January 31, 1997

Re: Investment of Contributed Capital in Mutual Fund — Financial Code Section 1560

Dear Mr. __________:

This replies to your letter of September 27, 1996.

Your letter requests an opinion that __________, a trust company, may, consistent with Financial Code Section 1560, invest a portion of its contributed capital in the shares of the Government Obligations Fund (“GOF”), a mutual fund that invests in United States Government backed obligations. You also request, on behalf of ________ , specific authority pursuant to Financial Code Section 772 to invest in GOF.

For the reasons set forth below, it is our view that (1) Financial Code Section 1560 prohibits ________ from investing its contributed capital in GOF, and (2) under Financial Code Section 782, ________ may invest funds other than its contributed capital in GOF without obtaining approval of the Superintendent pursuant to the regulations implementing Financial Code Section 772.

Financial Code Section 1560 provides:

“1560. A trust company may invest its contributed capital only in the securities and properties in which a commercial bank is permitted to invest its funds pursuant to Section 1352 to 1366, inclusive, of Chapter 10 (commencing with Section 1200) and in loans on real property which commercial banks are permitted to make pursuant to Article 2 (commencing with Section 1220) of Chapter 10.”

Even if we were to assume, solely for the sake of discussion, that GOF’s investment portfolio consisted exclusively of securities in which a trust company would be permitted to directly invest its contributed capital under Section 1560, an investment in the shares of GOF would not be the equivalent of an investment in GOF’s underlying assets. A mutual fund is a corporation. This Department has for many years taken the position that an investment in a mutual fund is an investment in the stock of the mutual fund corporation, and is not the equivalent of direct ownership of the fund’s underlying assets. Investment by a commercial bank or trust company in a mutual fund is, therefore, subject to the provisions of the Banking Law (Division 1 (commencing with Section 99) of the Financial Code) relating to investment in corporate stock. None of the Banking Law sections referred to in Section 1560 permits investment in corporate stock.

However, you apparently contend that Financial Code Section 782 creates an exception to the limitations in Section 1560 with respect to investment in mutual funds which, in turn, invest only in certain securities issued by or backed by the U.S. Government.

Section 782 provides in pertinent part:

“782. Notwithstanding Section 1335, a bank may invest in shares of an investment company (1) registered with the Securities and Exchange Commission pursuant to the federal Investment Company Act of 1940, as amended (15 U.S.C. Sec. 80a-1 et seq.) and for which the shares are registered under the federal Securities Act of 1933, as amended (15 U.S.C. Sec. 77a et seq.), and (2) the portfolio of which consists solely of the following:

“(a) Debt obligations in which a bank is permitted to invest without limitation pursuant to subdivision (a), (b), (c), or (d) of Section 1336 and repurchase agreements fully collateralized by those obligations . . .”

By its terms, Section 782 is applicable to banks. As you point out, Financial Code Section 109 defines the term “bank” to include both commercial banks and trust companies, unless the context otherwise requires. Section 782 makes reference to Financial Code Section 1335 and 1336. Those sections apply exclusively to commercial banks. It might therefore be argued that the context of Section 782 requires that the term “bank” as used in the section means only a commercial bank. However, we do not take such a restrictive view. In our view, the term “bank” as used in the first sentence of Section 782 means both commercial banks and trust companies. Therefore, Section 782 applies generally to trust companies.

Nevertheless, Section 782 expressly overrides only Financial Code Section 1335.

Section 1335 provides:

“1335. (a) A commercial bank may invest in gold and silver bullion and United States mint certificates of ascertained value, and purchase securities, except corporation shares, for its own account which in the informed opinion of the bank it is prudent to invest the funds of its depositors . . .” (Emphasis added.)

Section 782 suggests that Section 1335 impliedly prohibits a commercial bank from investing in corporation shares, and for purposes of this letter, we will assume that it does. So viewed, Section 782 expressly overrides only the prohibition against investment in corporate shares by commercial banks implied in Financial Code Section 1335. It does not expressly override the limitations on investment of a trust company’s contributed capital set forth in Financial Code Section 1560. As you point out, it is presumed that in enacting legislation, the Legislature was mindful of the existing law. Section 782 was enacted after Section 1560. Therefore, it is presumed that, had the Legislature in enacting 782 intended to create an exception to Section 1560, it would have done so expressly. “It is assumed that the Legislature has in mind existing laws when it passes a statute. [Citation.] ‘The failure of the Legislature to change the law in a particular respect when the subject is generally before it and changes in other respects are made is indicative of an intent to leave the law as it stands in the aspects not amended.’ [Citations.]” Estate of McDill 14 Cal.3d 831, 837-838 (1975).

