Notice To Members 87-8

South African Sanctions Act Regulations

Published Date:

TO: All NASD Members and Other Interested Persons

EXECUTIVE SUMMARY

The U.S. Department of the Treasury recently adopted regulations under the South African Sanctions Act. The provisions of the Act were the subject of NASD Notice to Members 86-76.

This notice provides information relating to the new investment provisions of the Act which became effective on November 16, 1986.

The full text of the regulations and the Treasury Department's interpretive summary, as published in the Federal Register on December 29, 1986, are attached to this notice.

BACKGROUND

On October 2, 1986, Congress enacted the Comprehensive Anti-Apartheid Act of 1986 (Sanctions Act) (Public Law 99-440) which contains prohibitions against certain transactions in securities issued by South African entities. An outline of the provisions of the Act was provided to members in Notice to Members 86-76, dated November 10, 1986.

This notice provides members with the new investment provisions under the Act. Members and associated persons should consult with their counsel to ensure that their trading activities comply with the Sanctions Act.

The new investment provisions of the Act became effective on November 16, 1986, and were issued pursuant to the foreign affairs exception to the Administrative Procedure Act. To a large degree, the new investment provisions restate the statutory provisions.

NEW INVESTMENT PROVISIONS UNDER THE SANCTIONS ACT

Some of the pertinent provisions are as follows.

  • Section 545.210 substantially restates the general prohibition of "new investment in South Africa."
  • Section 545.304 defines a "loan" to include the purchase of debt or equity securities issued by the government of South Africa or a South African entity on or after October 2, 1986.
  • Section 545.319 defines "new investments" and sets forth the secondary trading exemption pursuant to the provisions of Section 3(4) of the Act as described in Notice to Members 86-76.
  • Section 545.415 specifically recognizes the applicability of trading in American Depositary Receipts (ADRs) to the exemption for securities issued prior to October 2, 1986. This section also provides an exemption for shares issued as part of a stock split, dividend, recapitalization, merger or other reorganization transaction. Such securities will be deemed to have been issued on the date of issuance of the underlying shares unless the transaction results in payments to or for the benefit of the South African issuer from or on behalf of the security holder.

However, this exemptive treatment is not available for shares acquired on or after October 2, 1986, through the exercise of warrants or pre-emptive rights, although rights or warrants received after October 2 may be sold by the security holder without being in violation of the Act.

* * *

If any further clarification of these provisions is forthcoming, such information will be provided to members. Questions regarding this notice may be addressed to T. Grant Gallery, NASD Associate General Counsel, at (202) 728-8285.

Sincerely,

Frank J. Wilson
Executive Vice President and General Counsel

Attachment

DEPARTMENT OF THE TREASURY

Office of Foreign Assets Control

31 CFR Part 545

South African Transactions Regulations

AGENCY: Department of the Treasury.

ACTION: Final rule.

SUMMARY: This rule amends the South African Transactions Regulations, 31 CFR Part 545 (the "Regulations"), to implement sections 308 and 310 of the Comprehensive Anti-Apartheid Act of 1986, Pub. L. 99-440,100 Stat. 1086, as amended by H.J. Res. 756, Pub. L. 99-631, 100 Stat. 3515 ("the Act"). Section 308 prohibits United States depository institutions from accepting, receiving, or holding deposit accounts from the South African Government or its controlled entities, except for diplomatic or consular accounts authorized by the President (Regulations, § 545.209). Section 310 prohibits U.S. nationals from making any new investment in South Africa (Regulations, § 545.210). These sections became effective on November 16, 1986. The Treasury Department is also amending the Regulations to reflect approval by the Office of Management and Budget of the information collection provision contained in § 545.807 of the Regulations.

EFFECTIVE DATE: All sections except § 545.423 are effective at 12:01 a.m. Eastern Standard Time, November 16, 1986. Section 545.423 is effective at 12:01 a.m., Eastern Daylight Time, October 2, 1986.

FOR FURTHER INFORMATION CONTACT: Marilyn L. Muench, Chief Counsel, Office of Foreign Assets Control, Department of the Treasury, 1331 G Street, NW., Washington, DC 20220 (telephone: 202/376-0408).

