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Banking Interpretations

NYBL 103(6) and 12-a

To: Senior Bank Examiner Weisman
From: Assistant Counsel Sullivan

February 23, 2010


Application by the Bank of [---] to Reduce or Retire Capital Stock


[---] (the “Bank”) has submitted an application to purchase on the open market an amount of its common stock1 not to exceed $[---].  The reasons that the Bank specifies for the purchase are:

The Bank has represented that it will maintain its status as well-capitalized after the purchase of the stock and that: “The stock will not be acquired and held on speculation about changes in its value.”

The overall transaction has been approved by the board of directors of the Bank (the “Board”), but the timing, amount and price of each purchase would be left to the discretion of the Bank’s management. The Bank, which is a New York-chartered, non-member bank, applied to the Federal Deposit Insurance Corporation (the "FDIC") and has received the FDIC’s approval of the transaction under 12 C.F.R. §303.241.


  1. Whether the Bank has taken the corporate action required to authorize the purchase of its common stock?
  2. Whether the Bank’s purchase of its common stock is for a “legitimate corporate purpose”?
  3. Whether the Bank’s holding such stock as treasury stock would serve a “legitimate corporate purpose”?
  4. Whether the method of purchase will reasonably assure that directors of the Bank fulfill their fiduciary duties to the Bank and its stockholders?


  1. The Bank’s application does not indicate that it has taken the corporate action necessary to authorize the purchase of its common stock. Such purchase must be approved by the vote of the Bank’s stockholders who own in the aggregate two-thirds of its capital stock – whether such stock is voting or non-voting.
  2. The reasons set forth by the Bank in its application would indicate a “legitimate corporate purpose” for the Bank’s purchase of its common stock.
  3. It is not clear that the Bank has demonstrated a “legitimate corporate purpose” for the Bank’s holding the stock so acquired as treasury stock.
  4. The Bank has not proposed a methodology sufficient to assure that its purchases of stock will be fair to the bank and its non-purchasing stockholders.


New York Statutory Law:

Section 103(6) of the New York Banking Law (“NYBL”) generally prohibits a New York-chartered bank from purchasing its own capital stock.

Federal Law:

The law applicable to national banks is more complicated. Prior to 2000, there was a restriction in 12 U.S.C. §83 analogous to that in Section 103(6), which restriction prohibited a national bank from being the “purchaser or holder” of its own shares. Nevertheless, the Office of the Comptroller of the Currency (the “OCC”) permitted national banks to purchase their shares to effect capital reductions in accord with 12 U.S.C. §59, which section requires that the bank obtain the approval of such a reduction both by a two-thirds vote of its shareholders and by the OCC.2

In an Interpretive Letter in 1994, the OCC took the position that shares acquired by a national bank under 12 U.S.C. §59 need not be retired but could be held as treasury stock “to fulfill a legitimate corporate need”.3  In 1996, the OCC adopted Interpretive Ruling 7.2020,4 which formalized this interpretation.5  Then in 1999, the OCC amended Interpretive Ruling 7.2020 to incorporate the positions it had taken in several Interpretive Letters by adding a nonexclusive list of legitimate corporate purposes.  Currently, Interpretive Ruling 7.2020 reads as follows:

“(a) Acquisition of outstanding shares. Pursuant to 12 U.S.C. 59, including the requirements for prior approval by the bank's shareholders and the OCC imposed by that statute, a national bank may acquire its outstanding shares and hold them as treasury stock, if the acquisition and retention of the shares is, and continues to be, for a legitimate corporate purpose.

(b) Legitimate corporate purpose. Examples of legitimate corporate purposes include the acquisition and holding of treasury stock to:

(1) Have shares available for use in connection with employee stock option, bonus, purchase, or similar plans;

(2) Sell to a director for the purpose of acquiring qualifying shares;

(3) Purchase a director's qualifying shares upon the cessation of the director's service in that capacity if there is no ready market for the shares;

(4) Reduce the number of shareholders in order to qualify as a Subchapter S corporation; and

(5) Reduce costs associated with shareholder communications and meetings.

