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

**Interpretive Letter #1013**

January 7, 2005 **February 2005**

**12 USC 24(7)**

Subject: Gold Shares

Dear **\[ \]**:

This responds to your inquiry, on behalf of **\[ \]** ("Bank"), whether
the Bank may buy and sell, for its own account, exchange-traded units of
beneficial interest in gold ("Gold Shares") issued by the **\[ \]**
("***Co.***"). For the reasons discussed below, we conclude that this
activity is permissible for the Bank, provided that the Bank
demonstrates to the satisfaction of its examiner-in-charge ("EIC"),
prior to commencing the activity, that the Bank has the appropriate risk
management systems in place to conduct the activity in a safe and sound
manner.

#### I. Background

The **\[ *Co.* \]** provides an exchange-traded vehicle for investors to
buy and sell interests in a pool of gold, through the purchase and sale
of Gold Shares.[^1] The **\[ *Co.* \]** will be an investment trust
formed under **\[ *State* \]** law.[^2] **\[ \]** will be trustee
("Trustee") of the **\[ *Co.* \]**. The Bank's **\[ \]** branch will
serve as custodian of the assets of the **\[ *Co.* \]**, which will be
limited to gold bullion and cash. **\[ *Co.* \]** will issue Gold Shares
that will be registered under the Securities Act of 1933 ("Securities
Act"). The Gold Shares will represent undivided units of beneficial
interest in gold held by the **\[ *Co.* \]**. Gold Shares will be traded
on the New York Stock Exchange.[^3]

Certain registered broker-dealers and securities market participants
("Authorized Participants") may effect purchases and sales of Gold
Shares directly with the **\[ *Co.* \]** through the creation and
redemption of blocks of 100,000 Gold Shares, called "Baskets," upon
payment of a transaction fee to the Trustee.[^4] The **\[ *Co.* \]**
will not engage in sales or redemption transactions with investors
generally. After receiving an appropriate amount of gold bullion from an
Authorized Participant, the **\[ *Co.* \]** will create and issue a
corresponding number of Baskets to the Authorized Participant. An
Authorized Participant may redeem Baskets in exchange for a
corresponding amount of gold from the **\[ *Co.* \]**. Authorized
Participants will act both on a proprietary basis and as agent for other
investors. **\[ *Inc.* \]**, a broker-dealer affiliate of the Bank,
intends to be an Authorized Participant.[^5] The Bank will buy, hold and
sell Gold shares only for its own account and will not be a broker,
market-maker or distributor of Gold Shares or become an Authorized
Participant.

Initially, the **\[ *Co.* \]** will exchange one Gold Share for each
tenth of an ounce of gold deposited by an Authorized Participant.
Because Gold Shares represent undivided interests in the underlying
gold, it is expected that Gold Shares will initially trade at a price
close to one tenth of the spot market price for an ounce of gold.[^6]
However, the **\[ *Co.* \]** will periodically sell bullion to pay its
expenses. When the **\[ *Co.* \]** sells gold, the Gold Shares may
experience dilution (*e.g.,* where the ratio of outstanding Gold Shares
to the underlying gold increases and the price of Gold Shares falls
accordingly). As the **\[ *Co.* \]** sells more gold over time to meet
expenses, the net asset value ("NAV") of Gold Shares may continue to
diverge from the spot market price of gold.[^7] Under these
circumstances, a Gold Share and an ounce of gold would no longer be
exchanged by the Trust on a ten to one basis, but would be adjusted to
reflect the amount of gold bullion and cash underlying each outstanding
Gold Share. Nevertheless, for many investors, the risk of dilution and
cost of investing in Gold Shares could be less than the cost of buying,
transporting, storing, insuring, and selling gold bullion.

