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§ 1.1 Authority.
not members of the Federal Reserve Sys
tem) or other financial institutions or This part is issued by the Comptroller
private bankers from dealing in, underof the Currency under the general au
writing, purchasing and selling investthority of the national banking laws, 12
ment securities to the extent permitted U.S.C. 1 et seq., and under specific au
to national banking associations by the thority contained in paragraph Seventh
provisions of 12 U.S.C. 24. of 12 U.S.C. 24. The Comptroller of the
(28 F.R. 9916, Sept. 12, 1963) Currency is charged by the national banking laws with the execution of all $ 1.3 Definitions. laws of the United States relating to the
(a) The term “bank" includes naorganization, operation, regulation and
tional banks, banks located in the Dissupervision of national banks and in
trict of Columbia, and state banks which particular with the execution of 12 U.S.C.
are members of the Federal Reserve 24 which sets forth the corporate powers
System. of national banks. This part interprets
(b) The term “investment security" and applies paragraph Seventh of 12
means & marketable obligation in the U.S.C. 24 to provide for its due execution and for the proper regulation and super
form of a bond, note or debenture which vision of the operations of national
is commonly regarded as an investment banks. Paragraph Seventh of 12 U.S.C. security. It does not include invest24 also specifically provides for the ments which are predominantly speculaComptroller of the Currency to prescribe tive in nature. by regulation (a) limitations and restric- (c) The term “public security" means tions on the purchase of investment an obligation described in 12 U.S.C. 24 securities by a national bank for its own as not subject to the limitations and reaccount and (b) further definition of the strictions contained therein "as to dealterm "investment securities.”
ing in, underwriting and purchasing for [28 F.R. 9916, Sept. 12, 1963)
its own account, investment securities”.
Public securities include: § 1.2 Scope and application.
(1) Obligations of the United States; This part applies to the purchase, sale, (2) General obligations of any State dealing in, underwriting, and holding of of the United States or of any political investment securities by national banks, subdivision thereof; banks located in the District of Colum- (3) Other obligations listed in parabia, and by state banks which are mem- graph Seventh of 12 U.S.C. 24. bers of the Federal Reserve System. It (d) The term “political subdivision of may also apply to a limited extent to any State" includes a county, city, town others engaged in the banking business. or other municipal corporation, a public The Comptroller of the Currency is authority, and generally any publicly charged by various provisions contained owned entity which is an instrumenin Chapter 1 of Title 26 of the District tality of the State or of a municipal of Columbia Code with the supervision corporation. of banks located in the District of Colum- (e) The phrase "general obligation of bia. State banks which are members of any State or of any political subdivision the Federal Reserve System are, under thereof” means an obligation supported 12 U.S.C. 335, subject to the same limi- by the full faith and credit of the obligor. tations and conditions with respect to It includes an obligation payable from a the purchasing, selling, underwriting, special fund when the full faith and and holding of investment securities and credit of a State or any political substock as are applicable in the case of division thereof is obligated for paynational banks under paragraph Seventh ments into the fund of amounts which of 12 U.S.C. 24. Dealers in securities will be sufficient to provide for all reare prohibited by 12 U.S.C. 378 from en- quired payments in connection with the gaging in banking business. Section 378 obligation. It implies an obligor posspecifically provides, however, that it sessing resources sufficient to justify does not prohibit national banks or state faith and credit. banks or trust companies (whether or [28 F.R. 9916, Sept. 12, 1963)
eserve Sy tutions i
permita ons by the
$ 1.4 Limitations and restrictions on
purchase and sale of a public secu
rity. A bank may deal in, underwrite, purchase and sell for its own account a public security subject only to the exercise of prudent banking judgment. Prudence will require such determinations as are appropriate for the type of transaction involved. For the purpose of underwriting or investment, prudence will also require a consideration of the resources and obligations of the obligor and a determination that the obligor possesses resources sufficient to provide for all required payments in connection with the obligation. (28 F.R. 9916, Sept. 12, 1963)
of any obligor will usually be based in part upon estimates, it is the purpose of this paragraph to permit a bank to exercise a somewhat broader range of judgment with respect to a more restricted portion of its investment portfolio. It is expected that this authority may be exercised not only in the absence of a record of performance but also when there are prospects for improved performance. It is also expected that an investment security purchased pursuant to this paragraph may by the establishment of a satisfactory financial record become eligible for purchase under paragraph (a) of this section.
