Report to the Honorable

James A. Leach

House of Representatives

United States General Accounting Office

GAO

August 2001 EQUITY HEDGING

OCC Needs to

Establish Policy on

Publishing

Interpretive Decisions

GAO-01-945
Page i GAO-01-945 Equity Hedging

Letter 1

Results in Brief 2

Background 3

OCC’s Process in Making Its Equity Hedging Decision Is

Controversial 5

We Concur With OCC’s Legal Decision 15

Conclusions 20

Recommendations for Executive Action

Agency Comments 22

Scope and Methodology 22

Appendix I Equity Derivative Hedging 25

Appendix II Legal Analysis of OCC Equity Hedging Decision 28

Appendix III Comments From the Comptroller of the Currency 47

Tables

Table 1: Relevant Provisions of Section 24(Seventh) 16

Abbreviations

EIC examiner-in-charge

FDIC Federal Deposit Insurance Corporation

GLBA Gramm-Leach-Bliley Act

OCC Office of the Comptroller of the Currency

VALIC Variable Annuity Life Insurance Company

Contents
Page 1 GAO-01-945 Equity Hedging

August 16, 2001

The Honorable James A. Leach

House of Representatives

Dear Mr. Leach:

This report responds to your request that we review the Office of the

Comptroller of the Currency’s (OCC) legal decision and the process OCC

used to allow national banks1

 to acquire equities to hedge the risks arising

from customer-driven equity derivative transactions.2

 Over the last 10

years, a small number of large national and state banks have become

equity derivative dealers. Prior to OCC’s decision to allow national banks

to hedge their equity derivative transactions within the bank, national

banks had been hedging these transactions through nonbank affiliates of

holding companies. Rather than hedge in this manner, four national banks

sought OCC’s opinion on whether it was permissible to hedge their equity

derivative transactions by holding equities in the bank. Section

24(Seventh) of the National Bank Act, 12 U.S.C. § 24(Seventh), contains

equity-related limitations and restrictions that generally prohibit a national

bank from purchasing equities for its own account. These same limitations

and restrictions also apply to state banks.3

 OCC considered the

permissibility of banks owning equities under the National Bank Act and

approved four national banks’ requests, concluding that the equity

limitations in section 24(Seventh) of the National Bank Act do not prohibit

the purchase of equities for the purpose of hedging customer-driven equity

derivative transactions.

Because of your view on the equity ownership prohibitions contained in

section 24(Seventh), you questioned OCC’s decision, stating that allowing

banks to own equity in commercial companies is something that is not

 1

National banks are banks that are federally chartered and regulated by OCC.

2

Equities are stocks (ownership interest possessed by shareholders of a corporation). In a

letter to you (OCC interpretive Letter No. 892 at 1 (Sept. 8, 2000)), the Comptroller of the

Currency described “customer driven” transactions as “originated by customers for their

valid and independent business purposes.” The Comptroller also stated that the term

“equity derivative transactions” means “transactions in which a portion of the return

(including interest, principal or payment streams) is linked to the price of a particular

equity security or to an index of such securities.”

3

See footnotes 19 and 20.

United States General Accounting Office

Washington, DC 20548
Page 2 GAO-01-945 Equity Hedging

sanctioned by law. You also questioned the way in which OCC made its

decision, noting that OCC appeared to have granted its approval to the

national banks in “virtual secrecy,” or without notice or opportunity for

public comment.

Our objectives in this review were to (1) provide you with information on

the process OCC used to make its decision to allow banks to acquire

equities and discuss whether the decision was consistent with the way in

which OCC generally makes and communicates its decisions and (2)

provide a legal opinion as to whether national banks are authorized to

purchase equity securities to hedge their equity derivative transactions

under existing law.

OCC has discretion to determine how it will convey its decisions, but the

criteria it uses to determine when and whether to publish its decisions are

unclear. For the equity hedging decision, OCC first determined that banks

holding equities to hedge equity derivative transactions was a permissible

activity under the National Bank Act. OCC then decided that the

requesting banks would not be allowed to engage in the activity of equity

hedging without first obtaining supervisory staff approval of their

activities and risk management systems, enabling OCC to ensure that each

bank had the necessary risk management systems in place to monitor risks

and prevent speculation. OCC did not publish its interpretation until after

it received a congressional inquiry in September 2000 questioning its

decision. In making certain other decisions interpreting the National Bank

Act, OCC has published written interpretive letters. By approving the

equity hedge decision the way it did, OCC has been criticized for using

supervisory approval as a way to avoid public scrutiny of its decision and

has left itself open to questions not only about the process used in this

case, but also about the criteria OCC uses to decide when to publish its

interpretive decisions. Helping the Congress and other banking regulators

affected by OCC’s decisions understand the criteria OCC uses to

determine when and whether to publish interpretive decisions could help

mitigate concerns that arise when OCC interprets federal banking laws

that not only affect other banking regulators but are also considered

controversial.

We agree with OCC’s conclusion that the four national banks have

authority under the National Bank Act to own equities to hedge their

equity derivative transactions. To support this conclusion, OCC first

determined that certain equity derivative transactions and managing the

risks of those transactions are a permissible banking activity authorized by

Results in Brief
Page 3 GAO-01-945 Equity Hedging

section 24(Seventh) of the National Bank Act. OCC next found that

owning equities to conduct these hedging activities is not prohibited by the

stock-related limitations contained in the section. We concur with OCC’s

conclusion that those limitations do not prohibit the four banks from

maintaining the stock hedges as an incidental activity.

We recommend that the Comptroller of the Currency establish a policy

that articulates the criteria OCC uses in deciding when and whether to

publish its interpretive decisions. We also recommend that the

Comptroller of the Currency publish legal interpretations that pertain to

section 24(Seventh) of the National Bank Act in order to keep other

federal bank regulators and financial institutions informed of its

interpretation.

We provided a draft of this report to the Comptroller of the Currency.

OCC agreed with our recommendations.

The rapid rise in equity prices over the last 10 years has been accompanied

by new strategies for hedging equity positions. In the mid-1990s, some

national banks began engaging in customer-driven equity derivative

transactions. Since then, equity derivatives have become an increasing

part of banks’ businesses, as bank customers, both institutions and private

clients, increasingly use equity derivative products to hedge their equity

positions. Equity derivative products include instruments such as equity

options, equity collars, equity and equity-indexed swaps, and other

products.4

 Although the notional amount of equity derivatives is still small

compared with the volumes of other types of derivatives that bank

customers use, it has tripled in the last 5 years. According to the Bank for

International Settlements, the volume of equity derivative notional

amounts has gone from $630 billion in 1995 to almost $1.9 trillion in 2000,

while the notional amount for all over-the-counter derivatives has

increased from $41 trillion in 1995 to over $95 trillion in 2000. According to

OCC officials, the trading revenue from equity derivatives has also

increased as a share of bank customer revenues. As the equity derivatives

 4

An equity option is the right to buy (call option) or sell (put option) a specified amount of

shares of an underlying instrument (equity) for an agreed upon amount. An equity collar is

an option that limits upside and downside risk by selling a call and buying a put. An equity

index swap is an arrangement in which two parties (called counterparties) enter into an

agreement to exchange periodic appreciation or depreciation on an equity index such as

the Standard and Poor’s 500 Index.

Background
Page 4 GAO-01-945 Equity Hedging

business has grown, banks have increasingly had to devote more attention

and resources to managing the risks related to equity derivatives. Banks

hedge in order to offset or manage the risks arising from engaging in

equity derivative transactions.

Until recently, national banks hedged their equity derivative transactions

through holding company affiliates. The equity derivative was booked at

the bank, and the equities used to hedge the equity derivative transactions

were booked in a holding company affiliate. The holding company

affiliates were usually nonbank entities that were not broker-dealers and

were set up for the express purpose of hedging the bank’s equity

derivative risks. The banks would instruct the affiliates on the structure,

nature, and timing of the relevant hedging transactions, and the affiliates

would enter into the hedging transactions only when directed. These

arrangements allowed the banks to hedge their equity derivative

exposures without ever directly owning or selling the stock, in accordance

with prevailing guidelines.

The hedging transactions that the affiliates engaged in included “mirror”

transactions and going long or short in a particular equity or basket of

equities. For example, if a bank sold an equity derivative to its customer, it

would purchase an identical equity derivative from its affiliate in order to

hedge any risk, “mirroring” the initial transaction. Some of the banks we

spoke with said that instead of entering into mirror transactions with their

affiliates, they would instruct their affiliates to buy or short (sell) equities

on a delta equivalent basis.5

 Banking officials told us that no matter what

type of hedge the bank booked through the affiliate, the risks arising from

engaging in customer-driven equity derivative transactions always

remained in the bank, even when the bank hedged its risks through the

affiliate. See appendix I for a more detailed example of an equity

derivative hedge.

 5

Delta is a hedge ratio that banks calculate to determine the amount of equity the bank

must buy or short, so that for any given change in the price of the equity, the equity hedge

position will change by the same amount as the change in the equity derivative position.

With delta 1 hedging, a one-to-one correlation exists between the amount of shares the

bank instructs the affiliate to purchase or short to hedge the bank’s exposure and the

amount of shares underlying the equity derivative. Delta hedging, as distinct from delta 1

hedging, usually involves equity options. The objective of delta hedging is to have the

change in the value of the client derivative transaction match the change in the value of the

equity hedge, but in different directions. Unlike delta 1 hedging, the amount of equity the

bank would instruct its affiliate to hold would vary over time as the price of the underlying

equity changed.
Page 5 GAO-01-945 Equity Hedging

Beginning in December 1999, certain national banks requested OCC’s

opinion on whether it would be permissible for them to hedge their

customer-driven equity derivative transactions within the bank,

eliminating the need to enter into hedging transactions with affiliates.

After months of consideration, on July 20, 2000, OCC began verbally

approving the banks’ requests, relying on its internal written interpretation

of section 24(Seventh). As a result of OCC’s decision, the banks have

begun to directly book equity hedges within the banks. In addition, some

state-chartered banks have also asked their primary federal banking

regulators about OCC’s decision and its implication for their activities.

Beginning in December 1999, three national banks requested OCC’s

opinion on whether the banks may hold equities to hedge their customerdriven equity derivative transactions.6

 The banks said that their inability to

hedge their equity derivative transactions directly in the bank had caused

them to incur additional expenses and potentially increased their risk.

OCC approved the banks’ requests, but initially did not make its decision

public. After deciding that equity hedging in the bank was a permissible

activity, the process OCC used to approve the banks’ request was one in

which OCC required each bank to obtain supervisory staff approval prior

to engaging in the activity of equity hedging within the bank. OCC has

acknowledged that its initial decision was made in a nonpublic manner.

But OCC has insisted that it was necessary to grant the approval on a

bank-by-bank basis rather than issuing a blanket approval, in order to

ensure that each bank had the necessary risk management systems in

place to monitor risks and prevent speculation. In making certain other

decisions about equities or hedges, OCC has published written legal

interpretations. Because OCC has the discretion to determine how it will

convey its decisions, no one process exists for doing so. Consequently,

OCC leaves itself open to being questioned when it does not publish a

written interpretation on issues that others may consider controversial.