The **\[ *Co.* \]** represents that trading in Gold Shares is similar to
trading gold. Holding Gold Shares will present virtually the same
rights, liabilities, and risks as owning the underlying gold bullion
directly. There is only one class of Gold Shares, with equal rights and
privileges. Each Gold Share is transferable, fully paid and
non-assessable, and entitles the holder to one vote on the limited
matters set forth in a trust indenture ("Trust Indenture").[^8] Gold
Shares do not provide conversion or pre-emptive rights and have limited
distribution rights.[^9] Gold Shares do not carry the rights normally
associated with the ownership of the stock of a corporation. Instead,
the rights of holders of Gold Shares are limited to withdrawing gold
bullion through redemption and liquidation of the **\[ *Co.* \]**. The
right to redeem the Gold Shares is limited, however, as the **\[ *Co.*
\]** will redeem Gold Shares only through Authorized Participants and
only in Baskets.

The Bank views the Gold Shares as an alternative source of liquidity for
its physical gold holdings. The Bank expects that the transaction costs
of buying and selling Gold Shares in the secondary market will be less
than the cost of maintaining a position in gold bullion.

The Bank intends to use the Gold Shares to hedge physical gold
positions. For example, where a customer buys or sells gold from or to
the Bank in the over-the-counter spot or forward market, the Bank could
hedge this position by buying or selling Gold Shares. More specifically,
the Bank could buy 10,000 ounces of gold at the current price from a
customer and short Gold Shares to hedge the long spot position. The Gold
Shares will provide another mechanism that the Bank may use to hedge its
gold exposures.

The Bank believes that trading Gold Shares will be straightforward to
monitor and control within the Bank's existing risk infrastructure. For
market risk purposes, the Bank will treat the Gold Shares as the bullion
equivalent and will consolidate its positions in Gold Shares and gold
bullion. The Bank will book and manage Gold Shares in its existing
metals trading system, which feeds into its market risk system. In this
way the Bank may calculate, consolidate, and monitor its gold exposures
with the rest of its precious metal positions. The Bank believes its
trading of Gold Shares will not present any material modeling or
analytical issues.

The Bank\'s ownership of gold is recorded in its trading book. The Bank
may hold gold in its vault in connection with its precious metals
business. When the Bank purchases gold through COMEX, the Bank's
ownership of the gold is reflected by a certificate of receipt verifying
that the gold is held in a COMEX authorized depository, in the Bank's
name and for its account. Because the Bank itself is an authorized COMEX
depository, the Bank typically converts the receipt by having the gold
moved to its vault and issuing a new receipt indicating that the Bank is
the depository.

##### Discussion

A.  Trading of Gold Shares is Authorized under Express Authority in the
    National Bank Act and as Part of or Incidental to the Business of
    Banking

It is permissible for a national bank to buy and sell, as agent for
customers and for its own account, gold, silver, platinum, palladium and
copper coins and bullion under the express authority in 12 U.S.C. §
24(Seventh) to buy and sell "exchange, coin, and bullion."[^10] The
Bank's trading of Gold Shares for its own account represents a natural
and logical extension of the Bank's ability to purchase and sell gold.
Gold Shares are substantially the operational and economic equivalents
of gold bullion that national banks have clear authority to buy and
sell.

Gold Shares will provide holders with substantially the same rights,
liabilities and risks as if they held physical or certificated gold and
a cost effective and liquid means of investing in gold. Holders of Gold
Shares are entitled to redeem their interests for gold bullion. The Bank
expects the prices of Gold Shares and gold bullion to be closely
correlated, although the prices may diverge over time, as the **\[ *Co.*
\]** sells gold to cover expenses. The cost of buying and selling Gold
Shares in the secondary market, however, is expected to be lower than
the cost of obtaining and maintaining positions in gold bullion. And,
even though the Gold Shares are registered securities under the
Securities Act, holding the Gold Shares is substantially the same as
holding gold certificates because both holdings represent interests in
gold. When there is reduced liquidity in the gold market, the Gold
Shares may provide a needed source of liquidity. While the liquidity
enjoyed by holders of Gold Shares comes at a price reflected in the NAV,
there are also costs and burdens associated with holding potentially
less liquid physical gold or certificated gold that are not reflected in
the price of gold, *e.g.,* purchase, transportation, storage, delivery
and insurance costs. Nonetheless, the costs associated with holding
physical or certificated gold are as much a part of bank permissible
purchases and sales of gold, as are the fees and expenses associated
holding Gold Shares.[^11] Accordingly, the Gold Shares provide the Bank
with a means of holding an interest in gold that may be more cost
effective and liquid than holding physical or certificated gold.

