NYSBL 97(4-b) and 103(1)(i)
To: John C. Ryan - Community and Regional Banks
From: Harry C. Goberdhan - Legal Division
Date: January 21, 2005
Subject: Investment Limitations - Sections 97 4-b and 103 (1)(i)
I have reviewed your email, dated January 11, 2005, to the attention of Sara Kelsey.
- Is the aggregate amount of all investments (stocks and bonds) in a single issuer by an Article 3 bank ("bank or trust company") strictly limited to the lesser of 1 % of assets or 15 % of capital, surplus and undivided profits ("CUPS")? and
- Is a bank or trust company allowed to purchase up to 15% of its CUPS from any one issuer assuming the bank is in compliance with Section 103(1)(i), without regard to the limitations established in Section 97 4-b (c)?
According to Section 97 4-b (c), a bank or trust company may invest in and have and exercise all rights and ownership of common or preferred stock of any corporation, provided that:
"[T]he aggregate amount of all investments in the common and preferred stock of any one issuer pursuant to this subdivision, together with the aggregate amount of all investments in the bonds, debentures, notes or other obligations of such issuer made pursuant to paragraph (i) of subdivision one of section one hundred three of this chapter, shall at no time exceed one percent of the assets or fifteen percent of the capital, surplus and undivided profits of the bank or trust company, whichever is less"
According to Section 103(1)(i):
"The limitation in this subdivision shall not apply to the investments of such bank or trust company in the bonds, debentures, notes or other obligations of any person, provided: (i) ... (ii) such investment does not exceed fifteen per centum of the capital stock, surplus fund and undivided profits of such bank or trust company; and (iii) such investment complies with such additional limitations and conditions as the banking board from time to time may prescribe by general regulation."
With relation to your first question, we believe the answer is yes. It appears as though the intent of Section 97 4-b (c) was to limit investments in STOCKS of any one issuer to the lesser of 1 % of assets or 15% of CUPS. However, in an effort to make sure that no financial entity is over-exposed to any particular issuer, BONDS were also included in the calculation as an investment. Therefore, whenever a financial entity invests in the stocks of an issuer, then bonds issued by such issuer and held by such financial entity should be aggregated with the stocks to test the limitations prescribed by Section 97 4-b (c).
Under Section 103(1)(i), the bank is allowed to purchase bonds up to 15% of CUPS from any one issuer provided, however, that all the conditions of 103(1)(i) are met. The limitations of 1 % of assets or 15% of CUPS, whichever is less, is not applicable in the case where only bonds and not the stocks of a single issuer have been purchased by the bank. However, if a bank's investment in a single issuer includes both stocks and bonds, the more stringent 1 % asset test would also apply. Therefore, the answer to your second question is no.
To further clarify, if your second question were restated as follows "Without regard to the limitations established in Section 97 4-b (c), is a bank or trust company allowed to invest in bonds from one issuer up to 15% of CUPS if the bank invests in no stock of such issuer, assuming the bank is in compliance with Section 103(1)(i)?" then the answer is yes.
- If the bank or trust company is investing in bonds, then the limitations of such investments should be tested under Section 103(1)(i). This test should be met whether or not the entity invests in stocks as well.
- If the bank or trust company is investing in stocks, then the limitations of such investments should be tested under Section 97 (4-b). The restrictions of this section should be met whether or not the entity invests bonds as well.
- If the bank or trust company is investing in stocks and bonds of the same issuer, then the stocks and bonds should be aggregated and tested against the limitations in Section 97 4-b (c), and the total investments are limited to the lesser of 1 % of assets or 15°/® of CUPS.
Note that the legislative histories of both Sections 97 4-b (c) and 103(1)(i) were examined in order to determine whether the drafters intended a different approach. However, nothing was found that directed a different approach to reconcile the two Sections.