Three banks initially requested OCC’s interpretation about whether it

would be permissible to hold equities in the bank in order to hedge their

equity derivative transactions. Prior to OCC’s decision, the banks hedged

their equity derivative exposures through contractual arrangements with

holding company affiliates, which were set up as separate legal entities for

 6

A fourth bank received OCC’s approval after OCC had made its decision.

OCC’s Process in

Making Its Equity

Hedging Decision Is

Controversial

Banks Request OCC’s

Approval to Equity Hedge

Within the Banks
Page 6 GAO-01-945 Equity Hedging

the sole purpose of hedging the bank’s equity derivative transactions. The

banks hedged in this manner largely because of the perceived legal

constraints preventing banks from direct ownership of equities. In making

their requests to OCC, the banks stated that purchasing, holding, or selling

equities was a more cost-effective and accurate way to hedge exposures

arising from equity derivative transactions. The banks also maintained that

they could more practically manage the risks associated with equity

derivative transactions by purchasing and booking equity hedges within

the bank.

The primary reasons the banks gave for requesting OCC’s approval were

that booking equity hedges within the bank was likely to reduce their costs

and their exposure to operations risks. The cost savings would result from

eliminating the need for corporate funding and the expense of maintaining

and managing a separate legal entity. The corporate funding expense

occurred because a bank’s affiliate obtained its funding from the bank’s

corporate parent at a rate higher than the bank’s own funding rate.7

 In

addition, the banks maintained the affiliate as a separate legal entity,

sometimes incurring the expense of maintaining separate staff and

supporting the processing, reconciliation, accounting, and reporting

requirements for internal transactions between the bank and its affiliate.8

The cost of both corporate funding and maintaining a separate legal entity

made it expensive for the banks to hedge their equity derivative

transactions through affiliates.

The banks also said that they could reduce operations risks by directly

hedging their equity derivative transactions within the bank. According to

banking officials, hedging through an affiliate created numerous trading,

operational, and funding inefficiencies. For example, a bank’s affiliate

might have to maintain a long equity position in one account and a short

position in another because of the limitations on the banks holding

 7

By funding the hedging activity through the bank holding company rather than the bank,

the banks were trying to avoid creating a covered transaction. Under the Federal Reserve

Act and Federal Reserve Board regulations, certain financial transactions between banks

and their affiliates, such as loans, are defined as “covered transactions” subject to

requirements intended to limit the bank’s exposure to an affiliate’s credit or investment

risk. 12 U.S.C. §§ 371c, 371c-1 (1994 & Supp. 2000); 12 C.F.R. Part 250 (2001). A bank could

have created a covered transaction if the bank directly extended credit to its affiliate to

fund the purchases and sales of equities used to hedge the bank’s equity derivative

transactions.

8

This expense, which included capital usage, was included in a fee the bank paid to its

corporate parent.
Page 7 GAO-01-945 Equity Hedging

equities. Long and short positions in different entities were not effectively

netted, or canceled out, in the risk reports a bank produced. Risk

management systems would not always recognize all positions taken by a

bank and its affiliate, increasing the chance of trading, risk management,

and operational inefficiencies. The banks said that the optimal way to

hedge would be to net the long and short position in the same entity,

increasing the bank’s operational efficiency. Banking officials also said

that in order to hedge through an affiliate, banks must make multiple

trades, resulting in more transactional inputs that can lead to errors and

the need for more reconciliation.

Banking officials said two developments spurred their requests: OCC’s

decision to allow national banks to hedge nonqualified employee deferred

compensation plans, and the passage of the Gramm-Leach-Bliley Act

(GLBA) of 1999.9

 In December 1999, OCC decided to allow national banks

to hold an interest in insurance company products and other products in

order to hedge, on a dollar-for-dollar basis, their deferred compensation

obligations to employees.10 Banking officials said that they thought the

same analysis would support a bank’s ability to hedge its equity derivative

transactions within the bank. In addition, with the passage of GLBA, the

Federal Reserve Board was instructed to address the question of whether

credit exposures arising from derivative transactions between an insured

depository institution and its affiliates should be covered by section 23A of

the Federal Reserve Act.11 The Federal Reserve was considering whether

transactions between the banks and their hedging affiliates constituted

loans or extensions of credit instead of funding for the purchases and

sales that banks termed the transactions.12 Banking officials said that if the

Federal Reserve Board did determine that credit exposure arising from

derivative transactions was covered by section 23A of the Federal Reserve

 9

Gramm-Leach-Bliley Act, Pub. L. No. 106-102, 113 Stat. 1338 (1999).

10OCC Interpretive Letter No. 878 (Dec. 22, 1999). Banks proposed to offer their employees

a variety of registered investment companies and private investment funds as benchmarks

under the employee compensation plan. The benchmark funds were to include funds that

invest exclusively in bank-eligible assets, as well as funds that invest in assets traditionally

impermissible for investment by national banks. To hedge their obligations under the

employee compensation plan, the banks were proposing to acquire the number of units of

each benchmark fund selected by the employee.

11Pub. L. No. 106-102 § 121(b)(3), 12 U.S.C. § 371c(f)(3) (Supp. 2000).

12Federal Reserve officials said that the banks were providing the holding company with

funds that ultimately allowed holding company affiliates to purchase or sell the equities

used to hedge the banks’ equity derivative transactions.
Page 8 GAO-01-945 Equity Hedging

Act, then the Federal Reserve could impose collateral requirements,

markedly increasing the cost of hedging their equity derivative

transactions through affiliates.13 Lawyers representing two of the banks

said that they could not get a definitive reply from Federal Reserve Board

officials on this question. As a result, the banks turned to OCC.

After the decision that equity hedging in the bank was a permissible

activity, the process OCC used to allow four national banks to hedge their

equity derivative transactions was one in which OCC required each bank

to obtain supervisory approval prior to engaging in the activity of equity

hedging within the bank. OCC officials said that the legal determination

allowing banks to hold equities to hedge equity derivative transactions

could not be made without OCC supervisory staff generally determining

that there was no safety and soundness risk in allowing banks to hedge

their equity derivative transactions within the bank. Once the legal

determination was made, OCC decided that in order for equity hedging

within a particular bank to be permissible, OCC supervisory staff would

have to first review and approve the types of equity derivative

transactions, processes governing proposed hedges, and internal risk

management systems of the requesting banks. OCC considered its

approval to be a supervisory matter relating to each institution rather than

one that is generally applicable to all national banks. As a result, OCC

decided not to publish its interpretation, even though OCC has previously

published interpretations on the National Bank Act, including decisions

relating to hedging and equities.

In December 1999, outside counsel for two national banks called OCC to

ask if OCC was receptive to allowing banks to hedge their equity

derivative transactions by holding equities within the bank. The Chief

Counsel’s Office agreed to explore the legal issue. In January 2000, OCC

requested that the outside counsel for one of the banks submit a written

letter to the Chief Counsel’s Office in order to facilitate OCC’s

consideration of a possible framework for banks themselves to engage in

equity derivative hedges. The outside counsel complied and sent requests

on behalf of these banks to OCC for its interpretation on whether the

National Bank Act provides the authority for banks to minimize the risks

associated with customer-related equity derivative transactions through

 13See 12 U.S.C. § 371c(c), (f) (1994 & Supp. 2000).

OCC Determines Equity

Hedging Is Permissible,

Subject to Supervisory

Approval

Supervisory Concerns

Dominated OCC’s

Decisionmaking Process
Page 9 GAO-01-945 Equity Hedging

hedging transactions, including hedging transactions involving long and

short positions in physical equity securities.

In considering whether banks should be allowed to hold equities for

hedging purposes, OCC decided that its supervisory office would need to

determine if this activity posed a safety and soundness risk. OCC officials

said that in making any decision, they always consult with the examinerin-charge (EIC) or the deputy comptroller for large bank supervision of the

institution requesting an opinion on possible issues that need to be taken

into consideration before an interpretation is issued. However, in this case

OCC said that the supervisory judgment was to be a major factor in

determining whether this activity would be permitted. OCC’s Chief

Counsel told us that the agency was looking not so much for examiner

approval as for assurances that OCC supervisory staff would have no

objections to OCC determining that holding equities within the bank to

hedge equity derivative transactions is a permissible activity. Thus, if OCC

supervisory staff had determined that equity hedging within a national

bank posed safety and soundness risks, OCC could not have permitted the

activity. OCC supervisory staff said they did not see a reason to oppose the

permissibility of equity hedging on a safety and soundness basis. Based on

the supervisory staff’s findings, OCC moved ahead with its deliberations.

After being informed that OCC would consider the legal aspects, the banks

sent in proposals for their equity hedging programs. Our review of OCC

documents and discussions with OCC officials showed that OCC

supervisory staff sought to understand the specific nature of the banks’

hedging proposals, the benefits of allowing banks to engage in this activity,

and OCC’s examiners’ ability to supervise the activity effectively. In May

2000, OCC formed a working group separate from field staff, which

immediately decided that the requesting banks should brief OCC on the

methods they would use to control the risks arising from the transactions.

In considering the equity hedging proposals, OCC evaluated the types of

products that would be involved, as well as the risk management systems

the banks would need to have in place to effectively equity hedge within

the banks.14 OCC supervisory staff said they focused on the models and

methodologies the banks would use to measure risk, such as the risk limits

 14The type of equity products the banks were engaging in included equity options, equity

forwards, equity swaps, and variable forwards.
Page 10 GAO-01-945 Equity Hedging

that would be imposed to manage the risks.15 OCC was particularly

concerned about whether the risks at the bank level, especially market

risk, would change because of this proposal. Other supervisory concerns

related to the types of controls that would need to be in place to prevent

speculation and the taking of anticipatory or residual positions in stocks.

In order to ensure that banks effectively monitored their equity derivative

transactions and hedges, OCC decided that while it would determine that

it was legal for banks to hold equities to hedge equity derivative

transactions, it would not be permissible for banks to engage in this

activity without obtaining EIC approval of their activities and risk

management systems. Furthermore, when the four banks submitted their

equity hedging proposals to OCC, the banks made certain representations

as to how they would conduct hedging within the bank. OCC determined

that the banks would be allowed to engage in equity hedges within the

bank only if the equity hedges were done the way the banks represented to

OCC in their requests. The banks represented that they would

• use equities solely for hedging and not speculative purposes and

• not take anticipatory or maintain residual positions in equities except as

necessary to the orderly establishment or unwinding of a hedging position.

OCC officials said that if in practice the bank’s equity hedging programs

did not meet those representations, the banks would not be engaging in a

permissible activity, and OCC could take enforcement actions against

them if necessary.

OCC Chief Counsel’s Office prepared an “Equity Hedge Memorandum” on

July 13, 2000, that was for internal use only and not for public distribution.

The memorandum, which laid out the rationale for OCC’s legal decision

allowing banks to hold equities in order to hedge equity derivative

transactions, was sent solely to the Deputy Comptrollers for Large Bank

Supervision.

