Banking Interpretations

NYSBL 140-a
Article 15 Section 4001, 4004, 5002

July 18, 2006

[ ]

Dear [ ]:

In your recent emails to me, as well as our follow-up telephone conversations, you had several inquiries regarding the start-up of a New York state-chartered bank. You indicated that you are representing a group of investors that may be interested in establishing a new state-chartered bank (the "Bank").

First, you indicated that the group intends to form a limited liability company (the "LLC") prior to incorporating the Bank. The LLC will address certain preliminary start-up matters, such as paying for consultants who will prepare a business plan for the Bank, conducting a search for the CEO, laying the groundwork for a capital campaign, etc. Once the Bank is incorporated, the group intends to dissolve the LLC and transfer any assets to the general operating account of the Bank. You inquire whether the Department would have any objection to the aforementioned approach, or would prefer an alternative approach.

The Department would pose no objection to the aforementioned approach. It has been a common practice for new bank investor groups to form a corporation or limited liability company to engage in organizational activities prior to the chartering of a new banking organization. Frequently, some or more of the persons that organize such an entity will also be incorporators of the new bank. The new bank would need to raise capital in accordance with the requirements of the New York Banking Law ("Banking Law"). However, to respond to the specific question you raised, the Department would not object to the transfer of any net assets of an organizational entity, such as the LLC, to the general operating account of the Bank upon the dissolution of the LLC, provided that such assets are permissible assets for the Bank to own. You further inquired whether it would be permissible for the Bank to adopt a capital structure consisting of both common, and preferred stock, with the preferred stock only being offered for purchase to members of the LLC. There would be no restriction on what you propose. (See, e.g., NYBL 4001, 5002).

You asked whether the LLC could be an incorporator of the Bank. The Banking Law contemplates only natural persons as incorporators of banks. (See, e.g.. NYBL 4001 requiring the organizational certificate to list the names and places of residence of each incorporator).

You also inquired about incentive plans such as stock options and stock grants. In particular, you asked whether there would be a prohibition on compensating the CEO and other Bank executives with a combination of cash and outright grants of stock; and whether there are prohibitions against compensating consultants and other non-Bank employees with a combination of cash and outright stock grants for services rendered. In our telephone conversation, you indicated that your question related to the compensation of such individuals with stock from the initial stock offering of the Bank. The Banking Law would not permit such stock grants in connection with an initial offering, as the law requires that all of a bank's initial capital stock, except such shares as may be reserved in accordance with a provision in the organization certificate, must be fully paid in cash. (See NYBL 4004(10(a)). The Banking Law authorizes the establishment of stock option plans with appropriate approvals (NYBL 140-a and N.Y.C.R.R. Part 26). However, as you point out, Department policy does not favor establishment of stock option plans at the time of formation of the bank, since these plans are subject to shareholder approval.

Finally, you mentioned that the proposed Bank is expected to have a number of foreign investors, and you inquired whether such investors would be subject to special informational disclosure requirements. The application process for a new bank includes the provision of significant background information on all proposed incorporators and directors, as well as principal investors that will own five percent or more of the bank's stock. The same informational requirements would be imposed regardless of whether such principals were U.S. or foreign persons.

I trust that this is responsive to your inquiry. Please feel free to call me at (212) 709-1663 should you have additional questions.


Rosanne Notaro
First Assistant Counsel