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

#### Interpretive Letter #982

September 29, 2003 **February 2004**

#### 12 USC 1972

Re: **\[ \]** ("Bank") (Consumer Case Number **\[ \]**)

Dear **\[ \]**:

Thank you for your inquiry to the Office of the Comptroller of the
Currency's ("OCC's") Customer Assistance Group ("CAG") concerning a
proposal by a national bank, that you were concerned may involve tying
under Section 106 of the Bank Holding Company Act, 12 U.S.C. § 1972. As
you may recall, the CAG representative forwarded your inquiry to the Law
Department for resolution. In the meantime, the OCC and the Board of
Governors of the Federal Reserve System ("FRB") have focused
considerable attention on tying matters. The OCC and FRB recently
conducted a joint review of tying practices at large banking
organizations. Various other regulatory reviews also are on-going.[^1]
We provide the following response based on the information you submitted
and our subsequent review of the matter involving the Bank and School.

You indicated you are an investment banker from **\[ *Inc.* \]**
("consumer") and that you were involved in a tax-exempt bond
underwriting for a private school in **\[ *state* \]** in the spring of
2002. The school requested proposals for underwriting services and
letter of credit facilities. The Bank submitted a proposal.
Specifically, the Bank's letter stated: "**\[ *Bank's* \]**'s proposal
to serve as underwriter requires that the \[School\] utilize a **\[ \]**
letter of credit to secure its bond issue." We understand that neither
the Bank nor its securities affiliate received any of the proposed
underwriting or letter of credit business. You inquired whether the
practice described in the Bank's letter was a violation of the federal
tying statute.

The federal tying statute, 12 U.S.C. § 1972, provides in part:

A bank shall not in any manner extend credit, lease or sell property of
any kind, or furnish any service, or fix or vary the consideration for
any of the foregoing, on the condition or requirement\--

\(A\) that the customer shall obtain some additional credit, property,
or service from such bank other than a loan, discount, deposit, or trust
service;

Section 1972 generally prohibits a bank from tying a product or service
to another product or service offered by the bank, with certain
exceptions. A bank engages in a tie by conditioning the availability of,
or offering a discount on, one product or service (the "tying product")
on the condition that a customer purchase another product or service
offered by the bank or an affiliate (the "tied product"). Some tying
arrangements are permissible under statutory and regulatory exceptions.
Congress enacted the anti-tying provisions to keep banks from using bank
credit and other services as a means to coerce customers and reduce
competition. The FRB may permit exceptions to the anti-tying
prohibitions and has interpretive authority over section 1972.[^2]

Section 1972 contains an explicit exception (the statutory "traditional
bank product exception") that permits a bank to tie any product or
service to a loan, discount, deposit, or trust service offered by that
bank. This exception applies only if the "tied product" is a traditional
bank product. The availability of the exception does not depend on the
type of "tying product" involved, however. Section 1972 is premised on
the notion that the "tying product," also called the "desired product,"
is the product the customer really seeks. For example, the FRB has
explained that a bank could condition the use of its messenger service
on a customer's maintaining a deposit account at the bank.[^3] However,
a bank could not condition maintaining a deposit account on a customer
using the bank's messenger service. For this reason, a tie is
permissible in one direction but not in the other direction. Thus, a
bank might be engaging in a prohibited tying practice if the bank would
not extend credit to a customer unless the customer also engaged the
bank for certain products not within the scope of a traditional bank
product, such as securities underwriting.[^4] This example illustrates a
tying arrangement outside the traditional bank product exception because
the "tied product" is not a traditional bank product.

The information here indicates the Bank offered a non-traditional
product, *i.e.*, the securities underwriting, conditioned on the use of
the traditional bank product, *i.e.*, the letter of credit. Under the
statutory exception, traditional bank products include "loans." National
banks have long-provided "letters of credit" as part of their expressly
authorized lending function under 12 U.S.C. § 24(Seventh).[^5] The
direct advance of funds to a borrower through a letter of credit is well
recognized in the industry as a traditional bank product.[^6]

Accordingly, for this particular situation, based on the Bank's letter,
the OCC's review, the language of the statute, and the FRB's precedent,
the arrangement described was not a prohibited tying arrangement because
it was within the statutory traditional bank product exception of
12 U.S.C. § 1972(1).

If you have any questions regarding this letter, please contact Suzette
H. Greco, Special Counsel, Securities and Corporate Practices Division
at (202) 874-5210.

Sincerely,

**-signed-**

Julie L. Williams

First Senior Deputy Comptroller and Chief Counsel

[^1]: For example, the National Association of Securities Dealers, Inc.
    is conducting an investigation focusing on broker-dealers affiliated
    with commercial banks and seeking to determine whether tying of
    investment banking services and commercial credit has occurred in
    possible violation of their rules. Additionally, the General
    Accounting Office expects to issue a report concerning tying
    practices by banks in October 2003.

[^2]: Recently, the FRB issued a proposed interpretation and supervisory
    guidance providing comprehensive discussion on many aspects of the
    federal tying restrictions applicable to banks, including examples
    of conduct, actions, and arrangements by banks that are prohibited
    and permissible under section 1972. *See* Board of Governors of the
    Federal Reserve System, *Anti-Tying Restrictions of Section 106 of
    the Bank Holding Company Act Amendments of 1970* (Aug. 25, 2003)
    ("Fed Tying Release"). The FRB's release requests public comments by
    Sept. 30, 2003.

[^3]: 62 Fed. Reg. 9290, 9314 (1997) (FRB amendments to its tying
    regulation).

[^4]: *See, e.g.,* Fed Tying Release, at 13. The FRB has indicated for
    purposes of section 1972 that a "nonbanking product" or
    "non-traditional" banking product is anything other than a "loan,
    discount, deposit, or trust service." *See, e.g.,* 12 U.S.C.
    § 1972(1)(A); Letter from William W. Wiles, Secretary of the Board,
    FRB (Sept. 19, 1997); 60 Fed. Reg. 20186, 20188 (1995).

[^5]: *See* *American Insurance Ass'n v. Clarke,* 656 F. Supp. 404
    (D.D.C. 1987), *aff'd*, 865 F.2d 278 (D.C. Cir. 1988); R. Trimble,
    *The Implied Power of National Banks to Issue Letters of Credit and
    Accept Bills*, 58 Yale L.J. 713 (1949).

[^6]: In its recent release, the FRB specifically recognizes letters of
    credit as a product within the scope of a defined traditional bank
    product. *See* Fed Tying Release, at 17.