NYSBL 97(1), and 235(31)
August 21, 1997
Dear [ ]
This is in response to your letter inquiring whether New York State-chartered commercial banks and savings banks may invest in trust-preferred securities that could be considered below investment grade. As noted and qualified below, the Legal Division would concur in your opinion that these trust-preferred securities may be considered as debt securities in evaluating whether state-chartered commercial banks or savings banks may invest in them, and that both kinds of institutions may legally invest in such securities.
Trust-preferred securities are nonperpetual preferred stock issued by a wholly owned trust of a bank or savings and loan holding company. Such securities are typically issued for a term of thirty years and carry a fixed rate of interest. They also enjoy the benefits of both equity and debt, in that the Board of Governors of the Federal Reserve System permits the bank holding company to treat the securities as Tier 1 capital, yet the Internal Revenue Service treats the securities as debt, meaning that the dividends paid on trust-preferred stock are tax deductible to the issuing company. Moreover, you state that Statement of Financial Standards No. 115 ("FAS 115") treats these securities as debt, not equity, as the definition of "debt security" includes preferred stock that by its terms must be redeemed by the issuer.
With respect to investments by a commercial bank, chartered under Article 3 of the Banking Law, section 97(1) of the Banking Law permits a commercial bank 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." There is no requirement that the debt instrument be investment grade, merely that it be an obligation for the payment of money and not in default as to either principal or interest when the investment is made. Because the issuer is obliged to repay the holder's investment at maturity and the dividends on the preferred stock are effectively the interest payments received on the underlying debenture, such products may be seen to meet the definition of an obligation for the payment of money. Thus, there appears to be no impediment under New York law to a state-chartered commercial bank investing in trust-preferred" securities, whether or not of investment grade.
With respect to savings banks, section 235 of the Banking Law provides that a savings bank may invest in certain specified investments and no others. Section 235(31) is the so-called "leeway" provision that permits a savings bank to make investments not otherwise authorized under section 235, up to certain limits specified therein. Section 235 does not appear generally to otherwise permit a savings bank to invest in debt securities of less than investment grade.1 Thus, a savings bank legally may invest in trust-preferred securities under the authority of section 235(31) and subject to the limits contained therein.
Please note that this opinion is based upon the facts as described in your letter and should those facts change, then so might this opinion. In addition, this opinion deals solely with the legal authority for commercial and savings banks to invest in trust-preferred securities. This letter does not deal with any supervisory concerns that may arise from such investments, nor does it deal with federal law issues concerning these investments.
If you have any questions, please advise.
Very truly yours,
Kathleen A. Scott
1 Section 235(21-a) would permit a savings bank to invest in investment grade trust-preferred securities, provided that the specific investment is highly-rated as defined in that section. Such investment also would be subject to the limitations contained therein.