[SAA for NAFTA CHAPTER 14]
NORTH AMERICAN FREE TRADE AGREEMENT, STATEMENT OF
ADMINISTRATIVE ACTION, CHAPTER FOURTEEN: FINANCIAL SERVICES,
H.R. DOC. NO. 159, 103D CONG., 1ST SESS. 163-172 (NOVEMBER 4, 1993)
1.
Scope of Chapter
Chapter Fourteen sets out rules governing the treatment each NAFTA government
must accord to those financial institutions in its territory that are owned by investors from
other NAFTA countries, to the investors who own or seek to own those institutions, and to
persons in other NAFTA countries providing financial services into its territory on a
cross-border basis. The Chapter applies to federal, state and local government measures
in the financial sector and, pursuant to Article 1402, to certain self-regulatory
organizations.
Paragraph two of Article 1401 applies certain provisions in NAFTA’s investment
and cross-border services chapters to financial services. These are:
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the requirement to permit transfers of profits, interest and other payments
associated with an investment (Article 1109);
rules governing the expropriation of an investment (Article 1110);
procedures for investors to bring a NAFTA government to international arbitration
for violations of investment rights (Articles 1115-1138); and
exceptions allowing a NAFTA government to apply reasonable formalities to
foreign investors (Article 1111) or to deny benefits to “shell” corporations or
certain other companies (Articles 1113 and 1211).
Paragraph two also applies Article 1114 to financial services. That Article makes
clear that governments can apply environmental measures consistent with the NAFTA and
provides that no NAFTA government should lower its environmental standards to attract
investments.
Paragraph three clarifies that the chapter does not prevent a NAFTA government
from acting as the sole provider of public retirement benefits, social security or other
financial services.
Paragraph four and its accompanying Annex carry forward in the NAFTA two
specific commitments made by the United States in the CFTA. These commitments
apply only with respect to Canada. One permits foreign and domestic banks in the
United States to deal in, purchase and underwrite Canadian government securities under
the Glass-Steagall Act [which the U.S. has repealed]. The other guarantees certain
“grandfather” rights under the International Banking Act of 1978 for interstate branch
offices of Canadian banks. No other provisions of the CFTA have been carried forward
because the NAFTA obligations in all other respects exceed the level of obligation under
the CFTA.
2.
General Provisions
Chapter Fourteen establishes rules for governmental measures with regard to: (1)
the establishment of a financial institution; (2) cross-border financial services; (3) the
non-discriminatory treatment of investors, financial institutions and cross-border service
providers; (4) new financial services and data processing; (5) senior management and
boards of directors; and (6) the “transparency” of financial services laws and regulations.
a.
Establishment of a Financial Institution
Under Article 1403, each NAFTA country must permit investors from the other
NAFTA countries to establish financial institutions within its territory on a nondiscriminatory basis, although institutions may be required to take the form of
subsidiaries. The Article recognizes, however, that in principle investors should have the
right to choose the form of establishment – branch or subsidiary – that best meets their
particular needs. To this end, the Article provides that, in the event that the United States
permits nationwide banking, the three governments will undertake negotiations toward
ensuring a right to establish branches throughout North America.
b.
Cross-Border Trade
Article 1404 provides that each NAFTA country generally cannot enact measures
that restrict those cross-border financial services activities presently permitted under its
law. The obligation guarantees the continued access of U.S. financial firms to other
NAFTA markets on a cross-border basis. However, Canada recorded a “reservation” in
Annex VII exempting cross-border trade in securities services with the United States
from this general rule, and the United States took a reciprocal reservation in this area. ...
In addition, each government must permit its consumers to purchase financial services on
their own initiative in other NAFTA countries. Each government may require registration
of firms and financial instruments involved in cross-border transactions to protect
investors.
c.
Non-Discrimination
Chapter Fourteen sets out national treatment and most-favored-nation treatment
rules. The non-discriminatory treatment required under this article will permit U.S. firms
to compete in other NAFTA markets as those markets liberalize and grow in the future.
Under Article 1405, each country must provide financial services firms from other
NAFTA countries treatment that is “no less favorable” than the treatment it provides
domestic firms in like circumstances. This requirement can be met by providing equal
competitive opportunities to domestic and foreign-owned firms. In the case of foreign
firms operating in the United States in different states, national treatment will be
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determined by referring to the most favorable treatment accorded to firms in the foreign
firm’s state of domicile or, in the case of a commercial bank, its “home state” under the
International Banking Act of 1978.