(c) Securities ruled eligible by the Comptroller of the Currency. A bank may consider as a factor in reaching its prudent banking judgment with respect to an investment security a ruling published by the Comptroller of the Currency on the eligibility of such security for purchase. Consideration must also be given, however, to the possibility that circumstances on which the ruling was based may have changed since the time of the ruling. [28 F.R. 9916, Sept. 12, 1963)
$ 1.5 Limitations and restrictions
purchase of an investment security. (a) Evidence of obligor's ability to perform. A bank may purchase an investment security for its own account when in its prudent banking judgment (which may be based in part upon estimates which it believes to be reliable), it determines that there is adequate evidence that the obligor will be able to perform all that it undertakes to perform in connection with the security, including all debt service requirements, and that the security may be sold with reasonable promptness at a price which corresponds reasonably to its fair value.
(b) Judgment based predominantly upon reliable estimates, A bank may, subject to limitations set forth in s 1.6 (b), purchase an investment security for its own account although its judgment with respect to the obligor's ability to perform is based predominantly upon estimates which it believes to be reliable. Although the appraisal of the prospects
$ 1.6 Limitations and restrictions
holding investment securities. (a) Obligations of any one obligor. A bank may not hold at any time investment securities of any one obligor in a total amount in excess of 10 percent of the bank's capital and surplus. For this purpose the amount of an investment security is to be determined on the basis of the par or face val of the security.
(b) Obligations purchased predominantly on the basis of reliable estimates. A bank may not hold at any time investment securities which would not be eligible for purchase pursuant to paragraph
(a) of g 1.5 in a total amount in excess own account as an investment security; of 5 percent of the bank's capital and or which it holds, or desires to deal in, surplus.
underwrite, purchase, hold or sell as a (c) Limitations prescribed in eligibil- public security. Such a request for a ity rulings. When a ruling published ruling should be supported by (a) inforby the Comptroller of the Currency pro
mation sufficient to enable the Compvides that an investment security is eli- troller to make the necessary determinagible for purchase subject to a specified tion and (b) the bank's appraisal of the limitation, a bank may not at any time information furnished. thereafter purchase such security, if, [28 F.R. 9917, Sept. 12, 1963) after such purchase, the bank's holdings
$ 1.10 Convertible securities. of such security would be in excess of the specified limitation.
When a bank purchases an investment (d) Public securities. Public securi- security convertible into stock or with ties are not subject to the limitations stock purchase warrants attached, encontained in this section,
tries must be made by the bank at the [28 F.R. 9917, Sept. 12, 1963)
time of purchase to write down the cost
of such security to an amount which § 1.7 Limitations and restrictions
represents the investment value of the purchase, sale and holding of speci
security considered independently of the fied obligations.
conversion feature or attached stock A bank may deal in and underwrite purchase warrants. Purchase of securithe obligations of the International Bank ties convertible into stock at the option for Reconstruction and Development of the issuer is prohibited. and the Inter-American Development [28 F.R. 9917, Sept. 12, 1963) Bank and all bonds, notes and other
Amortization of premiums. obligations of the Tennessee Valley Authority, but it may not hold at any one When an investment security is purtime the obligations of any one of such chased at a price exceeding par or face obligors in a total amount in excess of value, the bank shall: 10 percent of the bank's capital and (a) Charge off the entire premium at surplus.
the time of purchase; or (28 F.R. 9917, Sept. 12, 1963)
(b) Provide for a program to amortize
the premium paid or that portion of § 1.8 Prudent banking judgment; credit
premium remaining after the write-down information required.
required by $ 1.10 so that such premium Every bank shall maintain in its files or portion thereof shall be entirely excredit information adequate to demon- tinguished at or before the maturity of
the security. strate that it has exercised prudence in making the determinations and carrying (28 F.R. 9917, Sept. 12, 1963) out the transactions described in $$ 1.4
$ 1.12 Exceptions. and 1.5.