Furthermore, while Section 782 provides general authorization for a bank, including a trust company, to invest any of its money in certain mutual funds, Section 1560 creates a highly specific limitation on the investment of funds that comprise a trust company’s contributed capital. As a general rule of statutory interpretation, the specific rules over the general. “It is well settled . . . that a general provision is controlled by one that is special, the latter being treated as an exception to the former. A specific provision relating to a particular subject will govern in respect to that subject, as against a general provision, although the latter, standing alone, would be broad enough to include the subject to which the more particular provision relates.” San Francisco Taxpayers Assn. V. Board of Supervisors 2 Cal 4th 571 (1992). It follows that the specific limitation in Section 1560, where applicable, governs over the general authorization in Section 782.

Accordingly, a trust company is not permitted to invest its contributed capital in a mutual fund, even if it meets the standards prescribed in Section 782.

On the other hand, ________ need not obtain approval under the regulations implementing Financial Code Section 772 in order to invest money other than its contributed capital in a mutual fund whose portfolio consists solely of assets described in Section 782(a). Section 782 provides a general authorization for banks, which, as discussed above, includes trust companies, to invest in such funds. The regulations implementing Section 772 specifically provide that neither Section 772 nor the regulations implementing it apply in a case where a bank invests in the equity securities of a corporation under any other statute or regulation. 12 CCR Section 10.19053. Accordingly, Section 782 of the Financial Code provides all of the authority that is necessary for a trust company to invest funds other than its contributed capital in shares of a qualifying mutual fund.

For the reasons discussed above, it is our view that ________ may not invest its contributed capital in GOF and that it is not necessary for ________ to obtain authority pursuant to Financial Code Section 772 and the regulations implementing that section to invest funds other than its contributed capital in a mutual fund that qualifies under Financial Code Section 782(a).

By way of comment, we note that your letter refers to instruments issued by FHLMC as excluded from Subdivision (b) of Financial Code Section 1336. As of January 1, 1996, such instruments will be included in Subdivision (b). See Sec. 30 of Assembly Bill No.3012 (1995-96 Regular Session), Chapter 1063 of the Statutes of 1996.

Please note that we are reviewing the issue of recommending amendment or repeal of Section 1560. We invite you to discuss with us any changes to that section which you believe would serve the public interest.

If you have any questions, please feel free to contact me at (415) 263-8512.

Very truly yours,

Superintendent of Banks


Senior Counsel


bcc: W. J. Mix
J. F. Carrig

June 6, 1997

Re: ________ — Investment of Contributed Capital in Mutual Fund –
Financial Code Section 1560

Dear Mr. __________:

This responds to your letter of February 21, 1997. Your letter requested that we reconsider the opinion set forth in our letter of January 31, 1997. Our letter stated that neither Section 782 nor Section 1560 of the Financial Code permit a trust company to invest its contributed capital in a mutual fund, which, in turn, invests exclusively in the types of investments specified in Section 1560.

You suggested in your letter that there is a conflict between Financial Code Sections 782 and 1560. You recommended that we harmonize the sections by applying to Section 1560 the provisions of Section 782 which permit investment in certain mutual funds.

However, in our view, Sections 1560 and 782 do not conflict. Section 782 is not a rule of general application. Section 782 creates an exception to the prohibition against a bank investing in corporate stock which may be implied in Financial Code Section 1335 and which is stated in Financial Code Section 761. It allows a bank to invest in certain mutual funds at the bank’s option notwithstanding the prohibitions that would otherwise apply. Section 1560, other hand, establishes a highly specific requirement regarding the assets in which the contributed capital of a trust company must be invested. It does not establish a prohibition, and is not affected by the exception created in Section 782.

You further suggested that we view a mutual fund as a conduit for the fund’s underlying investments and not as a separate investment with risks inherently different from the risks of the underlying investments. The Department has not taken that position in the past, and we do not propose to take that position now. Indeed, Section 782 was enacted for the purpose of allowing investment in mutual funds comprised exclusively of investments permitted for banks, notwithstanding the prohibition against investment in corporate stock implied in Section 1335. It, therefore, appears that for purposes of the Banking Law the Legislature regarded an investment in a mutual fund as different from an investment in the fund’s assets. If we were to accept your argument that investment in a mutual fund is not an investment distinct from the funds underlying assets, Section 782 would become largely superfluous. To so interpret the statute would contradict the well-recognized principal which holds that effect must be given, if possible, to every word, clause, and sentence of a statute being construed, so that effect is given to all its provisions, so that no part will be inoperative or superfluous, void, or insignificant, and so that one section will not destroy another unless the provision is the result of obvious mistake or error. Rodriquez v. Superior Court, 14 Cal.App.4th 1260, 1269 (1993).

Finally, as we stated in our previous letter, the Superintendent, as part of his program of regulatory reform, is presently reviewing the possibility of amending Section 1560 to, among other things, permit a trust company to invest its contributed capital in a mutual fund composed exclusively of specified assets. Your comments on possible amendments to the statute would be welcomed.

Very truly yours,

Superintendent of Banks


Senior Counsel


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