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| ## Comptroller of the Currency                                        |
|                                                                       |
| > Administrator of National Banks                                     |
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Washington, DC 20219

#### May 10, 2004 Interpretive Letter #992

**June 2004**

**12 USC 24(7)**

Re: Disposal of Stock Warrants Acquired Pursuant to 12 C.F.R. § 7.1006

Dear **\[ \]**:

This letter is in response to your request on behalf of **\[ *Bank*
\]**, **\[ *City* \]**, **\[ *State* \]** ("Bank"), for confirmation
that a national bank that has taken a borrower's stock warrants in
addition to or in lieu of interest on a loan to the borrower may dispose
of the warrants in the manner described below. Based on the particular
circumstances presented, the representations made in your letter, and
for the reasons discussed below, we believe that the Bank may dispose of
the warrants as described below.

#### Background

The Bank made a commercial loan to a borrower and received from the
borrower warrants to acquire shares of the borrower's common stock. The
Bank received the warrants pursuant to its authority in 12 C.F.R. §
7.1006 to take such warrants in addition to or in lieu of interest on
the loan to the borrower. The Bank now wishes to dispose of the
warrants. However, in evaluating its ability to sell the warrants, the
Bank has determined that no readily-identifiable market exists for the
warrants.[^1] With no market in which to sell the warrants, the Bank
would be unable both to accurately determine a fair market price for the
warrants and to sell the warrants for such price.

The Bank now proposes to exercise the warrants and convert them into
shares of the borrower's common stock, which the Bank immediately would
sell. The Bank would exercise the warrants only after entering into an
agreement to sell the resulting shares of the borrower's common stock.
To accomplish the sale of the warrants immediately after their exercise,
the

Bank would place a sell order of the borrower's common stock with a
registered broker-dealer on a particular date (the "Trade Date"), but
would not deliver the shares of common stock until the third business
day following the Trade Date ("Settlement Date").[^2] The Bank would
exercise the warrants and convert them into shares of common stock
effective on the Settlement Date and immediately deliver the shares it
receives to the selling broker for settlement of the trade made on the
Trade Date. [^3] The Bank would hold the shares only for the instant in
which it takes the borrower's transfer agent to transfer the shares of
common stock from the name of the Bank to the name of the selling
broker. For that instant, the Bank would own less that one percent of
the borrower's common stock.

By holding the shares only for the instant required for the borrower's
transfer agent to transfer the shares of common stock from the name of
the Bank to the name of the selling broker, and because it would be
holding the shares solely for the purpose of effecting that transfer,
the Bank would, as a practical matter, never have the ability to vote
the shares of common stock. Generally, the "record date" for voting
shares is as of the end of business on a particular date. Because the
Bank would not be the record owner of the shares at the end of any
business day, the Bank would at no time have the ability to vote the
shares.

**Discussion**

The OCC has long recognized the authority of national banks to share in
the profit, income, or earnings of a borrower as a full or partial
substitute for interest on a loan to the borrower.[^4] The ability to
share in a borrower's profit, income, or earnings permits the lending
bank a greater degree of flexibility in its lending activities, allowing
the bank to offer more competitive financing arrangements. Consistent
with this authority, the OCC has found that the means by which a lending
bank may share in the borrower's profit, income, or earnings can take
different forms. One permissible means of such sharing, long-recognized
in precedent[^5] and

codified in 12 C.F.R. § 7.1006,[^6] is a bank's acceptance of stock
warrants issued by the borrower, provided that the bank does not
exercise the warrants. The OCC has prohibited banks from exercising such
warrants -- and thereby converting them into shares of the borrower's
stock -- on the theory that doing so would be tantamount to a purchase
of stock for its own account.[^7]

Section 24(Seventh) includes language added by section 16 of the
Glass-Steagall Act ("Section 16"), that is sometimes referred to as a
prohibition on any stock ownership. Its purpose, however, was to prevent
national banks from engaging in speculative activity through stock
investment.[^8] The OCC repeatedly has found that national banks may
purchase shares of stock without violating Section 16 when the
acquisition is not for speculative or investment purposes and the stock
ownership is intended to facilitate a bank's participation in an
otherwise permissible activity, or to enable the bank to receive needed
services.[^9]

Here, at no time does the Bank have an investment motive. The Bank did
not use any of its assets to acquire the warrants; instead, the Bank
received the warrants in addition to, or in lieu of, interest on a loan.
The only Bank asset used in the initial lending transaction was the loan
principal, which the borrower remains obligated to repay. When the Bank
exercises the warrants and converts them to shares of the borrower's
stock, the Bank would not use any of its assets to acquire the stock.
The Bank represents that it would only exercise the warrants and acquire
the shares of the borrower's stock with an agreement in place to sell
the shares immediately. This series of transactions -- purchase and
immediate sale -- can hardly be viewed as investment-driven.[^10]
Moreover, in this instance, the authority to exercise the warrants and
purchase the shares of the borrower's stock would facilitate the Bank's
participation in permissible activities -- making a loan to a borrower
and sharing in the profit, income, or earnings of the borrower as a full
or partial substitute for interest on such a loan.

