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FDIC Federal Register Citations

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.


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.


Last Updated 05/12/2004

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