 15Specific types of equity derivative transactions, such as options and collars, pose specific

risks. In order to manage price or market risk, banks first have to quantify them. Several

measures exist to quantify risk, including delta, gamma, and vega. As previously stated,

delta measures the sensitivity of an option’s value to small changes in the price of the

underlying asset. Gamma measures the amount delta would change in response to a change

in the price of the underlying asset (in this case equity). Vega measures the sensitivity of an

option’s price to changes in the volatility of the price of the underlying asset (equity). In

managing an options portfolio, managers try to limit the bank’s exposures to these risks.

OCC Did Not Initially Make Its

Approval Public
Page 11 GAO-01-945 Equity Hedging

At the time the Equity Hedge Memorandum was finalized, OCC had not

decided how to publicly communicate its decision. The Chief Counsel’s

Office and the Deputy Comptrollers for Large Bank Supervision met to

determine how to let all national banks know about the OCC decision

without making it public. After much deliberation, OCC decided that the

Securities and Corporate Practices Division attorneys would prepare a

communication strategy for the Deputy Comptrollers for Large Bank

Supervision to give to EICs. The EICs would not promote the proposal or

provide copies of the Equity Hedge Memorandum to banks. Instead, they

would encourage banks interested in equity hedging to contact OCC’s

Securities and Corporate Practices Division in order to determine whether

their proposals for equity hedging were permissible under OCC’s legal

determination. The EICs would also be responsible for determining

whether the banks had the appropriate risk management systems in place

prior to engaging in the activity of equity hedging in order to prevent

equity hedging in the bank from being used for speculation.

On July 25, 2000, a cover distribution memorandum was finalized and sent

from the Chief Counsel’s Office to the Deputy Comptrollers for Large Bank

Supervision and large bank EICs, District Deputy Comptrollers, and

Assistant Deputy Comptrollers for mid-sized banks stating that OCC

supervisory staff may discuss OCC’s position with national banks other

than the requesting banks. The memorandum stated that because the

Equity Hedge Memorandum was an internal document, it was not to be

distributed outside of OCC. The memorandum also stated that each bank

was to be directed to obtain its EIC’s approval prior to hedging equity

derivative transactions with equities and that EICs were to make sure that

banks had adequate procedures in place to ensure that the bank’s equity

holdings were not for speculative purposes.

The EICs of the three requesting banks had already notified their banks of

OCC’s approval prior to the distribution of the Equity Hedge Memorandum

to all the EICs of large banks.16 The EICs of the three requesting banks

spoke to their banks’ legal departments to say that OCC had determined

that hedging equity derivative transactions is a permissible activity, subject

to supervisory approval of the banks’ risk management systems. The

banks were told that the legal determination was effective immediately

and were encouraged to contact the Securities and Corporate Practices

Division to determine whether their equity derivative activity was, in fact,

 16The fourth bank also received EIC notification on July 26, 2000.
Page 12 GAO-01-945 Equity Hedging

permissible under OCC’s legal determination. Finally, the EICs informed

their banks that equities would be held for hedging purposes only and not

for speculation, as represented by the banks. The EICs said that an

additional meeting would need to be set up with the banks’ risk

management staff to discuss expectations regarding the safety and

soundness practices and policies that would have to be implemented. The

banks were to formalize their policies and procedures and risk

management systems so that the EICs could review them either during

targeted examinations, the current supervisory cycle, or as the bank

implemented policies and procedures.17

We interviewed the EICs of the four banks that OCC had given approval to

equity hedge within the bank to get a better understanding of the process

used to approve the banks’ policies and procedures. The EICs told us that

they asked the banks to put together individual risk management

programs that would monitor the risks arising from equity derivative

transactions, in-house equity hedges, and any speculation resulting from

hedging within the bank. In some cases, the EICs made recommendations

that banks implemented before undertaking equity hedges. The EICs said

that they also discussed with banking officials the types of reporting

requirements that would be put in place to mitigate speculation.

The way in which OCC approved this activity caused you and certain

regulatory officials to question OCC’s process for determining whether to

publish a decision and to ask whether OCC circumvented its “normal”

process in communicating this decision. Because OCC has discretion in

determining how it conveys its decisions to national banks, it does not

have one set process for doing so. Thus, it is unclear what criteria OCC

uses to determine when and whether to publish its decisions. OCC

officials said, however, that there are several ways to convey decisions to

national banks. For example, OCC can publish an interpretive letter when

a bank requests its interpretation of the law. By using this method, OCC is

letting all national banks know its interpretation of the law or the

permissibility of an activity. Also, examiners for large banks reside in the

 17According to OCC examination manuals, in large banks most examination-related work is

conducted during the 12-month supervisory cycle through various ongoing supervisory

activities or targeted examinations. Targeted examinations are often conducted as

integrated risk reviews by business or product line. Since a product may have implications

for several risk categories, the targeted reviews evaluate risk controls and processes for

each applicable risk category.

OCC Decision Not to

Initially Publish Its

Interpretation Is

Questioned
Page 13 GAO-01-945 Equity Hedging

banks and frequently talk informally with bank staff. In some cases, an

examiner will attempt to obtain the views of OCC’s legal staff about a

specific activity and will ask for an oral or written opinion. Additionally,

legal staff from the banks often communicate informally with OCC’s legal

staff and may seek informal counsel on various issues. Furthermore, OCC

can issue no-objection letters when national banks ask if the agency

objects to a particular activity; however, such letters are usually not legal

decisions. Finally, OCC said that it provides oral comments to banks

whenever necessary.

OCC officials said that the form of their response is dictated by the way

the question is posed. In other words, if a bank requests a written opinion,

OCC will respond with a written opinion. With the equity hedge decision,

OCC did not initially issue either an interpretive letter or an opinion letter.

OCC and national banking officials told us that the agency chose initially

to provide a verbal opinion on the permissibility of equity hedging to the

requesting banks because the banks requested an oral response.

We asked OCC officials whether OCC’s initial decision not to publish its

interpretation was based on concern about a reaction from members of

Congress or officials from other federal banking agencies. The Chief

Counsel told us that OCC did not publish its interpretation because it was

focused and narrow in terms of notifying the banks that had requested the

approval. OCC also did not want to encourage other national banks that it

believed should not be engaged in equity derivatives to pursue this activity

because of the decision. The Chief Counsel also said that the

circumstances in this decision were limited to a small number of national

banks that were likely to present to OCC the issue of wanting to hedge

their equity derivative transactions within the bank. Thus, OCC believed

that only a handful of institutions would be affected by its legal

determination.

In light of the nonpublic way in which OCC initially conveyed its equity

hedge decision, questions arose about OCC’s overall process for

determining whether to publish its decisions and the legal basis on which

a decision was made. OCC has previously published numerous decisions

regarding equities and hedging. For example, OCC has published decisions

allowing banks to invest in warrants,18 to maintain ownership of equity in

 18A warrant is a financial instrument that usually entitles the holder to buy a proportionate

amount of common stock at a specified price, usually higher than the market price at the

time of issuance, for a period of years or to perpetuity.
Page 14 GAO-01-945 Equity Hedging

insurance companies, and to own otherwise impermissible investments to

hedge employee compensation plans. Furthermore, OCC’s 1994 decision

authorizing national banks to engage in equity derivative transactions was

a published decision.

OCC’s Chief Counsel said that OCC tries to publish its decisions, such as

interpretive letters, on a regular basis and has an informal process

whereby a law department committee reviews decisions and decides

which to publish. However, the committee does not comment on and

publish every decision. The equity hedge decision was not submitted to

the committee initially because at the time OCC did not intend the

decision to apply to all national banks. OCC officials told us that from the

time they made their legal determination, they were considering how best

to publicly treat their decision. However, congressional concern about the

decision prompted them to issue Comptroller Hawke’s response to your

inquiry as an interpretive letter in September 2000.

Other federal banking regulators also have an interest in OCC publishing

its decisions, especially when OCC interprets the equity-related provisions

contained in section 24(Seventh). The Federal Reserve Act provides that

state member banks are subject to the same limitations and conditions

with respect to investment securities and stock as those contained in

section 24(Seventh).19 The Federal Deposit Insurance Act prohibits insured

state banks from engaging in any activity that is not permissible for a

national bank unless the Federal Deposit Insurance Corporation (FDIC)

determines that the activity would pose no significant risks to the deposit

insurance fund and the bank complies with applicable federal capital

standards.20 Federal Reserve officials told us that the Federal Reserve

independently determines whether a particular equity-related activity is

permissible under section 24(Seventh). FDIC told us that in deciding on

the permissibility of a bank’s securities activity, the agency typically relies

on OCC’s determination. By failing to inform other federal banking

regulators of their analysis, OCC potentially affects how those regulators

interpret the National Bank Act on behalf of the institutions they oversee.

 1912 U.S.C.§ 335 (1994).

2012 U.S.C. § 1831a(a)(1) (Supp. 2000).
Page 15 GAO-01-945 Equity Hedging

We agree with OCC’s conclusion that the purchase of equity securities by a

national bank for the purpose of hedging its customer-driven equity

derivative transactions is a permissible incidental banking activity. To

support its conclusion, OCC first determined that customer-driven equity

derivative transactions and managing the risks of those transactions are

permissible banking activities authorized by section 24(Seventh) of the

National Bank Act. OCC next found that owning equities to conduct the

hedging activity is not prohibited by the stock-related limitations

contained in the section. We believe that OCC’s analysis is based on a

reasonable construction of section 24(Seventh).

National bank powers, as well as limitations on those powers, are

contained in the National Bank Act. Specifically, the first sentence of

Section 24(Seventh) (referred to as the “powers clause”) provides that a

national bank may engage in the business of banking, which includes but

is not limited to the five types of activity enumerated in the sentence, and

any activity incidental to the business of banking.21 The stock- and

securities-related restrictions, which immediately follow the powers

clause are in table 1.

 21NationsBank of North Carolina v. Variable Annuity Life Insurance Co., 513 U.S. 251

(1995) (VALIC). The first sentence of section 24(Seventh) lists the following five activities

as within the business of banking “discounting and negotiating promissory notes, drafts,

bills of exchange, and other evidences of debt . . . receiving deposits . . . buying and selling

exchange, coin, and bullion . . . loaning money on personal security and . . . obtaining,

issuing and circulating notes according to the provisions of title 62 of the Revised Statutes.”

In VALIC, the Supreme Court held that the business of banking is not limited to the five

types of activity enumerated in the first sentence, and said that OCC has discretion “within

reasonable bounds” to determine whether an activity constitutes the business of banking.

We Concur With

OCC’s Legal Decision

The Bank Powers

Provision Defines and

Limits Banking Activities
Page 16 GAO-01-945 Equity Hedging

Table 1: Relevant Provisions of Section 24(Seventh)

Components of section 24(Seventh) Provision

Powers clause (First sentence) To exercise by its board of directors or duly authorized officers or agents,

subject to law, all such incidental powers as shall be necessary to carry on

the business of banking; by discounting and negotiating promissory notes,

drafts, bills of exchange, and other evidences of debt; by receiving

deposits; by buying and selling exchange, coin, and bullion; by loaning

money on personal security; and by obtaining, issuing, and circulating

notes according to the provisions of title 62 of the Revised Statutes.