SUPPLEMENTARY INFORMATION: The initial set of amendments to the Regulations, implementing the immediately effective provisions of the Act, was published on November 19, 1986 (51 FR 41906). The amendments published today implement §§ 308 and 310 of the Act, effective November 16, 1986. Section 309 of the Act, banning importation of South African uranium ore, uranium oxide, coal, and textiles into the United States, will become effective on December 31, 1986.Regulations implementing this provision will be issued at a later date.

Section 545.209 prohibits depository institutions located in the United States from accepting, receiving, or holding deposit accounts of the South African Government or its controlled entities, with the exception of diplomatic and consular accounts authorized by the Office of Foreign Assets Control by specific license.

Section 545.210 prohibits U.S. nationals from making new investments in South Africa, unless the new investment is in a firm owned by South African victims of apartheid. Section 545.319 defines "new investment" to include a commitment or contribution of funds or other assets, and a loan or other extension of credit. Exceptions are made for reinvestment of profits earned by a U.S.-controlled South African entity in that or another South African entity; contributions required to enable a U.S.-controlled South African entity to operate in an economically sound manner, without expanding its operations; and for the ownership or control of an interest in a South African entity, or of securities of the South African Government or a South African entity issued prior to October 2, 1986, and the transfer or acquisition of such a pre-October 2 interest or security, where no payment, contribution of funds or assets, or credit to the entity or issuer results. Trading in South African securities issued on or after October 2, 1986 is prohibited, whether by direct purchase, purchase of American Depository Receipts evidencing such securities, mutual fund investment or reinvestment, or otherwise (§§ 545.415).

New investment does not include expenses to comply with the Code of Conduct (Sullivan principles) in § 208 of the Act (§ 545.417); market-rate sales of goods, services or technology (§ 545.418); purchase of a residence for personal use by the purchasing U.S. national (§ 545.419); opening and holding personal bank accounts in South Africa by U.S. nationals permanently resident in that country, or corporate bank accounts for U.S. businesses doing business through permanent establishments in South Africa (§ 545.420); opening and holding bank accounts in South Africa used strictly to pay for and clear transactions (§ 545.420); or charitable contributions (§ 545.421).

Since these regulations involve a foreign affairs function, the provisions of the Administrative Procedure Act, 5 U.S.C. 553, requiring notice of proposed rulemaking, opportunity for public participation, and delay in effective date, are inapplicable. Because no notice of proposed rulemaking is required for this rule, the Regulatory Flexibility Act, 5 U.S.C. 601 etseq., does not apply. Because these regulations are issued with respect to a foreign affairs function of the United States, they are not subject to Executive Order 12291 of February 17, 1981, dealing with Federal regulations. The information collection requests contained in this document are being submitted to the Office of Management and Budget (OMB) under the Paperwork Reductions Act of 1980, 44 U.S.C. 3501 et seq. Notice of OMB action on this request will be published in the Federal Register.

List of Subjects in 31 CFR Part 545

Banks, Investments, Loans, Namibia, Reporting and recordkeeping requirements, and South Africa.

PART 545—SOUTH AFRICAN TRANSACTIONS REGULATIONS

31 CFR Chapter V, Part 545, is amended as set forth below:

1. The "Authority" citation for Part 545 is revised to read as follows:
Authority: 50 U.S.C. 1701 et seq.; E.O. 12532, 50 FR 36861, Sept. 10, 1985; E.0.12535, 50 FR 40325, Oct. 3, 1985; Pub. L. No. 99-440, 100 Stat. 1086; H.J. Res. 756, Pub. L. 99-631, 100 Stat. 3515; E.0.12571, 51 FR 39505, Oct. 29, 1986.
2. Section 545.203 is amended by adding a new paragraph (e) to read as follows:

§ 545.203 Effective dates.

* * * * *

(e) The effective date of the prohibitions in §§ 545.209 and 545.210 is 12:01 a.m. Eastern Standard Time, November 16, 1986.
3. Section 545.209 is added to read as follows:

§545.209 Prohibition on South African Government bank accounts.

A United States depository institution may not accept, receive, or hold a deposit account from the Government of South Africa or from any agency or entity owned or controlled by the Government of South Africa, except for such accounts which may be authorized pursuant to specific license for diplomatic or consular purposes.

4. Section 545.210 is added to read as follows:

§ 545.210 Prohibition on new investment in South Africa.