(c) Prohibition. It is not a legitimate corporate purpose to acquire or hold treasury stock on speculation about changes in its value.”6

Finally, in 2000, the restriction on a national bank’s being the “purchaser or holder” of its own shares was deleted from 12 U.S.C. §83.7  The OCC’s memorandum in support of that legislative change stated:

“deleting the prohibition in § 83 will eliminate any confusion about the authority of a national bank to purchase its own shares for legitimate corporate purposes, e.g., to reduce its capital when market conditions or internal operations indicate that doing so is in the best interest of the bank and is consistent with safety and soundness.”8

 A national bank that buys back its outstanding common stock under 12 USC §59 has certain duties with regard to the fairness of the transaction.  In 2007, the OCC issued its Licensing Manual on Capital and Dividends.9  That manual points out that a national bank that is purchasing its stock must “ensure full and adequate disclosure to shareholders under the Federal securities laws as well as consider the interest of remaining shareholders under applicable fiduciary principles”.10 The Manual notes that the bank’s directors have fiduciary duties to the bank and that the value per share offered to individual shareholders is a decision for the bank’s board of directors.11  A bank whose securities are not actively traded must disclose to the OCC the method to be used to establish a price for the stock.12

Relief under the New York “Wild Card” Statute:
Under Section 12-a of the NYBL, the Banking Board may adopt a resolution authorizing one or more state chartered banking institutions to exercise a “federally permitted power”13 subject to such terms and conditions as the Superintendent shall find necessary and appropriate and as approved by the Banking Board.  Using this authority, the Banking Board adopted the following resolution on February 7, 2008 (the “Wild Card Resolution”):

“This Board, pursuant to Section 12-a of the Banking Law hereby authorizes state-chartered banks and trust companies to purchase and hold their outstanding stock to the same extent and subject to the same conditions as permitted for national banks pursuant to Title 12, United States Code, Sections 59 and 83, and Title 12 Code of Federal Regulations, Section 7.2020, as in effect as of the date of this resolution.”

The Superintendent may impose additional conditions on a bank’s exercising the authority set forth in the foregoing resolution.14 Also, a bank seeking approval to purchase and hold itsoutstanding stock under the Wild Card Resolution must follow the procedures set forth on the Banking Department’s website.15

The Distinction between Acquisition and Retention:

Interpretive Ruling 7.2020 permits a national bank to acquire and hold its shares as treasury stock, if both “the acquisition and retention of the shares is, and continues to be, for a legitimate corporate purpose.”  This language appears to indicate that some purposes for purchasing stock would support only the acquisition and retirement of a national bank’s outstanding stock while others would support not only the acquisition but also the retention of such shares as treasury stock.

Logically, to support not only the acquisition but the retention of the shares, the “legitimate corporate purpose” should contemplate some prospective use for the treasury stock.  However, in Interpretive Letter No. 660, the OCC noted somewhat inconsistently that there was no express requirement to retire such acquired shares in Section 59 and that holding the “shares as treasury stock, rather than retiring them, would not result in any greater ‘impairment’ of the bank’s capital.”  The letter continued and stated that: “If the purchase is not forbidden . . ., the subsequent holding should not be forbidden either.”

The implication left by Interpretive Letter No. 660 is that national banks have broad discretion to purchase and hold their own stock if they follow the procedures mandated by Section 59.  On the other hand, the OCC retains the ability to prevent abuse of this discretion in the approval process.  The OCC has enhanced its ability in this regard by adopting “legitimate corporate purpose” as the relatively vague standard for review.

On August 26, 2008, I spoke with Madonna Starr, then Senior Counsel at the Northeast District Office of the OCC.  She advised me that she and several of her colleagues at the OCC had reviewed the language that the OCC had used in supporting the amendment of Section 83.  That language had indicated that it would be a “legitimate corporate purpose” for a national bank to purchase its stock:

“to reduce its capital when market conditions or internal operations indicate that doing so is in the best interest of the bank and is consistent with safety and soundness.16

Ms. Starr advised me that she and her colleagues believed that the language quoted above was very broad.  She noted that the OCC evaluated the “legitimate corporate purposes” of each national bank seeking to purchase its stock on a case-by-case basis.  She and her colleagues felt that the language quoted above would likely state a “legitimate corporate purpose” for a national bank to purchase and retire its stock.  However, the OCC, during its case-by-case evaluation, would probably require that a national bank adduce additional reasons or purposes if it wished to retain the stock as treasury stock.

