First Republic Bank
May 3, 2004
Robert E. Feldman
Executive Secretary
Attention: Comments
Federal Deposit Insurance Corporation
550 17th
Street, N.W.
Washington, D.C. 20429
Re: Federal Deposit Insurance Corporation: Comments on Proposed
Rulemaking Relating to Transactions with Affiliates; RIN 3064-AC78
Dear Mr. Feldman:
We are pleased
to submit this letter on behalf of First Republic Bank ("First Republic") to the Federal Deposit Insurance
Corporation ("FDIC"), commenting on the FDIC's proposed
regulation implementing the affiliate transactions provisions of
Sections 23A and 23B of the Federal Reserve Act ("FRA")
with respect to insured non-member banks. 61 Fed. Reg. 12571 (2004).
First Republic
is a publicly owned, Nevada chartered, non-member commercial
bank
headquartered in Las Vegas, Nevada. First Republic
specialize in providing personalized, relationship-based banking
services to its clients through bank offices in seven major
metropolitan areas in California, Nevada and New York, as well
as online. Services provided include private banking, investment
management, trust, brokerage and real estate lending. First Republic
owns several wholly owned subsidiaries that assist it in providing
services to customers, including Trainer Wortham & Co. ("Trainer
Wortham), a New York based investment advisory firm, and First
Republic Securities Company, LLC ("FRSC"), a full service
investment banking company. As of December 31, 2003, First Republic
had total consolidated assets of $6.0 billion, total deposits of
$4.5 billion and shareholders' equity of $332 million.
As a state-chartered
non-member bank not in a holding company structure, First Republic
acknowledges its obligation under Section
18(j)(1) of the Federal Deposit Insurance Act, 12 U.S.C. § 1828(j)(1)
to comply with the provisions of Sections 23A and 23B of the FRA,
12 U.S.C. §§ 371c and 371c-1, and Regulation W promulgated
by the Board of Governors of the Federal Reserve System ("FRB")
in the same manner and to the same extent as if First Republic
were a member bank, and has complied with those obligations since
First Republic was established in 1979. First Republic agrees with
the FDIC, however, that a separate FDIC regulation would be useful
to confirm that while the substantive requirements and restrictions
set out in Regulation W apply equally to insured state non-member
banks, the FDIC is the appropriate agency to interpret, administer
and enforce those regulations for specific state non-member banks,
such as First Republic. In this connection, First Republic agrees
with the FDIC's interpretation of Sections 23A and 23B that while
the FRB has the exclusive authority to issue "regulations
and orders . . . as may be necessary to administer and carry out
the purposes of this section" as to member banks, the text
of Sections 23A and 23B does not appear to extend that authority
to non-member banks. Thus, we agree that a fair reading of the
statute leaves the FDIC free to establish its own regulations implementing
Sections 23A and 23B, as long as such regulations apply the restrictions
and limitations of Sections 23A and 23B "in the same manner
and to the same extent " as they are applied to member banks.1 We
also agree that the FDIC can most easily apply the restrictions
and limitations of Sections 23A and 23B to non-member banks by
cross-referencing the provisions of Regulation W and incorporating
them by reference into proposed Section 324.2(a), as the FDIC has
proposed. Otherwise, if the FRB were to adopt revisions to Regulation
W, the FDIC would have to itself propose the same revisions, essentially
duplicating efforts, rather than just adopting whatever substantive
provisions the FRB adopts with respect to Regulation W.
First Republic
also agrees with the FDIC's assertion in the proposed rulemaking
that
the FDIC is the appropriate agency for state non-member
banks, such as First Republic, to seek an exemption from the provisions
of Section 23A and 23B, and to provide such exemptions, if the
FDIC determines that such exemption is in the public interest and
is consistent with the purposes of Section 23A. See Proposed 12
C.F.R. §324.5. In this connection, First Republic believes
that the FDIC, as the primary federal regulator of state non-member
banks, is more familiar than the FRB with the overall condition
and management of non-member banks, and that accordingly, the FDIC
may be more efficient in processing any request for an exemption
that a non-member bank might have. This advantage is especially
true for a non-member bank, such as First Republic, that is not
in a holding company structure. Because the FDIC would still need
to
interpret Sections 23A and 23B in the same manner and to the same
extent as they are applied to member banks, the FDIC appropriately
could continue to consult with the FRB on an appropriate exemption
request.
One area where
First Republic believes that implementation of the FDIC's proposal
could result in efficiencies and benefits to
non-member banks, such as First Republic, is in areas where the
FRB has not adopted any rule or interpretation with respect to
whether an entity is an "affiliate" for purposes of Section
23A or whether a particular transaction should be covered by the
affiliate transaction rules of Sections 23A and 23B, or exempted
from such provisions. For example, in its proposed rulemaking promulgating
Regulation W, the FRB proposed treating special purpose securitization
vehicles ("SPVs") as affiliates of their associated banks.
Commentators uniformly opposed this proposal, arguing that existing
accounting rules and capital rules already deal comprehensively
with SPVs in connection with securitizations and that treating
such entities as affiliates would interfere with the socially beneficial
securitization process. As a result of the comments received, and
the complexities of the issue, the FRB deferred any rulemaking
with respect to the relationship between member banks and SPVs.
67 Fed. Reg. 76560, 76604 (2002). However, the FRB also noted that
any company that is sponsored and advised on a contractual basis
by an affiliate of a member bank would be considered an affiliate
of that bank under Section 23A. Id.
First Republic
sponsors the issuance of certain Collateralized Bond Obligations
("CBOs") are variable interest entities
("VIEs," also known as SPVs) created as bankruptcy remote
entities. Pursuant to compliance with FIN 46R these entities are
not consolidated on the books of First Republic. The VIEs purchase
debt securities, including asset backed securities, Real Estate
Investment Trust debt securities, corporate debt securities, and
certain synthetic securities from third parties, including from
First Republic, and repackage them into multi-tranche liability
and equity structures, all but the preference shares of which may
or may not be rated securities. Among its activities, Trainer Wortham
has acted as Collateral Manager for these transactions, selecting
and/or managing the portfolios collateralizing these CBOs through
a collateral management agreement. FRSC has participated in placing
the CBOs as a placement agent to various clients.
Notes from
one of the tranches of these CBO securities may be appropriate
for purchase
by First Republic (including the nonrated
preference shares), but because of the uncertainty surrounding
the FRB's views on whether SPVs should be considered "affiliates," First
Republic would not want to proceed with any such purchase unless
it received some assurances that such a transaction would not be
an affiliate transaction. While First Republic would be willing
to go to the FRB, First Republic believes that being able to obtain
such an interpretation, or if necessary, an exemption, from the
FDIC rather than the FRB, would be more expeditious, since the
FDIC already is familiar with First Republic and its operations,
including these types of transactions.
Thank you for this opportunity to provide these comments to the
FDIC staff on this rulemaking. Wewould be pleased to discuss these
comments in more detail at your convenience.
Sincerely,
Edward J. Dobranski
____________________
1 In this connection,
we note that the Office of Thrift Supervision has adopted the
substantive provisions of Regulation W into its
affiliate transaction regulations applicable to savings institutions.
See 12 C.F.R. §§ 563.41 and 563.42, not just the additional
affiliate transaction provisions applicable to saving institutions
in a holding company structure under Section 11 of the Home Owners'
Loan Act.
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