Banking Interpretations

Dear [                        ]:

Last year, you raised a question on behalf of [                   ] (the "Trust Company") with the Banking Department about the continued applicability, in light of the repeal of New York's mini-Glass-Steagall Act, of Part 17 of the Banking Board's regulations, which contains certain prudential limitations and restrictions on dealings between New York banks or trust companies and affiliated securities firms. The Trust Company is particularly interested in the continued applicability of Part 17 in light of the Trust Company's recent affiliation with [               ] Funds, a mutual fund provider.  We apologize for the delay in responding.

The Trust Company's particular concern was Part 17.1(f) which provides that "in the case of personnel interlocks between a banking organization and an open-end mutual fund, the bank shall not make any loans to the mutual fund nor to any investment advisers of the mutual fund nor to any company in which the mutual fund has a stock interest of over five percent."  In the context of Part 17, the term "bank" would include both banks and trust companies organized pursuant to Article III of the Banking Law.

The Trust Company serves as custodian for each of the seven portfolios of the [  ] Funds, and overdrafts in the custody accounts occur from time to time.  According to the Trust Company, the overdrafts may arise due to temporary (usually overnight) problems related to the settlement of security trades.  The largest overdrafts, however, occur in connection with shareholder redemptions from the Funds.  In the event of an overdraft, the Trust Company extends credit to the client so that the overdraft does not disrupt the normal operation of the custody account.  The overdraft is secured by the assets in the accounts, and the Trust Company charges for the overdrafts.  You point out that this process seems to be inconsistent with Part 17.1(f), and that this may necessitate the Funds having to seek other forms of credit.

We agree that Part 17.1(f) is still in effect and would appear to prohibit the Trust Company extending credit to the Funds as described above.  It should be noted that, although New York's mini-Glass-Steagall Act has been repealed, the prudential limitations of Part 17 were written to be applicable to banking organizations and securities firms which were allowed to affiliate even when mini-Glass-Steagall was still in effect.  Nevertheless, the Banking Department is undertaking a review of Part 17 to determine whether the provisions thereof should be modified or repealed.

I trust that this is helpful.

Sincerely,

Rosanne Notaro
Assistant Counsel

Cc:  Deputy Conlon - USFD