91-3

April 9, 1991

Re: Financial Code Section 3372 and Section 215.5 of Regulation O Interpretive Opinion

Dear M ________:

This letter is written in response to your letter of September 19, 1990. A copy of ________ letter dated August 23, 1990 was attached to your letter.

Your letter requests an opinion from the State Banking Department (the “Department”) regarding the issues set forth both in your letter and more specifically in ________ letter of whether Section 215.5 of Regulation O as incorporated into the Banking Law by Financial Code Section 3372 (the “Incorporated Section 215.5 of Regulation O”) is applicable to ________ (the “Bank”) and whether the Bank violated the Incorporated Section 215.5 of Regulation O in making a loan to ________, an executive officer of the Bank, in an amount exceeding $100,000 (the “Loan”).

The Loan has been cited as a violation of state law in the State Report of Examination for the Bank made as of close of business March 31, 1990, on May 21, 1990 (the “Report”). The Report was sent to the Bank on February 25, 1991.

After review of your letter, ________ letter, and the legal authorities cited in ________ letter, we have concluded that the incorporated Section 215.5 of Regulation O is applicable to the Bank and the Bank violated the incorporated Section 215.5 of Regulation O when the Bank made the Loan.

The present Article 2 (commencing with Section 3370) was added to Chapter 18 of the Banking Law effective April 1, 1985 (“Article 2”). According to the Legislative Counsel’s Digest for Assembly Bill No. 2734 enacted as Chapter 975 of the Statutes of 1984, operative April 1, 1985, Article 2 “would incorporate as state law specified provisions of federal regulations with certain designated exceptions relating to loans to executive officers, ________ directors, ________ and principal shareholders of member banks.” (Underscoring added.) This intent is made clear by the plain meaning and express language of Financial Code Section 3372 which expressly provides that certain specified sections of Regulation O, including Section 215.5, are incorporated into Article 2 of Chapter 18 of the Banking Law. Furthermore, Financial Code Section 3372(b) provides that the term “member bank” as used in the referenced sections of Regulation O, shall be construed to have the same meaning as “bank” as defined in Financial Code Section 3371. Financial Code Section 3371 defines “bank” to include any commercial bank or trust company incorporated under the law of this state. Consequently, Financial Code Section 3372 makes applicable to state nonmember banks certain provisions of Regulation O, including Section 215.5, which are also applicable only to member banks in the federal context.

The footnote 5 to Section 215.5 of Regulation O (the “footnote”) which is discussed in _____ letter is only meaningful in the context of federal law where there is a distinction drawn between member banks and non-member banks for purposes of determining the applicability of Federal Reserve regulations. There is no such distinction drawn in the context of Article 2. The footnote is not meaningful in the context of Article 2 as to the Bank since Section 215.5 of Regulation O is made applicable to any commercial bank or trust company pursuant to Article 2.

The main point to be made here is that Article 2 created a statutory scheme whereby certain federal laws and regulations applicable only to member banks of the Federal Reserve System are made applicable to all state-chartered banks and trust companies whether or not members of the Federal Reserve System. The footnote is only explanatory of how the federal statutes carry over into federal regulations and is only operative in the federal context. Outside the federal context, in the state context, the footnote is meaningless since Article 2 applies to all state-chartered bank and trust companies whether or not members of the Federal Reserve System. Seizing upon the footnote and giving it a literal application outside the federal context thwarts the basic statutory scheme. Such a result was not intended by the Legislature and is contrary to the plain meaning of Article 2.

This opinion is limited to the question of whether the Bank violated the Incorporated Section 215.5 of Regulation O in making the Loan. There are also other violations of Regulation O cited in the Report to which this interpretive opinion may also be applicable.

Please contact us if you have any questions regarding this matter.

Very truly yours,

JAMES E. GILLERAN
Superintendent of Banks

By

DIANA H. NISHIURA
Counsel