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

May 3, 2005 **Interpretive Letter #1027**

**May 2005**

**12 USC 24(7)**

Subject: Acquisition of Preferred Securities

Dear **\[ \]**:

**\[ \]**, ("Bank") is seeking confirmation from the Office of the
Comptroller of the Currency ("OCC") that it is permissible for the Bank
to purchase and hold for its own account, the preferred securities of
two special purpose entities that principally hold interests in
Australian mortgage loans. Based on the information you have provided,
and for the reasons discussed below, we conclude that the Bank may
purchase and hold the preferred securities.

#### 

#### Background

The Bank represents that its purchases of the preferred securities will
facilitate the Bank's plans to raise its profile as a provider of
funding in the Australian mortgage market. The Australian mortgage
market is attractive to the Bank because of the large supply of
Australian residential mortgages.

###### Underlying Assets

The Bank seeks to purchase interests in a pool of Australian residential
mortgages ("Mortgage Assets") originally held by an unaffiliated
Australian financial institution ("Sponsor"). The Sponsor intends to
deposit the Mortgage Assets into a bankruptcy remote securitization
vehicle ("Trust"). The Trust will issue several classes of residential
mortgage backed securities (collectively, the "RMBS"). The RMBS will
consist of a senior note ("Senior Note") and a junior note ("Junior
Note") (collectively, the "Notes") and an excess income unit ("Income
Unit") issued by the Trust.[^1] The Notes will be senior secured notes
that are backed by the Mortgage Assets. The Income Unit will entitle the
holder to the excess income of the Trust, if any.

###### Special Purpose Entities

Two special purpose entities organized under Australian law ("**\[ *AB*
\]**" and "**\[ *CD* \]**," collectively "SPEs") will acquire all of the
assets of the Trust.[^2] Then, the SPEs will issue securities
representing interests in the Mortgage Assets, some of which the Bank
proposes to acquire.

**\[ *CD* \]**'s only asset will be the Senior Note. **\[ *CD* \]** will
issue mandatory converting preferred shares ("**\[ *CD* \]** Preferred")
and a small amount of common stock.[^3]

**\[ *AB* \]**'s assets will include: (i) all **\[ *CD* \]** Preferred
(other than a nominal amount directly held by the Bank), (ii) all common
stock issued by **\[ *CD* \]**, (iii) the Junior Note issued by the
Trust, and (iv) the Income Unit issued by the Trust. **\[ *AB* \]** will
also have a minimum of \$25 million in excess cash that it will invest
in high quality short-term debt instruments. **\[ *AB Co.* \]** will
issue a Class A1 Note, a Class B Converting Note, Class C, D1, D2 and E
Preferred Shares, and Class F Common Shares. **\[ *AB.* \]**'s Class D1
and D2 Preferred Shares will rank senior to the Class E and Class F
shares but subordinate to the Class A note, Class B Converting Note and
Class C Shares. The Class E and Class F shares provide combined first
loss protection up to \$40.6MM.

The Bank will purchase a nominal amount of **\[ *CD* \]** Preferred and
the Class D-1 and Class D-2 Preferred Shares[^4] issued by **\[ *AB*
\]** ("**\[ *AB* \]** Preferred") (the **\[ *CD* \]** Preferred and **\[
*AB* \]** Preferred will be collectively be referred to herein as the
"Preferred").

Holders of the **\[ *CD* \]** Preferred vote together as a single class
for the election of all directors of **\[ *CD* \]**. Because the Bank\'s
direct ownership of the **\[ *CD* \]** Preferred represents
approximately .0013% of the total voting rights of **\[ *CD* \]** and
shareholder votes are decided on a majority basis, the Bank will not be
able to elect a director or exert any control over **\[ *CD* \]**. **\[
*AB* \]** will have control over **\[ *CD* \]** through its majority
voting rights in the **\[ *CD* \]** Preferred.

The **\[ *AB* \]** Preferred will be freely transferable and have a
fixed term for mandatory redemption[^5] subject to certain rights for
early termination and redemption. The **\[ *AB* \]** Preferred provides
for fixed, cumulative dividends.

