Proposal by a national bank to make a non-controlling investment in a limited liability company that will offer the placement of foreign currency time deposits with foreign banks. (03/20/97)

The OCC also received correspondence related to this proposal dated December 13, 1996 and

1

October 17, 1996 directly from Treasury Bank, Ltd.

Sections 23A and 23B of the Federal Reserve Act, 12 U.S.C. § § 371c and 371c-1, place restrictions

2

on extensions of credit and other transactions between member banks and their affiliates. The LLC is not an

“affiliate” of the Bank for purposes of Sections 23A and 23B since the statute excludes nonbank subsidiaries of

member banks from the definition. 12 U.S.C. § 371c(b)(2)(A). The LLC is a nonbank “subsidiary” for purposes

of Sections 23A and 23B because of the Bank’s 49 percent ownership and voting interest in the LLC. See 12

U.S.C. § § 371c(b)(3), (b)(4) and (b)(6). To address any issues involving possible conflicts of interest, [ ]

has represented that: (i) a majority of the Bank’s Board of Directors will approve in advance the investment in the

LLC, (ii) he will abstain from participating directly or indirectly in the voting, and (iii) he does not “control” the

Bank for purposes of the Change in Bank Control Act, 12 U.S.C. § 1817(j) et seq.

See section II, infra, for a discussion of laws applicable to a District of Columbia bank.

3

Comptroller of the Currency

Administrator of National Banks

Washington, DC 20219

March 20, 1997

Interpretive Letter #778

May 1997

[ ]

12 U.S.C. 24(7)

[ ]

[ ]

[ ]

Re: Participation in a Limited Liability Company by Treasury Bank, Ltd., Washington D.C.

Dear [ ]:

This is in response to your letters of March 3, 1997, December 13, 1996, November 25,

1996, and November 13, 1996, your legal opinions of February 18, 1997 and February 7,

1997, and subsequent telephone discussions, concerning a proposal by Treasury Bank, Ltd.,

1

Washington D.C

]

[ ]

Re: Participation in a Limited Liability Company by Treasury Bank, Ltd., Washington D.C.

Dear [ ]:

This is in response to your letters of March 3, 1997, December 13, 1996, November 25,

1996, and November 13, 1996, your legal opinions of February 18, 1997 and February 7,

1997, and subsequent telephone discussions, concerning a proposal by Treasury Bank, Ltd.,

1

Washington D.C. (the “Bank”) to make a non-controlling investment in Treasury Worldwide

LLC, a limited liability company (the “LLC”), to be formed with [ ] (“

”), an affiliated corporation wholly owned by [ ]. The Bank is

2

organized under section 29-303 of the Corporate laws of the District of Columbia, and the

Comptroller of the Currency is the primary federal regulator for district banks and retains

authority to supervise their activities. For the reasons given below, it is our opinion that this

3

transaction is legally permissible in the manner and as described herein.

I.

Background

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The Bank plans to design its internet site to offer both domestic products and FCTDs. Bank customers

4

who are interested in FCTDs may, by activating an icon on the Bank’s site, be transferred to the LLC Internet site

where they will be able to place an order for a FCTD directly with the LLC. See note 22 and accompanying text,

infra, for a discussion of disclosures and information packages that the LLC will provide to customers.

The Bank anticipates that most of the customer orders for FCTDs will be placed through the mail,

5

monitored telephone banks or through the Bank’s internet site. The Bank and the LLC have represented that they

will not be making recommendations to customers interested in purchasing a FCTD

t,

infra, for a discussion of disclosures and information packages that the LLC will provide to customers.

The Bank anticipates that most of the customer orders for FCTDs will be placed through the mail,

5

monitored telephone banks or through the Bank’s internet site. The Bank and the LLC have represented that they

will not be making recommendations to customers interested in purchasing a FCTD. However, in the event that

the Bank or the LLC make recommendations to any person, they have both represented that they will comply with

the suitability standards applicable to sales of government securities to institutional customers set forth in the

interagency regulation on Government Securities Sales Practices at 12 C.F.R. § 13.4 (1997).

Each customer will have the right to disaggregate his or her funds into a separate nominee account

6

upon the payment by such customer of all fees charged by the foreign bank and the LLC for that service.

A.

Proposed Activities of the LLC

The LLC desires to offer, as a service to customers, the placement of funds in foreign

currency time deposits (“FCTDs”) with foreign banks. The LLC will offer to purchase, as an

agent, FCTDs issued by foreign banks in approximately 20 currencies. The LLC intends to

market and sell the FCTD service through traditional means as well as through an interactive

internet site that will be linked to the Bank’s internet site. The Bank also intends to offer the

4

LLC’s FCTD service to its customers through traditional means.

To obtain a FCTD, customers will complete an application to the LLC and provide at least $[

] to the LLC’s account at the Bank. Customers will receive from the LLC a “concise

overview” of deposit insurance and/or other regulatory oversight of foreign depository

institutions in each country where the LLC will offer to place FCTDs. Customers will also

receive from the LLC a disclosure statement and a fee schedule. Upon receipt of wire

5

instructions, the Bank will remit a customer’s funds to the foreign bank issuer

Bank. Customers will receive from the LLC a “concise

overview” of deposit insurance and/or other regulatory oversight of foreign depository

institutions in each country where the LLC will offer to place FCTDs. Customers will also

receive from the LLC a disclosure statement and a fee schedule. Upon receipt of wire

5

instructions, the Bank will remit a customer’s funds to the foreign bank issuer. Funds will be

aggregated and will be remitted to the foreign bank issuer together with the funds of other

customers seeking a FCTD in the same country. Once the funds are placed, customers will

6

receive a certificate from the LLC detailing the terms and conditions of the FCTD.

