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Banking Interpretations

NYSBL 234(1) and 234(23) and 234(31)

August 19, 1992

Paul L. Lee, Esq.
Shearman & Sterling
599 Lexington Avenue
New York , New York 10022-6069

Dear Mr. Lee:

By your letter of August 3, 1992 you identified three possible methods whereby a New York State-chartered savings bank could invest in one or more subsidiaries the sole purpose of which would be to acquire and hold investment securities of the type and in the amounts that are permissible for a savings bank under any of subdivisions one through twenty-nine of section 235 that authorize investments in securities ("permissible securities"). Two of the three alternative authorities, Banking Law §235-d or Banking Law §§234(1) and (23) may be used; the third alternative, Banking Law §235(31), is inappropriate.

The Banking Department has taken the position that savings banks possess, as an "incidental power" under Banking Law §§234(1) and (23), the authority to establish operations subsidiaries. We have never had occasion to explore fully the scope of that authority. However, we have concluded, without any suggestion that it needs to be so narrowly construed, that the incidental powers clause encompasses any activity that is convenient or useful in connection with the performance of one of the savings bank's enumerated powers. The use of a subsidiary as a vehicle to invest in securities is permissible under this analysis. Since such a subsidiary, by its very nature, is merely a means for a savings bank to do indirectly what it may do directly, investments made by an operations subsidiary must be aggregated with any investments made directly by the savings bank for the purpose of computing investment limits. The location of the subsidiary in another state is unobjectionable. While an operations subsidiary could clearly not be used as a means to engage at unauthorized locations in activities requiring a branch license, investing in securities is not such an activity.

The second method of making indirect securities investments through a subsidiary corporation is the "service corporation" authority of Banking Law §235-d. The use of such a subsidiary for the purpose of "acquiring investment securities" is specifically authorized by the implementing regulation (General Regulations of the Banking Board, Part 85.2(11)). The term "investment securities" is not defined but includes permissible securities (B.L. §235-d(2)). Unlike an operations subsidiary, a service corporation subsidiary must be organized under the laws of the State of New York; but it may in turn invest in wholly-owned subsidiaries that need not be New York corporations. Also unlike an operations subsidiary, a service corporation subsidiary may be used to increase a savings bank's aggregate investments in permissible securities. Part 85.1 provides that the service corporation authority "shall be in addition to any other lending or investment powers authorized by law or regulation" (emphasis added). Thus, an investment in, say, common stock under section 235-d does not count against the amount that may be invested under section 235(26).

The other alternative you propose is the use of the "leeway" authority of Banking Law §235(31). While an argument can be made that this subdivision is available as a means to make indirect investments in permissible securities, it has historically been used to make investments that could not be made under any other subdivision of section 235 (e.g., common stock that fails to satisfy the tests contained in section 235(26)(c)), and is better suited to that use. Moreover, the opportunity to create an operations subsidiary under Banking Law §§234(1) and (23) obviates the need to turn to Banking Law S235(31) as the authority to establish such a subsidiary.

I hope this reply proves useful.

Very truly yours,

Michael Schussler
Assistant Counsel

Department of Financial Services


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