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May 2, 2000

Re: Insurance Premiums Charged to Credit Cards Issued by Industrial Loan Companies

Dear M ________:

This is in response to your letter of November 17, 1999.

Your letter asked whether California state-chartered banks, industrial loan companies and savings associations may become limited partners in small business investment companies that are organized as limited partnerships. As discussed below, state-chartered banks, industrial loan companies and savings associations may make such investments, subject to certain limitations.

Turning first to the authority of banks, Section 600 of the Financial Code provides that the articles of incorporation of a commercial bank shall state that the purpose of the corporation is to engage in the commercial banking business and, “any other lawful activities which are not, by applicable laws or regulations, prohibited to a commercial bank.” Pursuant to Section 206 of the Corporations Code, “. . . a corporation subject to the Banking Law or a professional corporation may engage in any business activity not prohibited by the respective statutes and regulations to which it is subject.”

The Banking Law (Division 1 (commencing with Section 99) of the Financial Code) does not prohibit a commercial bank from investing in limited partnership interests. Section 1335 of the Banking Law specifically authorizes a commercial bank to purchase securities, except corporate shares, for its own account, if the securities are in the informed opinion of the bank prudent investments of the funds of depositors. Accordingly, a commercial bank may invest in limited partnership interests, if it considers such investments prudent.

With respect to industrial loan companies, Section 18022 of the Financial Code provides that no industrial loan company shall invest its funds except as authorized by Division 7 (commencing with Section 18000) of the Financial Code. That section goes on to state that an industrial loan company may invest its funds in investments that are legal investments for commercial banks. Thus, like a commercial bank, an industrial loan company may invest in limited partnership interests, if such investments are prudent.

A savings association may invest in a limited partnership interest subject to the limitations in Financial Code Sections 7200 and 7250. Section 7250 of the Financial Code governs investments by state-chartered savings associations. That section provides that in addition to securities in which a savings association may invest without limit, a savings association may invest not in excess of five percent of its assets in other securities that are deemed prudent by the association. Limited partnership interests are not one of the securities listed in Section 7250 in which a savings association may invest without limit, and investments in such securities are, therefore, subject to the five percent limitation applicable to other securities. In addition, Financial Code Section 7200 provides that no savings association may invest in any security other than liquid assets, as defined in 12 C.F.R. Section 566.1, if the association fails to meet the minimum liquidity requirements set forth in 12 C.F.R. Section 566.2.

We express no opinion as to whether the investment discussed in your letter would be considered a safe, sound or prudent investment for any bank, industrial loan company, or savings association.

This Department administers, among other laws, the Banking Law (Division 1 (commencing with Section 99) of the Financial Code), the Savings Association Law, (Division 2 (commencing with Section 5000) of the Financial Code), and the Industrial Loan Law (Division 7 (commencing with Section 18000) of the Financial Code). We express no opinion as to any other law or regulation, state or federal, that may bear on the matters discussed in your letter.

Very truly yours,

DONALD R. MEYER
Commissioner of Financial Institutions

By

THOMAS M. LOUGHRAN
Senior Counsel

TML:lca