Letter concludes that Bank may buy and sell, for its own account, exchange-traded units of beneficial interest in gold.

O

Comptroller of the Currency

Administrator of National Banks

Washington, DC 20219

Interpretive Letter #1013

January 7, 2005 February 2005

12 USC 24(7)

Subject:

Gold Shares

Dear [ ]:

This responds to your inquiry, on behalf of [ ] (“Bank”), whether the Bank

may buy and sell, for its own account, exchange-traded units of beneficial interest in gold (“Gold

Shares”) issued by the [ ] (“Co.”). For the reasons discussed below, we

conclude that this activity is permissible for the Bank, provided that the Bank demonstrates to the

satisfaction of its examiner-in-charge (“EIC”), prior to commencing the activity, that the Bank

has the appropriate risk management systems in place to conduct the activity in a safe and sound

manner.

I. Background

The [ Co. ] provides an exchange-traded vehicle for investors to buy and sell interests in a

pool of gold, through the purchase and sale of Gold Shares.1 The [ Co. ] will be an

investment trust formed under [ State ] law.2

[ ] will be trustee (“Trustee”) of

the [ Co. ]. The Bank’s [ ] branch will serve as custodian of the assets of

the [ Co. ], which will be limited to gold bullion and cash. [ Co. ] will issue

Gold Shares that will be registered under the Securities Act of 1933 (“Securities Act”). The

1 The [ Co. ] is sponsored by [ ABC ], a subsidiary of the [ XYZ ], an

association of gold mining companies. The [ Co. ] is not a registered investment company under the Investment

Company Act of 1940

e registered under the Securities Act of 1933 (“Securities Act”). The

1 The [ Co. ] is sponsored by [ ABC ], a subsidiary of the [ XYZ ], an

association of gold mining companies. The [ Co. ] is not a registered investment company under the Investment

Company Act of 1940. [ ].

2 “An investment trust is an unincorporated trust or association managed by trustees not holding any property for

sale to customers in the ordinary course of its trade or business, the beneficial ownership of which is evidenced by

transferable shares or by transferable certificates of beneficial interest offered for sale to the public.” [

].

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2

Gold Shares will represent undivided units of beneficial interest in gold held by the [ Co.

]. Gold Shares will be traded on the New York Stock Exchange.3

Certain registered broker-dealers and securities market participants (“Authorized Participants”)

may effect purchases and sales of Gold Shares directly with the [ Co. ] through the creation

and redemption of blocks of 100,000 Gold Shares, called “Baskets,” upon payment of a

transaction fee to the Trustee.4 The [ Co. ] will not engage in sales or redemption

transactions with investors generally. After receiving an appropriate amount of gold bullion

from an Authorized Participant, the [ Co. ] will create and issue a corresponding number of

Baskets to the Authorized Participant. An Authorized Participant may redeem Baskets in

exchange for a corresponding amount of gold from the [ Co. ]. Authorized Participants will

act both on a proprietary basis and as agent for other investors. [ Inc

unt of gold bullion

from an Authorized Participant, the [ Co. ] will create and issue a corresponding number of

Baskets to the Authorized Participant. An Authorized Participant may redeem Baskets in

exchange for a corresponding amount of gold from the [ Co. ]. Authorized Participants will

act both on a proprietary basis and as agent for other investors. [ Inc. ], a

broker-dealer affiliate of the Bank, intends to be an Authorized Participant.5

The Bank will buy,

hold and sell Gold shares only for its own account and will not be a broker, market-maker or

distributor of Gold Shares or become an Authorized Participant.

Initially, the [ Co. ] will exchange one Gold Share for each tenth of an ounce of gold

deposited by an Authorized Participant. Because Gold Shares represent undivided interests in

the underlying gold, it is expected that Gold Shares will initially trade at a price close to one

tenth of the spot market price for an ounce of gold.6

However, the [ Co. ] will

periodically sell bullion to pay its expenses. When the [ Co. ] sells gold, the Gold Shares

may experience dilution (e.g., where the ratio of outstanding Gold Shares to the underlying gold

increases and the price of Gold Shares falls accordingly). As the [ Co. ] sells more gold

over time to meet expenses, the net asset value (“NAV”) of Gold Shares may continue to diverge

from the spot market price of gold.7 Under these circumstances, a Gold Share and an ounce of

gold would no longer be exchanged by the Trust on a ten to one basis, but would be adjusted to

reflect the amount of gold bullion and cash underlying each outstanding Gold Share.

Nevertheless, for many investors, the risk of dilution and cost of investing in Gold Shares could

be less than the cost of buying, transporting, storing, insuring, and selling gold bullion.