The FCTDs will be held in a nominee account in the foreign bank, and they will be

denominated in the local currency and payable at the office of the foreign bank. The FCTDs

will not be deposits of the Bank and will not be guaranteed by either the Bank or the LLC.

FCTDs will not be carried as liabilities on either the Bank’s or the LLC’s balance sheet.

Instead, they will be liabilities of the foreign depository institution. FCTDs will not be

insured by the Federal Deposit Insurance Corporation (“FDIC”). The LLC will not disclose

the names of the customers to the foreign bank, but this information would be available to

foreign regulatory authorities in such foreign jurisdictions under applicable law.

- 3 -

It is anticipated that between 2% and 5% of the equity and voting interest in the LLC may be owned

7

over time by employees and managers of the LLC. Such ownership will reduce the equity and voting interest of

the Bank and [ ] on a pro rata basis. This will leave the Bank with a minimum of 46.67 percent voting

interest.

See 12 C.F.R. § 5.34

ctions under applicable law.

- 3 -

It is anticipated that between 2% and 5% of the equity and voting interest in the LLC may be owned

7

over time by employees and managers of the LLC. Such ownership will reduce the equity and voting interest of

the Bank and [ ] on a pro rata basis. This will leave the Bank with a minimum of 46.67 percent voting

interest.

See 12 C.F.R. § 5.34.

8

The Operating Agreement can be amended by the managers provided such amendment is: (I) solely for

9

the purpose of clarification; (ii) for the purpose of substituting a member; (iii) merely an implementation of the

terms of the operating agreement; or (iv) in the opinion of LLC counsel is necessary to satisfy requirements of the

Internal Revenue Code or any federal or state securities laws or regulations.

Customers will not be able to liquidate their FCTDs before the expiration of their terms,

without incurring substantial penalties. Prior to the maturity date of the FCTD, the LLC will

notify the affected customer(s). If the customer does not terminate the FCTD, it will be rolled

over automatically by the LLC for a similar term at the then-prevailing interest rate being

offered by the foreign bank for such deposits. If the customer decides not to renew the

FCTD, the customer’s principal and interest, less any applicable withholding taxes, will be

converted to the currency of the original funds at the then prevailing currency exchange rate

and will be remitted directly to the customer by the LLC.

B.

Structure of the LLC

The LLC will be established under Delaware law with an initial capitalization of $[ ].

The Bank will initially invest $[ ] in the LLC and will hold a 49 percent ownership and

voting interest in the LLC. The remaining 51 percent ownership and voting interest in the

LLC will be held by [ ]. The LLC will have one office, which will be located in

7

the same building as the Bank’s main office, in Washington, D.C

law with an initial capitalization of $[ ].

The Bank will initially invest $[ ] in the LLC and will hold a 49 percent ownership and

voting interest in the LLC. The remaining 51 percent ownership and voting interest in the

LLC will be held by [ ]. The LLC will have one office, which will be located in

7

the same building as the Bank’s main office, in Washington, D.C. The conduct of the

business and affairs of the LLC will be governed by an operating agreement between the LLC

and the Bank (the “Operating Agreement”). Under the terms of the Operating Agreement: (i)

the Bank will be the sole “Corporate Manager” of the LLC; (ii) the business of the LLC will

be the offering and placement of foreign currency time deposits, in no event would the LLC

engage in any business that is not a part of the business of banking or incidental thereto, and

the business of the LLC will at all times be consistent with the permitted business activities of

a national bank; (iii) the limitations on the LLC’s permissible business activities cannot be

amended except upon the unanimous consent of all members; and (iv) no manager and no

member will be liable to third parties for the LLC’s debts except to the extent of such

member’s capital account. In addition, the Bank will have a right of first refusal to purchase

any interest in the LLC offered for sale to any third party at the same terms as offered to or by

the third party, subject to regulatory approval. Except for certain limited exceptions,

8

including the limitation on permissible business activities mentioned above, the Operating

Agreement can only be amended with the consent of members holding at least two thirds of

the voting interest of the LLC. Also, the consent of two-thirds of the members will be

9

required to admit any additional members, therefore, the Bank’s consent will be required.

Except for certain limited exceptions,

8

including the limitation on permissible business activities mentioned above, the Operating

Agreement can only be amended with the consent of members holding at least two thirds of

the voting interest of the LLC. Also, the consent of two-thirds of the members will be

9

required to admit any additional members, therefore, the Bank’s consent will be required.

- 4 -

The Operating Agreement will provide that the “Corporate Manager” could be removed as a manager

10

by members holding a majority of the voting interest of the LLC but only for cause as determined by a final non-

appealable order of the OCC or a court of competent jurisdiction.

The Operating Agreement provides that the business and affairs of the LLC will be overseen

by a “Corporate Manager” and such other managers as the members of the LLC may

designate from time to time. The Bank will be appointed the sole “Corporate Manager.”

