4000 - Advisory Opinions
Guaranteeing the Obligations of Others: Substantial Interest Exception
July 8, 1983
Joseph A. DiNuzzo, Senior Attorney
This is in reply to your letter of June 23, 1983, concerning whether a certain proposed transaction would be violative of section 332 of the FDIC's regulations (12 C.F.R. § 332 (1979) ("Section 332'') if undertaken by an FDIC-insured savings bank in Massachusetts.
As described in your letter, the bank proposes to sell to an investment banking firm ("Sponsor") a number of industrial revenue bonds it currently holds in its investment portfolio. The bonds will be placed by the Sponsor into a tax-exempt trust and undivided interests in the trust will be registered with the Securities and Exchange Commission and sold to the public. Before the Sponsor will purchase the bonds, however, the bank must: (1) agree to repurchase the bonds from the trust if necessary to provide funds for the trust to meet redemption of its units; (2) guarantee payment of the bonds to the trust and all subsequent holders; and (3) deposit with an escrow agent on behalf of the trust United States Government securities in an amount sufficient to secure the repurchase and guaranty commitments.
As you know, section 332 prohibits FDIC-insured, nonmember banks from guaranteeing the obligations of others. The enumerated exceptions to this prohibition are acceptances, endorsements and letters of credit made or issued in the usual course of the banking business. Over the years the FDIC has also generally recognized an exception when the guarantor bank disposes of its own paper and/or has a "substantial interest" in the underlying transaction. These exceptions to the general rule against bank guaranties are the same as those found in the Interpretive Rulings of the Office of the Comptroller of the Currency in 12 C.F.R. §§ 7.7000 and 7.7010 (1977). The first applies when the bank guarantees notes and other obligations sold by the bank for its own account. The second type of guaranty is permitted when the bank has a substantial interest in the performance of the appertaining transaction.
After reviewing the proposed transaction described above, it is our opinion that a guaranty afforded by the bank to the trust and the holders of interests therein would not be violative of section 332. This is so because the bank would be guaranteeing obligations sold for its own account, and because the bank would have a substantial interest in the overall transaction. We therefore agree with the conclusion reached in your letter. Please note, however, that this opinion is limited to the particulars of the above-described business arrangement. The bank would not be permitted, for example, to purchase securities for the purpose of selling them to a mutual fund and guaranteeing payment of the securities to the purchasers of shares in the fund. This, of course, is in contrast to the foregoing situation, where the bank is selling securities originally purchased for its own investment purposes and held for a certain period of time. Also, this opinion does not address any issues which may arise relative to the proposed transaction under the applicable laws and regulations of Massachusetts.
I hope this is adequately responsive to your inquiry.