I. INTRODUCTION
The NBA has fielded questions regarding the authority for state-chartered banks to engage in the underwriting of municipal revenue bonds. For the purposes of this article, municipal revenue bonds are defined as debt obligations of a city, state or municipal authority issued for a public purpose. Generally, the interest derived from the bonds is exempt from both federal and state income taxation. Municipal revenue bonds differ from general obligation bonds in that general obligation bonds are backed by the “full faith and credit” and taxing authority of the bond issuer. Municipal revenue bonds are to be repaid from the revenue generated by the project that is being financed by the bonds. Use of the term “underwriting” within this article means the process by which securities are distributed from an issuer to the public market by an underwriter who agrees with the issuer to distribute the securities. Typically, the underwriter advises the issuer concerning the terms, amount and timing of the securities to be issued.
II. STATE-CHARTERED BANK INVESTMENT AND UNDERWRITING AUTHORITY
Nebraska law does not directly address the authority of a Nebraska state-chartered bank to underwrite debt securities. While the authorization for state banks to underwrite state and municipal bonds is not explicitly found within Nebraska state statutes, the authorization may be drawn, in part, from Neb.Rev.Stat. § 8-101(5) and the Nebraska Department of Banking and Finance Statement of Policy Number 1 (“Other Powers”), Neb.Rev.Stat. § 8-1,140 (“Wild Card” provisions) and from the fact that banks are exempt from certain securities registration requirements under Nebraska law. State and municipal bond obligations are exempt from securities registration requirements.
An issue that should be relevant to any discussion is whether and to what extent the underwriting of a municipal bond by a bank would be subject to Nebraska’s bank lending limits laws.
Finally, in addition to the Nebraska banking code, laws and regulations applicable to national banks that engage in these activities must also be considered since, pursuant to § 24 of the Federal Deposit Insurance Act (“FDI Act”), state–chartered banks are generally limited in their investments and activities conducted as principal to those investments and activities in which national banks may engage in as principal.
III. RELATION BETWEEN STATE AND FEDERAL LAWS
Federal Reserve Board (“FRB”) and Federal Deposit Insurance Corporation (“FDIC”) regulations also determine the permissible activities of state insured member banks, and non-member banks, respectively. Under § 9(20) of the Federal Reserve Act, state member banks are subject to the same conditions and limitations with respect to the purchasing, selling, underwriting and holding of investment securities and stock as are applicable in the case of national banks. In the case of state non-member banks however, according to § 24 of the FDI Act, an insured non-member state bank may apply to the FDIC to conduct activities as principal that are not authorized for national banks, provided that the activities are authorized for the state bank under state law. The FDIC may permit a state-chartered bank to engage in such activities if the FDIC finds that the activities would pose no significant risk to the appropriate deposit insurance fund and the state bank is and continues to be in compliance with applicable capital standards prescribed by the appropriate federal banking agency [See, 12 U.S.C. 1831a(a)]. The Conference of State Bank Supervisors (CSBS) has published “Section 24: Frequently Asked Questions.”
IV. NATIONAL BANK INVESTMENT AND UNDERWRITING LIMITATIONS
Under the National Bank Act (12 U.S.C. 24) and the OCC investment regulations found in 12 CFR Part 1 (“Part 1”), national banks are permitted to underwrite, deal in and invest in, without limitation as to capital, general obligations of the United States or of any state, as well as in several types of specifically enumerated government and agency-backed obligations (referred to as Type I securities under Part 1).
Type II securities under OCC Part 1 include, among other securities, “obligations issued by a state, or a political subdivision or agency of a state, for housing, university or dormitory purposes that would not satisfy the definition of Type I securities”. Part 1 provides that a national bank may deal in, underwrite, purchase and sell Type II securities for its own account, so long as the aggregate par value of Type II securities issued by any one obligor held by the bank does not exceed 10% of the bank’s capital and surplus. NOTE: The authority to underwrite municipal revenue bonds that has been granted to national banks under the Gramm-Leach-Bliley Act of 1999 (“GLB”).
Type III securities under Part 1 are investment securities that do not qualify as Type I, II, IV or V (Types IV and V securities include investment grade small-business-related and mortgage-related securities, among others). Type III securities include corporate and municipal bonds that do not fall within the Type I or Type II definitions. Under Part 1, national banks may not underwrite, but may purchase and sell Type III securities for their own account provided that the aggregate par value of Type III securities issued by any one obligor held by the bank does not exceed 10% of the bank’s capital and surplus. Included among Type III securities are most types of municipal revenue bonds other than the housing, university or dormitory obligations that constitute Type II securities. NOTE again: The authority to underwrite municipal revenue bonds that has been granted to national banks under GLB municipal bond underwriting authority.
The types of restrictions on a national bank’s authority to underwrite or invest in various Type I, II and III municipal securities, found in OCC Part 1, place limitations on the underwriting and investment by state-chartered banks in municipal obligations.
Before GLB, a national bank’s ability to underwrite municipal obligations was unlimited as to general obligation municipal obligations and limited as to Type II and Type III securities as provided in Part 1 of the OCC regulations discussed above. GLB amended the National Bank Act to permit national banks that are well-capitalized to underwrite and invest in certain municipal revenue bonds, without limitation as to capital. Specifically, well-capitalized banks may underwrite and invest in:
obligations (including limited obligation bonds, revenue bonds and obligations that satisfy the requirements of Section 142(b)(1) of the Internal Revenue Code of 1986) issued by or on behalf of any State or political subdivision of a State, including any municipal corporate instrumentality or authority of any State or political subdivision of a State.
See, 12 U.S.C. 24.
In other words, for well-capitalized national banks, such municipal revenue obligations are considered Type I securities. For non-well-capitalized national banks, the ability to underwrite and invest in Type II and Type III securities is limited to pre-GLB levels, even though such Type II and Type III securities might qualify as Type I securities for a well-capitalized bank.
V. FEDERAL RESERVE BOARD SUPERVISORY LETTER
The Federal Reserve Board published a Supervisory Guidance relating to a change to permissible securities activities of state member banks [SR 01-13 (SUP), May 14, 2001]. As stated in the Guidance, GLB repealed the Glass-Steagall Act and made a change to the permissible securities underwriting, dealing and investment activities of state member banks. Effective March 13, 2000, GLB authorized well-capitalized state member banks to underwrite, deal in and invest in municipal revenue bonds, without limitation as to the level of these activities that may be conducted relative to the bank’s capital (capital limitations). Before the amendment, banks could underwrite, deal in and invest in, without capital limitation, only general obligation municipal bonds backed by the full faith and credit of an issuer with general powers of taxation. The Guidance addresses issues and questions that have been raised by examiners and other supervisory personnel regarding this change to the permissible securities activities of state member banks.
VI. CONCLUSION
The Nebraska banking code may be interpreted to allow Nebraska state-chartered banks to underwrite and invest in municipal revenue bonds. The underwriting may be subject to Nebraska’s bank lending limits laws (A bank’s investment, underwriting and loan exposure would probably be aggregated for these purposes). Since the limitations in OCC Part 1 also must be followed by Nebraska state-chartered banks, in most cases Nebraska banks could only underwrite and invest in municipal revenue bonds to the extent permitted in the OCC Part 1. As noted above, well-capitalized national banks may now invest in and underwrite municipal revenue bonds as defined in GLB without limitation as to capital. A non-member Nebraska state-chartered bank may apply to the FDIC, pursuant to § 24 of the FDI Act, to exceed national bank powers if Nebraska state law is interpreted to authorize broader powers.
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