The Bank’s Proposal:

Required Corporate Action:

The Bank’s application recites that its board of directors approved the proposed purchases of its stock on November 13, 2007.  Unfortunately, this is not sufficient.  A national bank’s reduction of its capital under 12 U.S.C. §53 must be approved by the vote of the bank’s shareholders who own two-thirds of its capital stock.  The resolution of the Banking Board adopted on February 7, 2008 makes this requirement applicable to a New York bank effecting an analogous reduction of its capital.

To obtain the approval of the Bank’s shareholders who own two-thirds of the Bank’s capital stock, the Bank would have to count the holders of the non-voting stock.  Section 53 literally requires approval “by a vote of shareholders owning, in the aggregate, two-thirds of [the Bank’s] capital stock”. 17 Moreover, requiring that both voting and non-voting shareholders be counted is equitable in that each will be affected by a reduction in capital.

“Legitimate Corporate Purpose”:

The Bank’s application states that it “proposes to reduce or retire its capital stock” by purchases on the open in an amount not to exceed $6,000,000.  The application does not indicate the amount of such stock that the Bank intends to retain as treasury stock.  As noted above, the Bank specifies five reasons for the proposed purchases.

First, the Bank seeks to acquire its stock at less than book value, if possible. Theoretically, such purchases would be accretive to value because, as shown on its books, the Bank’s assets would be reduced less than its equity.  This would result in an increase in net worth per share.  Such purchases to enhance shareholder value would fit within the language of the OCC in support of the amendment of Section 83 which would allow a bank to:

“purchase its own shares . . . to reduce its capital when market conditions . . . indicate that doing so is in the best interest of the bank . . . .”

However, the Bank’s rationale – purchasing its stock to enhance value does not provide any indication of the possible use of such stock if held in treasury.  Accordingly, the issue is whether a bank must state a specific future use for the stock held in treasury or whether it is sufficient that the stock be purchased for a “legitimate corporate purpose” and there be no intent to use the stock held in treasury either to speculate or to circumvent the law. 

Interpretive Ruling 7.2020(a) requires that both the acquisition and retention of the shares be for a “legitimate corporate purpose.”  Nevertheless, the OCC has not clearly established a requirement that a prospective use for the treasury stock be identified in advance.  At least two of the five “legitimate corporate purposes” listed Interpretive Ruling 7.2020(b) provide no indication of the future use for the stock held in treasury.   Moreover, Interpretive Letter 660, upon which Interpretive Ruling 7.2020 is based, indicated that if the acquisition of the stock is lawful, its retention should be lawful.

By leaving the term “legitimate corporate purpose” undefined, Interpretive Ruling 7.2020 allows a national bank broad discretion in determining whether to purchase and hold its own stock.  By retaining the right to approve or disapprove of the bank’s purchase transaction, the OCC maintains the ability to override the determinations of national banks on a case-by-case basis.  In our conversation, Ms. Starr emphasized the importance of this case-by-case process.

The Wild Card Resolution’s incorporation of Interpretive Ruling 7.2020 should put the Superintendent in a position with respect to New York banks that is analogous to that of the OCC with respect to national banks.  This means that the Superintendent should be able to determine that a particular set of facts and intentions presented by a New York bank demonstrate a “legitimate corporate purpose” unless the OCC has determined that those particular facts and intentions could never constitute a “legitimate corporate purpose”.18  

Second, the Bank seeks to acquire its stock “to create treasury shares for possible future use.” This reason, of course, does not provide an indication of the future use for the stock held in treasury.

