Banking Interpretations

NYBD 131(3)
NYBD 201-b

To: Senior Bank Examiner Keith Tam
From: Assistant Counsel Sullivan
Date:

August 17, 2010
Subject: Collateral Agent

Issue

Whether the New York branch (the “Branch”) of the [---] (the “Bank”) – which does not have the authority to exercise fiduciary powers under Section 201–b of the New York Banking Law (the “Banking Law”) – may act on behalf of itself and other lenders as collateral agent for syndicated loans that the Branch has originated and syndicated, and thereby hold and administer the collateral?

Answer:

Yes.

Facts:

The Bank intends to act through the Branch as agent to hold and administer various forms of collateral as security for extensions of credit made by the Bank individually or as one of multiple lenders.  The collateral would typically consist of pledged share certificates or other ownership interests, mortgages of real property including fee and leasehold interests, pledges and security interests as well as personal property, funds or security accounts, and the like.

In those cases where there were multiple lenders, the collateral would be held and administered under an Inter creditor and Collateral Agency Agreement (the “Agreement”) substantially in the form attached.  In such case, each lender would have a pari passu secured position in the collateral.  The Branch would act as collateral agent for the lenders.  Its obligation would be to hold the security interest in the collateral and realize upon such collateral in the case of an “Event of Default.”

In its capacity as agent, the Branch would hold the collateral documentation and could be named as the mortgagee, assignee, secured party, etc. in such documentation.  This would facilitate the perfection of a security interest and the realization upon the collateral in the event of a default. 

The Agreement would explicitly disclaim any fiduciary obligation on the part of the Bank and absolve it from liability in the absence of gross negligence or willful misconduct. Further, the Agreement would expressly permit the Bank to lend money to, accept deposits from and otherwise do business with the relevant borrower/debtor.

The Bank’s relationship with the borrower/debtor would be that of creditor and holder of a security interest.  It would undertake no fiduciary obligation to act on behalf of the borrower/debtor.

Reasoning:

Generally, under the Banking Law, the powers (except for deposit-taking) of a New York licensed branch of a foreign bank are co-extensive with those of a New York State-chartered bank.1  In a case concerning whether fiduciary powers were necessary to act as transfer agent, Legal Interpretation LI 3 distinguished what could be done by branches of foreign banks without fiduciary powers from what could be done by branches with such powers.2   In this regard, Legal Interpretation LI 3 specifically permitted banking entities without fiduciary powers to provide securities custody and related services.3

Section 131.3 of the banking law prohibits corporations without fiduciary powers from acting in a fiduciary capacity.   However, this prohibition has been held inapplicable to a corporation that is only performing ministerial functions.  In 1960, Deputy Superintendent and Counsel Simmons pointed out that:  “The purpose of Section 131(3) .  .  .  is to prevent encroachment on .  .  .  trust companies  .  .  .  acting as trustee.”4   He noted that extending the prohibition to corporations acting as agents in the exercise of purely ministerial functions would call in to question numerous roles where corporations without fiduciary powers acted as agents, and therefore, “would give rise to absurdities.”   This distinction between fiduciary activity and ministerial functions was reiterated in 1992 by Deputy Superintendent and Counsel Tibbals.5    The foregoing interpretations have been followed more recently.6

Conclusion:

The functions of a collateral agent as described above are essentially those of a custodian. The Branch’s obligations would be to hold the collateral, to realize on it in the case of an event of default and to apply the proceeds to each lender pro-rata after deducting the costs of collection.  The collateral agent would have neither the discretion to invest the collateral or its proceeds nor the discretion to distribute such proceeds on other than a pro-rata basis.

The collateral agent would have to exercise some judgment in connection with its realizing upon the collateral.  Still, this process would be essentially ministerial.

Noted: M.E.G.

________________

(1)       custody for safekeeping of customers" securities, pursuant to instructions by such customers;
(2)       receipt of dividends on the securities for the account of such customers, and disposition thereof in accordance with             instructions;
(3)       placing of orders for the purchase or sale  of securities in accordance with customers" instructions;
(4)       execution of voting and other rights  in connection with custodian accounts and in accordance with customers"             instructions;
(5)       transaction of such business through nominees; and
(6)       receipt of fees or commissions from customers in connection with such business.

  1. Letter from Assistant Counsel Christine M. Tomczak to [---] dated August 12, 2004; See Memorandum from Rosanne Notaro, Legal Division,  to Examiner J. P. Murphy dated June 26, 1997.
  2. 3 NYCRR LI 3.
  3. Interpretation LI 3 specifically allowed banking entities without fiduciary powers to provide:
  4. Letter dated March 10, 1960 from Deputy Superintendent and Counsel Richard S. Simmons to [---].
  5. Letter dated October 22, 1992 from Deputy Superintendent and Counsel Elizabeth Tibbals to [---].
  6. Letter dated July 25, 2008 from Assistant Counsel John B. Sullivan to [---].