Letter concludes that loans proposed by the bank to an unaffiliated distributor of mutual funds would not be subject to interaffiliate lending restrictions contained in 12 U.S.C. 371C. (05/29/96).

Office of the Comptroller of the Currency

Interpretive Letter #730

Published in Interpretations and Actions July 1996

12 U.S.C 371C

May 29, 1996

[ ]

Re: [ ] National Bank

Dear [ ]:

I am writing in response to your April 17, 1996 letter to the Office of the Comptroller of the Currency

("OCC") on behalf of [ ] (the "Bank") in which you seek our concurrence that loans proposed by the

Bank to an unaffiliated distributor of mutual funds would not be subject to the interaffiliate lending

restrictions contained in 12 U.S.C. 371c. Based on the information and representations set forth in your

letter, the OCC concurs with your conclusion that the loan transactions you describe will not be subject

to section 371c.

Proposed Transactions

The Bank, a wholly-owned subsidiary of [ ] Corporation, currently controls a broker-dealer subsidiary, [ ]

(The "Brokerage") and a general partnership, [ ], that is the investment adviser for the Bank's existing

mutual fund clients. The Bank is now considering the acquisition of a second mutual fund investment

adviser that is not presently affiliated with a bank (the "Adviser"). If acquired, the Adviser would either

be held as a separate, wholly-owned subsidiary of the Bank or be combined with [ ]. The mutual funds

advised by the Adviser (the "Investment Companies") would retain an independent distributor that is not

affiliated with the Bank to provide distribution services (the "Distributor"). The Distributor would enter

into arrangements with various broker-dealers (the "Selling Brokers") to sell as agent for their customers

shares of the Investment Companies under the "back-end load"/Class B shares structure. One of the

Selling Brokers would be the Brokerage. <NOTE:[ ] would not enter into such arrangements.>

The Investment Companies principally use a "back-end load structure" to sell shares (which are typically

referred to as "Class B" shares)

oker-dealers (the "Selling Brokers") to sell as agent for their customers

shares of the Investment Companies under the "back-end load"/Class B shares structure. One of the

Selling Brokers would be the Brokerage. <NOTE:[ ] would not enter into such arrangements.>

The Investment Companies principally use a "back-end load structure" to sell shares (which are typically

referred to as "Class B" shares). Under this structure, the Distributor pays to the Selling Broker a

commission at the time of sale of between 3-4% of the current net asset value of the shares being

purchased ("Retail Commission"). There is no sales charge imposed on the investor at the time of

purchase. There is, however, a sales charge imposed on the investor at the time the shares are redeemed.

This charge is called a "contingent deferred sales charge" or "CDSC" and is payable by the investor to

the Selling Broker, which is obligated to repay it to the Distributor.

The mutual funds using this "back-end load structure" and offering Class B shares have adopted

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"distribution plans" under Rule 12b-1 of the Investment Company Act of 1940. Pursuant to these

distribution plans, the mutual funds compensate the Distributor for its services, including the payment of

the Retail Commission, through the payment of an ongoing annual distribution fee (i.e., a 12b-1 fee). The

annual distribution or 12b-1 fee paid by the mutual fund to the Distributor may be as much as .75% of

the net asset value of the mutual fund's Class B shares. In essence, the distributor advances the Retail

Commission to the Selling Broker in anticipation of being compensated over time for that advance

through a combination of the CDSCs and the annual 12b-1 fees.

To finance the Retail Commissions, the Bank proposes to make loans (the "Loans") either to the

Distributor or to a wholly-owned subsidiary of the Distributor which provides distribution services only

for mutual funds advised by the Adviser

l

Commission to the Selling Broker in anticipation of being compensated over time for that advance

through a combination of the CDSCs and the annual 12b-1 fees.

To finance the Retail Commissions, the Bank proposes to make loans (the "Loans") either to the

Distributor or to a wholly-owned subsidiary of the Distributor which provides distribution services only

for mutual funds advised by the Adviser. The proceeds from the Loans would be used to pay Retail

Commissions and other expenses of the Distributor. The Loans would be on market terms. As security

for the Loans, the Distributor would pledge its rights under its distribution contract with the Investment

Companies to receive future distribution fees and its right to receive CDSCs. The 12b-1 fees and the

CDSCs would be expected to provide the funds to repay the interest and principal on such loans. The

Bank may also receive, in addition to the stated interest on the Loans and the return of principal, an

amount up to the amount by which the 12b-1 fees and CDSCs received exceed the Distributor's payments

of interest and principal and the Distributor's service charges.

Legal Analysis

You have asked whether the Loans would be subject to the interaffiliate transaction restrictions contained

in 12 U.S.C. 371c. Section 371c imposes quantitative and qualitative restrictions on a bank's "covered

transactions" with any "affiliate." The term "covered transactions" includes, among other things, loans or

extensions of credit to affiliates. The statute further provides that a transaction by a member bank with

any person shall be deemed a transaction with an affiliate "to the extent that the proceeds . . . are used for

the benefit, or transferred to, that affiliate." <NOTE:12 U.S.C. 371c(a)(2).> Thus, an analysis of the

interaffiliate lending restrictions begins with the issue of whether the Loans made by the Bank to the

Distributor are deemed, either directly or by attribution under section 371c(a)(2) to constitute a "covered

transaction" with an "affiliate"

e "to the extent that the proceeds . . . are used for

the benefit, or transferred to, that affiliate." <NOTE:12 U.S.C. 371c(a)(2).> Thus, an analysis of the

interaffiliate lending restrictions begins with the issue of whether the Loans made by the Bank to the

Distributor are deemed, either directly or by attribution under section 371c(a)(2) to constitute a "covered

transaction" with an "affiliate".