Holders of the **\[ *AB* \]** Preferred will have 22% of the voting
rights of **\[ *AB* \]**.[^6] **\[ *AB* \]** Preferred shareholders will
be entitled to appoint one director to **\[ *AB* \]**'s board. **\[*AB*
\]** will have a total of five directors. The remaining four directors
will be appointed by the holders of other classes of **\[ *AB* \]**
preferred stock (all unaffiliated with the Bank) and will be subject to
a shareholder agreement that states that the remaining directors shall
vote together on all matters. Because the organizational documents will
require a majority vote on all matters, the **\[ *AB* \]** Preferred
director in effect has no control or operational power over **\[ *AB*
\]**. The **\[ *AB* \]** Preferred director will have contingent
super-voting rights if certain triggering events potentially lead to
early termination and redemption.

######## Ratings

The Preferred will not be rated; however, the Bank believes that each
will be the credit equivalent of a security rated investment grade based
on the ratings and credit equivalence of the SPEs' underlying assets.

> *Exit Rights*

In the event that the Bank decides to redeem the Preferred prior to the
scheduled maturity date, the Bank may do so in one of two ways. The Bank
may sell the Preferred to a third party or, under certain circumstances,
cause **\[ *AB* \]** and **\[ *CD* \]** to liquidate their underlying
assets, dissolve **\[ *AB* \]** and **\[ *CD* \]**, and distribute the
proceeds to the Bank and the other investors.[^7]

**Discussion**

The Bank may purchase the Preferred as participation interests in pooled
loans under its general lending authority. A national bank's "general
lending authority" is derived from 12 U.S.C. § 24(Seventh)'s express
authorization to national banks to conduct the business of banking by
"discounting and negotiating promissory notes, drafts, bills of
exchange, and other evidences of debt" and "loaning money on personal
security." The OCC has previously concluded that national banks may
purchase participation interests in pooled loans under their general
lending authority.[^8] For example, the OCC has approved a national
bank's purchase of participation certificates representing interests in
pools of FHA-insured Title I property improvement loans as a use of it
its general lending authority.[^9] The fact that here the Bank's
interest in the Mortgage Assets is evidenced by the Preferred does not
change the fact that the Bank will indirectly be holding interests in
the underlying loans.

The Bank must adhere to the prudential requirements in Banking Circular
181 (Rev.) and OCC Bulletin 2002-19[^10] when acquiring the Preferred.
The Bank must satisfy itself, based on an independent credit analysis,
that the Preferred is an appropriate investment for the Bank. The nature
and extent of the Bank's independent credit assessment is a function of
the type of transactions at issue and the Bank's lending policies and
procedures. The Bank's acceptance of a favorable analysis of the
Preferred by the SPE issuers, a credit rating institution, or another
entity does not satisfy the need to conduct an independent credit
analysis. The Bank may, however, consider an analysis by other sources
as a factor when independently assessing the Preferred. The Bank must
maintain its analysis on an ongoing basis and must have continued access
to appropriate credit and portfolio performance data as long as it holds
the Preferred.[^11] The analysis conducted at the time of acquisition
should be maintained as part of a national bank's fully documented loan
files.[^12]

The Bank's acquisition of the Preferred is subject to the lending limit
restrictions of 12 U.S.C. § 84. Thus, the Bank may not purchase the
Preferred from **\[ *CD* \]** or **\[ *AB* \]** in an amount that, when
combined with all other loans to, or acquisitions made on the basis of
the Bank's lending authority from, either of these issuers exceeds 15%
of the bank's capital and surplus.[^13] In this case, the Preferred
acquisitions represent approximately 1% of the Bank's capital and
surplus. This amount is within the prudential limits of 12 U.S.C. § 84,
provided the Bank has no other loans outstanding to, or acquisitions
made on the basis of the Bank's lending authority from, **\[ *CD* \]**
or **\[ *AB* \]**.

