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Banking Interpretations

January 15, 2002

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Re: [                                           ]
Proposed Equity Investment

Dear [                     ]:

You submitted a letter request for approval to allow the [                      ]("Bank") to become a limited partner ("LP") in a private investment fund ("Fund") formed by [                                                      ] The Fund has been organized as a Delaware limited partnership and has been approved by the Small Business Administration ("SBA") to be licensed as a Small Business Investment Corporation ("SBIC") under the Small Business Investment Act of 1958 (as amended) ("SBIA"), 15 U.S.C. §661, et. seq.[1]

The Bank intends to make a $1.7 million equity investment in the Fund that will be drawn down over five years and remain outstanding for up to ten years.  According to your letter, this is the Bank's only SBIC investment and the Bank's Board of Directors and Investment Committee have reviewed and approved the proposed transaction.  Since the Bank will be an LP in the Fund, its obligation resulting from the capital investment in the Fund is limited to the amount of its commitment.

A New York limited liability company, wholly owned by [   ], shall serve as the Fund's general partner ("GP") and [   ] will act as an adviser to the GP.  Further, the GP will have the entire management responsibility for the Fund. [2]  The Fund's primary investment vehicle will be to provide mezzanine capital, typically in the form of subordinated debt with equity participation features, i.e. warrants, to companies that meet the SBA definition of a "small business" to be used for business expansion, acquisitions or recapitalizations.  The Fund may also invest in equity securities of certain companies but it is anticipated that such investments will be less than 7.5% of the Fund's total investments.

The SBIA permits member banks of the Federal Reserve System and nonmember insured banks to invest in an SBIC to the extent permitted under state law, but limits the amount of such an investment to no more than 5% of the Bank's capital and surplus.  See, 15. U.S.C. §682(b).

Section 2001(2)(f) of the Banking Law provides that, subject to any limitations or other specific statutory provisions contained in either the Banking Law or other New York statutes, a bank may be a partner in a business enterprise.  Accordingly, while there is no legal prohibition to the Bank becoming an LP in the Fund, its participation is contingent upon the Fund making investments that are legally permissible for the Bank.  Therefore, the equity securities held by the Fund, whether through the exercise of a warrant or direct investment, must be equity securities authorized by the provisions of Banking Law §97(4-b) in order for the Bank to participate in those investments.  Please be reminded that, among other things, Banking Law §97-(4-b)(a) states that banks and trust companies may only invest in stock that is registered on a national exchange.[3]  Finally, please be advised that the Bank's participation in the issuance of the subordinated debt by the Fund will be subject to the lending limit provisions of Banking Law §103.

Accordingly, the Department has no objection to the Bank's becoming an LP in the Fund to the extent that it engages in permissible investments to the extent outlined above.

Thank you for your attention to the above.

Very truly yours,

Manuel Kursky
Deputy Superintendent


[1]  In addition to the Bank's letter application, on December 20, 20001, representatives from the Bank, BBH and outside counsel met with members of the Department's US Financial Services, Community Financial Services and Legal Divisions regarding the Fund.

[2]  Although LP's will have no management responsibilities for the Fund, there will be a limited partner advisory committee that will review and approve the valuation of the Fund's investments and potential conflicts between the Fund and other business activity of BBH.

[3]  However, it should be noted that Banking Law §97(5) permits a bank or trust company to acquire the stock of any corporation in settlement or reduction of a loan, advance of credit or investment when acquisition of such stock is necessary to minimize or avoid loss in connection with such loan, advance of credit or investment.