The restrictions and limitations of this (28 F.R. 9917, Sept. 12, 1963
part do not apply to securities acquired Requests for rulings.
through foreclosure on collateral, or acAny bank may request the Comptroller quired in good faith by way of comproof the Currency to rule on the applica- mise of a doubtful claim or to avoid a tion of this part, or paragraph Seventh loss in connection with a debt previously of 12 U.S.C. 24, to any security which contracted. it holds, or desires to purchase for its [28 F.R. 9917, Sept. 12, 1963)
ELIGIBILITY OF SPECIFIC BOND ISSUES FOR 129.6 percent in 1960; 147.0 percent in
1961, and 179.7 percent for the first nine $ 1.105 Miscellaneous rulings.
months of 1962. For the same period in
1962, earnings were 128.9 percent of total The Comptroller has ruled as follows debt service, up from 106.4 percent for on specific security issues:
the like period in 1961. The Authority (a) (Reserved]
has purchased at discount and retired (b) The $28,000,000 State Highway $934 thousand of its bonds, and on SepDepartment of the State of Delaware, tember 30, 1962, had cash and invest448% Delaware Turnpike Revenue ments totaling $5,984,493. The two year Bonds, dated January 1, 1962, are in- interest reserve requirement has been eligible for purchase by national banks. met.
(c) The $74,000,000 State Roads Com- (c) Ruling. We conclude that the mission of the State of Maryland 448% $58,500,000 Texas Turnpike Authority, Northeastern Expressway
Revenue Dallas-Fort Worth Turnpike Revenue Bonds, dated January 1, 1962, are ineligi- Bonds, Series 1955, dated April 1, 1955, ble for purchase by national banks. now qualify as “investment securities"
(d) The $25,000,000 Town of Chero- within the meaning of Paragraph Sevkee, Alabama, 434% Industrial Develop- enth of 12 U.S.C. 24. Under 12 U.S.C. ment Revenue Bonds, dated March 1, 355, this ruling is applicable to state 1961, are eligible for purchase by na- member banks. tional banks, within the limitations of [27 F.R. 12811, Dec. 28, 1962. Redesignated Paragraph Seventh of section 5136 of 28 F.R. 8280, Aug. 13, 1963) the Revised Statutes (12 U.S.C. 24). 127 F.R. 2506, Mar. 16, 1962, as amended at
Commonwealth of Kentucky, 27 FR. 6539, July 11, 1962; 27 F.R. 12811,
Department of Parks.
(a) Opinion. (1) Request has been § 1.106 Texas Turnpike Authority.
made of the Comptroller of the Currency
for a ruling whether the $9,900,000 State (a) Request. The Comptroller of the
Property and Buildings Commission of Currency has been requested to recon- the Commonwealth of Kentucky Departsider the rulings of June 8, 1955 and ment of Parks Revenue Bonds, Series March 12, 1962 that the $58,500,000 1962, are eligible for investment by naTexas Turnpike Authority, Dallas-Fort tional banks. Worth Turnpike Revenue Bonds, Series (2) It is proposed to issue $9,900,000 1955, dated April 1, 1955, were ineligible of revenue bonds to finance construction for investment by national banks under of lodges, cottages, dining facilities and Paragraph Seventh of 12 U.S.C. 24.
necessary appurtenances thereto in cer(b) Opinion. (1) The Texas Turn- tain of the Commonwealth's parks. pike Authority was created by an Act (3) The bonds will be due serially beof the 1953 State Legislature to construct ginning with an amount of $160,000 on turnpike facilities within the State, and April 1, 1964, and increasing yearly until specifically to build and operate a toll the final maturity date of April 1, 1992, highway between the cities of Dallas and when $622,000 will be due.
The coupon Fort Worth. The instant issue, payable has not been decided upon. Bonds masolely from net revenue of the turnpike turing after April 1, 1972, will be subject system, consists of $15 million 2.70 per- to redemption at certain prices set forth cent bonds due January 1, 1980, and in the Official Statement. $43.5 million 278 percent bonds due Jan- (4) The bonds are being issued by the uary 1, 1995. In 1955, prior to the con- State Property and Buildings Commisstruction of the turnpike, this issue was sion on behalf of the Department of ruled ineligible for purchase by national Parks pursuant to the provisions of secbanks, under the Investment Securities tions 58.010 to 58.140 inclusive of KenRegulation of this Office. This ruling tucky Revised Statutes, as permitted and was reviewed and reaffirmed on March provided by section 56.450 KRS and a 12, 1962 (27 F.R. 2506).