Third, the Bank seeks to acquire its stock “to discourage takeover.”  It is not clear, however, that discouraging takeovers is in the best interests of the shareholders of a bank.  Theoretically, a takeover attempt would cause the market value of the shares of the target bank to appreciate.  The directors of the bank would have to evaluate the takeover offer in light of their fiduciary duty to the bank’s stockholders.19

Even if it were determined that Interpretive Letter No. 825 stood for the proposition that avoiding takeovers is a “legitimate corporate purpose,” the Superintendent would not have to adopt that position.  In each instance, he would have the ability, like that of the OCC, to withhold or condition his approval a bank’s proposal to purchase its stock.  Moreover, under Section 12-a.6 of the NYBL, he could impose additional conditions on a New York bank’s exercising the authority provided under the Wild Card Resolution.

Fourth, the Bank seeks to acquire its stock “to enhance the liquidation market for shareholders.”  The OCC has taken inconsistent positions on whether enhancing the liquidity of the market for a bank’s stock would constitute a “legitimate corporate purpose.” 

In Interpretive Letter No. 747,20 the OCC was asked to allow a closely-held national bank to purchase life insurance, the proceeds of which would have been used by the bank to redeem stock from the estate of a major shareholder.  The bank asserted that the bank’s purchase of the stock would benefit the bank and its other shareholders as well as provide liquidity to the decedent’s estate.   The bank argued that the purchase would enable the bank to remain independent, and the OCC recognized that the bank had an interest in avoiding the decline in stock value that might be caused by a sale of shares by the decedent’s estate.  Nevertheless, Interpretive Letter No. 747 opined that accommodating the estate of the major shareholder would not provide a “legitimate corporate purpose” sufficient enough to “qualify for an exception to 12 U.S.C. §83.”  

The script of the presentation that explained the Wild Card Resolution to the Banking Board in February, 2008 set forth several examples of “valid purpose[s]” for a bank to purchase its own shares.  These included:

“A closely-held bank might seek to repurchase shares following the death of a major shareholder in order to avoid a change in control of the bank.”

Based on the foregoing, it would appear that a closely-held bank would have an interest in enhancing the liquidity of the market for its stock.  This would allow the Superintendent to determine that a bank’s purchasing its stock to achieve such goal would indicate that the bank was acting for a “legitimate corporate purpose.”  

Fifth, the Bank seeks to acquire its stock “to reduce costs associated with shareholder communications and meetings.”  This reason reiterates one of the “legitimate corporate purposes” set forth in Interpretive Ruling 7.2020, and is, therefore, by definition a “legitimate corporate purpose”.  The question that remains is whether each individual purchase would reduce the number of shareholders at the Bank.  It is not clear to what extent this rationale would support purchases that do not, in fact, reduce the number of shareholders.

The Superintendent would arguably have the power to approve the Bank’s acquisition and retention of its stock based on the reasons already set forth by the Bank.  However, he need not do so.  Instead, the Bank could be required to specify with greater particularity how it intended to use the stock held in treasury.  In the alternative, the Superintendent could condition his approval of the Bank’s acquisition and holding its stock on the Bank’s obtaining further approval from the Superintendent prior to disposing of such stock.

The Method of Purchase:

The Bank proposes to purchase its stock on the open market.  The Bank’s shares trade in the “Over-the-Counter” market.  The symbol for the voting shares is [---], and the symbol for the non-voting shares is [---].  The Bank has stated the purchase price to be paid for shares “will be established by the ‘Bid’ and ‘Ask’ prices created by the market from time to time.”  Unfortunately, from the Internet source cited by the Bank (“”), it would appear that the stock of the Bank (both voting and non-voting) trades infrequently.  In the absence of an active market, the “Bid” and “Ask” prices at any given time are likely to provide an inaccurate measure of the value the stock.

As noted above, the OCC’s Licensing Manual on Capital and Dividends requires that a national bank whose securities are not actively traded set forth in its application to purchase its stock the method to be used to establish a price for the stock.  That manual further requires that:

“If a bank’s board determines that the treasury stock should be repurchased for a consideration that exceeds the fair value, it must provide an opinion as to why the proposed consideration is fair to the bank and minority shareholders.21

These requirements would apply to the Bank’s purchase of stock under the Wild Card Resolution.

