1.12 Authority. Scope and application. Definitions. Limitations and restrictions on purchase and sale of a public security. Limitations and restrictions on purchase of an investment security. Limitations and restrictions on holding investment securities. Limitations and restrictions on purchase, sale and holding of specified obligations. Prudent banking judgment; credit information required. Requests for rulings. Convertible securities. ELIGIBILITY OF SPECIFIC BOND ISSUES FOR PURCHASE BY NATIONAL BANKS 1.105 Miscellaneous rulings. 1.106 Texas Turnpike Authority. 1.109 Commonwealth of Kentucky, Depart ment of Parks. 1.110 City of Kansas City, Missouri. 1.111 Georgia State Authorities. 1.112 New Jersey Highway Authority. 1.113 The Music Center Lease Company, Los Angeles, California. 1.114 Federal National Mortgage Association. 1.115 Dormitory Authority of the State of New York. 1.116 Massachusetts Turnpike Authority. 1.117 City of London, Kentucky. 1.118 Inter-American Development Bank. 1.119 Savings Banks Trust Company, New York, New York. 1.121 City of Opelika, Alabama. 1.122 Public Building Commission of Chicago. 1.123 Alaska State Development Corporation. 1.124 Virginia Public School Authority. 1.125 General State Authority of the Commonwealth of Pennsylvania. 1.126 Wanapum Hydroelectric Refunding Revenue Bonds. 1.127 Washington State Public School Plant Facility Bonds and Public Building Bonds. 1.128 Commonwealth of Pennsylvania Tax Anticipation Notes. 1.129 State Highway and Bridge Authority of the Commonwealth of Pennsylvania Bonds. 1.130 California Bond Anticipation Notes. 1.131 District of Columbia Redevelopment Land Agency Urban Renewal Bonds. 1.132 General State Authority of the Commonwealth of Pennsylvania Serial bonds, 19th Series. 1.133 State of Israel Bonds. AUTHORITY: §§1.1 to 1.134 issued under R.S. 324 et seq., as amended, paragraph Seventh of R.S. 5136 as amended; 12 U.S.C. 1 et seq., 12 U.S.C. 24. § 1.1 Authority. This part is issued by the Comptroller of the Currency under the general authority of the national banking laws, 12 U.S.C. 1 et seq., and under specific authority contained in paragraph Seventh of 12 U.S.C. 24. The Comptroller of the Currency is charged by the national banking laws with the execution of all laws of the United States relating to the organization, operation, regulation and supervision of national banks and in particular with the execution of 12 U.S.C. 24 which sets forth the corporate powers of national banks. This part interprets and applies paragraph Seventh of 12 U.S.C. 24 to provide for its due execution and for the proper regulation and supervision of the operations of national banks. Paragraph Seventh of 12 U.S.C. 24 also specifically provides for the Comptroller of the Currency to prescribe by regulation (a) limitations and restrictions on the purchase of investment securities by a national bank for its own account and (b) further definition of the term "investment securities." § 1.2 Scope and application. This part applies to the purchase, sale, dealing in, underwriting, and holding of investment securities by national banks, banks located in the District of Columbia, and by state banks which are members of the federal Reserve System. It may also apply to a limited extent to others engaged in the banking business. The Comptroller of the Currency is charged by various provisions contained in Chapter 1 of Title 26 of the District of Columbia Code with the supervision of banks located in the District of Columbia. State banks which are members of the Federal Reserve System are, under 12 U.S.C. 335, subject to the same limitations and conditions with respect to the purchasing, selling, underwriting, and holding of investment securities and stock as are applicable in the case of national banks under paragraph Seventh of 12 U.S.C. 24. Dealers in securities are prohibited by 12 U.S.C. 378 from engaging in banking business. Section 378 specifically provides, however, that it does not prohibit national banks or state banks or trust companies (whether or not members of the Federal Reserve System) or other financial institutions or private bankers from dealing in, underwriting, purchasing and selling investment securities to the extent permitted to national banking associations by the provisions of 12 U.S.C. 24. (a) The term "bank" includes national banks, banks located in the District of Columbia, and state banks which are members of the Federal Reserve System. (b) The term "investment security" means a marketable obligation in the form of a bond, note or debenture which is commonly regarded as an investment security. It does not include investments which are predominantly speculative in nature. (c) The term "public security" means an obligation described in 12 U.S.C. 24 as not subject to the limitations and restrictions contained therein "as to dealing in, underwriting and purchasing for its own account, investment securities". Public securities include: (1) Obligations of the United States; (2) General obligations of any State of the United States or of any political subdivision thereof; (3) Other