NYSBL 141 and 142 and 143-b
October 20, 2005
Dear [ ]
This responds to your inquiry, submitted via email dated October 17, 2005, in which you seek the Department's concurrence with your view that certain provisions of Article III-A of the New York Banking Law (the "NYBL") do not apply to securities underwriting activities conducted by one or more subsidiaries of an entity that is (or otherwise could become) a bank holding company (as defined under Section 141 of the NYBL, a "NY BHC").
Your request is on behalf of your client, a broker-dealer (the "Underwriter") that is a subsidiary of an entity that is a bank holding company ("Parent") within the meaning of the federal Bank Holding Company Act of 1956, as amended (the "BHCA"). The Underwriter proposes to underwrite shares of voting stock of a foreign banking organization (the "Stock" and the "FBO", respectively). The FBO controls a subsidiary bank chartered under Article III of the NYBL. The Underwriter will purchase the Stock and hold it with the intention of promptly reselling it to unaffiliated purchasers. It is expected that the Underwriter would hold the shares probably on an overnight basis. In any event, the Underwriter expects to be able to dispose of the Stock within 30 days or less. The Stock will not be voted as long as it is held by the Underwriter.
You note that the Stock may exceed 10% of the voting stock of the FBO, the threshold at which the ownership, control, or voting power over voting stock of a company gives rise to a subsidiary relationship under Section 141(5) of the NYBL. This 10% threshold also gives rise to a presumption of control of a banking institution by a person or company under Section 143-b of the NYBL. If the FBO were to become a subsidiary of the Underwriter, ownership of the FBO's banking institution subsidiary would be attributed up to the Underwriter and thus to the Parent. Under a technical reading of the NYBL, this could be viewed as violative of both Sections 142 and 143-b of the NYBL. In the instant case, however, these theoretical ownership and control relationships are created exclusively for the purpose, limited in time and scope, of enabling the Underwriter to resell the Stock to unaffiliated purchasers.
You also note that Section 3 of the BHCA includes a number of express exceptions to the definition of "bank holding company" (as defined in 12 U.S.C. 1841, a "Federal BHC"). Stock of banking institutions held in a fiduciary capacity, for instance, and stock acquired in settlement of a previously contracted debt does not cause its owner to become a Federal BHC, because the owners of such stock have not acquired it with an intent to control or influence the management of those banking institutions ( See 12 U.S.C. 1841(a)(5)). There is also an exception, justified on the same grounds, for shares acquired in an underwriting that are held long enough to be resold "on a reasonable basis" (12 U.S.C. 1841(a)(5)(B)). You point out that, as a general matter, the interpretations of the Federal Reserve Board have allowed underwritings to be excepted from restrictions on the ownership of stock provided that (i) the underwriter disposes of stock within a reasonable period of time given the circumstances of the transaction (which is often considered to be 30 days but can be up to 90 days) and (ii) the stock is not voted while held by the underwriter (a transaction that satisfies these criteria, a "Bona Fide Underwriting"). Further, you indicate that the use of the term "underwriting" in the international securities markets has evolved to encompass a broad variety of transactions ( i.e. is not limited solely to classic firm-commitment underwritings in registered public offerings, but also includes, for example, acting as an initial purchaser of securities in offerings exempt from registration under Securities Act Rule 144A, certain block transactions, etc).
You suggest that both the BHCA and the NYBL should be read with the understanding that the transitory ownership by and purpose of an underwriter in a Bona Fide Underwriting was not intended to be captured by either statute. In particular, you request the Department's confirmation that the ownership of voting stock of a banking institution or NY BHC should not be considered in determining whether a company is in compliance with Sections 142 and 143-b to the extent that such ownership is part of a Bona Fide Underwriting, as defined above. We agree with your conclusion, and we would clarify that we would not limit this conclusion to the facts presented by your situation (i.e. where the underwriter happens to be a subsidiary of a company that is or would become a NY BHC ).
I trust that this is helpful.
Rosanne Notaro -First Assistant Counsel