August 26, 1974

Dear M _________________:

This is in reply to your letter which was received in this office on July 22, 1974.

We have reviewed your opinion and the various activities in which your client intends to engage. It is clear that a corporation which operates on the principle of arbitrage is not per se a bank under Section 102 of the Financial Code. Moreover, it is our opinion that the issuance of the debt securities which you have described would not constitute the solicitation, receipt, or acceptance of deposits as prohibited by Sections 102, 3390 and 3391 of the Financial Code. Accordingly, it will not be necessary for your client to receive a license from this Office.

This opinion is specifically limited to the facts enumerated in your letter, and, therefore, no reliance should be placed upon this opinion if there is a material deviation from these facts.

If you have any further questions in regard to this matter, please do not hesitate to contact us.

Very truly yours,

Superintendent of Banks



Mr. John Stuart
State Banking Commission
235 Montgomery Street
San Francisco, California 94104

Dear Mr. Stuart:

Pursuant to our telephone conversation, I am forwarding this Opinion Letter to your office for your consideration and comment.

The client I represent wishes to engage in a business which may or may not entail registrations with regulatory bodies. The inquiry set forth herein, concerns whether registration would be necessary with the California Banking Commission.

The client anticipates forming a small investment business which would operate on the principal of arbitrage; that is, it would borrow funds in the money market by issuing debt securities (short term interest bearing notes) and then lending the proceeds at a higher interest rate by purchasing U.S Government obligations, commercial paper, foreign trade bills. etc.

The client is not a banking institution, nor do I feel that it qualifies as a “bank” pursuant to Section 102 of the Finance Code. In other words, it does not, nor does it contemplate, soliciting, accepting or holding money on deposit. Instead, its sole purpose would be to take in money through the issuance of debt securities (notes) for the primary purpose of immediate re-investment.

As a privately held, small investment company, the client would operate as follows:

(1) Issue debt securities with these key features:

(a) would be in the form of short term, interest bearing notes;

(b) have a maturity date at issuance not exceeding 270 days;

(c) would be in units of not less than $5,000;

(d) not payable upon demand;

(e) eligible for discount at the Federal Reserve Bank:

(f) financing will arise out of current transactions;

(g) would be discounted at the time of sale;

(h) notes would be payable at banks located in principal cities.

(2) Immediately re-invest the proceeds from the issuance of the aforesaid notes in any one, all, or any combination thereof, of the following investments:

(a) U.S. Government obligations, e.g., treasury bills:

(b) Commercial corporate paper;

(c) Loans to foreign businesses, e.g., foreign trade bills.

After considering the aforementioned features of this small investment company, could you please advise and comment on whether or not this company would have to register with the California State Banking Commission. Thank you.

Very truly yours,

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