10

The consent of two-thirds of the members of the LLC will be required to admit a person as

manager; therefore, the Bank’s consent will be required. A majority vote of the managers will

bind all the managers. The Operating Agreement also provides that managers will not have

the authority to: (I) sell or otherwise dispose of all or substantially all of the assets of the

LLC, (ii) merge the LLC into, or with, any other business entity, (iii) grant a security interest

in any real property of the LLC, or enter into any real property lease agreements on behalf of

the LLC, (iv) borrow money from, or on behalf of, the LLC; and (v) admit a person as

manager or member of the LLC

authority to: (I) sell or otherwise dispose of all or substantially all of the assets of the

LLC, (ii) merge the LLC into, or with, any other business entity, (iii) grant a security interest

in any real property of the LLC, or enter into any real property lease agreements on behalf of

the LLC, (iv) borrow money from, or on behalf of, the LLC; and (v) admit a person as

manager or member of the LLC.

It is anticipated that the LLC will initially require a staff of five persons to conduct its

business; they include (i) a managing director who will be the Bank’s designee to manage the

operations of the LLC, and who will report to the president of the Bank, (ii) a customer

service representative responsible for customer inquiries and account openings, (iii) an

account representative responsible for maintaining relationships and account management

with non-US depository institutions, (iv) a data processor to maintain customer and account

records, and (v) an administrative assistant. It is also anticipated that an additional customer

service representative will be added to the staff for each $[ ] increase in

placements. The managing director of the LLC will be a dual employee of both the LLC and

the Bank. To the extent that the managing director devotes his or her time to the management

of the LLC, he or she will be paid by the LLC. All other LLC staff will be employed by the

LLC. It is intended that the Bank, as a member of the LLC, will share pro rata according to

its interest in the LLC’s profits and losses. However, losses would be limited to the amount of

a member’s capital contributions. The Bank will receive no fee for managing the LLC and

would receive fees for services provided to the LLC on the same basis such fees will be

received if such services were provided for any other Bank customer.

II. Applicable Law

As previously stated, the Bank is organized under section 29-303 of the Corporate laws of the

District of Columbia

to the amount of

a member’s capital contributions. The Bank will receive no fee for managing the LLC and

would receive fees for services provided to the LLC on the same basis such fees will be

received if such services were provided for any other Bank customer.

II. Applicable Law

As previously stated, the Bank is organized under section 29-303 of the Corporate laws of the

District of Columbia. The Comptroller of the Currency is the primary federal regulator for

district banks and retains authority to supervise their activities. See 12 U.S.C. § 1813(q) and

D.C. Code Ann. § 29-103 (1996); see also D.C. Code Ann § 26-102(a) (1996). The OCC

authorized the Bank to commence operations as a “bank of deposit” under the laws of the

District of Columbia pursuant to section 26-103(b) of the District of Columbia Banking Law.

See Decision on the Application of Treasury Bank, Application Control No. 86-NE-01-005

- 5 -

Under the District of Columbia Regional Interstate Banking Act of 1985 Amendments Act of 1985,

11

D.C. Law 6-107 (1985) (“Amendments Act”), the District of Columbia Council created the position of

Superintendent of Banking and Financial Institutions (“D.C. Superintendent”) with the power to regulate district

banks “to the same extent that these institutions were regulated by the Comptroller of the Currency” prior to the

effective date of the Amendments Act. Even after the enactment of the Amendments Act, the Comptroller

retained significant supervisory authority over district banks including the ability to examine such banks, D.C.

Code Ann. § 26-102(a), and the Comptroller is designated as the primary federal regulator of district banks under

various federal statutes. These include the FDIC Act, 12 U.S.C. § 1813(q); the Bank Services Corporation Act,

12 U.S.C. § 1861(b); the Management Interlocks Act, 12 U.S.C. § 3206; the Bank Protection Act, 12 U.S.C. §

1881 and various provision of the Securities Exchange Act, 15 U.S.C. § 78b et seq., and the Bank Holding

Company Act, 12 U.S.C. § 1841 et seq

ederal regulator of district banks under

various federal statutes. These include the FDIC Act, 12 U.S.C. § 1813(q); the Bank Services Corporation Act,

12 U.S.C. § 1861(b); the Management Interlocks Act, 12 U.S.C. § 3206; the Bank Protection Act, 12 U.S.C. §

1881 and various provision of the Securities Exchange Act, 15 U.S.C. § 78b et seq., and the Bank Holding

Company Act, 12 U.S.C. § 1841 et seq. District banks are also subject to various provisions of federal law which

have been incorporated into the D.C. Code, such as the legal lending limits of 12 U.S.C. § 84, the call report

requirements of 12 U.S.C. § 161, and certain insider statutes at 12 U.S.C. §§ 375, 375a, and 376. D.C. Code Ann.

§ § 26-101, 26-103(b) and 26-109. District banks are also subject to the regulatory authority contained in the

OCC Rules, Policies and Procedures for Corporate Activities at 12 C.F.R. Part 5, which indicates that a bank

located in the District of Columbia operating under the OCC’s supervision is included in the term “national

bank.” 12 C.F.R. § 5.3(j). Furthermore, these rules for corporate activities provide that “national banks” are

permitted to make various types of equity investments pursuant to 12 U.S.C. § 24(Seventh) and other statutes. 12

C.F.R. § 5.36.

See also 12 C.F.R. § 5.36(b). National banks are permitted to make various types of equity

12

investments pursuant to 12 U.S.C. § 24(Seventh) and other statutes.

(August 28, 1990) (unpublished); see also D.C. Code Ann. § 26-103(b) (prior to the

Amendments Act). [

11

] it is appropriate for the OCC to analyze this transaction

based upon the laws applicable to national banks and OCC interpretations and precedents

concerning bank powers.