obligations listed in paragraph Seventh of 12 U.S.C. 24. (d) The term “political subdivision of any State" includes a county, city, town or other municipal corporation, a public authority, and generally any publicly owned entity which is an instrumentality of the State or of a municipal corporation. (e) The phrase "general obligation of any State or of any political subdivision thereof" means an obligation supported by the full faith and credit of the obligor. It includes an obligation payable from a special fund when the full faith and credit of a State or any political subdivision thereof is obligated for payments into the fund of amount which will be sufficient to provide for all required payments in connection with the obligation. It implies an obligor possessing resources sufficient to justify faith and credit. $ 1.4 Limitations and restrictions on purchase and sale of a public security. 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. § 1.5 Limitations and restrictions on 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 § 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 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. § 1.6 Limitations and restrictions on 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 value 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 § 1.5 in a total amount in excess of 5 percent of the bank's capital and surplus. (c) Limitations prescribed in eligibility rulings. When a ruling published by the Comptroller of the Currency provides that an investment security is eligible for purchase subject to a specified limitation, a bank may not at any time thereafter purchase such security, if, after such purchase, the bank's holdings of such security would be in excess of the specified limitation. (d) Public securities. Public securities are not subject to the limitations contained in this section. § 1.7 Limitations and restrictions on purchase, sale and holding of specified obligations. A bank may deal in and underwrite the obligations of the International Bank for Reconstruction and Development and the Inter-American Development Bank and all bonds, notes and other obligations of the Tennessee Valley Authority, but it may not hold at any one time the obligations of any one of such obligors in a total amount in excess of 10 percent of the bank's capital and surplus. § 1.8 Prudent banking judgment; credit information required. Every bank shall maintain in its files credit information adequate to demonstrate that it has exercised prudence in making the determinations and carrying out the transactions described in §§ 1.4 and 1.5. § 1.9 Requests for rulings. Any bank may request the Comptroller of the Currency to rule on the application of this part, or paragraph Seventh of 12 U.S.C. 24, to any security which it holds, or desires to purchase for its own account as an investment security; or which it holds, or desires to deal in, underwrite, purchase, hold or sell as a public security. Such a request for a ruling should be supported by (a) information sufficient to enable the Comptroller to make the necessary determination and (b) the bank's appraisal of the information furnished. § 1.10 Convertible securities. When a bank purchases an investment security convertible into stock or with stock purchase warrants attached, entries must be made by the bank at the time of purchase to write down the cost of such security to an amount which represents the investment value of the security considered independently of the conversion feature or attached stock purchase warrants. Purchase of securities con vertible into stock at the option of the issuer is prohibited. § 1.11 Amortization of premiums. When an investment security is purchased at a price exceeding par or face value, the bank shall: (a) Charge off the entire premium at the time of purchase; or (b) Provide for a program to amortize the premium paid or that portion of premium remaining after the write-down required by § 1.10 so that such premium or portion thereof shall be entirely extinguished at or before the maturity of the security. § 1.12 Exceptions. The restrictions and limitations of this part do not apply to securities acquired through foreclosure on collateral, or acquired in good faith by way of compromise of a doubtful claim or to avoid a loss in connection with a debt previously contracted. [Dated: September 10, 1963.] ELIGIBILITY OF SPECIFIC BOND ISSUES FOR PURCHASE BY NATIONAL BANKS § 1.105 Miscellaneous rulings. The Comptroller has ruled as follows on specific security issues: (a) [Reserved] (b) The $28,000,000 State Highway Department of the State of Delaware, 4% % Delaware Turnpike Revenue Bonds, dated January 1, 1962, are ineligible for purchase by national banks. (c) The $74,000,000 State Roads Commission of the State of Maryland 4% % Northeastern Expressway Revenue Bonds, dated January 1, 1962, are ineligible for purchase by national banks. (d) The $25,000,000 Town of Cherokee, Alabama, 434 % Industrial Development Revenue Bonds, dated March 1, 1961, are eligible for purchase by national banks, within the limitations of paragraph