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Banking Interpretations

NYBL  100-b

December 21, 2010 

[---]

Re: Banking Law Section 100-b

Dear Mr. Stern:

This responds to your letter to Marjorie Gross on behalf of [---] (the "Bank") concerning Section 100-b of the Banking Law -which section prohibits a corporate fiduciary's purchase of securities from itself.

The Bank is authorized to exercise fiduciary powers and does, in fact, engage in a broad range of corporate agency, custody and fiduciary activities. Moreover, the Bank is a leading provider in the United States of transition management and other directed investment management services. In certain cases, the Bank effects transactions on behalf of a client through various types of derivatives transactions. In this regard, the Bank proposes to act as a principal in certain such derivatives transactions when and as directed by its clients.

Section 100-b of the Banking Law provides that "no corporate fiduciary shall purchase securities from itself." However, your letter requested that the Banking Department confirm that:

"the prohibition in Section 100-b of the Banking Law on the purchase by a 'corporate fiduciary1 of securities from itself is not applicable if the person to whom the corporate fiduciary owes a fiduciary duty authorizes the otherwise prohibited self-dealing transaction by informed consent".1

Your letter did assert that a bank's purchase or sale of securities "with and pursuant to customer instructions" was not a fiduciary function because the Banking Department had previously determined that a bank without fiduciary powers could engage in such activity. However, your letter also indicated that:

"the Bank may have certain fiduciary obligations to its client to act on the client's behalf in exercising control over the timing and manner of disposition of the client's securities, exercising discretion to vote proxies on behalf of its clients and providing advice regarding derivatives transactions."

Accordingly, your letter was willing to assume for the purpose of this inquiry that the Bank would be a corporate fiduciary.2 In this regard, this letter is assuming that the Bank would retain "material discretion"3 over the relevant transactions. The derivative transactions in which the Bank desires to act as principal are private contracts. Their terms and conditions would not be widely available ahead of their consummation. Accordingly, a client that merely instructed the Bank to enter a derivatives transaction would generally grant significant discretion to the Bank over the terms of the transaction.

As noted above, your letter requested that the Banking Department confirm that the prohibition in Section 100-b on a corporate fiduciary's purchasing securities from itself can be waived by informed consent even though that section does not expressly state that such prohibition can be so waived. You pointed out that the prohibition on self-dealing in Section 100-b "was merely a statutory statement of the common law rule".4   You argued that since the common law prohibition on self-dealing can be overcome by the informed consent of the person to whom the fiduciary duty is owed, a similar rule should apply in the case of the prohibition in Section 100-b.

The Banking Department concurs with your view that the express prohibition on self-dealing in securities in Section 100-b was merely a codification of the common law. Therefore, it follows that such prohibition can be overcome by the informed consent of the Bank's client. Moreover, as you noted in your letter, even if the Bank were released from the prohibition on self-dealing, it would still have an obligation to act with good faith with respect to its client.5

We hope that this letter is helpful.

Very truly yours,

John B. Sullivan
Assistant Counsel

________________
  1. Although your letter indicated that the derivatives instruments would, in many cases, not be classified as "securities" for purposes of Section 100-b, your letter was willing to treat those derivatives instruments as such for the purposes of your inquiry.
  2. The Banking Department has determined that a bank is not acting in a fiduciary capacity when "it exercises no material discretion and merely acts upon the direction given to it." Letter dated January 29, 1997 from Kathleen A. Scott. In this regard, a bank is not exercising fiduciary powers if it is only acting in a ministerial capacity. Letters dated March 10, 1960 from Deputy Superintendent and Counsel Richard S. Simmons; January 8, 1990 from Associate Attorney Barbara Kent, and October 22, 1992 from Deputy Superintendent and Counsel Elizabeth Tibbals. In contrast, a bank has been found to be exercising fiduciary powers when it exercises discretion on behalf of its clients. Memoranda dated February 24, 1965 from Assistant Counsel von Hirsch and September 29, 1993 from M. Schussler.
  3. Letter from Kathleen A. Scott, note 2, supra.
  4. This assertion was based on Matter of Ryan, 291 N.Y. 376; 52 N.E. 2d 909 (1943), which stated as dicta that the prohibition on self-dealing in securities in a predecessor to Section 100-b "was merely a statutory statement of the common law." 291 N.Y. at 404.
  5. O'Hayer v. de St. Aubin, 30 A.D.2d 419, 423; 293 N.Y.S. 2d 147, 151 (2nd Dept. 1968); In re Dow, 32 Misc 2d 415, 419; 156 N.Y.S. 2d 804, 809 (Surr. Ct. Chautauqua 1955), modified, 3 A.D.2d 968; 162 N.Y.S. 2d 327 (4th Dept. 1957), aff'd, 5 N.Y. 2d 739; 177 N.Y.S. 2d 718 (1958).

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