The Bank intends to use the Gold Shares to hedge physical gold
positions. Hedging risks arising from permissible banking activities is
part of the business of banking.[^12] Because the Gold Shares are the
substantive equivalent of holding gold, which banks may permissibly buy
and sell, their use as a hedge is equally permissible as part of the
business of banking. A national bank can protect itself against changes
in the value of a bank permissible transaction by taking an offsetting
(long or short, as appropriate) position in a related instrument.[^13]

B.  **National Banks May Purchase Interests in an Investment Trust
    Composed of Bank-Permissible Assets**

The Bank also may purchase and sell Gold Shares in reliance on the
authority of national banks to purchase and sell interests in entities
that hold bank-permissible assets.[^14] In general, the OCC has allowed
national banks to invest in registered investment companies and
unregistered entities that hold bank-permissible assets where the
investment represents an interest in the entity's underlying
assets.[^15] The particular entity that serves as the vehicle for
obtaining an interest in bank permissible assets may be, for example, a
partnership, investment company or trust.[^16] The nature of the
interest national banks may acquire in certain entities holding bank
permissible assets include equity interests.[^17] Where a national bank
holds interests in entities whose underlying portfolios consist of bank
permissible assets that are subject to investment limits, those limits
are imported to the interest the bank holds in the particular entity.
Thus, as a general matter, where a national bank uses its lending
authority to hold an interest in an entity that invests in loans, the
lending limits in 12 U.S.C. § 84 apply.[^18] Conversely, a national bank
investment in an entity that invests solely in bank permissible assets
that are not subject to investment limits may hold unlimited interests
in such entities, subject only to safety and soundness restrictions. The
assets held in the **\[ *Co.* \]** are bank permissible assets, thus
national banks may potentially hold unlimited equity interests in the
Trust.

##### Trading in Gold Shares is not Prohibited by Section 24(Seventh)

The Bank's trading in Gold Shares for its own account does not violate
Section 24(Seventh)'s restrictions on national bank purchases and sales
of certain securities for its own account. Section 24(Seventh) provides
that "\[e\]xcept . . . .as otherwise permitted by law, nothing herein
contained shall authorize the purchase by the association for its own
account of any shares of stock of any corporation." The authority for
the Bank to hold Gold Shares is found in the express authority in
Section 24(Seventh) for national banks to buy and sell "exchange, coin,
and bullion," *i.e*., gold bullion, and engage in activities incidental
thereto. Thus, the activity is "otherwise permitted by law." Because the
activity is "otherwise permitted by law," Section 24(Seventh) does not
prohibit the activity.[^19]

**III. Conclusion**

The Bank may buy and sell the Gold Shares for its own account under the
express authority granted to national banks to buy and sell "exchange,
coin, and bullion," and the Gold Shares, as interests in gold, may be
used to hedge purchases and sales of gold as part of or incidental to
the business of banking, provided that the Bank demonstrates to the
satisfaction of the EIC, prior to commencing the activity, that the Bank
has the appropriate risk management systems in place to conduct the
activity in a safe and sound manner.

Sincerely,

/s/ Daniel P. Stipano

Daniel P. Stipano

Acting Chief Counsel

[^1]: The **\[ *Co.* \]** is sponsored by **\[ *ABC* \]**, a subsidiary
    of the **\[ *XYZ* \]**, an association of gold mining companies. The
    **\[ *Co.* \]** is not a registered investment company under the
    Investment Company Act of 1940. **\[ \]**.

