Banking Interpretations

NYSBL 103(1)


To: Examinations Division, Domestic Commercial Banks Division

From: Deputy and Counsel Rogers

Date: March 18, 1997

Subject: Limited Purpose Trust Companies - Permissible Investments

Various questions have arisen recently concerning permissible investments by limited purpose trust companies ("LPTC's"). Typically, LPTC's have restrictions in their Organization Certificates restricting them from engaging in the business of making loans or taking deposits. Such restrictions are directed at insuring that deposit and loan activity does not take place in an uninsured financial institution, with levels of capital substantially below those mandated by risk-based capital rules, matching a low-risk business profile.

Thus, an LPTC is not permitted to accept deposits or make loans except as incidental to its trust business. § 100-b(1) of the Banking Law provides, among other things, that funds awaiting investment or deposit may be held by a trust company in its own name, and it must pay interest on such funds. An LPTC will be under competitive pressure to maximize the rate of return on such balances by investing in such instruments as reverse repurchase agreements, federal funds purchased and commercial paper.

In the Legal Division's opinion, uninvested balances maintained on behalf of the customers of an LPTC (so-called "idle cash") may properly be construed as being "incidental" to the LPTC's trust business, and thus permissible. Such balances are assets of the LPTC and are available for investment by it. And the LPTC may invest in any investment not prohibited by its Organization Certificate or the Banking Law.

Accordingly, an LPTC may directly purchase any of the following for the purpose of investing idle cash:

  • U.S. Treasury securities;
  • reverse repurchase agreements (including receiving Treasury securities as collateral for funds advanced to the counterparty);
  • federal funds sold by the LPTC; and
  • prime" commercial paper (rated A-1/P-1), and similar money market instruments, such as bank certificates of deposit and bankers' acceptances.

It is recognized that federal fund purchases and commercial paper are frequently legally categorized as loans; however, such characterization does not bind the Department in its construction of the terms it has required to be included in an LPTC's Organization Certificate. The instruments listed above, when employed for investment purposes, have sufficiently different characteristics from commercial loans that they may properly be viewed as compatible with an LPTC's Organization Certificate. It is noted that investment in any such instruments is subject to the applicable amount limitations imposed by the Banking Law under Sections 103 and 106.

It should be noted that the foregoing discussion relates to the investment by an LPTC of its own funds, not the funds of its customers. Investment of customer funds is not subject to limitations imposed by the Banking Law or by the Organization Certificate; rather, such investments are governed by agreement with the customer.

Finally, it is the Legal Division's opinion that an LPTC may lend its own portfolio securities as an incidental treasury function. Such securities lending would not be considered making commercial loans, and should be viewed as compatible with the LPTC's Organization Certificate.