The term "affiliate" is defined, for purposes of section 371c, as a company that controls the member bank

or a subsidiary of that controlling company, a bank subsidiary of a member bank, a company that is

controlled for the benefit of the shareholders of the member bank, a company with an interlocking

majority of directors with the member bank, or any investment company which the member bank or its

affiliate advises. <NOTE:12 U.S.C. 371c(b)(1).> The loan to the Distributor is not subject to section 371c

because the Distributor is not an affiliate of the Bank. Neither the Bank nor [ ] Corporation (collectively

with the Bank, "[ ]") owns any shares of the Distributor, and the Distributor does not otherwise fall

within the definition of "affiliate." Thus, no direct "affiliate" relationship exists between the Bank and the

Distributor.

Upon receipt, the Distributor uses the proceeds to pay Retail Commissions to the Selling Brokers. As

noted above, section 371c(a)(2) requires a loan to a third party, such as the Distributor, to be attributed to

any affiliate that receives the loan proceeds or the benefit of those proceeds. In this case, however, none

of the Selling Brokers is an "affiliate" of the Bank. All but one of the Selling Brokers have no

relationship with [ ]. [ ] does not own any of their stock, and they do not otherwise fall within the

definition of "affiliate." One Selling Broker, the Brokerage, is a subsidiary of the Bank. Section

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oceeds or the benefit of those proceeds. In this case, however, none

of the Selling Brokers is an "affiliate" of the Bank. All but one of the Selling Brokers have no

relationship with [ ]. [ ] does not own any of their stock, and they do not otherwise fall within the

definition of "affiliate." One Selling Broker, the Brokerage, is a subsidiary of the Bank. Section

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371c(b)(2)(A), however, specifically excludes from the definition of affiliate "any company, other than a

bank, that is a subsidiary of a member bank. . . ." Accordingly, even though the Brokerage will receive

the proceeds of the Bank's loan to the Distributor, section 371c does not apply to restrict the transaction.

<NOTE:Similarly, even if the Advisor were to receive any benefit of the Loan proceeds, as a nonbank subsidiary of a

member bank, the Advisor also is excluded from the definition of "affiliate.">

The final issue is whether the Loans are attributable to the Investment Companies under section

371c(a)(2). Section 371c(b) defines as "affiliates" investment companies for which a bank or any of its

affiliates acts as investment adviser. Thus, the plain language of the statute does not include within the

definition of "affiliate" an investment company advised by a subsidiary of a member bank. <NOTE:See 12

U.S.C. 371c(b)(1)(D)(ii).>

Moreover, even if the Investment Companies were regarded as "affiliates" of the Bank, no Loan proceeds

will be used for the benefit of the Investment Companies in any direct or tangible manner. While the

success of the Distributor and Selling Brokers results in increased sales of shares of the Investment

Companies and thus growth in the size of the Investment Companies, it is unclear how this is a benefit to

the Investment Companies themselves. Even if a form of benefit exists, it is intangible and impossible to

quantify, and therefore not the type of benefit contemplated by the statute

While the

success of the Distributor and Selling Brokers results in increased sales of shares of the Investment

Companies and thus growth in the size of the Investment Companies, it is unclear how this is a benefit to

the Investment Companies themselves. Even if a form of benefit exists, it is intangible and impossible to

quantify, and therefore not the type of benefit contemplated by the statute. Accordingly, the making of

the Loan does not result in a "covered transaction" with an "affiliate" with respect to the Investment

Companies. <NOTE:This reading of the statute is consistent with the attribution rules contained in Regulation O and the

National Bank Act's lending limits. The attribution rule in Regulation O refers to "tangible economic benefit." 12 U.S.C.

215.3(f). The attribution rule applicable to the lending limit restrictions contained in 12 U.S.C. 84 requires a "direct

economic benefit." 12 C.F.R. 32.5(b). Although section 371c does not, by its terms, require the "benefit" to an affiliate to

be "direct," "tangible," or even "economic," the OCC historically has construed section 371c(a)(2) in a manner that is

consistent with the attribution rules in Regulation O and the OCC's lending limit rules.>

Conclusion

Because the Bank's Loan to the Distributor does not constitute a covered transaction with an affiliate of

the Bank, I conclude that none of the transactions described above are subject to 12 U.S.C. 371c. The

opinion expressed herein, however, relates solely to applicability of 12 U.S.C. 371c to the Bank and the

transactions described in your letter. I express no opinion as to the role of the holding company or the

Brokerage and any associated legal or supervisory issues, or on federal securities law requirements that

may apply to the proposed arrangement. Any change in the structure of the transactions you describe

may require a different conclusion. Please feel free to call me at 202-874-5200, if you have any

questions.

Sincerely,

/s/

Julie L

express no opinion as to the role of the holding company or the

Brokerage and any associated legal or supervisory issues, or on federal securities law requirements that

may apply to the proposed arrangement. Any change in the structure of the transactions you describe

may require a different conclusion. Please feel free to call me at 202-874-5200, if you have any

questions.

Sincerely,

/s/

Julie L. Williams

Chief Counsel

Interpretive Letter #730

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