The OCC issued an interpretive letter (“Letter # 1124”) addressing the issue of whether a national bank (the “Bank”) may directly hold auction rate securities (the “ARS”). The OCC stated that, as a general matter, the Bank could directly hold the ARS, conditioned upon the Bank’s compliance with certain specified conditions.
Specifically, the OCC concluded in Letter # 1124 that the Bank, pursuant to 12 C.F.R., Part 1, may acquire the ARS as investment securities. The OCC mandated, however, that the Bank’s acquisition of the ARS be subject to three enforceable conditions. First, prior to the acquisition of the ARS, the Bank must enter into an operating agreement with the OCC, which shall require the Bank to enter into an indemnification/repurchase agreement with the Bank’s holding company (the “Holding Company”) within 30 days of the Bank’s acquisition of the ARS. Second, under the indemnification/repurchase agreement, the Holding Company must agree to cover certain losses and expenses that the Bank (including any of the Bank’s subsidiaries) may incur as a result of its acquisition of the ARS, and the Holding Company must also agree to repurchase all of the ARS from the Bank, no later than a date specified by the OCC. Finally, the OCC required that the Bank’s Board of Directors must give assurances to the OCC that the operating agreement is fully adopted, timely implemented, and adhered to thereafter. The OCC also stated that the Bank must seek prior guidance from the OCC before terminating, modifying, or amending either its operating agreement with the OCC or its indemnification/repurchase agreement with the Holding Company.