Therefore, for the reasons and subject to the conditions and
restrictions stated above, we find that the Bank, having acquired the
warrants in conformance with 12 C.F.R. § 7.1006, permissibly may
exercise the warrants and immediately sell the resulting shares of the
borrower's common stock under the circumstances and in the manner
described herein. If you have any questions, please contact Steven Key,
Senior Attorney, at (202) 874-5300.

Sincerely,

/s/ Julie L. Williams

Julie L. Williams

First Senior Deputy Comptroller

And Chief Counsel

[^1]: The common stock underlying the warrants is publicly traded on the
    NASDAQ Stock Market.

[^2]: The Bank represents that delivery of the securities three business
    days after placing the sale order is consistent with industry
    standards. *See* Rule 15c6-1 promulgated under the Securities
    Exchange Act of 1934.

[^3]: The Bank represents that it would avail itself of the tacking
    provisions of Rule 144(d) promulgated under the Securities Act of
    1933, as amended, in order to permit its immediate sale of the
    common stock it receives upon exercise of the warrants. *See* Rule
    144(a)(3)(ii) promulgated under the Securities Act of 1933, as
    amended; Precision Optics Corp. S.E.C. No-Action Letter, reprinted
    at \[1993 Transfer Binder\] Fed. Sec. L. Rep. (CCH) ¶ 76,627 (Jan.
    14, 1993), 1993 WL 12387.

[^4]: 12 C.F.R. § 7.1006 (2004); Interpretive Letter No. 517, *reprinted
    in* \[1990-1991 Transfer Binder\] Fed. Banking L. Rep. (CCH) ¶
    83,228 (Aug. 16, 1990); Letter from Thomas G. DeShazo, Deputy
    Comptroller of the Currency (Aug. 26, 1969) (unpublished) (profits).

[^5]: Interpretive Letter No. 517, *supra*; Letter from Patrick Parise,
    Regional Counsel (Oct. 16, 1970) (unpublished) (warrants); Letter
    from Robert Bloom, Chief Counsel (May 26, 1969) (unpublished)
    (warrants).

[^6]: Recognizing that the authority to accept warrants was
    well-established, the OCC added the authority to 12 C.F.R. § 7.1006
    in 1996. 61 F.R. 4849 (Feb. 9, 1996).

[^7]: Interpretive Letter No. 517, *supra*; Letter from Richard V.
    Fitzgerald, Assistant Director, LASD (Jan. 13, 1976) (unpublished).

[^8]: *See Investment Company Institute v. Camp*, 401 U.S. 616, 630
    (1976).

[^9]: For example, the OCC has permitted national banks to acquire and
    hold, for a moment in time, the stock of another depository
    institution to facilitate a permissible corporate restructuring.
    *E.g.,* Corporate Decision No. 97-13 (Feb. 24, 1997); Letter from
    Charles F. Byrd, Assistant Director, LASD (Oct. 1, 1987)
    (unpublished). The OCC has also permitted national banks to acquire
    and hold stock in organizations that facilitate access to secondary
    markets. *E.g.*, Interpretive Letter No. 427, *reprinted in*
    \[1988-1989 Transfer Binder\] Fed. Banking L. Rep. (CCH) ¶ 85,651
    (May 9, 1988) (stock in Federal Agricultural Mortgage Corporation).

[^10]: Indeed, the proposed transaction is analogous to riskless
    principal brokerage transactions. In such a transaction the bank,
    after receiving an order to buy (or sell) a security from a
    customer, purchases (or sells) the security for its own account to
    offset an immediate, contemporaneous sale to (or purchase from) the
    customer. The transaction is considered "riskless" because it is not
    entered into unless there is already an order from a customer that
    will generate an immediate, offsetting transaction. The OCC has
    found that these transactions are permissible under the express
    terms of Section 16 and present none of the hazards of speculation
    that the Glass-Steagall Act was intended to prevent. *See*
    Interpretive Letter No. 371, *reprinted in* \[1985-1987 Transfer
    Binder\] Fed. Banking L. Rep. (CCH) ¶ 85,541 (Jun. 13, 1986); *see
    also* Interpretive Letter No. 626, *reprinted in* \[1993-1994
    Transfer Binder\] Fed. Banking L. Rep. (CCH) ¶ 49,101 (Jul. 7,
    1993).