Article 1406 requires most-favored-nation treatment. That means that a NAFTA
country must give financial services firms from another NAFTA country treatment that is
“no less favorable” than the treatment it provides to financial firms from any other
country in like circumstances, including non-NAFTA countries. Paragraphs two through
four clarify that the article does not prevent a NAFTA country from applying different
treatment where the difference is based on valid regulatory harmonization or recognition
of home-country regulation in a particular country.
Where the national treatment required under Article 1405 is a different standard
than that required under the most-favored-nation treatment obligation of Article 1406, the
better of the two treatments must be accorded.
d.
New Financial Services and Data Processing
Article 1407 requires each NAFTA government to permit financial institutions
from other NAFTA countries to offer new services that are similar to those already
permitted under its law. The article also provides that foreign financial firms must be
permitted to transfer data from one NAFTA country to another for processing. These two
rights will allow U.S. firms to utilize their expertise in financial innovation and backoffice operations in other NAFTA countries.
e.
Senior Management and Boards of Directors
Article 1408 protects the rights of U.S. financial firms to staff and manage their
investments in other NAFTA countries with U.S. personnel. The article provides that
financial institutions in one NAFTA country owned by persons from other NAFTA
countries may hire senior management and other essential personnel regardless of their
nationality. In addition, the board of directors of a financial institution owned or
controlled by investors of another NAFTA country may not be required to include more
than a simple majority of members who are nationals or residents of a particular NAFTA
country.
f.
Regulatory “Transparency”
Under Article 1411, each NAFTA government is generally required to provide its
draft financial laws and regulations to interested persons before putting them into effect
and to permit those persons to comment on the drafts. In addition, the article commits
each government’s regulatory authorities to provide information on the status of an
application and to act on an application within 120 days, if possible, after a completed
application is provided to them. These disciplines will assure transparency in foreign
regulation and expeditious processing of applications.
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3.
Exceptions
Article 1410 sets out generally exceptions that apply to the chapter and
Agreement. Paragraph one provides that nothing in the Chapter ... prevents a government
from taking reasonable prudential measures. Paragraph two makes clear that actions by a
NAFTA country to carry out non-discriminatory monetary, credit and exchange rate
policies are not subject to the Chapter.... Paragraph two does not affect the obligations
imposed under the NAFTA regarding the imposition of performance requirements in
connection with an investment or regarding restrictions on transfers.
Under Paragraph three, each NAFTA country is permitted to favor its nationals or
firms in the privatization of social security and public retirement plans. Paragraph four
specifies that governments may impose non-discriminatory prudential restrictions on
transfers to affiliates.
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5.
Reservations and Transitional Arrangements
Article 1409 creates a system of limited “reservations” and “grandfathering” to
exempt certain laws and regulations that are inconsistent with the obligations set out in
Articles 1403 through 1408. Each government has listed in Section A of its schedule to
Annex VII those existing federal-level measures that are exempt. A “ratchet” provision
in paragraph 1(c) of the article provides that once a reserved law is liberalized in cannot
later be made more restrictive.
The three governments have listed in Section B of their schedules those financial
services sectors where they have reserved the right both to maintain existing inconsistent
federal measures and adopt new ones. ...
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The following describes the principal reservations recorded by each country,
including, where relevant, any phase-in schedule under which a government will bring its
laws into conformity with the obligations of the Chapter.
a.
Canada
... [One restriction,] found in Section B of Canada’s schedule, permits Canada to
introduce new restrictions on cross-border securities activities.
... [Another] restriction involves the question of whether U.S. and Mexican banks
owned by non-NAFTA persons can benefit from the Agreement’s rules. The general rule
in Chapter Fourteen is that any company resident in a NAFTA country – regardless of
ultimate ownership – is considered a NAFTA firm. For purposed of access to Canada,
however, NAFTA’s benefits are limited to firms in Mexico and the United States that are
ultimately controlled by U.S. and Mexican persons. [Accordingly, a European- or
Japanese-controlled bank in Mexico or the United States would not be eligible.]
b.
Mexico
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(1)
Existing and Future Restrictions
Under Section A of its schedule to Annex VII, Mexico has reserved the right to
apply its current investment restrictions. Under these restrictions, foreign investors may
hold an aggregate of 30 percent of the voting stock in financial holding companies,
securities firms or banks, and up to 49 percent of the voting stock of insurance
companies, factoring companies, leasing companies, bonding companies and
warehousing companies.
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Paragraph 16 of section B allows Mexico to restrict cross-border peso operations
where such operations would impair the conduct of Mexico’s monetary and exchange
rate policies. This provision is intended to permit Mexico to continue to avoid the
establishment of an off-shore peso market. It is not intended to allow Mexico to restrict
transactions that are based in pesos but settled in dollars. Thus, a Mexican company
would not be restricted from drawing on an off-shore dollar facility even though the
amount of the draw was based on a specific peso amount. Also, the purchase outside of
Mexico of a peso-denominated instrument for an amount of foreign exchange would not
be covered by this exception.
