Banking Interpretations

NYSBL 97(4-a)
General Regulations Part 14

To:        Senior Examiner Howa Young

From:    Alan M. Weinberg - Legal Division

Date:     March 26, 2007

Subject: [---] Part 14.3 Notice Re Investment in an Operating Subsidiary

Issue

Is [---] attached letter of [---] to the New York Banking Department (the "Department") concerning its investment in Euro [---] ("Euro") sufficient to meet the requirements of Part 14.3?

Recommendation

Yes, [---] letter is legally sufficient to meet the requirements of Part 14.3(a) except that certain formal certifications, as noted below, were not provided in the letter. In a subsequent letter of March 21, 2007, also attached, [---] addressed the missing certifications, [---].

Background/Reasoning

[---] a Wholly owned subsidiary of [---] a foreign bank that is a financial holding company for purposes of the Bank Holding Company Act., sent the attached letter of [---] to the Department giving notice, pursuant to Part 14.3, that it seeks approval to make an investment in Euro [---].  Euro [---] is a Denmark-based limited shareholder not-for-profit corporation currently owned by 12 postal organizations and banks each with a 10 percent or less stake. (This investment opportunity is available to [---] because the U.S. share holder position in Euro [---], previously owned by the U.S. Post Office, is vacant.) [---] has been a member of Euro [---] since 1998. The investment of [---] that it seeks to make will enable [---] to become a 10 percent shareholder in Euro [---].
 
Euro [---] does not directly offer funds (or "giro") transactions but rather facilitates such transactions across borders.  Euro [---], much like the Society for Worldwide Interbank Financial Telecommunication ("SWIFT"), is strictly a financial messaging service. In this capacity Euro [---] has established a universal message format and a network through which banks and postal services can communicate for the purpose of initiating and ultimately settling giro transactions. Euro [---] does not hold assets nor manage accounts on behalf of customers. It does not clear or settle transactions.

[---] will be making a less than majority equity investment in Euro [---], which raises questions about the applicability of Part 14. The procedures enumerated in Part 14.3 speak to corporations of which a bank or trust company is or will become the owner of at least a majority of the voting stock and which are controlled by no other persons. Therefore, Part 14 does not technically apply and an area of concern is that [---] will not have a majority interest in Euro [---] to be able to prevent the entity from engaging in activities impermissible for a bank.

By interpretation, however, the Department consistently has acknowledged that banks and trust companies may invest in and have less than majority ownership interests in operating subsidiaries. By "operating subsidiary", the Department means a subsidiary engaged in the transaction of business in which the bank or trust company could engage directly.  Euro [---]'s activities are permissible for an operating subsidiary of a New York state-chartered bank pursuant to New York State Banking Law Section 97(4-a) and 3 N.Y.C.R.R. Part 14.3. In such situations --i.e. involving a less than majority ownership --the Department's policy is to require the bank or trust company to file a Part 14 notice just as it would for majority-owned corporate subsidiary.

Also, when the investment is a less than majority interest, the Department requires the same commitments and satisfaction of the same conditions relating to the non­controlling investment as the OCC imposes on national banks making similar non­controlling investments in Subsidiaries. These commitments and conditions may vary over time and, in their current form, are found in 12 CFR Part 5.36(e) which states:

Non-controlling investments. A national bank may make a non-controlling investment, directly or through its operating subsidiary, in an enterprise that engages in the activities described in paragraph (e)(2) of this section by filing a written notice. The written notice must be filed with the appropriate district office no later than 10 days after making the investment and must:

  1. Describe the structure of the investment and the activity or activities conducted by the enterprise in which the bank is investing. To the extent the notice relates to the initial affiliation of the bank with a company engaged in insurance activities, the bank should describe the type of insurance activity that the company is engaged in and has present plans to conduct. The bank must also list for each state the lines of business for which the company holds, or will hold, an insurance license, indicating the state where the company holds a resident license or charter, as applicable;
  2. State which paragraphs of Sec. 5.34(e)(5)(v) describe the activity or activities, or state that, and describe how, the activity is substantively the same as that contained in published OCC precedent approving a non-controlling investment by a national bank or its operating subsidiary, state that the activity will be conducted in accordance with the same terms and conditions applicable to the activity covered by the precedent, and provide the citation to the applicable precedent;
  3. Certify that the bank is well managed and well capitalized at the time of the investment;
  4. Describe how the bank has the ability to prevent the enterprise from engaging in activities that are not set forth in Sec. 5.34(e)(5)(v) or not contained in published OCC precedent approving a non-controlling investment by a national bank or its operating subsidiary, or how the bank otherwise has the ability to withdraw its investment;
  5. Certify that the bank will account for its investment under this section under the equity or cost method of accounting;
  6. Describe how the investment is convenient and useful to the bank in carrying out its business and not a mere passive investment unrelated to the bank's banking business;
  7. Certify that the bank's loss exposure is limited, as a legal and accounting matter, and the bank does not have open-ended liability for the obligations of the enterprise; and
  8. Certify that the enterprise in which the bank is investing agrees to be subject to OCC supervision and examination, subject to the limitations and requirements of section 45 of the Federal Deposit Insurance Act (12 U.S.C. 1831v) and section 115 of the Gramm-Leach-Bliley Act (12 U.S.C. 1820a).

In the letter of [---] in connection with its investment in Euro[---],[---] described the required items, but did not provide formal certifications that:

  • [---] both "well managed" and "well capitalized" as those terms are defined in Regulation Y of the Board of Governors of the Federal Reserve System;
  • [---] will account for its investment in under the equity or cost method of accounting:
  • [---] loss exposure is limited, as a legal and accounting matter, and [---] does not have open-ended liability for the obligations of Euro [---] (the letter notes that this is the case, however); and
  • Euro [---] agrees to be subject to NYBD supervision and examination.

Thus, except for these formal certifications, the other matters covered in the letter seem to meet the OCC requirements, including the description found in 12 CFR Part 5.36(e)(4). In the letter, [---] addressed how it will prevent Euro [---] from engaging in activities that are not permissible. The letter states, in part, that

While we do not anticipate that the other shareholders of Euro [---] will seek to change the status of Euro [---] as a financial messaging utility, we note that [---] will have the right to redeem its investment in Euro [---] at any time.

Euro [---] is located in Denmark, as stated above. You should note that nothing in the New York Banking Law (Section 97(4-a)), Part 14 or any interpretation of which I am aware places any geographical limitation on the permissible location of New York state bank or trust company operating subsidiaries, or on the application or reach of the Part 14 procedures.

Noted: _____
          R. N.