(a) No national of the United States may, directly or through another person, make any new investment in South Africa.
(b) The prohibition contained in this section shall not apply to a firm owned by black South Africans, provided that prior registration of new investment in such a firm is filed pursuant to § 545.603.
5. Section 545.304 is revised to read as follows:

§545.304 Loan.

(a) The term "loan" means any transfer or extension of funds or credit on the basis of an obligation to repay, or any assumption or guarantee of the obligation of another to repay an extension of funds or credit, including, but not limited to, overdrafts; currency swaps; the purchase by a financial institution in the United States of debt securities issued by the Government of South Africa after November 11, 1985; the purchase of debt or equity securities issued by the Government of South Africa or a South African entity on or after October 2, 1986; the purchase of a loan made by another person; the sale of financial assets, including precious metals, subject to an agreement to repurchase; a renewal or refinancing whereby new funds or credits are transferred or extended to a prohibited borrower or recipient; or the issuance of a standby letter of credit.
(b) The term "loan" does not include normal short-term trade financing for goods or services having a maturity not exceeding one year, as by commercial letters of credit, bankers' acceptances eligible for discount by a Federal Reserve Bank pursuant to para. 7 of section 13 of the Federal Reserve Act (12 U.S.C. 372), or similar trade credits; sales on open account in cases where such sales are normal business practice; or the rescheduling of existing loans, if no new funds or credits are thereby transferred or extended to a prohibited borrower or recipient.

§ 545.306 Government of South Africa; South African Government.

6. Section 545.306 is revised to delete therefrom the final phrase: ", as defined in § 545.307."

§545.307 [Removed]

7. Section 545.307 is removed.
8. Section 545.311 is revised to read as follows:

§545.311 Prohibited borrower.

The term "prohibited borrower" means a person, including the Government of South Africa, to whom the making of a loan or other extension of credit is prohibited by the terms of § 545.202(a) or 545.210(a).

9. Paragraph (c) of § 545.313 is revised to read as follows:

§ 545.313 National of the United States; U.S. national.

* * * * *

(c) For purposes of §§ 545.206, 545.208, and 545.210 of this part, the terms "national of the United States" and "U.S. national" also mean a person located in the United States.
10. Section 545.317 is added to read as follows:

§545.317 Code of Conduct.

The term "Code of Conduct" means the Code of Conduct set forth in § 208(a) of the Act, as well as the additional actions stated in, or adopted pursuant to, that section which are intended to promote the end of the apartheid system.

11. Section 545.318 is added to read as follows:

§ 545.318 Controlled South African entity.

The term "controlled South African entity" means—

(a) A corporation, partnership, or other business association or entity organized in South Africa and owned or controlled, directly or indirectly, by a national of the United States; or
(b) A branch, office, agency, or sole proprietorship in South Africa of a national of the United States.
12. Section 545.319 is added to read as follows:

§ 545.319 New investment.

For purposes of § 545.210, the term "new investment" means—

(a) A commitment or contribution of funds or other assets; and
(b) A loan or other extension of credit, as defined in § 545.304; but
(c) Does not include—
(1) The reinvestment of profits generated by a controlled South African entity into that same controlled South African entity or the investment of such profits in a South African entity;
(2) Contributions of money or other assets where such contributions are necessary to enable a controlled South African entity to operate in an economically sound manner, without expanding its operations; or
(3)
(i) The ownership or control of a share or interest in a South African entity, or a controlled South African entity, or a debt or equity security issued by the Government of South Africa or a South African entity before October 2, 1986, or
(ii) The transfer or acquisition of such a share, interest, or debt or equity security, if any such transfer or acquisition does not result in a payment, contribution of funds or assets, or credit to a South African entity, a controlled South African entity, or the Government of South Africa.
13. Section 545.320 is added to read as follows:

§545.320 Prohibited recipient.

The term "prohibited recipient" means a person in whom the making of a new investment is prohibited pursuant to § 545.210.

14. Section 545.321 is added to read as follows:

§ 545.321 United States depository institution.