[^2]: "An investment trust is an unincorporated trust or association
    managed by trustees not holding any property for sale to customers
    in the ordinary course of its trade or business, the beneficial
    ownership of which is evidenced by transferable shares or by
    transferable certificates of beneficial interest offered for sale to
    the public." **\[ \]**.

[^3]: *See* Registration Statement.

[^4]: *Id.*

[^5]: **\[ *Inc.* \]** is a subsidiary of **\[ \]**, which is indirectly
    controlled by **\[ *Controller.* \]**.

[^6]: For example, on June 30, 2004, the spot market price of an ounce
    of gold was approximately \$393. It is therefore expected that Gold
    Shares will initially trade at approximately \$39.30. A single
    Basket would represent approximately \$3.93 million in gold bullion.

[^7]: Any differences between the price of a Gold Share and the spot
    market price of gold would present arbitrage opportunities.

[^8]: The Trust Indenture provides that holders of Gold Shares generally
    have no voting rights. However, a vote of the holders of 66 2/3% of
    the shares may remove the Trustee or terminate the Trust. In
    addition, a majority vote or unanimous consent of the shareholders
    is necessary to make certain amendments to the Trust Indenture.
    *See* Registration Statement.

[^9]: ^?^ Distributions can occur only in two circumstances. First,
    there may be a cash distribution to shareholders should the Trustee
    determine that the **\[ *Co.* \]**'s cash account balance exceeds
    the anticipated expenses of the **\[ *Co.* \]** for the next 12
    months and that excess amount exceeds \$0.01 per share. Second, upon
    the liquidation and termination of the **\[ *Co.* \]**, there will
    be a *pro rata* distribution to shareholders of amounts remaining
    after the satisfaction of the Trust's liabilities. **\[ \]**.

[^10]: OCC Interpretive Letter No. 693 (November 14, 1995); OCC
    Interpretive Letter No. 685 (August 5, 1995); OCC Interpretive
    Letter No. 553 (May 2, 1991).

[^11]: *See e.g.,* OCC Interpretive Letter No. 994 (June 14, 2004).

[^12]: OCC Interpretive Letter No. 892 (Sept. 13, 2000).

[^13]: *Id.; See* OCC Interpretive Letter No. 935 (May 14, 2002).

[^14]: *See e.g.,* 12 C.F.R. §1.3(h)(1) (national banks may purchase
    investment company shares if the investment company's portfolio
    consists exclusively of assets that a national bank can purchase
    directly); 12 C.F.R. §1.3(h)(2) (national banks may invest in an
    entity that is exempt from registration as an investment company if
    the portfolio of the company consists exclusively of assets that a
    national bank may purchase and sell for its own account): OCC
    Interpretive Letter No. 911 (June 4, 2001) (national banks may
    acquire beneficial interests in a privately offered investment fund
    that invests in loans, cash and cash equivalents, and an offshore
    fund that invests solely in loans, as securities under the reliable
    estimates standard of Part 1, subject to a 5 percent aggregate
    investment limits or as loan participations, subject to the
    requirements of Banking Circular No. 181 (Rev.) (August 2, 1984));
    OCC Interpretive Letter 687 (September 5, 1995) (national banks may
    become limited partners in a limited partnership that invests solely
    in fixed income securities in which national banks may invest
    directly subject to the restrictions in 12 U.S.C. § 24(Seventh) and
    12 C.F.R. Part 1; OCC Interpretive Letter No. 388 (June 16, 1987)
    (national banks may issue and sell certificates evidencing interests
    in a pool of its mortgage loans).

[^15]: *Id.*

[^16]: *Id.*

[^17]: *See e.g.,* OCC Interpretive Letter 912 (July 3, 2001) (a
    national bank may purchase for its own account shares in a mutual
    fund with a portfolio consisting of bank eligible investment
    securities).

[^18]: *See e.g.,* OCC Interpretive Letter No. 779 (Apr. 3, 1997).

[^19]: ^?^ *See, e.g.,* United States General Accounting Office, Equity
    Hedging ---Report to the Honorable James A. Leach, House of
    Representatives, GAO-01-945 (August 2001).