NYSBL Sections 222 and 223 and 225
December 5, 2001
Re: Proposed New York Branch of [ ]
Dear Mr. [ ]:
In your letter of October 9, 2001 ("October 9 Letter"), you seek the Banking Department's confirmation that a proposed acquisition transaction involving [ ] Bank USA, [ ] Utah ("Bank") and its affiliate, [ ] Trust Company of New York ("Trust Company") would be permissible under New York's Interstate Branching Act ( the "NYIBA") (N.Y. Banking Law §§ 222 et. seq.), and that the Bank and the Trust Company have satisfied any filing or approval requirements under the NYIBA to consummate the proposed transaction. We confirm both that the transaction is permissible under the NYIBA, and that all of the filing or approval requirements under the NYIBA have been met.
You also asked that the Banking Department provide the Federal Deposit Insurance Corporation ("FDIC") with a letter discussing the NYIBA, as the FDIC must determine whether the NYIBA meets the standards set forth in the Federal Deposit Insurance Act ("FDI Act") Section 18(d)(4) (12 USC 1828(d)(4)), which relates to "de novo" interstate branching by an insured nonmember bank under the FDI Act. We are therefore furnishing a copy of this letter to the FDIC.
The Bank is an industrial loan corporation chartered under the laws of Utah and insured by the FDIC. The Bank is not a member of the Federal Reserve System. You indicate in your Memorandum of Law ("Memorandum") attached to your October 9 Letter that, as of June 30, 2001, the Bank reported assets of approximately $60.4 billion and deposits of approximately $55.0 billion. According to your Memorandum, Utah law authorizes the Bank to provide a broad range of commercial and consumer banking products and services. However, you point out that while the Bank accepts certain types of deposits, including certificates of deposits, savings and NOW accounts, the Bank does not accept demand deposits in order to avoid meeting the definition "bank" under the Bank Holding Company Act of 1956, as amended, and thereby triggering the requirement that [ ] register with the Federal Reserve System as a bank holding company.
The Trust Company
The Trust Company is a New York limited purpose trust company headquartered At [ ]New York, New York. The Branch in question to be sold is located at [ ] New York, New York (the "Branch"). As a limited purpose trust company, the Trust Company is uninsured and is prohibited from taking deposits (other than certain deposits incidental to its trust business), or making loans. The Trust Company's authorized activities are limited to traditional trust activities. According to your Memorandum, the Trust Company provides a broad range of services to personal and business clients.
The proposed Branch acquisition transaction would include the acquisition of a portion of the Trust Company's custodial business. In particular, the Bank would assume certain custodial services that the Trust Company provides for two employee benefit collective investment funds (the "Funds", and each are referred to as a "Fund"). The Funds for which the Bank would act as custodian are the following: [ ]("EIT") and [ ]("RPT"). The assets of EIT consist primarily of common stocks that replicate the S&P 500. Total assets of EIT were approximately $4 billion as of December 31, 2000. The assets of RPT were approximately $5.7 billion as of December 31, 2000. On a combined basis, the Bank would take over responsibility for custody of approximately $10 billion of assets as custodian. You enclosed a copy of the proposed form a purchase agreement between the Trust Company and the Bank, and indicated that it has been approved by the Bank's board of directors.
According to your October 9 Letter, as custodian, the Bank would be responsible for providing nondiscretionary services to the Funds. Essentially, the Bank would be responsible for holding the assets of the Funds and carrying out a wide range of functions related to the holding of the Fund's assets. In particular, the custodian is responsible for receiving securities purchased by a Fund; executing ownership and other certificates for tax purposes in connection with the receipt of income in respect of securities and in connection with the transfer of such securities, and generally performing all nondiscretionary details in connection with the sale, exchange, substitution, or purchase of securities and property of a Fund; delivering proxy materials to the Funds; delivering to the Funds written information received from issuers; including notices of expiration of rights in connection with put and call options; making funds available to the transfer agent for payment to shareholders who redeem shares of a Fund; receiving payments from the transfer agent and depositing such payments into the account of the Fund; endorsing cheeks for collection; maintaining records for purposes of the ,,.Funds' regulatory compliance obligations; and paying Fund expenses upon receipt of instructions from a Fund.
You describe that the Bank would perform these custodian services pursuant to an agreement between the Bank and the trustee of the Fund. The trustee of each Fund is [ ], a New Jersey Trust Company. The Bank would become the custodian for each Fund by taking an assignment of the custodian contract between the Trust Company and the trustee of the Fund. In order to carry out its, day-to-day responsibilities as custodian, the Bank has contracted with its affiliate, [ ], to act as sub-custodian. As custodian, however, the Bank would remain legally responsibility for ensuring that the custodial functions are performed according to the standards set forth in the Bank's custodial agreement with the trusted of each Fund. While the nondiscretionary custodial and related activities proposed to be conducted by the Bank would not appear to require that the Bank possess trust powers, we assume that the Bank will ensure that is has the requisite legal authority and regulatory approvals to perform all activities it seeks to undertake, now or in the future. For example, you mention in a footnote to your October 9 Letter that the Bank eventually expects to be appointed as trustee for the Funds. This clearly would appear to require trust powers, if the Bank does not already have such powers.
