October 1, 1997

Re: Investment in Trust Preferred Securities by State-Chartered Banks

Dear Mr. __________:

This is in response to your letter of August 20, 1997, in which you asked whether commercial banks and savings banks chartered by the State of California may invest in trust preferred securities.

Initially, we note that the law of California does not provide for the chartering of a financial institution known as a savings bank. Although savings and loan associations are sometimes referred to as savings banks, we assume you refer to the type of savings bank defined in Section 3(g) of the Federal Deposit Insurance Act which is chartered by many of the New England states and the State of Washington.

Commercial banks are licensed and regulated by this Department pursuant to Division 1 (commencing with Section 99) of the California Financial Code. Section 1335 of Division 1 delineates the investments permissible for a commercial bank. That section provides in pertinent part as follows:

“(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.)

Under Section 1335, trust preferred securities must be both securities which are not corporate shares and a prudent investment for the funds of depositors.

By facsimile transmission of September 19, 1997, you sent us a copy of a letter dated April 8, 1997, from the Director of the Securities and Corporate Practices Division of the Office of the Comptroller of the Currency (the “OCC Letter”). The OCC Letter describes generally the characteristics of trust preferred securities. A copy of the OCC Letter is enclosed for convenient reference.

The OCC Letter concludes that trust preferred securities are securities in the nature of debt securities rather than equity securities. For the same reasons expressed by the OCC, we agree.n1 While trust preferred securities may be denominated as undivided interests in the assets of the Issuer Trust (as defined in the OCC Letter), they are, in fact, merely conduits by which the obligation on a debt security of the Issuer Corporation (as defined in the OCC Letter) is passed through the Issuer Trust to investors. Of particular significance is the fact that the holders of trust preferred securities have the right to proceed directly against the Issuer Corporation to enforce the obligation on its debenture in the event that the Issuer Corporation fails to fund any payment due on the trust preferred securities. Moreover, the voting and other rights of the holders of trust preferred securities are more akin to the rights of debenture holders than to the rights of holders of corporate stock.

n1 Although the OCC does not appear to rely on footnote 3 to the OCC Letter as support for its conclusions, we wish to emphasize that this Department does not concur in the view expressed in footnote 3. Our conclusions respecting the status of trust preferred securities are based on the reasoning set forth in the primary text of the OCC Letter. In footnote 3, the OCC cites 12 CFR § 1.3(h) and certain interpretive letters which hold that the OCC will look through the intermediary of an investment company to the underlying investments of the investment company for purposes of determining whether an investment in the investment company is a permissible investment for a bank. We do not take that view. In our view, the acquisition of shares in an investment company is an investment in corporation shares which is not permitted under Financial Code Section 1335, but which may be authorized under certain sections of the Financial Code, such as Sections 772 and 782, that do authorize a bank to invest in corporation shares in limited circumstances.

Accordingly, trust preferred securities meet the first test under Section 1335, namely, they are securities that are not corporation shares.n2

n2 It should be noted that even if trust preferred securities were considered corporation shares, a commercial bank may invest in corporation shares pursuant to regulations adopted by the Commissioner of Financial Institutions pursuant to Section 772 of the Financial Code. See 10 CCR § 10.19050, et seq.

We cannot determine on the basis of what you have presented whether any specific trust preferred security would be considered a prudent investment. That, of course, would have to be determined on a case-by-case basis in the informed opinion of the investing bank.

In summary, a commercial bank chartered in California is permitted to invest in trust preferred securities pursuant to Section 1335 of the Financial Code to the extent that the specific investment is a prudent investment of the funds of its depositors.

This Department administers the Banking Law (Division 1 (commencing with Section 99) of the California Financial Code). We express no opinion as to any other law or regulation, state or federal. Furthermore, this response is limited to the facts and circumstances set forth in the OCC Letter. Should those facts and circumstances change, our answers might be different.

Very truly yours,

Commissioner of Financial Institutions


Senior Counsel



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