[ ] the transaction must be permissible under the laws of the

District of Columbia

prior to the

Amendments Act). [

11

] it is appropriate for the OCC to analyze this transaction

based upon the laws applicable to national banks and OCC interpretations and precedents

concerning bank powers.

[ ] the transaction must be permissible under the laws of the

District of Columbia. For purposes of District of Columbia law we have relied on legal

opinions provided by [ ]. These legal opinions provide

that under District of Columbia law the Bank is permitted to invest in a foreign limited

liability company engaged in the activities proposed for the LLC.

III.

Discussion

In a variety of circumstances the OCC has permitted national banks to own, either directly, or

indirectly through an operating subsidiary, a non-controlling interest in an enterprise. The

enterprise might be a limited partnership, a corporation, or a limited liability company. In

12

recent interpretive letters, the OCC concluded that national banks are legally permitted to

make a non-controlling investment in a limited liability company provided four criteria or

standards are met. See Interpretive Letter No. 692 (November 1, 1995), reprinted in [Current]

- 6 -

In other recent letters, the OCC has permitted national banks to make a non-controlling investment in

13

an enterprise other than an LLC, provided the investment satisfies these four standards. See e.g. Interpretive

Letter No. 697 (November 15, 1995), reprinted in [Current] Fed. Banking L. Rep. (CCH) ¶ 81,012; Interpretive

Letter No. 705 (October 25, 1995), reprinted in [Current] Fed. Banking L. Rep. ¶ 81,020.

National banks are also currently authorized to purchase, on behalf of customers, foreign currency

14

contracts, foreign currency options, and provide foreign exchange services. See OCC Interpretive Letter No. 414,

reprinted in [1988-89 Transfer Binder] Fed. Banking L. Rep

Rep. (CCH) ¶ 81,012; Interpretive

Letter No. 705 (October 25, 1995), reprinted in [Current] Fed. Banking L. Rep. ¶ 81,020.

National banks are also currently authorized to purchase, on behalf of customers, foreign currency

14

contracts, foreign currency options, and provide foreign exchange services. See OCC Interpretive Letter No. 414,

reprinted in [1988-89 Transfer Binder] Fed. Banking L. Rep. (CCH) ¶ 85,638 (authorizing national bank

subsidiary to buy and sell foreign currency in the spot and forward markets and to buy and sell over the counter

foreign currency options); Interpretive Letter No. 384, reprinted in [1988-89 Transfer Binder] Fed. Banking L.

Rep. (CCH) ¶ 85,608 (authorizing establishment of operating subsidiary to engage in buying and selling of

Fed. Banking L. Rep. (CCH) ¶ 81,007, and No. 694 (Dec. 13, 1995), reprinted in [Current]

Fed. Banking L. Rep. (CCH) ¶ 81,009. See also Letter of Steven J. Weiss, Deputy

13

Comptroller, Bank Organization and Structure (December 27, 1995 unpublished) (“Weiss

Letter”). These standards, which have been distilled from our previous decisions in the area

of permissible non-controlling investments for national banks and their subsidiaries, are: (1)

The activities of the entity or enterprise in which the investment is made must be limited to

activities that are part of, or incidental to, the business of banking; (2) The bank must be able

to prevent the enterprise or entity from engaging in activities that do not meet the foregoing

standard or be able to withdraw its investment; (3) The bank’s loss exposure must be limited,

as a legal and accounting matter, and the bank must not have open-ended liability for the

obligations of the enterprise; and (4) The investment must be convenient or useful to the bank

in carrying out its business and not a mere passive investment unrelated to that bank’s

banking business.

Based upon the facts presented, the Bank’s proposal satisfies these four standards.

1

posure must be limited,

as a legal and accounting matter, and the bank must not have open-ended liability for the

obligations of the enterprise; and (4) The investment must be convenient or useful to the bank

in carrying out its business and not a mere passive investment unrelated to that bank’s

banking business.

Based upon the facts presented, the Bank’s proposal satisfies these four standards.

1.

The activities of the entity or enterprise in which the investment

is made must be limited to activities that are part of, or incidental

to, the business of banking.

The proposed activities of the LLC -- placing deposits at foreign banks on behalf of customers

on an agency basis and offering this service over the internet -- are legally permissible under

12 U.S.C. § 24 (Seventh) as part of, or incidental to, the business of banking.

As part of their traditional role as financial intermediaries, banks have broad powers to act as

agent for their customers, and under this broad authority the OCC has permitted national

banks to place deposits at other banks or thrifts on behalf of their customers. OCC Investment

Securities Letter No. 32 (December 2, 1988), reprinted in [1989-90 Transfer Binder] Fed.

Banking L. Rep. (CCH) ¶ 83,038. Similarly, a national bank may offer participation interests

in certificates of deposit purchased as agent from a third party affiliated bank on behalf of a

number of the national bank’s depositors. OCC Interpretive Letter No. 385 (June 19, 1987),

reprinted in [1988-89 Transfer Binder] Fed. Banking L. Rep. (CCH) ¶ 85,609. National

14

1989-90 Transfer Binder] Fed.

Banking L. Rep. (CCH) ¶ 83,038. Similarly, a national bank may offer participation interests

in certificates of deposit purchased as agent from a third party affiliated bank on behalf of a

number of the national bank’s depositors. OCC Interpretive Letter No. 385 (June 19, 1987),

reprinted in [1988-89 Transfer Binder] Fed. Banking L. Rep. (CCH) ¶ 85,609. National

14

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options in foreign currency and Eurodollar time deposits); Interpretive Letter No. 380, reprinted in [1988-89

Transfer Binder] Federal Banking L. Rep. (CCH) ¶ 85,604 (authorizing operating subsidiary to engage in, among

other things, options trading involving foreign currencies, and futures contracts involving Eurodollars and foreign

currencies).