The [ Co. ] represents that trading in Gold Shares is similar to trading gold

s, but would be adjusted to

reflect the amount of gold bullion and cash underlying each outstanding Gold Share.

Nevertheless, for many investors, the risk of dilution and cost of investing in Gold Shares could

be less than the cost of buying, transporting, storing, insuring, and selling gold bullion.

The [ Co. ] represents that trading in Gold Shares is similar to trading gold. Holding Gold

Shares will present virtually the same rights, liabilities, and risks as owning the underlying gold

bullion directly. There is only one class of Gold Shares, with equal rights and privileges. Each

3 See Registration Statement.

4 Id.

5 [ Inc. ] is a subsidiary of [ ], which is indirectly controlled by [ Controller. ].

6 For example, on June 30, 2004, the spot market price of an ounce of gold was approximately $393. It is therefore

expected that Gold Shares will initially trade at approximately $39.30. A single Basket would represent

approximately $3.93 million in gold bullion.

7 Any differences between the price of a Gold Share and the spot market price of gold would present arbitrage

opportunities.

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3

Gold Share is transferable, fully paid and non-assessable, and entitles the holder to one vote on

the limited matters set forth in a trust indenture (“Trust Indenture”).8 Gold Shares do not provide

conversion or pre-emptive rights and have limited distribution rights.9 Gold Shares do not carry

the rights normally associated with the ownership of the stock of a corporation. Instead, the

rights of holders of Gold Shares are limited to withdrawing gold bullion through redemption and

liquidation of the [ Co. ]. The right to redeem the Gold Shares is limited, however, as the

[ Co. ] will redeem Gold Shares only through Authorized Participants and only in Baskets

y

the rights normally associated with the ownership of the stock of a corporation. Instead, the

rights of holders of Gold Shares are limited to withdrawing gold bullion through redemption and

liquidation of the [ Co. ]. The right to redeem the Gold Shares is limited, however, as the

[ Co. ] will redeem Gold Shares only through Authorized Participants and only in Baskets.

The Bank views the Gold Shares as an alternative source of liquidity for its physical gold

holdings. The Bank expects that the transaction costs of buying and selling Gold Shares in the

secondary market will be less than the cost of maintaining a position in gold bullion.

The Bank intends to use the Gold Shares to hedge physical gold positions. For example, where a

customer buys or sells gold from or to the Bank in the over-the-counter spot or forward market,

the Bank could hedge this position by buying or selling Gold Shares. More specifically, the

Bank could buy 10,000 ounces of gold at the current price from a customer and short Gold

Shares to hedge the long spot position. The Gold Shares will provide another mechanism that

the Bank may use to hedge its gold exposures.

The Bank believes that trading Gold Shares will be straightforward to monitor and control within

the Bank’s existing risk infrastructure. For market risk purposes, the Bank will treat the Gold

Shares as the bullion equivalent and will consolidate its positions in Gold Shares and gold

bullion. The Bank will book and manage Gold Shares in its existing metals trading system,

which feeds into its market risk system. In this way the Bank may calculate, consolidate, and

monitor its gold exposures with the rest of its precious metal positions. The Bank believes its

trading of Gold Shares will not present any material modeling or analytical issues.

The Bank's ownership of gold is recorded in its trading book. The Bank may hold gold in its

vault in connection with its precious metals business

sk system. In this way the Bank may calculate, consolidate, and

monitor its gold exposures with the rest of its precious metal positions. The Bank believes its

trading of Gold Shares will not present any material modeling or analytical issues.

The Bank's ownership of gold is recorded in its trading book. The Bank may hold gold in its

vault in connection with its precious metals business. When the Bank purchases gold through

COMEX, the Bank’s ownership of the gold is reflected by a certificate of receipt verifying that

the gold is held in a COMEX authorized depository, in the Bank’s name and for its account.

Because the Bank itself is an authorized COMEX depository, the Bank typically converts the

receipt by having the gold moved to its vault and issuing a new receipt indicating that the Bank is

the depository.

8 The Trust Indenture provides that holders of Gold Shares generally have no voting rights. However, a vote of the

holders of 66 2/3% of the shares may remove the Trustee or terminate the Trust. In addition, a majority vote or

unanimous consent of the shareholders is necessary to make certain amendments to the Trust Indenture. See

Registration Statement.

9 Distributions can occur only in two circumstances. First, there may be a cash distribution to shareholders should

the Trustee determine that the [ Co. ]’s cash account balance exceeds the anticipated expenses of the [ Co. ]

for the next 12 months and that excess amount exceeds $0.01 per share. Second, upon the liquidation and

termination of the [ Co. ], there will be a pro rata distribution to shareholders of amounts remaining after the

satisfaction of the Trust’s liabilities. [ ].

