Statutory deposits and non-New York banks

The Office of General Counsel has issued the following informal opinion on February 24, 2000, representing the position of the New York State Insurance Department.

Statutory deposits and non-New York banks

Question Presented:

1. In regard to the deposit of securities required by N.Y. Ins. Law § 1314(a) (McKinney 1985), may a New York trust company (Trust Company), as a custodian of the securities, use a non-New York bank (Bank) as a sub-custodian, which in turn will either hold book-entry securities through the Bank's Depository Trust Company (DTC) account in New York or vault physical securities at the DTC in New York?

2. In regard to the deposit of such § 1314(a) securities, may the Trust Company, as a custodian of the securities, use the Bank as a sub-custodian, which in turn will hold book-entry securities through the Federal Reserve's centralized National Book-Entry System (NBES) via the Bank's book-entry account with its local district Federal Reserve bank, which is also a non-New York bank?

Conclusions:

1. No, the use of a non-New York bank makes the transaction improper.

2. No, because both the Bank and the local Federal Reserve banks are non-New York banks.

Facts:

The Trust company is a New York limited purpose trust company. It is a subsidiary of the Bank, which is a non-New York state chartered bank and trust company.

Pursuant to N.Y. Ins. Law § 1314(a) (McKinney 1985), the Superintendent shall be the official custodian of all deposits of securities required or authorized under the Insurance Law. The securities are to be kept by the Superintendent either " . . .in a safe place provided by the state or in custody for his account with a bank, trust company or national bank in this state which may be designated by the depositing insurer, subject to the approval of the superintendent."

The requester had the impression that a New York trust company, as the custodian of the securities, may use a non-New York bank as a sub-custodian, where the bank will hold book-entry securities through the non-New York bank's DTC account in New York or vault physical securities at the DTC in New York.

Based upon this impression, they inquired whether the Trust Company, as a custodian of the securities, may use the Bank as a sub-custodian where the Bank will hold book-entry securities through the Federal Reserve's NBES via the Bank's book-entry account with its local district Federal Reserve bank, which is also a non-New York bank. As all of the Federal Reserve Banks have centralized their securities processing at a single data processing facility in New Jersey, all securities in the Federal Reserve System are processed outside of New York. The requester concluded, therefore, that their proposal is indistinguishable from what would occur if the Trust Company had an independent book-entry account with the New York Federal Reserve Bank.

For reasons discussed below, the non-New York bank may not be used as a sub-custodian in either scenario. Further, the non-New York Federal Reserve bank may not be utilized either.

Analysis:

By Circular Letter No. 1 (1975), the Department advised insurers that they may participate in the "certificateless society" programs of the Federal Reserve System and the DTC. A subsequent addendum to the Circular Letter revised one of the suggested custodian agreements (Circular Letter 13 (1976).) The Circular Letters were general in nature regarding insurers" assets, and did not address § 1314(a) specifically. The author of this opinion, by letter dated October 27, 1986, had previously stated that, assuming all other requirements were satisfied, for the purposes of § 1314, both the DTC and the Federal Reserve of New York were acceptable depositories. The DTC is a trust company located in New York, and the Federal Reserve of New York, as part of the federal banking system, is a "bank"; specifically, a "national bank."

The issue raised by the instant DTC scenario is whether the statutory requirement is complied with when the securities are deposited with a trust company, bank or national bank in New York as custodian, and then redeposited with a sub-custodian, which itself could not have been a custodian.

The statute clearly requires deposit with a trust company, bank, or national bank in New York. We believe that permitting the New York institution to redeposit the securities with a non-New York institution would frustrate the clear requirement of the statute. Rather, it appears to us that the only correct reading of the statute is that, for a sub-custodian to be acceptable to the Superintendent, the sub-custodian itself must be capable of being a custodian. Otherwise, the securities are not on deposit with a trust company, bank, or national bank in New York. The Bank does not satisfy this requirement.

As to the Federal Reserve scenario, it too is defective because book-entry securities would be deposited with a non-New York Federal Reserve bank. Even assuming, arguendo, that there is no real difference between book-entry deposit with New York and non-New York members of the Federal Reserve, the statute still mandates the use of a New York institution.

For further information, you may contact Supervising Attorney Paul A. Zuckerman at the New York City office.