See OCC Interpretive Letter No. 677, reprinted in [1994-1995 Transfer Binder] Fed. Banking L. Rep.

15

(CCH) ¶ 83,625 (June 28, 1995); OCC Interpretive Letter No. 284, reprinted in [1983-1984 Transfer Binder] Fed.

Banking L. Rep. (CCH) ¶ 85,448 (Mar. 26, 1984), OCC Interpretive Letter No. 449, reprinted in [1988-1989

Transfer Binder] Fed. Banking L. Rep. (CCH) ¶ 85,673 (Aug. 23, 1988).

Banking is defined in § 126 of Title 8 of the Delaware Code as the “power of issuing bills, notes, or

16

other evidences of debt for circulation as money, or the power of carrying on the business of receiving deposits of

money.” Del. Code Ann. tit. 8 § 126 (1994). In the course of its business activities the LLC will not engage in

banks may also offer foreign currency deposits directly to their customers. Letter from Peter

Liebesman, Assistant Director, LASD, March 21, 1989 (unpublished). Thus, a national bank

may, as part of the business of banking, offer foreign currency deposits to its customers and

place deposits at foreign banks on behalf of customers on an agency basis.

In addition, it is well established that a national bank may use electronic means to perform

services expressly or incidentally authorized to national banks

stant Director, LASD, March 21, 1989 (unpublished). Thus, a national bank

may, as part of the business of banking, offer foreign currency deposits to its customers and

place deposits at foreign banks on behalf of customers on an agency basis.

In addition, it is well established that a national bank may use electronic means to perform

services expressly or incidentally authorized to national banks. The OCC Interpretive

15

Ruling setting forth this authority was recently revised, in recognition of the rapid

advancement of technology, to authorize a national bank to “perform, provide, or deliver

through electronic means and facilities any activity, function, product, or service that it is

otherwise authorized to perform, provide or deliver.” 61 Fed. Reg. 4849 (1996), codified at

12 C.F.R. § 7.1019.

Here, the LLC’s proposal to purchase FCTDs on an agency basis is substantially similar to

activities and services that the OCC has previously approved. Furthermore, the use of the

internet to market and sell this product is consistent with previous OCC interpretive rulings.

The proposed activities of the LLC are part of, or incidental to, the business of banking.

Accordingly, this first standard is satisfied.

2.

The bank must be able to prevent the enterprise from engaging

in activities that do not meet the foregoing standard, or be able

to withdraw its investment.

As a corollary to the above, it is not sufficient that the LLC’s activities are permissible at the

time the bank initially purchases LLC membership shares; they must also remain permissible

for as long as the bank retains an ownership interest in the LLC.

Under Delaware law, a limited liability company may engage in “any lawful business,

purpose or activity with the exception of the business of granting policies of insurance, or

assuming insurance risks or banking as defined in § 126 of Title 8.” Del. Code Ann. tit. 18 §

106 (1994). Here, the LLC Operating Agreement prohibits the LLC from engaging in any

16

tains an ownership interest in the LLC.

Under Delaware law, a limited liability company may engage in “any lawful business,

purpose or activity with the exception of the business of granting policies of insurance, or

assuming insurance risks or banking as defined in § 126 of Title 8.” Del. Code Ann. tit. 18 §

106 (1994). Here, the LLC Operating Agreement prohibits the LLC from engaging in any

16

- 8 -

any of the foregoing activities.

The Operating Agreement specifically provides that “no . . . [m]ember or [m]anager shall be

17

personally held accountable for any other debts, losses, claims, judgments or any of the liabilities of the [LLC]

beyond the [m]ember’s or [m]anager’s capital contributions to the [LLC].”

The necessity for at least one general partner reflects a policy that someone have personal liability.

18

See section 1 of the Uniform Limited Partnership Act. However, this is frequently circumvented in states where

a corporation (with limited liability under state corporate laws) can be the general partner.

line of businesses that is not permissible for a national bank or that is not a part of the

business of banking or incidental thereto. The Operating Agreement also provides that the

limitations on the LLC’s business activities cannot be amended except upon the unanimous

consent of all members. Therefore, since the Bank is a member of the LLC holding a 49

percent interest, it will have the power to prevent the LLC from engaging in impermissible

activities. Accordingly, this standard is satisfied.

3.

The bank’s loss exposure must be limited and the bank must

not have open-ended liability for the obligations of the enterprise.

a.

Loss exposure from a legal standpoint

A primary concern of the OCC is that national banks should not be subjected to undue risk,

especially where an investing bank will not control the operations of the entity in which the

bank holds an interest. It is important that a bank’s investment not expose it to unlimited

liability. Such is the case here

iability for the obligations of the enterprise.

a.

Loss exposure from a legal standpoint

A primary concern of the OCC is that national banks should not be subjected to undue risk,

especially where an investing bank will not control the operations of the entity in which the

bank holds an interest. It is important that a bank’s investment not expose it to unlimited

liability. Such is the case here. As a legal matter, investors in a Delaware limited liability

company will not incur liability with respect to the liabilities or obligations of the limited

liability company solely by reason of being a member or manager of the limited liability

company. Del. Code Ann. Tit. 18, § 303 (1994). This limited liability feature is what

17

differentiates limited liability companies both from general partnerships, where all partners

are generally liable for the debts of the partnership, and from limited partnerships, which must

have at least one general partner who is personally liable for the obligations of the

partnership.