]’s cash account balance exceeds the anticipated expenses of the [ Co. ]

for the next 12 months and that excess amount exceeds $0.01 per share. Second, upon the liquidation and

termination of the [ Co. ], there will be a pro rata distribution to shareholders of amounts remaining after the

satisfaction of the Trust’s liabilities. [ ].

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II. Discussion

A. Trading of Gold Shares is Authorized under Express Authority in the

National Bank Act and as Part of or Incidental to the Business of Banking

It is permissible for a national bank to buy and sell, as agent for customers and for its own

account, gold, silver, platinum, palladium and copper coins and bullion under the express

authority in 12 U.S.C. § 24(Seventh) to buy and sell “exchange, coin, and bullion.”10 The

Bank’s trading of Gold Shares for its own account represents a natural and logical extension of

the Bank’s ability to purchase and sell gold. Gold Shares are substantially the operational and

economic equivalents of gold bullion that national banks have clear authority to buy and sell.

Gold Shares will provide holders with substantially the same rights, liabilities and risks as if they

held physical or certificated gold and a cost effective and liquid means of investing in gold.

Holders of Gold Shares are entitled to redeem their interests for gold bullion. The Bank expects

the prices of Gold Shares and gold bullion to be closely correlated, although the prices may

diverge over time, as the [ Co. ] sells gold to cover expenses. The cost of buying and selling

Gold Shares in the secondary market, however, is expected to be lower than the cost of obtaining

and maintaining positions in gold bullion

to redeem their interests for gold bullion. The Bank expects

the prices of Gold Shares and gold bullion to be closely correlated, although the prices may

diverge over time, as the [ Co. ] sells gold to cover expenses. The cost of buying and selling

Gold Shares in the secondary market, however, is expected to be lower than the cost of obtaining

and maintaining positions in gold bullion. And, even though the Gold Shares are registered

securities under the Securities Act, holding the Gold Shares is substantially the same as holding

gold certificates because both holdings represent interests in gold. When there is reduced

liquidity in the gold market, the Gold Shares may provide a needed source of liquidity. While

the liquidity enjoyed by holders of Gold Shares comes at a price reflected in the NAV, there are

also costs and burdens associated with holding potentially less liquid physical gold or certificated

gold that are not reflected in the price of gold, e.g., purchase, transportation, storage, delivery

and insurance costs. Nonetheless, the costs associated with holding physical or certificated gold

are as much a part of bank permissible purchases and sales of gold, as are the fees and expenses

associated holding Gold Shares.11 Accordingly, the Gold Shares provide the Bank with a means

of holding an interest in gold that may be more cost effective and liquid than holding physical or

certificated gold.

The Bank intends to use the Gold Shares to hedge physical gold positions. Hedging risks arising

from permissible banking activities is part of the business of banking.12 Because the Gold Shares

are the substantive equivalent of holding gold, which banks may permissibly buy and sell, their

use as a hedge is equally permissible as part of the business of banking. A national bank can

10 OCC Interpretive Letter No. 693 (November 14, 1995); OCC Interpretive Letter No. 685 (August 5, 1995); OCC

Interpretive Letter No. 553 (May 2, 1991)

the business of banking.12 Because the Gold Shares

are the substantive equivalent of holding gold, which banks may permissibly buy and sell, their

use as a hedge is equally permissible as part of the business of banking. A national bank can

10 OCC Interpretive Letter No. 693 (November 14, 1995); OCC Interpretive Letter No. 685 (August 5, 1995); OCC

Interpretive Letter No. 553 (May 2, 1991).

11 See e.g., OCC Interpretive Letter No. 994 (June 14, 2004).

12 OCC Interpretive Letter No. 892 (Sept. 13, 2000).

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5

protect itself against changes in the value of a bank permissible transaction by taking an

offsetting (long or short, as appropriate) position in a related instrument.13

B. National Banks May Purchase Interests in an Investment Trust Composed of

Bank-Permissible Assets

The Bank also may purchase and sell Gold Shares in reliance on the authority of national banks

to purchase and sell interests in entities that hold bank-permissible assets.14 In general, the OCC

has allowed national banks to invest in registered investment companies and unregistered entities

that hold bank-permissible assets where the investment represents an interest in the entity’s

underlying assets.15 The particular entity that serves as the vehicle for obtaining an interest in

bank permissible assets may be, for example, a partnership, investment company or trust.16 The

nature of the interest national banks may acquire in certain entities holding bank permissible

assets include equity interests.17 Where a national bank holds interests in entities whose

underlying portfolios consist of bank permissible assets that are subject to investment limits,