(a). For purposes of § 545.209, the term "United States depository institution" means a depository institution located in the United States, but does not include the foreign branches of a depository institution organized in the United States, or the parents, subsidiaries, branches or offices located outside the United States of a depository institution organized under foreign law.
(b) For purposes of this section, the term "depository institution" means a depository institution as defined in section 19(b)(l) of the Federal Reserve Act, 12 U.S.C. 461(b)(l).
15. Section 545.404 is revised to read as follows:

§ 545.404 Rescheduling existing loans.

Provided that no new funds or credits are thereby transferred or extended to a prohibited borrower or a prohibited recipient, |§ 545.202 and 545.210 do not prohibit a national of the United States or a financial institution in the United States from rescheduling loans or otherwise extending the maturities of existing loans, or from charging fees, or interest at commercially reasonable rates, in connection therewith.

16. Section 545.406 is revised to read as follows:

§ 545.406 Loans through intermediaries.

Sections 545.202 and 545.210 prohibit a national of the United States or a financial institution in the United States from making a loan to any person in the United States or a foreign country, where the U.S. national or financial institution has reason to believe that the loan is being obtained for, or on behalf of, a prohibited borrower or recipient, and that the relevant funds or credit will be made available to a prohibited borrower or recipient.

17. Section 545.408 is revised to read as follows:

§545.408 Approval of loans by foreign affillates

Sections 545.202 and 545.210 prohibit nationals of the United States or financial institutions in the United States from approving loans by their foreign affiliates to prohibited borrowers or recipients.

18. Section 545.409 is revised to read as follows:

§545.409 Loan participations.

Sections 545.202 and 545.210 prohibit a national of the United States or a financial institution in the United States from purchasing, or otherwise acquiring a participation in, all or part of any loan made by any other person or persons to a prohibited borrower or recipient, regardless of the date of the original loan. However, the prohibition of § 545.202 does not apply if, in the case of a financial institution, it is obligated to make the purchase under an agreement entered into before September 9, 1985, or, in the case of a national of the United States that is not a financial institution in the United States, it is obligated to make the purchase under an agreement entered into before October 2, 1986. The prohibitions of §§ 545.202 and 545.210 do not apply to the acquisition of all or part of a loan made by any other person or persons to a prohibited borrower or recipient if such acquisition is incidental to the purchase or acquisition of an entity or all or substantially all of the assets of an entity that has previously made, or acquired a participation in, such a loan.

19. Section 545.410 is revised to read as follows:

§545.410 South African law.

If, under applicable laws of South Africa, a national of the United States or a financial institution in the United States cannot obtain enough information from a person in South Africa to enable it reasonably to conclude that a loan is not being obtained for, or on behalf of, a prohibited borrower or recipient, or that a new investment is not being made in, or with respect to, a prohibited recipient, §§ 545.202 or 545.210 prohibits the loan or new investment.

20. Section 545.415 is added to read as follows:

§ 545.415 Trading in South African securities; American Depositary Receipts; recapitalizations.

(a) For purposes of the prohibition on new investment in I 545.210, the ownership, control, transfer or acquisition of (1) a debt or equity security issued by the Government of South Africa or a South African entity, or (2) an American Depositary Receipt (ADR) evidencing an interest in such a security, is authorized provided that no interest represented by the security or ADR was issued on or after October 2, 1986.
(b) Shares issued by a South African entity on or after October 2, 1986 in a stock split or similar recapitalization transaction, in a merger or other reorganization, or as a stock dividend, with respect to its shares issued on or prior to that date, will be deemed issued on the date of issuance of the underlying shares for the purposes of § 545.210, provided that, except as permitted in § 545.319(c)(l), such split, recapitalization, reorganization, or dividend does not result in a payment, contribution of funds or assets, or credit to, or for the benefit of, the South African issuer from, or on behalf of, the security holder. This treatment is not available for shares acquired on or after October 2, 1986 through the exercise of warrants or preemptive rights. Rights or warrants received on or after October 2, 1986 with respect to shares issued prior to that date may, however, be sold by the security holder, or on an ADR holder's behalf by the depositary.
21. Section 545.416 is added to read as follows:

§ 545.416 Trading in commodities.

Trading in commodities futures or options thereon with respect to South African commodities will be treated as the purchase or sale of the underlying goods. However, no such commodities subject to import prohibitions may be imported into the United States on or after the effective date of a relevant import prohibition.

22. Section 545.417 is added to read as follows:

§ 545.417 Expenses to comply with Code of Conduct.