18

Thus, the Bank’s loss exposure for the liabilities of the LLC will be limited by statute and the

Operating Agreement establishing the LLC.

b.

Loss exposure from an accounting standpoint

In assessing a bank’s loss exposure as an accounting matter, the OCC has previously noted

that the appropriate accounting treatment for a bank’s 20-50 percent ownership share or

investment in a limited liability company is to report it as an unconsolidated entity under the

equity method of accounting. Under this method, unless the bank has extended a loan to the

entity, guaranteed any of its liabilities or has other financial obligations to the entity, losses

OCC has previously noted

that the appropriate accounting treatment for a bank’s 20-50 percent ownership share or

investment in a limited liability company is to report it as an unconsolidated entity under the

equity method of accounting. Under this method, unless the bank has extended a loan to the

entity, guaranteed any of its liabilities or has other financial obligations to the entity, losses

- 9 -

As set forth in the Background section, the Operating Agreement provides that managers will not

19

have the authority to: (I) sell or otherwise dispose of all or substantially all of the assets of the LLC, (ii) merge

the LLC into, or with, any other business entity, (iii) grant a security interest in any real property of the LLC, or

enter into any real property lease agreements on behalf of the LLC, (iv) borrow money from or on behalf of the

LLC; and (v) admit a person as manager or member of the LLC.

are generally limited to the amount of the investment shown on the investor’s books. See

generally, Accounting Principles Board, Op. 18 § 19 (1971) (equity method of accounting for

investments in common stock). Interpretive Letter 692, supra.

As proposed, the Bank will have a 49 percent ownership interest in the LLC, and will be

designated the sole “Corporate Manager” of the LLC. As “Corporate Manager,” the Bank

would oversee the day-to-day operations of the LLC. Control over the LLC will be vested

with those members holding at least two-thirds of the voting interest in the LLC. The Bank

19

believes, and its independent auditors have opined, that the equity method of accounting is

appropriate in this instance because even though the Bank will be appointed the sole

“Corporate Manager,” it will not be able to control the LLC under the terms of the Operating

Agreement. Thus, the Bank’s loss from an accounting perspective would be limited to the

amount invested in the LLC as reflected on the Bank’s books, and the Bank will not have any

open-ended liability for the obligations of the LLC

e in this instance because even though the Bank will be appointed the sole

“Corporate Manager,” it will not be able to control the LLC under the terms of the Operating

Agreement. Thus, the Bank’s loss from an accounting perspective would be limited to the

amount invested in the LLC as reflected on the Bank’s books, and the Bank will not have any

open-ended liability for the obligations of the LLC.

In addition, as noted above, Delaware law limits members’ losses to their capital investment.

The Bank will not have open-ended liability for the obligations of the LLC, so the third

standard is satisfied.

4.

The investment must be convenient or useful to the bank in carrying

out its business and not a mere passive investment unrelated to that

bank’s banking business.

A national bank’s investment in an enterprise or entity must also satisfy the requirement that

the investment have a beneficial connection to the bank’s business, i.e., be convenient or

useful to the investing bank’s business activities, and not constitute a mere passive investment

unrelated to that bank’s banking business. Twelve U.S.C. § 24(Seventh) gives national

banks incidental powers that are “necessary” to carry on the business of banking.

“Necessary” has been judicially construed to mean “convenient or useful.” See Arnold Tours,

Inc. v. Camp, 472 F.2d 427, 432 (1st Cir. 1972). The provision in 12 U.S.C. § 24(Seventh)

relating to the purchase of stock, derived from section 16 of the Glass-Steagall Act, was only

intended to make it clear that section 16 did not authorize speculative investments in stock.

See Interpretive Letter No. 697 (November 15, 1995), reprinted in [Current] Fed. Banking L.

Rep. (CCH) ¶ 81,012. Therefore, a consistent thread running through our precedents

concerning stock ownership is that it must be convenient or useful to the bank in conducting

that bank’s banking business. The investment must benefit or facilitate that business and

cannot be a mere passive or speculative investment.

etive Letter No. 697 (November 15, 1995), reprinted in [Current] Fed. Banking L.

Rep. (CCH) ¶ 81,012. Therefore, a consistent thread running through our precedents

concerning stock ownership is that it must be convenient or useful to the bank in conducting

that bank’s banking business. The investment must benefit or facilitate that business and

cannot be a mere passive or speculative investment.

- 10 -

Participation in the LLC will benefit the Bank and its electronic deposit-gathering business.

The Bank’s current business lines are focused on mortgage products - an emphasis that would

leave it adversely exposed in an increasing interest rate environment. The Bank’s recently

revised strategic plan reflects an intention to diversify and seek fee income from fiduciary

services and deposit broker activities. The Bank’s management and its Board believe that the

FCTDs will meet these needs and will provide the Bank with a needed extension of the

Bank’s product line.

In addition, the Bank has had success in the electronic deposit-gathering business. The Bank

currently operates an interactive internet site and approximately [ ] of the Bank’s

depositors have become Bank customers through interaction on the internet. In fact, the

Bank, with no retail branches, currently has depositors from more than [ ] states and several

foreign countries. Bank management and its Board believe that the offering of additional

products will enhance its internet site, and that the addition of interactive enhancements will

create a “destination” internet site that will attract potential customers. Thus, the offering of

the FCTDs will constitute a natural extension of the Bank’s internet business.

