Banking Interpretations

NYSBL Sections 97 and 103(1)(i)

June 19, 2006

[ ]

Dear [ ]:

This is in response to your email message to Rosanne Notaro of this
office dated May 26, 2005 regarding [ ]("Bank's")
proposed investment in money market preferred stock ("MMPS"). In
particular you have asked whether the Banking Department ("Department")
would consider MMPS to be "debt securities" and thus subject to BL § 97
(1), which permits commercial banks to invest in "bonds, notes, debentures,
and other obligations for the payment of money which are not in default as
to either principal or interest when acquired". The issue has to do with
whether these hybrid securities bear enough similarities to typical debt
instruments so that they can be viewed as "debt securities" and, as such, be
permissible investments for banks under BL § 97 (1). You further inquired
whether BL § 103(1) (i) would be applicable in the case of the Bank's
investment in MMPS. BL § 103 (1) (i) provides that a Bank's investment in
certain types of securities shall not subject to (i.e., need not be aggregated
with other exposures to the same issuer for purposes of) the loan to single
borrower limits of BL § 103 (1), provided the requirements enumerated in
BL § 103 (1) (i) are met.

As you note in your email, the Department has opined on a similar
issue involving trust preferred securities ("TPS"). TPS are preferred stock
that is typically issued by a wholly owned trust of a bank or bank holding
company. Typically, they are issued for a 30-year term and carry a fixed
interest rate. The dividends issued on the stock are considered interest under
the Internal Revenue Code, and are deductible as such. Both the Office of
the Comptroller of the Currency ("OCC") and the Department have found
TPS to be debt-like securities in substance, and have therefore permitted
banking institutions to own TPS under the guidelines permitting ownership of
debt securities (See, e.g., OCC Interpretive Letter 908 (April 2001);
Department Letter dated August 21, 1997 by Kathleen A. Scott, Assistant

MMPS is likewise similar in many ways to debt instruments. As we
understand it, based on a description of these securities in OCC Interpretive
Letter #781 (June 1997), and your representation that the stock in issue is
the same, MMPS usually carry voting rights only when dividends are in
arrears for 180 days or so, holders do not share in profits of the issuer, and
dividend yield floats between minimum and maximum rates on the basis of
prevailing interest rates and the credit standing of the issuer. In addition, as
you explained to me over the telephone, MMPS has an effective maturity
date of 49 days inasmuch as the yield is reset every 49 days and the holder
must bid for what is, effectively, different stock. We understand that, absent
a bid, the MMPS simply expires at the end of the 49 day period.

We agree that MMPS should qualify as a debt instrument under BL §
97 (1), and, on that basis, that the Bank may invest in it. This view is in
accord with the position of the OCC, which is set forth in Interpretive Letter
# 781 cited above.

With respect to the application of BL § 103 (1)(i), MMPS, as you have
described it; is rated in one of the three highest rating grades by an
independent credit rating agency and has a life of 49 days. On the basis of
those representations, then, it would appear that the Bank would be
permitted to rely on the separate investment limitation set forth in BL §
103(1) (i).

Please note that the foregoing opinion is limited to the facts you have
presented and which are set forth above. Deviations from these facts may
result in different conclusions.

We hope that the foregoing is helpful.



Bryan J. Farrell
Assistant Counsel

cc: Deputy Kursky---Community & Regional Banks Division