The Preferred described herein, arise from a structured finance
transaction that is very complex and as such, are only appropriate in a
well-diversified portfolio at institutions that have sophisticated risk
management processes to conduct the necessary due diligence and ongoing
monitoring of risk exposures. While the Bank may acquire the Preferred
under its general lending authority, it may do so only if the activity
can be conducted in a safe and sound manner. Accordingly, the Bank's
risk management process must reflect that the proposed activities are
conducted safely and soundly. An effective risk management process
includes appropriate oversight and supervision, managerial and staff
expertise, comprehensive policies and operating procedures, risk
identification and measurement, management information systems and an
effective and independent risk control function that oversees and
ensures the appropriateness of the risk management process.[^14]

####### **Conclusion**

The Bank has the authority to acquire the Preferred under its general
lending authority if the acquisition is consistent with BC-181 and OCC
2002-19, within the applicable limits of 12 U.S.C. § 84, and safe and
sound. This authorization is limited to the Bank and the particular
investment addressed herein.

If you have any questions, please contact Tena M. Alexander, Special
Counsel, Securities and Corporate Practices Division, at (202) 874-5210.

Sincerely,

**signed**

Daniel P. Stipano

Acting Chief Counsel

[^1]: The Income Unit pays the excess margin between the income
    generated by the Mortgage Assets and the expense associated with the
    Notes issued by the Trust.

[^2]: **\[ *CD* \]** and **\[ *AB* \]** are exempt from registration
    under the Investment Company Act of 1940 ('40 Act). Section 3(c)(1)
    of the '40 Act exempts an entity from registration if it will have
    fewer than 100 investors. **\[ *CD* \]** and **\[ *AB* \]** both
    will have fewer than 100 investors and are therefore exempt under
    this provision. In addition, **\[*AB*\]** and **\[ *CD* \]** may
    offer their securities through nonpublic offerings to sophisticated
    investors pursuant to another exemption from registration under the
    '40 Act. Section 3(c)(7) of the '40 Act.

[^3]: The **\[ *CD* \]** Preferred will convert to equity at the
    expiration of ten years. Simultaneous with the conversion, the Bank
    will exercise its right to sell the securities to **\[ *AB* \]**
    under the terms of a put option.

[^4]: The economic rights of the Class D-1 and D-2 Preferred shares are
    identical; however, the voting rights of the overall Class D
    Preferred will be allocated between them disproportionately. Thus,
    the Bank can elect to sell one class of these shares to third
    parties, while retaining the other.

[^5]: The fixed term is anticipated to be 10 years.

[^6]: Class D-1 shares will hold 5% of the voting rights, while Class
    D-2 shares will hold 17% of the voting rights.

[^7]: To pursue any or all of these strategies, the Bank will take
    advantage of super-voting rights, provided by the **\[ *AB* \]**
    Preferred.

[^8]: *See, e.g.,* OCC Interpretive Letter No. 579 (March 24, 1992); OCC
    Interpretive Letter No. 25 (February 14, 1978); OCC Interpretive
    Letter No. 41 (May 18, 1978).

[^9]: OCC Interpretive Letter No. 579, *supra.*

[^10]: Banking Circular 181, Rev. (August 2, 1984) ("BC-181"), OCC
    Bulletin 2002-19, (May 22, 2002) ("OCC

    2002-19").

[^11]: *See e.g.,* OCC Interpretive Letter No. 941 (June 11, 2002); OCC
    Interpretive Letter No. 908 (April 23, 2001); OCC Interpretive
    Letter No. 600 (July 31, 1992).

[^12]: *See, e.g.,* OCC Interpretive Letter No. 941, *supra*; OCC
    Interpretive Letter No. 930 (March 11, 2002); OCC Interpretive
    Letter No. 908, *supra.*

[^13]: OCC Interpretive Letter No. 579, *supra.*

[^14]: *See e.g.,* OCC Bulletin 2004-20, *Risk Management of New,
    Expanded, or Modified Bank Products and Services* (May 10, 2004);
    *Interagency Statement on Sound Practices Concerning Complex
    Structured Finance Activities*,

    69 Fed. Reg. 28980 (May 19, 2004) (proposed guidance).