The Bank’s investment in the LLC is not a speculative or passive investment. The Bank’s

investment in the LLC is related to diversifying its business line pursuant to its revised

strategic plan and is useful to it in carrying out its banking business

site that will attract potential customers. Thus, the offering of

the FCTDs will constitute a natural extension of the Bank’s internet business.

The Bank’s investment in the LLC is not a speculative or passive investment. The Bank’s

investment in the LLC is related to diversifying its business line pursuant to its revised

strategic plan and is useful to it in carrying out its banking business. It will also expand and

enhance its current delivery of services via the internet. Therefore, the fourth standard is

satisfied.

IV.

Other Issues

A.

Securities Laws

The Bank and the LLC have represented that the FCTDs would not constitute securities under

the federal securities laws and would not create a new security requiring registration under the

Investment Company Act of 1940. Whether the FCTDs constitute “securities” within the

meaning of the federal securities laws depends on whether the foreign issuer of the FCTD is

subject to a comprehensive regulatory system that provides protections to customers

comparable to those available to customers of U.S. banks. See Marine Bank v. Weaver, 455

U.S. 551 (1982); Wolf v. Banco National de Mexico, 739 F.2d 1458 (9th Cir. 1984); Callejo v.

Bancomer, S.A., 764 F.2d 1101 (5th Cir. 1985); West v. Multibanco Comermex, S.A., 807

F.2d 820 (9th Cir. 1987). But see Gary Plastic Packaging v. Merrill Lynch Pierce, 756 F.2d

230 (2d Cir. 1985). The Bank and the LLC should satisfy themselves that, in fact, the FCTD

complies with case law and regulatory pronouncements on those questions and precedent.

The OCC has previously concluded that, under the Glass-Steagall Act, national banks may

aggregate their customers’ deposits to purchase certificates of deposit from another bank. See

Interpretive Letter No. 385 (June 19, 1987), reprinted in [1988 - 1989 Transfer Binder] Fed.

Banking L. Rep. (CCH) ¶ 85,609.

CTD

complies with case law and regulatory pronouncements on those questions and precedent.

The OCC has previously concluded that, under the Glass-Steagall Act, national banks may

aggregate their customers’ deposits to purchase certificates of deposit from another bank. See

Interpretive Letter No. 385 (June 19, 1987), reprinted in [1988 - 1989 Transfer Binder] Fed.

Banking L. Rep. (CCH) ¶ 85,609.

- 11 -

In any event, the LLC will not receive deposits within the meaning of 12 U.S.C. § 36(j); rather, it

20

will receive funds for placement in a non-depository custodial account at the Bank for the purpose of having the

Bank wire these funds for deposit into an unaffiliated foreign bank. This transaction would be more properly

characterized as the purchase of a service, similar to a simple wire transfer transaction, rather than the placing of

a deposit with the LLC. See OCC Interpretive Letter No. 638, reprinted in [1993-94 Transfer Binder] Fed.

Banking L. Rep. (CCH) ¶ 83,525 (Jan. 6, 1994) (arrangement in which banks provide information to customers

about certificates of deposits offered by affiliate banks does not constitute branching). Moreover, the operations

of an entity in which a national bank has a non-controlling, minority interest are not ordinarily attributed to the

bank for branching purposes. See Interpretive Letter No. 711, reprinted in [1995-1996 Transfer Binder] Fed.

Banking L. Rep. (CCH) ¶ 81-026 (Feb. 23, 1996).

B.

Deposit Broker Regulation

The Bank’s proposal also raises the issue of whether the LLC would be deemed a “deposit

broker” for purposes of the FDIC brokered deposits regulation. 12 C.F.R. § 337.6. This

regulation provides that a party that places deposits with insured depository institutions is

generally deemed to be a “deposit broker.” 12 C.F.R. § 337.6(a)(5). A deposit broker must

file a notice with the FDIC regarding its activities and must maintain certain records. 12

C.F.R. § 337.6(h)

emed a “deposit

broker” for purposes of the FDIC brokered deposits regulation. 12 C.F.R. § 337.6. This

regulation provides that a party that places deposits with insured depository institutions is

generally deemed to be a “deposit broker.” 12 C.F.R. § 337.6(a)(5). A deposit broker must

file a notice with the FDIC regarding its activities and must maintain certain records. 12

C.F.R. § 337.6(h). The regulation defines an insured depository institution as any bank,

savings association, or branch of a foreign bank insured under the Federal Deposit Insurance

Act. 12 C.F.R. § 337.6(a)(8). To the extent that a certificate of deposit is issued by a foreign

office of a foreign bank and is only payable outside the United States, the foreign bank would

not meet the definition of insured depository institution, and accordingly, the deposit broker

regulation would not apply to the LLC.

C.

Branching

No domestic branching issues are raised because the LLC’s sole office will be located in the

same building as the Bank’s main office. Moreover, the LLC is not a branch of the foreign

20

bank even though customers’ funds are being accepted by the LLC and deposited into the

foreign bank. Rather, the LLC is merely acting as an intermediary agent and custodian for its

customers in processing these foreign deposits and facilitating the wire transfer of these

deposits between the Bank and the foreign bank issuer. The OCC has acknowledged the

permissibility of a similar agency/custodian arrangement and stated that the national bank

accepting customer funds was not a branch of the CD issuing bank. OCC Interpretive Letter

No. 385, supra, (national bank may offer participation interests in a CD purchased as agent on

behalf of a number of the bank’s depositors).