Seventh of section 5136 of the Revised Statutes (12 U.S.C. 24). [Dec. 21, 1962] § 1.106 Texas Turnpike Authority. (a) Request. The Comptroller of the Currency has been requested to reconsider the rulings of June 8, 1955 and March 12, 1962 that the $58,500,000 Texas Turnpike Authority, Dallas-Fort Worth Turnpike Revenue Bonds, Series 1955, dated April 1, 1955, were ineligible for investment by national banks under Paragraph Seventh of 12 U.S.C. 24. (b) Opinion. (1) The Texas Turnpike Authority was created by an Act of the 1953 State Legislature to construct turnpike facilities within the State, and specifically to build and operate a toll highway between the cities of Dallas and Forth Worth. The instant issue, payable solely from net revenue of the turnpike system, consists of $15 million 2.70 percent bonds due January 1, 1980, and $43.5 million 28 percent bonds due January 1, 1995. In 1955, prior to the construction of the turnpike, this issue was ruled ineligible for purchase by national banks, under the Investment Securities Regulation of this Office. This ruling was reviewed and reaffirmed on March 12, 1962 (27 F.R. 2506.) (2) The turnpike has been in operation for over five years. Net reserves from its operation have shown a steady rise. Bond interest was covered by 129.6 percent in 1960; 147.0 percent in 1961, and 179.7 percent for the first nine months of 1962. For the same period in 1962, earnings were 128.9 percent of total debt service, up from 106.4 percent for the like period in 1961. The Authority has purchased at discount and retired $934 thousand of its bonds, and on September 30, 1962, had cash and investments totaling $5,984,493. The two year interest reserve requirement has been met. (c) Ruling. We conclude that the $58,500,000 Texas Turnpike Authority, Dallas-Fort Worth Turnpike Revenue Bonds, Series 1955, dated April 1, 1955, now qualify as "investment securities" within the meaning of Paragraph Seventh of 12 U.S.C. 24. Under 12 U.S.C. 335, this ruling is applicable to state member banks. [Dec. 21, 1962] § 1.109 Commonwealth of Kentucky, Department of Parks. (a) Opinion. (1) Request has been made of the Comptroller of the Currency for a ruling whether the $9,900,000 State Property and Buildings Commission of the Commonwealth of Kentucky Department of Parks Revenue Bonds, Series 1962, are eligible for investment by national banks. (2) It is proposed to issue $9,900,000 of revenue bonds to finance construction of lodges, cottages, dining facilities and necessary appurtenances thereto in certain of the Commonwealth's parks. (3) The bonds will be due serially beginning with an amount of $160,000 on April 1, 1964, and increasing yearly until the final maturity date of April 1, 1992, when $622,000 will be due. The coupon has not been decided upon. Bonds maturing after April 1, 1972, will be subject to redemption at certain prices set forth in the Official Statement. (4) The bonds are being issued by the State Property and Buildings Commission on behalf of the Department of Parks pursuant to the provisions of sections 58.010 to 58.140 inclusive of Kentucky Revised Statutes, as permitted and provided by section 56.450 KRS and a resolution adopted by the Commission and approved by the Department on March 22, 1962. The bonds will be secured pursuant to the terms of the resolution, whereunder the Citizens Fidelity Bank and Trust Company, Louisville, Kentucky, is named as Trustee for the holders of the bonds for the purpose of securing the payment of both principal and interest on the bonds and to secure the faithful performance of the covenants and provisions contained in the resolution. (5) The bonds are payable from and constitute a first lien upon the gross revenues to be derived from all revenue-producing facilities presently located in the State Parks System or presently operated by the Department and all revenue-producing facilities hereafter constricted, acquired or operated by the Department. (6) The Department is empowered by section 148.030 KRS to unite into one project for financing purposes all or as many parks, and the improvements thereon, or to be constructed, enlarged or improved, as it deems practicable, so that the fee and charges and other revenue or receipts from every source whatsoever from the parks thus united shall be used for the payment of the principal and interest of all bonds which may be issued. The lien of the bonds for such united project shall be a lien on the gross income and revenue of all of the parks thus united. (7) The bonds are additionally secured by the obligation of the Commission and the Department to levy an entrance fee subject to certain conditions. (8) The anticipated revenues and State appropriations appear to be sufficient to provide adequate debt service. The outstanding feature underlying this issue is the ability of the Department to charge an entrance fee if certain conditions occur. Inasmuch as the Department does not presently charge an entrance fee and the present gross revenues of the Department amply cover estimated Debt Service, the covenant to charge such entrance |
