Alert May 04, 2010

OCC Issues Interpretive Letter Confirming Authority of National Bank to Hold Auction Rate Preferred Securities for its Own Account

The OCC issued an interpretive letter (“Letter #1126”) in which it concluded that a national bank (the “Bank”) had the authority to purchase and hold auction rate preferred securities (“ARPS”) for its own account subject to certain representations and conditions.  In the proposed transaction, a subsidiary of the Bank proposed buying ARPS as Type III investment securities from two other affiliates of the Bank at fair value for the purposes of fully realizing the tax-exempt benefits of the ARPS.  The Bank affiliate represented that the ARPS carried many of the same debt-like characteristics that had been previously approved by the OCC under Interpretive Letter # 1115 and that the ARPS met the quality and marketability requirements of Type III investment securities under 12 C.F.R. Part 1. 

The OCC found that it would permit the purchase by the Bank affiliate with the following conditions:

  • The Bank could only exercise its voting rights under the ARPS instruments where the rights and seniority of the ARPS holders could be adversely affected.  The OCC wants to ensure that banks limit their voting rights to those commonly associated with the holder of debt instruments.
  • The Bank is required to enter into an operating agreement with the OCC which requires the Bank to enter into an indemnification and repurchase agreement (the “Agreement”), satisfactory to the OCC, with the Bank’s holding company, pursuant to which the holding company represents that it will cover certain losses and expenses that the Bank and any of its subsidiaries will incur as a result of the ARPS purchase.  The agreement must be entered into within 30 days of the Bank subsidiary’s ARPS acquisitions.
  • The Agreement shall provide that the Bank’s holding company shall repurchase the ARPS no later than two years after purchase. 
  • The Bank’s Board of Directors shall assure that the operating agreement is fully adopted, timely implemented and adhered to thereafter.