Dealing and Underwriting Prohibition (Second sentence) The business of dealing in securities and stock by the association shall be

limited to purchasing and selling such securities and stock without

recourse, solely upon the order, and for the account of, customers, and in

no case for its own account and the association shall not underwrite any

issue of securities or stock.

Stock Ownership Limitation (Fifth sentence) Except as hereinafter provided or 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.

Source: 12 U.S.C.§ 24(Seventh).

In approving the equity hedging activity, OCC maintained its long-standing

position, which dates back to the 1960s, that national banks may hold

stock in certain instances based on the incidental activities authority

contained in the powers clause.22 In a letter to you dated September 8, 2000

(Equity Hedge Letter), the Comptroller relied upon a provision in GLBA

referring to equity derivative transactions as transactions that are part of

the banking business.23 OCC also referred to an earlier interpretive letter,

which concluded that one type of equity derivative transaction–equity

derivative swaps—is a permissible banking activity under the powers

clause and stated that hedging risks is an integral part of such transactions

as well as other permissible banking activities.24 Relying again on the

powers clause, OCC next concluded that the banks’ purchase of equity

securities to hedge equity derivative transactions is permissible because

the activity is incidental to the business of banking. Specifically, OCC

determined that equity hedging benefits the banks by enabling them to

efficiently manage risks arising from permissible derivative activities and

thus are convenient and useful to those activities. In this regard, we note

that each approval was conditioned upon OCC examiners determination

 22Acquisition of Controlling Stock Interest in Subsidiary Operations Corporations, 31 Fed.

Reg. 11459 (1966).

23Equity Hedge Letter at 5-6.

24Equity Hedge Letter at 5-8.
Page 17 GAO-01-945 Equity Hedging

that a particular bank’s risk management system is adequate. Finally, OCC

concluded that the equity hedging activity does not violate the stock

ownership limitations contained in section 24(Seventh). (See app. II.) We

believe OCC had reasonable bases for reaching these conclusions.

In determining that the limitations on securities and stock ownership

contained in section 24(Seventh) do not prohibit hedging with equities,

OCC first concluded that this activity does not constitute dealing or

underwriting under the statute. Specifically, the statute limits a national

bank’s ability to engage in the “. . . business of dealing in securities and

stock . . . to purchasing and selling such securities and stock without

recourse, solely upon the order, and for the account of, customers, and in

no case for its own account.” Furthermore, the sentence prohibits a

national bank from underwriting any issue of securities or stock.

The National Bank Act does not define any of the key terms in the second

sentence. Accordingly, OCC has defined the term “the business of dealing”

as the purchase and sale of securities as part of a regular business. OCC

has defined a dealer as one that maintains an inventory of securities and

holds itself out to the public as willing to purchase, sell, and continuously

quote prices for these securities.25 In essence, OCC has interpreted this

“dealing in” limitation on banks as prohibiting only those securities

activities that constitute the business of dealing, not all purchases and

sales of securities by banks as principal if such holdings qualify as being

incidental to a permissible business function.

Although the banks, in connection with the hedging activity, will purchase

and sell equity securities on a regular basis, OCC concluded that securities

hedges do not constitute dealing in securities, which is prohibited by the

second sentence. According to OCC, the banks will not hold the securities

as inventory in order to engage in the business of regularly buying and

selling them in the secondary market. They will not act as market makers

in the securities by continuously quoting prices on both sides of the

market.26 They will purchase and sell the securities solely to hedge their

own risks and not for the speculative purpose of profiting from price

movements. As OCC further points out in the Equity Hedge Letter, unlike

the business of dealing, securities hedges are intended to manage and

 25Equity Hedge Letter at 10-11.

26Id.

Hedging With Equities

Does Not Violate the

Dealing or Underwriting

Prohibitions of the

National Bank Act
Page 18 GAO-01-945 Equity Hedging

reduce a bank’s own risks arising from bank-permissible activities. Based

on these reasons and subject to the outlined conditions, we concur with

OCC’s conclusion that the equity hedging in question does not constitute

dealing in securities as prohibited by section 24(Seventh).

OCC also has defined underwriting in the second sentence as

encompassing the purchase of securities from an issuer for distribution

and sale to investors through a public offering. In connection with the

equity hedging activity, the banks will not engage in underwriting

securities. We concur with OCC’s conclusion that the equity hedging

activity does not violate the underwriting prohibition because the banks,

in connection with the equity hedges, will not participate in a public

offering of securities to investors.27 Furthermore, we believe that OCC’s

interpretation of the second sentence and its determination that equity

hedging does not constitute dealing and underwriting in securities are

reasonable.

OCC interprets the fifth sentence of section 24(Seventh), which limits a

bank’s ability to purchase stock for its own account, as clarifying that the

immediately preceding provision permitting banks to own certain debt

securities does not authorize national banks to purchase stock. The fifth

sentence provides “[e]xcept as hereinafter provided or 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.” This sentence, rather than affirmatively proscribing stock

ownership, provides that “nothing herein contained” authorizes a national

bank to purchase stock for its own account, subject to two exceptions. In

our view, although the sentence has a generally prohibitive effect on a

national bank’s ability to own stock, it does not contain an absolute bar on

stock ownership. We concur with OCC’s view that the fifth sentence is not

a blanket prohibition on all equity holdings by national banks and that

national banks have the power to acquire and hold corporate stock in

those specific circumstances that qualify as incidental to the business of

banking.

A key point to OCC’s analysis of the fifth sentence is its interpretation of

the phrase “nothing herein contained.” If the phrase pertains to section

24(Seventh) in its entirety, it means that nothing in the section, including

 27Id.

Hedging With Equities Is

Not Prohibited by the

Stock Ownership

Limitation Contained in

the National Bank Act
Page 19 GAO-01-945 Equity Hedging

the powers granted to national banks by the powers clause, authorizes a

national bank to purchase stock for its own account unless the activity is

permitted in subsequent provisions of the section or “otherwise permitted

by law.” Because neither the subsequent provisions of the section nor any

statutory provision outside of section 24(Seventh) authorizes stock

ownership except in specific circumstances not pertinent here, under this

interpretation the sentence would bar banks from owning stock for

hedging purposes. On the other hand, if the phrase “nothing herein

contained” does not refer to the authority contained in the powers clause,

stock ownership is “otherwise permitted by law” to the extent authorized

in the first sentence and therefore is not prohibited by the fifth sentence.

OCC interprets the phrase “nothing herein contained” as referring only to a

specific provision in section 24(Seventh) that does not apply to stock

ownership. The Congress added the fifth sentence in a 1933 amendment to

section 24(Seventh) that also permitted national banks to purchase certain

types of debt securities, which the section describes as “investment

securities.” OCC has concluded that the Congress added the fifth sentence

to clarify that nothing contained in the investment securities ownership

authority permits national banks to purchase corporate stock.

Consequently, banks may purchase stock if the activity is “otherwise

permitted by law,” which law includes the powers clause. OCC thus

interprets the powers clause to permit stock ownership as an activity

incidental to the business of banking.

We believe that the fifth sentence was intended to do more than clarify the

investment securities ownership authority. We interpret the sentence as

generally prohibiting national banks from owning stock for their own

accounts. Therefore, we do not completely agree with OCC’s analysis of

the fifth sentence. However, we find that it is reasonable for OCC to

conclude that this sentence, like the second sentence, does not preclude a

national bank from owning securities if such ownership is authorized by

the powers clause as an activity incidental to the business of banking.28

The powers clause, which was enacted in 1864, initially was interpreted to

restrict the securities activities of national banks by, among other things,

prohibiting these banks from dealing and investing in stocks. Early

 28Failure to interpret these sentences this way would appear to result in a bank’s inability to

hold securities as collateral on a failed loan. All of the federal banking agencies have

recognized banks’ ability to hold securities for this purpose.
Page 20 GAO-01-945 Equity Hedging

Supreme Court decisions interpreted the clause to prohibit bank dealing

and investment in stocks and securities but held that a national bank’s

incidental power to engage in activities necessary for it to carry on the

business of banking includes stock ownership. In two cases, the Supreme

Court permitted stock ownership because it was incidental to one of the

enumerated banking powers. Thus, the Supreme Court held that a bank

was not prohibited from owning stock when the stock was acquired to

compromise a preexisting debt29 or when it was taken as personal security

incidental to the power to loan money.30

The second and fifth sentences were passed in 1933 as part of the GlassSteagall Act, which was enacted to prohibit commercial banks from

engaging directly in investment banking. Neither section 16 of GlassSteagall nor the act’s legislative history indicate that the Congress

intended to reverse or modify these decisions or the underlying principle

that a national bank’s incidental power includes owning stock when

necessary to carry on the business of banking. The exception in the fifth

sentence allowing for banks to own stock as “otherwise permitted by law”

can reasonably be interpreted as referring to the incidental powers

provision, as construed by the Supreme Court before passage of section

16, that permits national banks to own stock for incidental purposes.

Accordingly, OCC had a reasonable basis for concluding that hedging with

equities, which it determined to be incidental to the business of banking, is

not prohibited by the second or fifth sentences of section 24(Seventh).

Although we concluded that OCC had a reasonable basis for making its

equity hedging decision, the process it used to communicate the decision

to national banks, regulatory officials, and other interested parties raised

concerns, especially given the nature of the legal interpretation to be

communicated—banks owning equities. OCC’s stated goal was to

communicate its decision on the law as a supervisory matter rather than as

a generally applicable legal interpretation for all national banks. By

verbally conveying its approval to the requesting banks and requiring that

those banks and other interested national banks receive EIC approval

prior to booking equity hedges within the bank, OCC ensured that its

decision would not be generally applicable to all national banks.

 29First National Bank of Charlotte v. National Exchange Bank of Baltimore, 92 US 122,

128 (1875).

30California National Bank v. Kennedy, 167 U.S. 362, 366-67 (1897).

Conclusions
Page 21 GAO-01-945 Equity Hedging

OCC has continually emphasized that the reason it conveyed its approval

in this way was because safety and soundness concerns led it to conclude

that banks needed to obtain supervisory approval prior to engaging in

equity hedging within the bank. However, it is hard to understand how this

interpretation differs substantially from previous decisions OCC has made

in which supervisory approval was a precondition for banks to engage in

an activity deemed permissible. In addition, by communicating its decision

the way it did, OCC eventually drew external attention that focused on the

basis for the nonpublic nature of that communication. Because the basis

for determining whether to publish its interpretations was unclear, some

were left to assume that OCC does not publish an interpretive decision

when it does not want to draw attention to a decision. Much of the

concern about the basis for OCC’s decision could have been avoided if

OCC had had a well-defined policy that clearly articulated the criteria used

to decide when and whether to publish interpretive decisions and had

acted in accordance with those criteria.

OCC determines permissible bank equity-related activities under section

24(Seventh) of the National Bank Act, and its conclusions are relevant in

determining whether such activities are permissible for state-chartered

banks that are members of the Federal Reserve System or insured by

FDIC. Thus, in this situation when OCC interpreted section 24(Seventh) to

permit an equity-related activity for the first time, informing the other

federal bank regulators and the banks they regulate of the decision would

have contributed to regulatory transparency and efficiency in a number of

ways. For example, furnishing the information to the federally regulated

state-chartered banks would have enabled them to determine whether

such an activity was suitable for their purposes and to seek regulatory

guidance from their respective regulators. Furthermore, providing its

decision and analysis to the Federal Reserve and FDIC would have given

each agency an opportunity to decide whether OCC’s interpretation should

serve as guidance for all the institutions they supervise and, if not, to set

forth clear standards for those institutions to follow.

