97-6

January 31, 1997

Re: Opinion Regarding Financial Code Section 1560

Dear Mr. __________:

This is in response to your letter of July 5, 1996.

You contend that ____________ may retain its contributed capital in the form of an interest-bearing cash deposit even though such a deposit is not an investment specifically permitted under Financial Code Section 1560. As discussed below, we do not agree.

Section 1560 of the Financial Code provides as follows:

“1560. A trust company may invest its contributed capital only in the securities and properties in which a commercial bank is permitted to invest its funds pursuant to Sections 1352 to 1366, inclusive, of Chapter 10 (commencing with Section 1200) and in loans on real property which commercial banks are permitted to make pursuant to Article 2 (commencing with Section 1220) of Chapter 10.”

An interest-bearing cash deposit is not a type of property listed in Sections 1352 to 1366 or Article 2 of Chapter 10 of the Financial Code.

Nevertheless, as we understand it, you take the position that:

1. An interest-bearing cash deposit is not an “investment” for purposes of Section 1560, and

2. The predecessor to Section 1560, which provided that every trust company “shall” invest its contributed capital in a certain manner, was amended to provide that a trust company “may” invest its contributed capital in certain things, indicating an intent to provide trust companies with “discretion in deciding whether and when to ‘invest’ their capital” in the properties specified in Section 1560.

We disagree with the contention that an interest-bearing cash deposit is not an investment. Black’s Law Dictionary, 741 (5th Ed. 1979) defines “investment” as follows:

“An expenditure to acquire property or other assets in order to produce revenue; the asset so acquired. The placing of capital or laying out of money in a way intended to secure income or profit from its employment . . . . To purchase securities of a more or less permanent nature, or to place money or property in business ventures or real estate, or otherwise lay it out, so that it may produce a revenue or income.”

Placing money in a cash deposit at interest is clearly a means of laying out money with the intention of securing income. The deposit is, therefore, an investment.

With respect to your second contention, the amendment of Section 1560 was not intended to grant trust companies unlimited discretion in investing their contributed capital. While it is true that the term “shall” is generally construed as mandatory while the term “may” is generally construed as permissive, the term “may” as used in Section 1560 must be interpreted in the context of the sentence in which it appears. That sentence states that “a trust company may invest its contributed capital only in . . . ” certain specified investments. (Emphasis added.) Webster’s New World Dictionary, 2nd College Edition (1976) defines “only” as follows: “[a]nd no other; and no (or nothing) more; solely; exclusively.” Even if we to were assume solely for the sake of argument that the term “may” as used in Section 1560 is permissive, the permission is limited by the term “only.” Therefore, any discretion is limited to choosing among the types of investments specified in Section 1560, and investment in a cash deposit is not permitted by Section 1560.

Finally, Section 400(b) of the Financial Code does not override the limitations in Section 1560. Section 400(b) provides that prior to being licensed to engage in the trust business, a trust company in organization must demonstrate to the Superintendent that its contributed capital is on deposit in a California bank, subject to withdrawal on demand. This section applies only to the period immediately prior to licensing and does not apply to a licensed trust company.

For the reasons discussed above, it is our view that Section 1560 does not permit a trust company to retain its contributed capital in an interest-bearing cash deposit.

Please note, however, that we are reviewing the issue of recommending amendment or repeal of Section 1560. We invite you to discuss with us any changes to the section which you believe would serve the public interest.

Very truly yours,

CONRAD W. HEWITT Superintendent of Banks

By

THOMAS M. LOUGHRAN Senior Counsel

TML:arc

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