Expenses incurred by U.S. nationals to comply with the Code of Conduct will not be treated as prohibited new investment in South Africa.

23. Section 545.418 is added to read as follows:

§545.418 Sales of goods, services, and technology.

Purchases and sales of goods, services, and technology in arms' length transactions on normal commercial terms will generally not be treated as new investment in South Africa for purposes of the prohibition in § 545.210.

24. Section 545.419 is added to read as follows:

§ 545.419 Real estate acquisition.

The purchase of real estate in South Africa for use as a residence by the purchasing individual U.S. national will not be treated as new investment in South Africa for purposes of § 545.210,provided that no commercial or rental use is made of such real estate.

25. Section 545.420 is added to read as follows:

§545.420 Bank accounts in South Africa.

(a) The opening and holding of personal bank accounts in South Africa by an individual resident in South Africa, or of corporate or similar accounts by an entity that is a U.S. national doing business through a permanent establishment in South Africa, will not be treated as a "loan" or "new investment" for purposes of § 545.202 or 545.210.
(b) The opening and holding of non- interest-bearing demand deposit or call accounts in South Africa by a U.S. national located outside South Africa will not be treated as a "loan" or "new investment" for purposes of $ 545.202 or 545.210, where such accounts are used exclusively to pay for and clear transactions with South African entities.
26. Section 545.421 is added to read as follows:

§ 545.421 Charitable contributions.

Contributions to charitable organizations engaged in social welfare, public health, religious, educational, and emergency relief activities in South Africa will not be treated as "new investments" for purposes of § 545.210.

27. Section 545.422 is added to read as follows:

§ 545.422 Foreign exchange transactions.

A foreign exchange transaction executed at current market prices, for immediate or future delivery but without an extension of credit, will not be deemed a "loan" as defined in § 545.304.

28. Section 545.423 is added to read as follows:

§545.423 Confirmation of short-term trade credits.

The confirmation of short-term trade financing instruments, such as commercial letters of credit, is authorized, provided that the instrument being confirmed is not within the definition of "loan" in § 545.304.

29. Section 545.424 is added to read as follows:

§545.424 Firm owned by Mack South Africans.

For purposes of § 545.210, the term "firm owned by black South Africans" means an entity owned by South African victims of apartheid.

30. Section 545.603 is added to read as follows:

§545.603 Registration of new investment in firms owned by black South Africans.

Every person m«Kng a new investment in a firm owned by black South Africans pursuant to the exception to the prohibition on new investment in § 545.210(b) shall, prior to making such new investment, file with the Office of Foreign Assets Control a report with respect to such investment, including: (a) The name and address of the U.S. national making the investment; (b) the name of the black-owned firms, (c) full information on the black-owned firm's ownership, sufficient to demonstrate its eligibility under § 545.210(b); and (d) the amount and nature of the U.S. national's new investment.

31. Section 545.004 is added to read as follows:

§ 545.604 Registration of contributions necessary to enable a controlled South African entity to operate in an economically sound manner.

Every person making a contribution necessary to enable a controlled South African entity to operate in an economically sound manner, pursuant to the exception to the prohibition on new investment in § 545.317(c)(2), shall, prior to making such contribution, file with the Office of Foreign Assets Control a report with respect to such contribution, including: (a) the name and address of the U.S. national making the contribution; (b) the name and address of the controlled South African entity; (c) full information on the circumstances requiring the contribution, sufficient to demonstrate its eligibility under § 545.319(c)(2); and (d) the amount and nature of the U.S. national's contribution.

32. Section 545.901 is revised to read as follows:

§ 545.901 Paperwork Reduction Act notice.

The information collection requirements in §§ 545.503, 545.504, 545.601, and 545.602 have been approved by the Office of Management and Budget (OMB) and have been assigned control number 1505-0091. The information collection requirements of § 545.807 have been approved by OMB and have been assigned control number 1505-0097.

Dated: December 12, 1986.

Dennis M. O'Connell,

Director, Office of Foreign Assets Control.

Approved: December 19, 1986.

Francis A. Keating II,

Assistant Secretary (Enforcement).

[FR Doc. 88-29172 Filed 12-23-88; 4:42 pm]

BILLING CODE 4810-25-M