The issue of banks owning equities has been the subject of debate for

decades. The recent OCC interpretation focuses on the activity of holding

equities in the bank as incidental to its equity derivatives banking

business. One of the criteria expressed in the interpretation states that

banks are not to hold equities for speculative purposes. However, it can be

difficult in practice to draw too fine a line between speculation and

hedging. As such, continued OCC oversight will be required to monitor

that line. More controversial issues could be raised if OCC were to take an

even broader interpretation of the business of banking or its incidental
Page 22 GAO-01-945 Equity Hedging

powers so that owning equities outright would become a permissible

banking activity for national banks. Whether such controversies should be

settled by regulatory interpretation or by legislation would be a

fundamental question.

Because of larger questions that the process of reaching and announcing

this equity hedge decision raises about OCC’s interpretive decisionmaking

process, we recommend that the Comptroller of the Currency establish a

policy that articulates the criteria OCC uses in deciding when to publish its

interpretive decisions. Furthermore, because interpretations relating to

section 24(Seventh) of the National Bank Act have implications for other

banking regulators, we recommend that the Comptroller publish all legal

decisions that pertain to section 24(Seventh) in order to keep other bank

regulators and financial institutions informed of OCC’s analysis.

We received written comments on a draft of this report from OCC that are

reprinted in appendix III. OCC agreed with our recommendations and said

that they are currently in the process of establishing a policy that is

responsive to our recommendations. OCC also provided technical

comments on the draft that we incorporated as appropriate.

To report on the process by which OCC approved this activity, we spoke

to OCC legal officials about the process used, the way in which their

approval was communicated to banks, and other ways in which OCC

could have communicated its decision. We reviewed OCC’s internal

documentation (including e-mails, notes, and rough drafts of

memorandums) on its internal decisionmaking process and concerns that

OCC had about granting this approval. Included in the files we reviewed

was information on the role of OCC supervisory staff in OCC’s approval, as

well as information on the types of equity hedges banks would be engaging

in and the risks involved. To further understand the supervisory role in the

approval process and the equity hedge activities, we interviewed the EICs

of the four banks that had requested OCC’s approval and other risk

management and supervisory officials at OCC. We also talked with legal

and risk management officials from the Federal Reserve Board and FDIC

about how their banks were hedging their equity derivatives exposure

through affiliates and what they believed the risks were in allowing banks

to book equity hedges within the bank. Finally, we spoke to officials from

banks that were equity derivative dealers to get a better understanding of

equity hedging and to get their views on OCC’s approval. The five banks

Recommendations for

Executive Action

Agency Comments

Scope and

Methodology
Page 23 GAO-01-945 Equity Hedging

we interviewed included two national banks that are engaging in equity

hedges within the bank, one national bank that has not sought OCC’s

approval to hedge within the bank, and two state member banks of the

Federal Reserve that are large equity derivatives dealers. The interviews

with banking regulators and the banks included detailed discussions on

OCC’s decision as well as on the process OCC used in granting its

approval.

In order to determine whether OCC’s decision was in accordance with

section 24(Seventh) of the National Bank Act, we examined OCC’s letter

outlining its legal opinion and related OCC documents, the applicable and

related statutory provisions, legislative history, prior OCC decisions under

section 24(Seventh), and relevant case law and secondary sources. In

addition, we spoke with attorneys at OCC regarding its opinion in this case

and prior decisions. We also spoke with lawyers at the Federal Reserve

Board and the FDIC to get their views on OCC’s legal opinion and the

related statutory provisions applicable to the state banks they regulate.

Finally, we spoke with a number of banks, including their counsel, that are

equity derivative dealers to get their views of the OCC approval.

We performed our work between February and June 2001 in accordance

with generally accepted government auditing standards. We visited

regulatory agencies and banks in Washington, D.C.; New York, N.Y.; and

Chicago, Ill.

As agreed with you, unless you publicly release its contents earlier, we

plan no further distribution of this report until 30 days from its issue date.

At that time, we will provide copies to the Chairman and Ranking Minority

Member, House Committee on Financial Services, and the Chairman and

Ranking Minority Member, Senate Committee on Banking, Housing and

Urban Affairs. We are also sending copies to the Comptroller of the

Currency and the Chairmen of the Federal Reserve Board and the FDIC.

Copies will be made available to others on request.

This report was prepared under the direction of Barbara I. Keller,

Assistant Director, Financial Markets and Community Investment, and

Rosemary Healy, Assistant General Counsel, Office of the General
Page 24 GAO-01-945 Equity Hedging

Counsel. If you have any questions about this report, please contact me at

(202) 512-8678 or Susan Poling at (202) 512-7648. Key contributors to this

report were Tamara Cross, Paul Thompson, John Treanor, and Emily

Chalmers.

Thomas J. McCool

Managing Director, Financial Markets

 and Community Investment

Susan A. Poling

Associate General Counsel
Appendix I: Equity Derivative Hedging

Page 25 GAO-01-945 Equity Hedging

The Office of the Comptroller of the Currency (OCC) and banking officials

said that banks have clients that may have concentrated equity holdings

representing significant risks to the bank’s customer. Although customers

may engage in a put option with a bank to protect against the risk that

their equity price might fall, the most common product bank customers

have purchased to protect against the downside risk of their equity

position is a zero-cost collar. The collar is created when the customer

purchases a put option from the bank at a strike price below the current

market price of the stock and sells a call option to the bank at a price

above the current market price of the stock. With a collar, the bank

provides the customer with a minimum and maximum value around the

customer’s equity position until the expiration of the option. The collar is

referred to as a zero-cost collar because the premium the customer

receives from the bank for selling the call option to the bank exactly

offsets the premium or purchase price the customer pays to the bank in

purchasing the put option.

A customer owns 100,000 shares of XYZ stock with a current market price

of $50. In entering the collar, the customer buys a 3-year, European-style,

cash-settled1

 XYZ put option from the bank, with a strike price of $35 and

sells a 3-year, European-style, cash-settled XYZ call option to the bank,

with a strike price of $90. The collar minimum is $35 dollars and the

maximum is $90. The customer is thus protected if the price of XYZ falls

below $35 but is “exposed” to the price difference between the put strike

price and current market price until the price falls below $35. The

customer participates in the appreciation of XYZ’s price up to $90 but does

not participate in any upside appreciation of XYZ’s price above $90. If the

price of XYZ stock is below $35 upon expiration of the collar, the bank

pays the customer the difference between the strike price of $35 and the

current market price below $35. If the price of XYZ is above $90 upon

expiration of the collar, the customer pays the bank the difference

between the strike price of $90 and current market price above $90. If,

however, the price of XYZ is between $35 and $90 at the time of expiration

of the collar, the options expire worthless.

 1

If the customer wanted to physically settle its option at the time of expiration, the

customer would sell its shares to the bank with the put option and the investor would

pledge its shares to the bank to secure its obligations to the bank under the call option.

Appendix I: Equity Derivative Hedging

An Example of an

Equity Collar
Appendix I: Equity Derivative Hedging

Page 26 GAO-01-945 Equity Hedging

Prior to OCC’s decision, banks hedged their equity derivative transactions

by entering into offsetting mirror transactions with their affiliates. The

bank entered into a collar with its affiliate that exactly matched the collar

entered into with a customer. For example, the XYZ collar entered into

with the customer consisted of the bank buying an XYZ call option from

the customer and selling an XYZ put option to the customer. The mirror

transaction with the affiliate consisted of the bank purchasing an XYZ put

option from its affiliate with the exact terms and conditions of the XYZ put

the bank sold to the customer and selling an XYZ call option to the affiliate

with the exact terms and conditions of the XYZ call that the bank bought

from the customer. As a result of this mirror transaction with the affiliate,

the bank has perfectly hedged its market risk. The hedging affiliate would

then hedge its collar with the bank by taking a position in XYZ stock—that

is, by shorting XYZ stock.

Once OCC made its decision that banks were allowed to hedge their equity

derivative transactions by booking equity hedges within the bank, the

requesting banks were no longer obligated to enter into mirror

transactions with an affiliate in order to hedge their collars. Banks could

therefore hedge changes in their equity derivative transactions through

delta hedging. As previously stated, delta is a hedge ratio that banks

calculate to determine the amount of equity the bank must buy or short, so

that for small changes in the price of the equity, the bank’s equity hedge

position and its contract with the client will change by equal, and

offsetting, amounts.

With the XYZ collar example, as the price of XYZ goes up, the value of the

XYZ collar increases because the bank’s call option increases in value and

the put option decreases in value. Without entering into a perfect mirror

collar with its affiliate, the bank needs an equity hedge position that

changes in value as the value of the collar changes, but in a different

direction than the change in the value of the collar. Thus, the bank needs

an equity hedge position that declines in value when the price of XYZ rises

and increases in value when the price of XYZ falls. The bank would

therefore short XYZ on a delta basis because a short position in XYZ would

produce losses when the price of XYZ rises. For example, the bank would

determine an initial delta of say 0.7, so that for every $100 represented by

the collar, the bank needs to be short $70 in XYZ stock. Then for every

$1.00 increase in price of XYZ, the collar value to the bank increases by

$0.70, an amount which is offset by losses in the short position the bank

has in XYZ shares. Alternatively, for every $1.00 decrease in the price of

XYZ, the collar value to the bank decreases by $0.70, which again is offset

Hedging Through an

Affiliate

Hedging Within the Bank
Appendix I: Equity Derivative Hedging

Page 27 GAO-01-945 Equity Hedging

by a gain the short position in XYZ shares. Over the life of the collar, the

bank rebalances its hedge, buying and selling XYZ shares as the collar’s

delta changes. At maturity, the collar’s delta is either 0 percent or 100

percent—100 percent if the price of XYZ is below the put strike price or

above the call price and 0 percent if the price of XYZ is between the strike

prices.

Banks contend that being able to book equity positions within the bank

enables the bank to net its positions more effectively on a portfolio basis.

For example, when a bank customer sells an XYZ put option to the bank,

the bank’s hedge is to go long or buy the XYZ stock on a delta basis. If the

bank has sold collars on XYZ stock to other customers, then the bank’s

hedge for those positions would be to short XYZ stock. At the end of the

day, the short and long positions of XYZ stock are to cancel each other

out, and the bank then hedges any residual position that is left over. Banks

also contend that hedging within the bank decreases the operational risk

of booking back-to-back transactions and reduces costs.
Appendix II: Legal Analysis of

OCC Equity Hedging Decision

Page 28 GAO-01-945 Equity Hedging

During 2000, the Office of the Comptroller of the Currency (OCC)

approved the requests of four national banks to purchase equities to hedge

their equity derivative transactions. In approving these requests, OCC

concluded that a provision of the National Bank Act, 12 U.S.C. §

24(Seventh), which generally prohibits national banks from purchasing

stock for their own account, does not prohibit these banks from

purchasing equities to hedge their customer-driven equity derivative

transactions.1 That provision sets forth the primary authority for national

banks to engage in the business of banking by limiting their activities to

those that are either part of the banking business or incidental to carrying

on that business (an incidental power). OCC concluded that the four

banks have authority, by virtue of their incidental powers, to own stock as

a hedge against equity derivatives risks, provided that their hedging

programs satisfy supervisory requirements.

