Banking Interpretations

NYSBL 200 and 14


TO:        Examiner Young
              Foreign Financial Services Division

FROM:  Assistant Counsel Kane 
              Legal Division

RE:        The [                            ] New York Branch – Notice of Investment Pursuant to Banking Department June 4, 2001 Guidance Letter

DATE:   November 4, 2002


The [                   ] New York Branch (“Branch”) has filed notice with the Superintendent of its intention to establish an operating subsidiary. The proposed operating subsidiary (“Op Sub”) would be in the form of a grantor trust, evidenced by a trust agreement between the Branch, as beneficiary, and another financial institution, as trustee (“Trustee”). The Branch will fund the Op Sub/trust with $100 million in cash. The Trustee will enter into an investment management agreement pursuant to which an investment manager (“Investment Manager”), which is the same financial institution as the Trustee, will invest the $100 million in investment grade bonds.

The Branch will at all times be the sole beneficiary of the Op Sub/trust. All investments will be held in the name of the Trustee acting for the benefit of the Branch. The Op Sub will have no officers or employees and its mailing address will be the same as that of the Branch. 


The Branch has submitted information similar to that required by domestic banks investing in operating subsidiaries. Part 14 does not apply to branches of foreign banking organizations (“FBOs”).  However, the Banking Department issued a Guidance Letter dated June 4, 2001 (a copy which is attached hereto for your reference), which provides that FBOs seeking to acquire, establish, or make an additional investment in a branch or agency subsidiary (whether such subsidiary is a corporation, or other type of legal entity such as a limited liability company), are advised to follow the procedures applicable to the establishment of operating subsidiaries by New York banks and trust companies set forth in Section 14.3 of Part 14.  FBOs are advised to follow the prior notice procedures in Section 14.3(a) when its investment in a subsidiary will exceed the lesser of one-tenth of one percent (0.1%) of New York assets or five million dollars. 

With respect to whether it is within the Branch’s authorized powers to conduct the contemplated activity through the Op Sub, Section 14.1 of Part 14 permits banks and trust companies to own or make investments in operating subsidiaries which may engage in the transaction of any business which a bank or trust company may engage in directly. The Branch asserts that pursuant to the statutory authority set forth in Banking Law Sections 96(1) and 97(1) it may invest directly in investment grade bonds.  Section 96(1) permits banks to “discount, purchase and negotiate promissory notes … [and] other evidences of debt, … [and] lend money on real or personal security”. Section 97(1) provides that banks “may invest in and have and exercise all rights of ownership with respect to bonds, notes, debentures and other obligations for payment of money, which are not in default as to either principal or interest when acquired”. Foreign branches generally have powers coextensive with those of New York banks.

The Branch represents in its application that it has engaged directly in the same types of activities and will continue to engage separately in such types of activities directly after establishment of the Op Sub.  Accordingly, we conclude that the requirement under Section 14.1 that an operating subsidiary be “engaged in the transaction of any business in which a bank … may engage directly” is, in our opinion satisfied through the activities of the Op Sub/trust.

However, we would recommend that your Division seek more information regarding the motivations for the Branch to conduct this activity through a subsidiary trust.

Technically Part 14 would not apply to the Branch’s investment in a grantor trust because Section 14.3 applies to investments in corporations in which a bank or trust company will be the owner of at least a majority of the voting stock.  In this case, the Branch’s investment is not in a corporation, but rather in a grantor trust, of which the Branch will be the sole beneficiary. However, the Guidance Letter indicates that the Part 14 guidelines should be followed regardless of the type of legal entity in which the investment is made.

Moreover, the Legal Division has previously opined that banks and trust companies have the authority under Banking Law Section 96 to make the types of investment proposed by the Branch under their general authority to engage in activities which are “incidental to banking”.  Of course, in any such investment by a bank or trust company, the Department would have similar concerns as when a bank makes an investment in a different entity such as a limited partnership or a limited liability company.

The Department has identified these concerns to include: (1) that the activities of the enterprise are incidental to banking and permissible for the investing bank itself; (2) that the investing bank must be in a position to prevent the enterprise from engaging in activities impermissible for the bank, or else must be able to withdraw its investment; (3) the bank must not have open-ended liability; and (4) the investment must provide a convenient way to carry out the bank’s business and not merely be a passive investment.

Based on the general structure of grantor trusts, we assume that the applicable conditions would be satisfied in this case, although we point out that we have not been provided with a copy of the instrument creating the trust for our review.  Accordingly, at a minimum your Division should satisfy itself that the following conditions are met: (i) that the Branch’s investment is limited to $100 million, thus ensuring that its loss exposure is not open-ended; (ii) since the Branch is sole beneficiary, we assume that it has ensured that the instrument creating the grantor trust includes terms which would prevent the Trustee or Investment Manager from engaging in impermissible activities; and (iii) the instrument creating the grantor trust permits the Branch to liquidate the trust for regulatory reasons.  Since the Branch is the beneficiary of the trust, it has selected the Trustee, Investment Manager and designated the types of permissible investment, thus meeting the requirement that the investment not be “passive”.

We also note that the Guidance Letter urges FBOs to contact the Federal Reserve Board (“FRB”) to assure themselves that any investment in a subsidiary by a New York-licensed branch or agency is permissible under the FRB’s regulations governing FBO investments, and complies with any approval or notice requirements of the FRB.  We have contacted Mr. Jay Bernstein at the FRB who has indicated that the FRB, at this time, has interposed no objection to the establishment of this Op Sub/trust.

We recommend that your Division prepare a draft approval letter, on which the Federal Reserve should be copied. The Legal Division should review this letter.  Also, please be aware that Banking Department policy now requires all Part 14 notices be round-robined through the Executive Division, and this notice should follow that procedure as well.  Since those steps may take additional time, you should notify [           ] in a short letter that additional time is required to review the matter and the investment should not be made until approval is received.


The Legal Division has no objection to the proposed investment by the Branch in the Op Sub/trust.  It should be noted that our non-objection is for the investment in the grantor trust as described and provided that the motivation for use of the subsidiary trust vehicle does not raise regulatory or legal concerns.  If the investment objective of the trust changes, this opinion could change.

Noted: ______