Recently, the Banking Department considered a New York bank’s purchase of relatively thinly traded stock. In that case, the Bank developed a methodology to determine the price would be paid for each acquisition of stock.  Specifically, the bank established a committee of three directors who would review the price to paid in each instance and, after analysis, determine whether the price was above, at or below fair value.  Purchases at or below fair value could be approved by the committee; purchases above fair value would have to be approved by the board as a whole.  In any event, all consummated purchases would be reported to the board at its next regular meeting.

The above methodology may or may not be appropriate for the Bank.  Still, the Bank’s stock is not actively traded, and it is incumbent on the Bank to propose a method that will assure that its purchases of its stock are effected under terms and conditions that are fair.

Draft Letter:

Attached is a draft letter asking for additional information from the Bank.  The letter has been prepared for Deputy Cofsky’s signature.


Considerable time has elapsed since the Bank submitted its letter application, and the circumstances of the Bank may have changed.

Noted:  M.E.G.

1      The Bank has two classes of common stock - one voting and the other non-voting. The Bank seeks authority to purchase
        shares of either class.

2       It is not necessary that the OCC approve each separate purchase by a national bank of its stock.  In 2005,
        the OCC approved a national bank’s “purchasing up to 140,000 shares of common stock on the open market from time to time”.
        OCC Corp. Decision No. 2005-07  (June 20, 2005).

3        Interpretive Letter No. 660 (Dec. 19, 1994).

4        12 C.F.R. §7.2020.

5         As originally adopted Interpretive Ruling 7.2020 read as follows: 

“Pursuant to the authority and procedures of 12 U.S.C. 59, a national bank may acquire its outstanding shares and hold them as treasury stock, provided that the acquisition and retention of the shares is, and continues to be, for a legitimate corporate purpose.It would not be permissible for a national bank to acquire or hold treasury stock for speculation.” 12 C.F.R. §7.2020, as adopted, 61 Fed. Reg. 4849, 4868 (Feb. 9, 1996).

6         12 C.F.R. §7.2020, as amended, 64 Fed. Reg. 60092, 60099 (Nov. 4, 1999).

7         Pub.L. 106–569, Title XII, §1207(a), 114 Stat. 3034. Title XII was entitled the
           Financial Regulatory Relief and Economic Efficiency Act of 2000.

8         Summary and Comments of the OCC on H.R. 1585, The Depository Institution Regulatory Streamlining Act of 1999
          which was an Annex to the Testimony of John D. Hawke, Jr., Comptroller of the Currency before the Subcommittee on
          Financial Institutions and Consumer Credit of the Committee on Banking and Financial Services of the House of Representatives
          May 12, 1999 available at

9         Available at

10        Id. at p. 10.

11        Id. at p. 10.

12        Id. at p. 11.

13       This term is broadly defined as including:

          “any right, power, privilege or benefit, any activity, or any loan, investment or transaction which a federally chartered
          banking institution directly or through a subsidiary  or subsidiaries, may lawfully exercise or into which it may lawfully engage
enter.” NYBL § 12-a.1(d)

14       Id. at § 12-a.6.

15   These procedures include, inter alia, a summary of the conditions that the
          OCC imposes on a bank’s purchase and subsequent holding of its outstanding stock.

16       See Note 7, supra.

17       The OCC’s Licensing Manual on Capital and Dividends at p. 5, Note 8, supra, indicates that national banks cannot create
          common stock without voting rights.

18       Interpretive Ruling 7.2020 has already made such a determination in its prohibition on speculation.

19       In this regard, the protection of shareholders is one of the objectives of the policy of the State of New York
          as codified in Section 10 of the NYBL.

20       Interpretive Letter No. 747 (Sept. 11, 1996).

21       Licensing Manual on Capital and Dividends at p. 11, Note 9, supra.

22       Memorandum from Harry Goberdhan to Deputy Cofsky dated June 17, 2008.

Department of Financial Services


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