Representative James A. Leach, a member of the House Committee on

Financial Services, asked us to assess the process OCC followed in issuing

its approval and to determine whether national banks have authority

under the National Bank Act to own corporate stock to hedge their equity

derivative transactions. Our work relating to the approval process is

discussed in the accompanying report. Our analysis of whether national

banks have authority to hedge equity derivative transactions by owning

equities is discussed in this appendix.

After a review of applicable laws, judicial decisions, and related materials,

we agree with OCC’s conclusion that the four national banks have

authority under the National Bank Act to own corporate stock to hedge

their equity derivative transactions. OCC’s approvals are consistent with a

 1

In a letter to Representative Leach dated September 8, 2000, the Comptroller described the

term “equity derivative transactions” to mean “transactions in which a portion of the return

(including interest, principal or payment streams) is linked to the price of a particular

equity security or to an index of such securities. Equity derivative transactions include

equity and equity index swaps, equity index deposits, equity-linked loans and debt issues,

and other bank permissible equity derivative products.” The Comptroller described

“customer driven” transactions as “originated by customers for their valid and independent

business purposes.” OCC Interpretive Letter No. 892 at 1 (Sept. 8, 2000) (Equity Hedge

Letter).

Appendix II: Legal Analysis of OCC Equity

Hedging Decision
Appendix II: Legal Analysis of

OCC Equity Hedging Decision

Page 29 GAO-01-945 Equity Hedging

reasonable interpretation of section 24(Seventh).2 OCC first determined

that the business of banking includes equity derivative transactions and

managing the risks of those transactions. OCC further determined that the

four banks have authority under their incidental powers to own stock in

order to carry on that business, subject to approval of their risk

management systems. OCC construes section 24(Seventh) so that

notwithstanding a general prohibition against stock ownership, a national

bank may own stock only as necessary to carry on the business of

banking. We believe that interpreting section 24(Seventh) to permit equity

hedging as an incidental power is reasonable.

National banks derive their general banking powers from section

24(Seventh) of the National Bank Act. The first sentence of the section,

known as the “powers clause,” authorizes national banks to conduct “the

business of banking” and to exercise “all such incidental powers as shall

be necessary to carry on” that business.3

 The second sentence limits a

national bank’s business of dealing in securities and stocks to brokerage

and specifically prohibits owning securities and stocks as part of the

bank’s business of dealing in securities. The second sentence also

prohibits national banks from underwriting any issue of securities and

stocks.4

 The fifth sentence states that a national bank is not authorized to

 2

Under Chevron U.S.A., Inc. v. Natural Resources Defense Council, 467 U.S. 837, 842-843

(1984), and, more recently, United States v. Mead Corp., 121 S. Ct. 2164 (2001), OCC’s

approvals likely would be accorded deference by the courts. In Mead, the Supreme Court

recognized that it gave considerable weight to an OCC opinion of whether an activity

constitutes the business of banking or an incidental activity under section 24 (Seventh)

despite the lack of a notice-and-comment procedure or other administrative formality.

Mead, 121 S. Ct. at 2173 (citing NationsBank of N.C., N.A. v. Variable Annuity Life Ins.

Co., 513 U.S. 251, 256-57, 263 (1995)).

3

The powers clause provides that a national bank shall have the following power:

To exercise by its board of directors or duly authorized officers or agents, subject to law,

all such incidental powers as shall be necessary to carry on the business of banking; by

discounting and negotiating promissory notes, drafts, bills of exchange, and other

evidences of debt; by receiving deposits; by buying and selling exchange, coin, and bullion;

by loaning money on personal security; and by obtaining, issuing, and circulating notes

according to the provisions of title 62 of the Revised Statutes.

4

The second sentence states, in pertinent part, as follows:

Background
Appendix II: Legal Analysis of

OCC Equity Hedging Decision

Page 30 GAO-01-945 Equity Hedging

purchase corporate stock for its own account, except as specifically

provided in subsequent parts of the section or otherwise permitted by

law.5

Four national banks sought OCC’s approval to purchase equities to hedge

their customer-driven equity derivative transactions. OCC determined that

equity derivative transactions and hedging the related risks are part of the

business of banking. OCC approved the four banks’ ownership of stocks to

hedge equity derivatives by interpreting the stock-related limitations and

restrictions in section 24(Seventh) to mean that national banks generally

are prohibited from owning stock but are authorized to do so if owning

stock constitutes a permissible incidental activity. An incidental activity is

one that is necessary to carry on the business of banking.6

 OCC concluded

that the purchase of equity securities as a hedging device is an incidental

activity not prohibited by the stock-related limitations contained in section

24(Seventh).

OCC based its approvals on an interpretation of section 24(Seventh) it has

relied on since the 1960s.7

 OCC reiterated this position in 1996 in its

revised final rules governing national bank ownership of subsidiaries.

Specifically addressing the fifth sentence, OCC stated:

“This language, which was added to 12 U.S.C. 24(Seventh) by section 16 of the 1933 Act

has, for decades, been consistently interpreted by the OCC as preventing national banks

 The business of dealing in securities and stock by the association shall be limited to

purchasing and selling such securities and stock without recourse, solely upon the order,

and for the account of, customers, and in no case for its own account, and the association

shall not underwrite any issue of securities or stock: . . . Provided, That the association may

purchase for its own account investment securities under such limitations and restrictions

as the Comptroller of the Currency may by regulation prescribe.

The term “investment securities” is defined elsewhere in the section to mean certain

marketable debt securities.

5

The fifth sentence states as follows: “Except as hereinafter provided or 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.”

6

In an interview, OCC officials told us that an activity cannot be incidental to conducting an

authorized banking activity unless the incidental activity is conducted in a safe and sound

manner. OCC defines an activity as “incidental” to the business of banking when the

activity is “convenient” or “useful” to conducting statutorily enumerated banking activities

or other activities that are permissible because they are part of “the business of banking.”

Equity Hedge Letter at 9; See infra note 34.

7

Equity Hedge Letter at 14; Acquisition of Controlling Stock Interest In Subsidiary

Operations Corporation, 31 Fed. Reg. 11459 (1966).
Appendix II: Legal Analysis of

OCC Equity Hedging Decision

Page 31 GAO-01-945 Equity Hedging

from undertaking the types of speculative stock purchases that were the object of the 1933

Act, not as a bar to the ability of national banks to have subsidiaries or to own stock, where

such ownership is otherwise authorized. This interpretation is entirely consistent with the

language of 12 U.S.C. 24(Seventh) cited above — that the new provisions added in 1933 do

not authorize national banks to purchase corporate stock, but to the extent other authority

exists to do so, that authority remains intact (citation omitted).”8

This interpretation of national bank powers is the legal foundation of

OCC’s decision to permit equity hedging.

The following discussion sets forth our analysis of OCC’s authority to

determine which activities constitute the business of banking and our

reasons for concluding that OCC acted within its authority by considering

equity derivative transactions and associated risk management programs

to be part of the business of banking. We then analyze the laws and

principles applicable to OCC’s conclusion that section 24(Seventh) does

not prohibit equity hedging and discuss the reasons why we believe OCC’s

interpretation of the section is reasonable.

OCC’s approvals of equity hedging by the four banks touches upon several

aspects of the nature of dealing in equity derivatives as a banking business

and the legality of the banks’ owning stock to hedge the risks arising from

the business. In contrast with earlier opinion letters concluding that

derivatives transactions are permissible because they are a financial

intermediary activity incidental to the business of banking, OCC now

considers such transactions to be a part of the business of banking.9

 In

addition, the approvals broke new ground by specifically authorizing the

ownership of stock as an activity incidental to that function.

 8

61 Fed. Reg. 60,342, 60,351 (1996).

9

In the Equity Hedge Letter, the Comptroller acknowledged that OCC once considered

financial intermediation, which includes equity derivative transactions, to be an incidental

activity but has re-examined this position and now considers financial intermediation to be

a function in its own right as within the business of banking. Equity Hedge Letter at 7 n. 19.

Discussion
Appendix II: Legal Analysis of

OCC Equity Hedging Decision

Page 32 GAO-01-945 Equity Hedging

In a letter to Representative Leach dated September 8, 2000 (Equity Hedge

Letter), the Comptroller of the Currency (Comptroller) stated that equity

derivative transactions are authorized under express authorities in the

National Bank Act and as part of the business of banking. He pointed out,

moreover, that where bank-permissible activities involve risks, “...banks

must manage [the risks] as part of the business of banking . . . and may

engage in hedging activities to do so.”

OCC has discretion, “within reasonable bounds,” to determine whether an

activity, including derivatives transactions, is part of the business of

banking. In NationsBank of North Carolina, N.A. v. Variable Annuity

Life Insurance Co. (VALIC), the Supreme Court addressed the question of

what constitutes the business of banking under section 24(Seventh) by

holding that “‘the business of banking’ is not limited to the enumerated

powers in [the first sentence of] §24 Seventh and that the Comptroller

therefore has discretion to authorize activities beyond those specifically

enumerated.”10 The Supreme Court further observed that “[t]he exercise of

the Comptroller’s discretion, however, must be kept within reasonable

bounds” and that “[v]entures distant from dealing in financial investment

instruments . . . may exceed those bounds.”11 In this case, OCC exercised

its discretion in concluding that equity derivative transactions are part of

the business of banking.

In reaching this conclusion, the Comptroller relied upon a definition in the

Gramm-Leach-Bliley Act (GLBA) describing certain instruments in which

banks may conduct business.12 GLBA specifies that banks conducting

transactions in “identified banking products” are not within the definitions

of “broker” and “dealer” contained in the Securities Exchange Act of 1934

 10513 U.S. 251, 258 n. 2 (1995). Prior to VALIC, a debate existed as to whether the business

of banking authorized in the powers clause was limited to the five activities enumerated in

the clause, which are as follows: “discounting and negotiating promissory notes, drafts,

bills of exchange, and other evidences of debt . . . receiving deposits . . . buying and selling

exchange, coin, and bullion . . . loaning money on personal security . . . and obtaining,

issuing, and circulating notes according to the provisions of title 62 of the Revised

Statutes.” In VALIC, the Supreme Court accepted OCC’s determination that the business of

banking includes the brokerage of financial instruments as part of national banks’

traditional function as financial intermediaries. 513 U.S. at 257, 258- 259. The Supreme

Court upheld the agency’s determination that brokerage of annuities is “incidental” to that

function. 513 U.S. at 264.

11VALIC, 513 U.S. at 258 n. 2.

12Gramm-Leach-Bliley Act, Pub. L. No. 106-102, 113 Stat. 1338 (1999).

