94-3
January 10, 1994
Dear Ms. ________:
This is in reply to your letter of December 6, 1993.
California Financial Code Section 782 authorizes a bank to invest in the shares of an investment company if the following requirements are met: (1) The investment company must be registered with the Securities and Exchange Commission (the “SEC”) pursuant to the Investment Company Act of 1940; (2) the shares of the investment company must be registered with the SEC under the Securities Act of 1933; and (3) the portfolio of the investment company must consist solely of specified types of securities. The specified types of securities include the securities described in Subdivisions (a), (b), (c), and (d) of Financial Code Section 1336. Copies of Sections 782 and 1336 are enclosed for your reference.
According to the information in the Prospectus dated May 3, 1993, the Variable Rate Government Fund (the “Fund”) does not meet the third requirement. The Prospectus states that the Fund invests in, among other things, adjustable rate mortgage securities issued and guaranteed by the Federal Home Loan Mortgage Corporation (“FHLMC”). The Prospectus notes that such securities are not backed by the full faith and credit of the United States. Consequently, the securities do not qualify under Subdivision (a) of Section 1336. Neither do the securities qualify under Subdivision (b) of Section 1336, for obligations of FHLMC are not listed in Subdivision (b).
Other securities in which the Fund invests may also fall outside the scope of the investments specified in the third requirement; for example, adjustable rate portions of collateralized mortgage obligations issued by FHLMC. However, since the adjustable rate mortgage securities issued and guaranteed by FHLMC are beyond the parameters defined in the third requirement, it is not necessary to examine the eligibility of the Fund’s other investments.
In sum, then, the Fund does not satisfy the third requirement of Section 782. Therefore, a bank may not invest in the shares of the Fund under authority of Section 782.
Additional authority for banks to invest in the stock of corporations is found in Financial Code Section 772. Section 772 provides that, subject to the regulations of the Superintendent of Banks, a bank may invest in the stock of one or more corporations. The Superintendent’s regulations, which are set forth in Subarticle 2 (commencing with Section 10.19050), Article 7, Subchapter 10, Chapter 1, Title 10 of the California Code of Regulations, provide that a bank may invest in stock under “general authorization” or “specific authorization.” Under general authorization, a bank which has been granted “eligibility” for purposes of the regulations may invest in stock subject to certain exclusions and limitations. Under specific authorization, other banks that wish to make stock investments and eligible banks that wish to make stock investments beyond the scope of the exclusions and limitations defined in the general authorization must first obtain approval from the Superintendent. The exclusions and limitations defined in the general authorization depend in large measure on the bank and its relationship, if any, to the corporation in which it proposes to invest. Similarly, the factors for determining whether approval will be granted under the specific authorization for a bank to make a stock investment, as prescribed in Section 10.19084 of the regulations, depend in large measure on the condition of the bank. Consequently, it is not possible to say in advance whether an investment in any particular mutual fund would or would not be authorized for all banks.
In responding to your inquiry, we have limited ourselves to matters arising under California law, and we have not considered any provisions of federal law. Since all banks are insured by the Federal Deposit Insurance Corporation and some are, in addition, members of the Federal Reserve System, you may wish to take up your inquiry with the Federal Deposit Insurance Corporation and with the Federal Reserve System.
If you require any additional information from us, please feel free to call.
Very truly yours,
JAMES E. GILLERAN
Superintendent of Banks
By
JAMES CARRIG
Chief Counsel
JFC:lca
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