In addition to the contract pursuant to which the Trust Company provides custodial services for the Funds, the proposed Branch acquisition would entail the acquisition of a small amount of fixed assets (approximately $20,000) representing all the Trust Company assets relating to the Branch location. The Trust Company does not own the Branch location, and thus the Bank would not acquire the real property assets in connection with this transaction.
New York Banking Law Analysis
The proposed branching transaction would be permitted under the NYIBA. The NYIBA, Section 223, permits the entry into New York by an "out-of-state bank" by means of an "acquisition transaction". "Out-of-state bank" includes an out-of-state state bank and an out-of-state national bank. (N.Y.Banking Law § 222). An "out-of-state state bank" is defined in the NYIBA as a state bank, as such term is defined in Section 3(a)(2) of the FDI Act, but the term does not include New York banking institutions. (§ 222). As you point out in your Memorandum, the Bank, as an insured industrial loan company, meets the definition of "out-of-state state bank" under the NYIBA.
An "acquisition transaction" under the NYIBA is defined as any merger, consolidation or purchase of assets and assumption of liabilities of all or part of a banking institution. (§ 222). The term "banking institution" is not defined within the NYIBA, but, when used elsewhere throughout the New York Banking Law, virtually always would include "New York banks", as that term is defined in the NYIBA, that is, banks, trust companies and savings banks chartered under the New York Banking Law. As further evidence of this, Section 225 of the NYIBA expressly provides that an out-of-state bank may engage in an acquisition transaction with a "New York bank". As a trust company, the Trust Company, even though it is a limited purpose uninsured trust company, meets the definition of "New York bank" for purposes of the NYIBA and would be a permissible "acquisition" target under the NYIBA.
Further, New York permits out-of-state banks to acquire a single branch of a banking institution to gain entry into New York. The NYIBA expressly states that an "acquisition transaction" means the acquisition of "all or part" of a banking institution (§ 222). The legislative history accompanying the NYIBA clearly supports the Department's interpretation that a single branch constitutes a sufficient "part" of a banking institution for acquisition, as the legislative history repeatedly refers to entry to into New York by purchase of a "one or more branches' of New York banking institutions. (See Memorandum in Support, New York State Assembly, 1996 McKinney's Session Laws of New York, p. 1980; Governor's Approval Memorandum # 2, 1996 New York State Legislative Annual, p.8). While the Department, by letter interpretation, has prohibited acquisition transactions involving the mere purchase of a branch's real estate/and or fixtures as being inconsistent with the spirit of the NYIBA, the Bank has proposed to acquire a substantial portion of the Trust Company's business. Thus, the proposed transaction would be consistent with those found by the Department in prior instances to be lawful.
Under New York law, such a branching transaction would not be termed a "de novo" branching transaction under the NYIBA. New York uses the term "de novo" to refer to the establishment of a branch other than by means of an "acquisition transaction". In fact, the NYIBA does not permit "de novo" branching into New York by out-of-state banks. However, if this "definitional" difference is not of significance for purposes of the FDIC's analysis under Section 18(d)(4), we believe that the FDIC could find that New York's law otherwise meets the requirements of Section 18(d)(4). This is because the NYIBA does not discriminate against an out-of-state bank similarly situated to the Bank which would propose entering New York through a similar transaction to the one proposed; that is, by acquisition of a branch of a New York uninsured limited purpose trust company.
Regarding the filing or approval requirements under the NYIBA for the proposed transaction, Section 225 of the NYIBA provides that when the out-of-state bank is the receiving corporation in an acquisition transaction, the only requirement is that the out- of-state bank file with the Superintendent of Banks of the State of New York ("Superintendent") a copy of any application filed with the appropriate state supervisor and the appropriate federal banking agency. This is a notice requirement only; there is no requirement of an affirmative approval by the Superintendent of such transactions.
The Bank has provided the Superintendent with a copy of both its application to the FDIC and to the State of Utah relating to the proposed transaction. Thus, the Bank has satisfied all filing or other requirements under New York Banking Law.
I trust that the foregoing is helpful.
Very truly yours,
Cc: Mr. George Masa
Federal Deposit Insurance Corporation
25 Ecker Street, Suite 2300
San Francisco, CA 94105
Honorable G. Edward Leary, Commissioner
Utah Department of Financial Institutions