D

etween the Bank and the foreign bank issuer. The OCC has acknowledged the

permissibility of a similar agency/custodian arrangement and stated that the national bank

accepting customer funds was not a branch of the CD issuing bank. OCC Interpretive Letter

No. 385, supra, (national bank may offer participation interests in a CD purchased as agent on

behalf of a number of the bank’s depositors).

D.

Consumer Laws

The Truth in Savings Act (“TSA”) applies to any advertisement made by any “depository

institution or deposit broker relating to any demand or interest-bearing account offered by an

insured depository institution which includes any reference to a specific rate of interest . . . .”

12 U.S.C. § 4302(a). The Federal Reserve Board has adopted regulations implementing the

- 12 -

The LLC will be providing customers with the following additional information on a continually

21

updated basis:

(1)

The interest rates being offered in each foreign currency in which

FCTDs can be placed.

(2)

The term of each FCTD being offered.

(3)

Indication of the applicable exchange rate.

(4)

A concise overview of deposit insurance and/or other regulatory oversight

concerning the soundness of foreign depository institutions in each country

where FCTDs can be placed.

(5)

Applicable withholding taxes, if any, on interest earned on FCTDs.

(6)

A fee schedule.

(7)

A disclosure statement.

(8)

A list of terms and conditions.

TSA known as Regulation DD. The applicable staff interpretation provides that “[a]ccounts

held in an institution located outside the United States are not covered [by Regulation DD],

even if held by a U.S. resident.” 12 C.F.R. part 230, Appendix D, Supp.I, Section

230.1(c)(1)(1996). Thus, the provisions of Regulation DD are not applicable to FCTDs or to

the LLC since they are issued by a foreign bank from an office located outside the United

States and are payable only outside the United States

nstitution located outside the United States are not covered [by Regulation DD],

even if held by a U.S. resident.” 12 C.F.R. part 230, Appendix D, Supp.I, Section

230.1(c)(1)(1996). Thus, the provisions of Regulation DD are not applicable to FCTDs or to

the LLC since they are issued by a foreign bank from an office located outside the United

States and are payable only outside the United States. The Bank, however, has represented

that the LLC will adopt the disclosure principles contained in Regulation DD.

21

E. Interagency Statement on Retail Sales of Nondeposit Investment Products

On February 15, 1994, the OCC and the three other federal bank regulatory agencies issued

the Interagency Statement on Retail Sales of Nondeposit Investment Products (“the

Interagency Statement”). The Interagency Statement is applicable to the FCTDs and, among

other things, it provides that banks, thrifts and affiliated third party brokers should ensure that

retail customers are fully informed that nondeposit investment products: (i) are not insured by

the FDIC; (ii) are not deposits or other obligations of the institution and are not guaranteed by

the institution; and (iii) are subject to investment risks, including possible loss of the principal

invested.

The LLC will provide potential customers with information packages that will disclose to

customers the risks of FCTDs and each customer will sign an acknowledgment that he or she

understands the risks associated with such an investment. These disclosures will explain that

the FCTDs: (i) are not insured by the FDIC, (ii) are not deposits or other obligations of, or

guaranteed by, the bank, (iii) involve investment risks, including possible loss of principal

invested (and that this loss may result from adverse changes in currency exchange rates) and,

edgment that he or she

understands the risks associated with such an investment. These disclosures will explain that

the FCTDs: (i) are not insured by the FDIC, (ii) are not deposits or other obligations of, or

guaranteed by, the bank, (iii) involve investment risks, including possible loss of principal

invested (and that this loss may result from adverse changes in currency exchange rates) and,

(iv) lack liquidity during the term of the deposit. In addition, the LLC must ensure that its

foreign CD program complies with other provisions of the Interagency Statement, including,

advertising, setting and circumstances of sales activities, suitability and sales practices,

- 13 -

As noted earlier, the Bank plans to design its Internet site so that Bank customers who are interested

22

in FCTDs may, by activating an icon on the Bank’s site, be transferred to the LLC Internet site. The OCC

believes there are a variety of possible ways to structure the Bank’s Internet activities that would provide

appropriate disclosures to the Bank’s customers. The OCC will review the procedures that the Bank proposes to

employ in order to ensure that appropriate disclosures are made.

qualifications, training and compensation of personnel, and compliance with applicable

federal and state laws and regulations.22

V.

Conclusion

In sum, it is our opinion that the Bank is legally permitted to purchase a non-controlling

minority interest in the LLC in the manner and as described herein, provided:

(1) the LLC will engage only in activities that are part of, or incidental to, the business

of banking;

(2) the Bank will have veto power over any activities and major decisions of the LLC

that is inconsistent with condition number one, or will withdraw from the LLC in the

event it engages in an activity that is inconsistent with condition number one;

(3) the Bank will account for the investment in the LLC under the equity method of

accounting; and

of, or incidental to, the business

of banking;

(2) the Bank will have veto power over any activities and major decisions of the LLC

that is inconsistent with condition number one, or will withdraw from the LLC in the

event it engages in an activity that is inconsistent with condition number one;

(3) the Bank will account for the investment in the LLC under the equity method of

accounting; and

(4) the LLC will be subject to OCC supervision, regulation, and examination.

Please be advised that the conditions of this approval are deemed to be “conditions imposed

in writing by the agency in connection with the granting of any application or other request”

within the meaning of 12 U.S.C. § 1818.

If you have any questions, please contact James Vivenzio, Senior Attorney, Northeast District

at (212) 790-4010.

Sincerely,

/s/

Julie L. Williams

Chief Counsel