Equity Derivatives

Transactions and Hedging

the Associated Risks Are

Part of the Business of

Banking
Appendix II: Legal Analysis of

OCC Equity Hedging Decision

Page 33 GAO-01-945 Equity Hedging

(Exchange Act).13 GLBA defines “identified banking products” to include

“swap agreements,” which are defined as:

“any individually negotiated contract, agreement, warrant, note or option that is based, in

whole or in part, on the value of, any interest in, or any quantitative measure or the

occurrence of any event relating to, one or more commodities, securities, currencies,

interest or other rates, indices, or other assets, but does not include any other identified

banking product.”14

Thus, the Comptroller concluded that because equity derivative

transactions are swap agreements as defined by GLBA, they are part of the

business of banking.

The Comptroller’s reliance on GLBA’s definition of “identified banking

products” is reasonable. GLBA defines both brokers and dealers as

persons engaged in the securities business.15 The Congress excluded banks

that engage in swap transactions from these definitions because it

recognized that banks, by conducting such activities, might otherwise be

subject to the Exchange Act. It is reasonable to infer that the Congress, by

acknowledging bank equity derivative transactions as a business activity,

considers them to be part of the business of banking. Even if the

Comptroller’s reliance on GLBA’s provision is misplaced, OCC appears to

have appropriately concluded that equity derivative transactions are part

 1315 U.S.C. § 78c(a)(4)(B)(xi) (Supp. 2000); 15 U.S.C. § 78c(a)(5)(iv) (Supp. 2000).

1415 U.S.C. §78c(a)(6) (Supp. 2000). Compare Equity Hedge Letter at 1 n.1.

15Section 201 of GLBA amended the term broker as defined in the Exchange Act, to mean

“any person engaged in the business of effecting transactions in securities for the account

of others.” 15 U.S.C. § 78c(a)(4)(A) (Supp. 2000). Section 202 amended the term dealer, as

defined in the Exchange Act, to mean “any person engaged in the business of buying and

selling securities for such person’s own account through a broker or otherwise.” See 15

U.S.C. § 78c(a)(5)(A) (Supp. 2000).
Appendix II: Legal Analysis of

OCC Equity Hedging Decision

Page 34 GAO-01-945 Equity Hedging

of the business of banking based on the application of tests generally used

to determine whether an activity constitutes the business of banking.16

In addition to determining that customer-driven equity derivative

transactions are part of the business of banking, OCC concluded that

hedging the risks arising from those transactions is part of the business of

banking because risk management is “integral” to equity derivative

transactions as well as other bank activities incurring risk. When a

national bank’s business involves derivatives, OCC always has required the

bank to take appropriate risk management measures.17 When OCC

determined that equity swap business was authorized as an incidental

power, it required adequate risk management not as an activity “incidental

to the incidental” derivatives business, but as a part of that business

governed by supervisory principles.18 In conjunction with its present

position that financial intermediation (and therefore derivatives dealing)

constitutes the business of banking, OCC continues to consider risk

management to be part of that function, as it considers risk management

to be part of any banking activity involving risk.19 Finally, it is clear from

our interviews with officials from several large banking institutions that

risk management is an inherent part of the banks’ equity derivative

activities. According to these officials, even when equity derivative

transactions were hedged through arrangements with affiliates with the

 16OCC applied tests used by courts for determining whether an activity is part of the

business of banking. Equity Hedge Letter at 4-6 (citing Merchant Bank v. State Bank, 77

U.S. 604 (1871); M&M Leasing Corp v. Seattle First Nat’l Bank, 563 F.2d 1377, 1382 (9th

Cir. 1977), cert. denied, 436 U.S. 956 (1978); American Insurance Assn. V. Clarke, 865 F.2d

278, 282 (2d Cir. 1988). The tests consider whether the activity (1) is functionally equivalent

to or a logical outgrowth of a recognized banking function, (2) benefits bank customers

and/or strengthens the bank, and (3) presents risks of a type similar to those already

assumed by banks. Equity Hedge Letter at 4 n. 8; Julie L. Williams and Mark P. Jacobsen,

The Business of Banking: Looking to the Future, 50 Bus. Law. 783 (1995). The Equity

Hedge Letter discusses how the function of financial intermediation is a logical outgrowth

of recognized banking functions, how the activity benefits customers and strengthens the

bank, and how equity hedging presents risks of a type similar to those already assumed by

banks. As discussed previously, OCC acknowledges that it no longer considers the function

to constitute an incidental activity. This recharacterization of the activity does not appear

to be arbitrary or to have a prejudicial effect–consequences that have occasionally

undermined agency changes of position. Smiley v. Citibank, 517 U.S. 735, 742 (1996).

17OCC approved the stock hedging in question here subject to each bank’s compliance with

supervisory risk management standards.

18OCC Interpretive Letter No. 652 (Sept. 13, 1994).

19See Equity Hedge Letter at 7.
Appendix II: Legal Analysis of

OCC Equity Hedging Decision

Page 35 GAO-01-945 Equity Hedging

affiliates holding the stock for hedging purposes (mirror transactions), the

risks (profit and loss) of owning the stock as a hedge were attributed to

the banks. In this regard, we note that each of the approvals in the matter

under discussion was conditioned on OCC’s determining that the

particular bank’s risk management controls are adequate.20

Based on the previous analysis, in our view, OCC reasonably concluded

that the business of banking includes equity derivative transactions and

managing the risks of those transactions. OCC’s conclusion is based on a

reasonable interpretation of GLBA and the application of tests typically

used by courts to determine whether an activity is part of the business of

banking.21

Section 24(Seventh) contains limitations and restrictions upon a national

bank’s authority to do business in securities. The section allows banks to

own certain debt securities (defined in the section as “investment

securities”) and to deal in, underwrite, and purchase for their own account

government obligations specified in the section, but it imposes limitations

specific to stocks and other bank-ineligible securities.22 The second

sentence prohibits banks from dealing in and underwriting bank-ineligible

securities, and specifically stocks. The fifth sentence states as follows:

“Except as hereinafter provided or otherwise permitted by law, nothing

herein contained shall authorize the purchase by the association [i.e., a

national bank] for its own account of any shares of stock of any

corporation.”

OCC interpreted the second sentence as prohibiting stock ownership only

in the contexts of dealing and underwriting.23 OCC concluded that owning

stock for hedging purposes does not constitute either type of activity.

Thus, the second sentence does not apply here. OCC interprets the fifth

sentence as a statutory explanation that amendments made to section

24(Seventh) in 1933 did not authorize banks to purchase stock for their

 20Equity Hedge Letter at 1-2.

21See note 41 supra.

22 For purposes of this opinion, the term “bank-ineligible securities” refers to all types of

debt and equity securities that a bank may not own, underwrite, or deal in directly under 12

U.S.C. § 24(Seventh).

23Equity Hedge Letter at 10-11.

Section 24(Seventh) Does

Not Prohibit Banks From

Owning Stocks for

Incidental Purposes
Appendix II: Legal Analysis of

OCC Equity Hedging Decision

Page 36 GAO-01-945 Equity Hedging

own account.24 According to OCC, the sentence does not affect a national

bank’s authority to own stock.25

We believe that OCC’s interpretation of section 24(Seventh) is reasonable.

We base our conclusion on Supreme Court decisions since the 19th

century, which hold that the powers clause permits stock ownership as an

incidental power, and on the reasoning that the Congress did not overrule

or limit this principle when it inserted the stock ownership prohibitions in

1933. We note, moreover, that interpreting section 24(Seventh) to permit

stock hedging as an incidental power is consistent with other indications

by the Congress that the section does not impose a complete bar against

national bank ownership of corporate stock.

Since the early days of the National Bank Act, the Supreme Court and OCC

have interpreted the powers clause as granting national banks two distinct

but related powers–the power to carry on the business of banking and the

incidental powers necessary to conduct the business.26 Certain activities

prohibited because they did not constitute the business of banking were

nonetheless authorized because they were necessary for banks to carry on

their business. This analysis is found in Supreme Court decisions dating to

the late 19th century, in which the Court interpreted the powers clause to

prohibit national banks from owning stock for dealing, investment, and

other purposes, but recognized that banks have authority to own stock as

an incidental power.

In First National Bank of Charlotte v. National Exchange Bank of

Baltimore, the Supreme Court in 1875 determined that national bank

dealings in stock were implicitly prohibited because authority to engage in

such activities was not granted by the powers clause.27 However, the

Supreme Court held that the plaintiff national bank was authorized to

acquire stock, “with a view to their subsequent sale or conversion into

money so as to make good or reduce an anticipated loss,” in a “fair and

bona fide compromise of a contested claim . . . growing out of a legitimate

 24Equity Hedge Letter at 12-14.

25As discussed later, OCC maintains that section 24(Seventh) nonetheless prohibits stock

ownership except as an incidental activity.

26Since it was adopted in 1864, the powers clause has remained virtually unchanged.

27First National Bank of Charlotte v. National Exchange Bank of Baltimore, 92 U.S. 122,

128 (1875).

National Bank Incidental

Powers Permit Stock

Ownership
Appendix II: Legal Analysis of

OCC Equity Hedging Decision

Page 37 GAO-01-945 Equity Hedging

banking transaction.”28 In addition, the Supreme Court observed that the

bank directors had specific authority to transact the bank’s business and

that section 24(Seventh) granted all incidental powers necessary to carry

out that authority.29

The Supreme Court applied the same reasoning with respect to the

performance of a commercial banking activity—that is, lending. On this

point, in California National Bank v. Kennedy the Court made the

following observation:

“It is settled that the United States statutes relative to national banks constitute the

measure of the authority of such corporations, and that they cannot rightfully exercise any

powers except those expressly granted, or which are incidental to carrying on the business

for which they are established. . . . No express power to acquire the stock of another

corporation is conferred upon a national bank, but it has been held that, as incidental to the

power to loan money on personal security, a bank may, in the usual course of doing such

business, accept stock of another corporation as collateral, and, by the enforcement of its

rights as pledge, it may become the owner of the collateral . . . . So, also, a national bank

may be conceded to possess the incidental power of accepting in good faith stock of

another corporation as security for a previous indebtedness. It is clear, however, that a

national bank does not possess the power to deal in stocks.”30

It is clear from these and other Supreme Court decisions that before 1933,

national banks were prohibited from doing business or investing in

corporate stock but that owning stock was permissible when necessary in

order for banks to conduct their business affairs or carry on commercial

banking activities.31

 28Id. at 126-28.

29Id.

30167 U.S. 362, 366-67 (1897) (citations omitted). In First National Bank of Ottawa v.

Converse, 200 U.S. 425, (1906), the Supreme Court made clear that business of banking also

does not include investing in stock for speculative purposes. In that case, the Court stated

that “no authority, express or implied, has ever been conferred by the statutes of the United

States upon a national bank to engage in or promote a purely speculative business or

adventure. . . . [I]t follows that the bank had no power to engage in such business by taking

stock or otherwise.” Id. at 438-39.

31The Supreme Court has applied the same analysis in holding that national banks’

incidental powers authorize other types of activity that do not constitute the business of

banking. Edward Symons, The “Business of Banking” in Historical Perspective, 51 Geo.