those limits are imported to the interest the bank holds in the particular entity. Thus, as a general

matter, where a national bank uses its lending authority to hold an interest in an entity that

invests in loans, the lending limits in 12 U.S.C

ere a national bank holds interests in entities whose

underlying portfolios consist of bank permissible assets that are subject to investment limits,

those limits are imported to the interest the bank holds in the particular entity. Thus, as a general

matter, where a national bank uses its lending authority to hold an interest in an entity that

invests in loans, the lending limits in 12 U.S.C. § 84 apply.18 Conversely, a national bank

investment in an entity that invests solely in bank permissible assets that are not subject to

investment limits may hold unlimited interests in such entities, subject only to safety and

soundness restrictions. The assets held in the [ Co. ] are bank permissible assets, thus

national banks may potentially hold unlimited equity interests in the Trust.

13 Id.; See OCC Interpretive Letter No. 935 (May 14, 2002).

14 See e.g., 12 C.F.R. §1.3(h)(1) (national banks may purchase investment company shares if the investment

company’s portfolio consists exclusively of assets that a national bank can purchase directly); 12 C.F.R. §1.3(h)(2)

(national banks may invest in an entity that is exempt from registration as an investment company if the portfolio of

the company consists exclusively of assets that a national bank may purchase and sell for its own account): OCC

Interpretive Letter No. 911 (June 4, 2001) (national banks may acquire beneficial interests in a privately offered

investment fund that invests in loans, cash and cash equivalents, and an offshore fund that invests solely in loans, as

securities under the reliable estimates standard of Part 1, subject to a 5 percent aggregate investment limits or as loan

participations, subject to the requirements of Banking Circular No

1 (June 4, 2001) (national banks may acquire beneficial interests in a privately offered

investment fund that invests in loans, cash and cash equivalents, and an offshore fund that invests solely in loans, as

securities under the reliable estimates standard of Part 1, subject to a 5 percent aggregate investment limits or as loan

participations, subject to the requirements of Banking Circular No. 181 (Rev.) (August 2, 1984)); OCC Interpretive

Letter 687 (September 5, 1995) (national banks may become limited partners in a limited partnership that invests

solely in fixed income securities in which national banks may invest directly subject to the restrictions in 12 U.S.C.

§ 24(Seventh) and 12 C.F.R. Part 1; OCC Interpretive Letter No. 388 (June 16, 1987) (national banks may issue and

sell certificates evidencing interests in a pool of its mortgage loans).

15 Id.

16 Id.

17 See e.g., OCC Interpretive Letter 912 (July 3, 2001) (a national bank may purchase for its own account shares in a

mutual fund with a portfolio consisting of bank eligible investment securities).

18 See e.g., OCC Interpretive Letter No. 779 (Apr. 3, 1997).

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C. Trading in Gold Shares is not Prohibited by Section 24(Seventh)

The Bank’s trading in Gold Shares for its own account does not violate Section 24(Seventh)’s

restrictions on national bank purchases and sales of certain securities for its own account.

Section 24(Seventh) provides that “[e]xcept . . . .as otherwise permitted by law, nothing herein

contained shall authorize the purchase by the association for its own account of any shares of

stock of any corporation.” The authority for the Bank to hold Gold Shares is found in the express

authority in Section 24(Seventh) for national banks to buy and sell “exchange, coin, and

bullion,” i.e., gold bullion, and engage in activities incidental thereto

herwise permitted by law, nothing herein

contained shall authorize the purchase by the association for its own account of any shares of

stock of any corporation.” The authority for the Bank to hold Gold Shares is found in the express

authority in Section 24(Seventh) for national banks to buy and sell “exchange, coin, and

bullion,” i.e., gold bullion, and engage in activities incidental thereto. Thus, the activity is

“otherwise permitted by law.” Because the activity is “otherwise permitted by law,” Section

24(Seventh) does not prohibit the activity.19

III. Conclusion

The Bank may buy and sell the Gold Shares for its own account under the express authority

granted to national banks to buy and sell “exchange, coin, and bullion,” and the Gold Shares, as

interests in gold, may be used to hedge purchases and sales of gold as part of or incidental to the

business of banking, provided that the Bank demonstrates to the satisfaction of the EIC, prior to

commencing the activity, that the Bank has the appropriate risk management systems in place to

conduct the activity in a safe and sound manner.

Sincerely,

/s/ Daniel P. Stipano

Daniel P. Stipano

Acting Chief Counsel

19 See, e.g., United States General Accounting Office, Equity Hedging —Report to the Honorable James A. Leach,

House of Representatives, GAO-01-945 (August 2001).