resolution adopted by the Commission (2) The turnpike has been in opera- and approved by the Department on tion for over five years. Net reserves March 22, 1962. The bonds will be sefrom its operation have shown a steady cured pursuant to the terms of the resorise. Bond interest was covered by lution, whereunder the Citizens Fidelity
Bank and Trust Company, Louisville, of Kansas City, Missouri, 444 percent Kentucky, is named as Trustee for the Airport Revenue Bonds, dated July 1, holders of the bonds for the purpose of 1954, are eligible for investment by nasecuring the payment of both principal tional banks. and interest on the bonds and to secure (2) On February 21, 1955, this Office the faithful performance of the cove- ruled that subject bonds would not be nants and provisions contained in the eligible for investment by national banks. resolution.
Since that date, we have reaffirmed our (5) The bonds are payable from and position several times, the most recent constitute a first lien upon the gross rev- being in December 1959. We have been enues to be derived from all revenue- requested again to re-examine our posiproducing facilities presently located in tion relative to these bonds. the State Parks System or presently (3) The bonds are not general oblioperated by the Department and all reve- gations of the city, but are special revenue-producing facilities hereafter con- nue obligations payable from revenues structed, acquired or operated by the derived by the city from certain rentals Department.
to be paid by Trans World Airlines, Inc. (6) The Department is empowered by to the city under the provisions of a section 148.030 KRS to unite into one lease and agreement between the city project for financing purposes all or as and the company. many parks, and the improvements (4) The bonds were issued on July 1, thereon, or to be constructed, enlarged 1954, with interest capitalized until June or improved, as it deems practicable, so 30, 1957. The facilities for TWA were that the fee and charges and other reve- completed by January 1, 1957, and the nue or receipts from every source what- company has been paying the required soever from the parks thus united shall rental since that date. Payments into be used for the payment of the principal the sinking fund from rentals received and interest of all bonds which may be will be used for the payment of serial issued. The lien of the bonds for such bonds and the ultimate retirement of the united project shall be a lien on the term bonds. gross income and revenue of all of the (5) Rentals received from TWA from parks thus united.
January 1, 1957, to April 30, 1961, the (7) The bonds are additionally se- date of the latest fiscal report of Kansas cured by the obligation of the Commis- City, total $5,557,000, which when added sion and the Department to levy an en- to total occupancy permit fees received trance fee subject to certain conditions. from TWA from July 1, 1954, to Decem
(8) The anticipated revenues and ber 31, 1956, of $370,000, aggregate State appropriations appear to be suffi- $5,927,000. Interest and fiscal fees on cient to provide adequate debt service. revenue bonds from July 1, 1954, to The outstanding feature underlying this April 30, 1961, amounted to $5,173,000. issue is the ability of the Department to The rentals paid for this period were charge an entrance fee if certain condi- sufficient to provide for the required debt tions occur. Inasmuch as the Depart- service. ment does not presently charge an en- (6) A review of the earnings for the trance fee and the present gross revenues year ending April 30, 1961, reveals that of the Department amply cover esti- net operating income was 2.19 times the mated Debt Service, the covenant to debt service required for the same period. charge such entrance fee adds additional The debt service amounted to $794,750 and supplementary security to the bonds. for this period and the same amount will
(b) Ruling. We conclude that the be required for the period ending in 1962. subject bonds are eligible for investment The first of the serial maturities takes by national banks, within the limitations place on July 1, 1962, in the amount of of Paragraph Seventh of section 5136 of $400,000. Using the earnings figures for the Revised Statutes (12 U.S.C. 24). the year ending April 30, 1961, this total 127 F.R. 6539, July 11, 1962. Redesignated debt service for 1962 of $1,187,000 is COV28 F.R. 8280, Aug. 13, 1963)
ered 1.47 times. § 1.110 City of Kansas City, Missouri.
(7) It should be noted that city ordi(a) Opinion. (1) Request has been nace authorizing the bonds required made of the Comptroller of the Currency that at July 1, 1962, the Reserve Account for a ruling whether the $18,700,000 City have a minimum balance of $2,250,000.