Finally, paragraph 17 of Section B permits Mexico to deny the benefits of Article
1403 and Articles 1405 through 1408 to the direct bank branches of Citibank, N.A., the
only foreign bank currently operating through branch offices in Mexico. These branch
operations can be converted to a foreign financial affiliate operation under the terms of
the Mexican schedule to Annex VII. Once converted, the capital equivalency required by
Mexico for these branches on the date of signature of the NAFTA will neither be counted
against nor subject to the capital limits established under the transitional arrangements
described below.
(2)
Investment Liberalization
Under Sections B and C of Mexico's schedule, Mexico has committed to
liberalize its investment restrictions for investors qualifying to invest in Mexican “foreign
financial affiliates.” This liberalization marks the first substantial access by the U.S.
financial services industry into Mexico in several decades. In order to qualify, Mexico
may require a U.S. or Canadian investor to be engaged in a similar financial services
business in its home country. Further, Mexico may require a foreign financial affiliate to
be wholly owned by a NAFTA investor and may prohibit them from establishing offices
outside of Mexico. If Mexico waives the application of these restrictions, they cannot
later be re-imposed. During the transition period, Mexico may also restrict any foreign
financial affiliate from issuing certain kinds of subordinated debentures other than to the
investor that owns the affiliate.
Foreign banks, securities firms, insurance companies, factoring companies and
leasing companies are subject to limits on the aggregate percentage of capital in the
Mexican market they are permitted to hold. Foreign bank, securities and insurance
affiliates are also subject to individual capital limits during the transition to substantially
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full liberalization of investment in the Mexican financial market. Other forms of
financial firms – such as mutual fund companies, investment advisers, insurance
brokerages or agencies and financial warehouses – will not be subject to capital
restrictions.
(3)
Commercial Banks
For commercial banks, the individual size of both newly established and acquired
firms will be limited to no more than 1.5 percent of the total capitalization of the Mexican
banking system until January 1, 2000. After that date, acquisitions may be limited to four
percent of total capitalization. Internal growth, such as through retained earnings or
capital contributions, will be unlimited.
The aggregate capitalization of all Canadian and U.S. bank subsidiaries in Mexico
will be subject to a limit of eight percent of the Mexican banking system beginning with
the entry into force of the Agreement [1 January 1994] and rising in equal annual
increments until reaching 15 percent on January 1, 1999. After January 1, 2000, the
aggregate capital limit will be removed, but Mexico will retain the right to apply a further
three-year freeze on aggregate market share if the capitalization of Canadian and U.S.
banks reaches one-quarter of the Mexican banking system before the year 2004.
(4)
Securities Firms
U.S. and Canadian securities affiliates will be subject to an aggregate limit of ten
percent of the Mexican market when the NAFTA goes into effect, rising in equal annual
increments to 20 percent by January 1, 1999. Similar to commercial banks, Mexico may
invoke once during the period from January 1, 2000 to January 1, 2004, a temporary
safeguard on foreign securities firms if their total capitalization reaches 30 percent of the
Mexican securities market. Individual firm size will be limited until January 1, 2000, to
four percent of total capitalization. Mexico has also committed to review the general
minimum capital requirements for securities firms in Mexico after the NAFTA goes into
effect by issuing a report on the introduction of a variable capitalization scheme.
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c.
United States
The United States has “grandfathered” all current federal measures that may be
inconsistent with the obligations of Chapter Fourteen. These are:
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citizenship and residency requirements for membership on the boards of directors
of national banks;
discriminatory aspects of the federal interstate banking laws under the federal
banking laws;
foreign ownership restrictions applicable to Edge Act corporations;
a prohibition on the domestic retail deposit-taking business of foreign bank
branches;
the prohibition against foreign banks becoming shareholders in the Federal
Reserve System;
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the reciprocal national treatment tests applicable to primary dealers in government
debt and foreign trustees for certain U.S. bond offerings;
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provisions allowing securities firms in Canada to maintain in banks located in
Canada reserves required under U.S. securities laws;
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a prohibition on sale of onion futures and options under the Commodity Exchange
Act;
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a prohibition on the provision by foreign insurance companies of surety bonds for
government contracts; and
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the requirement that only foreign bank branches must register under the
Investment Advisers Act of 1940.
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Section C of the U.S. schedule to Annex VII sets out a commitment by the United
States to provide a five-year transition period during which certain Mexican firms can
conform their U.S. activities to the Bank Holding Company Act of 1956.
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