues.