92-4

August 6, 1992

Re: Local Agency Security — Eligibility of Securitized Pool of Loans Guaranteed by the Export-Import Bank of the United States as Collateral for Government Deposits

Dear M ________:

This responds to your letter of March 7, 1991. We regret the delay in responding to your inquiry. You have asked whether bonds issued by ________ which are Securitized by pools of loans originated by ________ and guaranteed by the Export-Import Bank of the United States may be pledged as pooled collateral for government deposits.

As you state in your letter, all state government deposits in depository institutions in excess of $100,000 may be secured by “bonds, notes, or other obligations of the United States, or those for which the faith and credit of the United States are pledged for the payment of principal and interest . . . .” (Government Code Section 16522(a).) In addition, all local agency deposits in depository institutions in excess of $100,000 may be secured by “United States Treasury notes, bonds, bills or certificates of indebtedness, or obligations for which the faith and credit of the United States are pledged for the payment of principal and interest . . . .” (Government Code Section 53651(a).)

You state that the bonds issued by ________ are effectively guaranteed by the Export-Import Bank as to 100 percent of principal and all but 50 basis points of interest due to the Export-Import Bank’s guarantee of the pool of loans. In addition, ________ has arranged for an amount equal to the remaining 50 basis points to be held by a trustee, either in the form of cash or U.S. Treasury securities. You argue that the bonds issued by ________ are, in essence, fully guaranteed by the full faith and credit of the United States and should, therefore, qualify as eligible collateral pursuant to Section 16522(a) and 53651(a). Your essential contention is that we and the depositories should “look through” the bonds to their underlying security to determine the bonds’ eligibility to secure government deposits.

In 1985, we were presented with a similar issue with regard to bank investments. At that time, several California state commercial banks argued that an investment by such a bank in shares of a mutual fund that invested only in securities which the bank might purchase for its own account should be treated as an investment by the bank in securities held by the mutual fund. We rejected that argument and ruled that the investment by a bank in shares of a mutual fund was subject to the exclusion for investments in corporation shares specified in Financial Code Section 1335(a) but would, if applicable requirements were met, be permissible under Financial Code Section 772.

In the course of our ruling, we took note of the Office of the Comptroller of the Currency’s adoption of what might be called a “look through” approach to investments in shares of money market mutual funds which, in turn, invest solely securities of the type that a national bank may itself purchase. We declined to follow the “look through” approach in interpreting Section 1335(a) for two reasons. First, the California Attorney General had rejected the “look through” rationale, ruling that, where a trustee is directed to invest the corpus of a trust in specified securities, the trustee may not invest the corpus in a mutual fund which, in turn, invests exclusively in such securities. (67 Ops.Cal.Atty.Gen. 212 (1984).) Second, under the California Banking Law, unlike the National Bank Act, California state banks are expressly authorized to invest in corporation shares, and such investments are subject to and governed by Section 772.

Recent legislation created an exception to the rule established by the opinion of the Attorney General and our ruling. In 1989, the California Legislature added Financial Code Section 782 to the Banking Law, which authorizes a California state bank to invest in the shares of an investment company which is registered with the Securities and Exchange Commission and which places its funds only in specified types of investments. While Section 782 is a departure from the general rule rejecting the “look through” approach to mutual funds, it is a narrowly drawn statute. Section 782 does not, either by its terms or by its consequences, authorize a California state commercial bank to invest in the “hares of any mutual fund so long as the mutual fund, in turn, invests in securities that the bank itself is authorized to purchase for its own account. In short, Section 782 does not adopt as a general principle the “look through” approach with regard to bank investments.

Since Section 782 does not establish a general “look through” principle with regard to bank investments, it is inapplicable to any determination of what constitutes an eligible security under Sections 16522 and 53651. Indeed, it might be contented that, by omitting to add to the law regarding state government deposits and the Local Agency Depository Security Law any provisions remotely comparable to Section 782, the Legislature indicated its intent that, even if were assumed that Section 782 reflected an endorsement of the “look through” principle, that principle is not to be applied to the law regarding state government deposits and the Local Agency Depository Security Law. (See 67 Ops.Cal.Atty.Gen. 212, 216, ft. 1.)

If you have any further questions regarding this matter, please do not hesitate to contact me.

Very truly yours,

JAMES E. GILLERAN
Superintendent of Banks

By

KENNETH SAYRE-PETERSON
Counsel

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