Wash. L. Rev. 676, 683, 702-13 (1983).
Appendix II: Legal Analysis of

OCC Equity Hedging Decision

Page 38 GAO-01-945 Equity Hedging

The Supreme Court decisions permitting stock ownership as an incidental

power were decided before the stock-related limitations and restrictions in

section 24(Seventh) became law in 1933.32 Whether OCC correctly

approved stock ownership for hedging purposes depends upon the scope

of national banks’ incidental power to own stock before 1933 and the

effect of the 1933 provisions upon that power. We believe that the

authority to own stock as an incidental power was not limited to the facts

of the cases decided by the Supreme Court and that the 1933 provisions

did not limit the banks’ incidental powers to own stock.

The powers clause defines a national bank’s incidental powers as those

“necessary” for the bank to carry on the business of banking. Nothing in

the clause itself suggests that stock ownership qualifies as “necessary”

only in relation to particular types of banking activities. Although the

Supreme Court decisions permitting stock ownership as an incidental

power involved particular sets of circumstances, nothing in those

decisions suggests that the incidental powers authority was limited to

those circumstances.33 In approving stock hedging by the four banks, OCC

applied the standard generally accepted to show that an activity is

“necessary” and, therefore, permissible as an incidental power.34 OCC’s

decision that the four banks have incidental authority to own stock as a

hedging device is consistent with the express language of the powers

clause as well as with Supreme Court interpretations of the clause in place

before 1933.

 32Banking Act of 1933, Pub. L. No. 73-66, 48 Stat. 162 (1933) (codified in scattered sections

of title 12 of the Unites States Code) (1933 Banking Act). The stock-related limitations and

restrictions in section 24(Seventh) were contained in section 16 of the Glass-Steagall Act,

which consists of sections 16, 20, 21, and 32 of the 1933 Banking Act.

33See First National Bank of Charlotte, 92 U.S. at 127 (describing incidental powers to be

“such as are required to meet all the legitimate demands of the authorized business, and to

enable a bank to conduct its affairs, within the general scope of its charter, safely and

prudently”).

34Equity Hedge Letter at 9-10. To determine whether a particular activity is necessary to

carry on the business of banking, OCC applies standards derived from a decision of the

First Circuit Court of Appeals in Arnold Tours, Inc., v. Camp, 472 F.2d 427, 432 (1st Cir.

1972) and VALIC and standards generally accepted by courts. See Independent Insurance

Agents of America v. Hawke, 211 F.3d 638, 640 (D.C. Cir. 2000). In Arnold Tours, the court

held that the term “necessary” in 12 U.S.C. §24(Seventh) should be construed broadly to

include activities that are “convenient and useful” to one of the five types of activity

enumerated in the first sentence. Arnold Tours, 472 F.2d at 432. Applying the holding in

VALIC, OCC determines whether an activity is convenient and useful to an activity that

constitutes the business of banking regardless of whether the activity is covered by the

statutory list.

Prohibitions on Stock

Ownership Do Not Limit

National Banks’ Incidental

Power to Own Stock
Appendix II: Legal Analysis of

OCC Equity Hedging Decision

Page 39 GAO-01-945 Equity Hedging

Nothing in section 16 of the Glass-Steagall Act or the legislative history of

the 1933 Banking Act establishes that the Congress limited the scope of

incidental powers with respect to stock ownership. The purpose of the

Glass-Steagall provisions was to separate commercial banks from

engaging directly in investment banking.35 The Congress adopted section

16 to prohibit banks from risking depositor funds by participating directly

or indirectly in bank-ineligible securities and stock markets as dealers,

underwriters, or investors.36 Nothing in the section or its history indicates

that the Congress sought to prohibit or limit the ability of national banks

to conduct activities recognized as commercial banking.

The second sentence of section 24(Seventh) specifies that a national

bank’s “business of dealing in securities and stock” is limited to brokerage

and does not include purchasing and selling securities and stock for the

bank’s own account. In addition, the sentence specifically prohibits a

national bank from underwriting securities and stock. The terms “dealing”

and “underwriting” are not defined in the 1933 Banking Act. OCC

interprets the dealing activity referred to in the second sentence to

encompass the purchase of securities as principal for resale to others.

According to OCC, dealing is buying and selling as part of a regular

business. A dealer typically maintains an inventory of securities and holds

itself out to the public as willing to purchase, sell, and continuously quote

 35See Citicorp, 73 Fed. Res. Bull. 473, 479 (1987), aff’d sub nom. Securities Industry Ass’n

v. Board of Governors of the Federal Reserve System, 839 F.2d 47 (2d Cir.), cert. denied,

486 U.S. 1059 (1988). In its decision in that proceeding, the Federal Reserve said that the

Glass-Steagall Act provisions “were enacted with one central purpose in mind, to protect

bank depositors from the hazards that Congress viewed as attributable to the combination

of commercial and investment banking.”

36During the years before 1933, national banks were involved in investment banking

primarily through state-chartered affiliates whose investment banking activities largely

involved bonds and other debt securities. After passage of the McFadden Act in 1927, Pub.

L. No. 69-639, which amended section 24(Seventh) specifically to permit national banks to

purchase and sell certain debt securities (bonds and other forms of indebtedness described

as “investment securities”), bank affiliates, often using the banks’ resources, also engaged

in underwriting operations, stock speculation and maintaining a market for the bank’s own

stock. Among other things, these activities gave rise to the concern that bank deposits were

being placed at risk in the stock market. Board of Governors of Fed. Reserve Sys. v.

Investment Co. Inst., 450 U.S. 46, 61, n. 27 & 28 (1981); see also Edwin J. Perkins, The

Divorce of Commercial and Investment Banking: A History, 6 Banking L. J. 483, 495-505

(1971).
Appendix II: Legal Analysis of

OCC Equity Hedging Decision

Page 40 GAO-01-945 Equity Hedging

prices.37 Similarly, OCC interprets the underwriting activity prohibited by

the sentence to be “the purchase of securities from an issuer for

distribution and sale to investors. . . . [o]ne cannot be an underwriter in the

absence of a public offering.”38 Given these definitions, the second

sentence only prohibits national banks from owning stock as part of the

general prohibition against dealing in and underwriting certain securities

and stock. We consider OCC’s reliance on these definitions to be

reasonable and therefore agree with its conclusion that the second

sentence does not prohibit equity hedging.39

Unlike the second sentence, the fifth sentence by its terms does not

affirmatively proscribe stock ownership. Rather, the fifth sentence utilizes

explanatory language. It states that “nothing herein contained” authorizes

a national bank to purchase stock for its own account, subject to two

exceptions. The first exception allows for any stock ownership authority

 37Equity Hedge Letter at 10-11; see also Citicorp, 73 Fed. Res. Bull. at 481 (according to the

Federal Reserve Board, the term “dealer” commonly refers to an entity that holds itself out

to the public as being willing to buy and sell securities for its own account (citation

omitted)).

38Equity Hedge Letter at 11.

39See, e.g., Securities Industry Ass’n v. Board of Governors of the Federal Reserve System,

468 U.S. 137, 158 n. 11 (1984) (discounting commercial paper is not the “business of

dealing” in securities prohibited by the second sentence because the discounting activity is

part of the business of banking). By “limiting” banks’ “business of dealing” to brokerage,

the syntax of the second sentence suggests that the Congress considered securities

brokerage to be an activity within banks’ business of dealing. Brokerage is not within the

definition of dealing applied by OCC. OCC’s definition of dealing, therefore, might appear

to be underinclusive. In this regard, we note that in the Securities Act of 1933, the Congress

defined the term “dealer” to mean “any person who engages either for all or part of his

time, directly or indirectly, as agent, broker, or principal, in the business of offering,

buying, selling, or otherwise dealing or trading in securities issues by another person.” 15

U.S.C.§ 77b(12) (1994). The legislative history of the Securities Act of 1933 indicates that

the Congress used this expansive definition of “dealer” for the purpose of subjecting those

within the definition to the same advertising restrictions that apply to dealers in order to

prevent brokers and others from “being used as a cloak for the sale of securities.” H.R. Rep.

No. 85, 73d Cong. 1st Sess. 14 (1933). This action suggests that even in the context of the

Securities Act of 1933 the Congress considered dealing to be an activity distinct from

brokerage. OCC’s interpretation appears to be consistent with the general understanding of

the practice of “dealing in” securities that existed before the second sentence was adopted

in 1933. As early as 1875, the Supreme Court observed that “a prohibition against trading

and dealing [is] nothing more than a prohibition against engaging in the ordinary business

of buying and selling for profit, and [does] not include purchases resulting from ordinary

banking transactions.” First National Bank of Charlotte, 92 U.S. at 128 (1875) (citation

omitted).
Appendix II: Legal Analysis of

OCC Equity Hedging Decision

Page 41 GAO-01-945 Equity Hedging

provided in the portion of section 24(Seventh) that follows the sentence.40

The second exception allows for stock ownership “otherwise permitted by

law.”

In OCC’s view, this sentence does not prohibit stock hedging because it

does not affect a national bank’s authority to own stock to the extent

authorized by the powers clause. OCC considers the fifth sentence to be

simply a statement by the Congress clarifying that amendments made to

section 24(Seventh) by section 16 of the Glass-Steagall Act did not

authorize national banks to purchase stock for their own account. Thus,

the sentence has no effect on bank powers that existed before section 16

was passed. A key point in OCC’s analysis of the sentence is the meaning

of the phrase “nothing herein contained.” If the phrase pertains to section

24(Seventh) in its entirety, it means that nothing in the section, including

the powers granted to national banks by the powers clause, authorizes a

national bank to purchase stock for its own account unless the activity is

permitted in subsequent provisions of the section or “otherwise permitted

by law.” In this sense, the phrase “otherwise permitted by law” refers to

laws other than section 24(Seventh). Because neither the subsequent

provisions of the section nor any law outside of section 24(Seventh)

authorize stock ownership except in specific circumstances not pertinent

here, under this interpretation the sentence would bar the ownership of

stock as an incidental power. On the other hand, if the phrase “nothing

herein contained” does not refer to the authority contained in the powers

clause, stock ownership is “otherwise permitted by law” to the extent

authorized in the powers clause and therefore is not prohibited by the fifth

sentence.

OCC interprets the phrase “nothing herein contained” so that it refers only

to a specific provision in section 24(Seventh) that does not apply to stock

ownership. Although section 16 of the Glass-Steagall Act limited bank

powers with respect to securities and stock, the section authorized

national banks to own certain types of securities for their own account.

These securities, referred to in the section as “investment securities,” are

defined generally as “marketable obligations, evidencing indebtedness.”

OCC maintains that the Congress added the fifth sentence only to clarify

that nothing contained in the investment securities ownership authority

 40Following the fifth sentence, section 24(Seventh) specifically provides that the limitations

and restrictions relating to dealing in, underwriting and purchasing investment securities

do not apply to several government or government-related obligations and securities and

stock issued in connection with government-sanctioned programs.
Appendix II: Legal Analysis of

OCC Equity Hedging Decision

Page 42 GAO-01-945 Equity Hedging

permits national banks to purchase corporate stock. Consequently, the

fifth sentence recognizes that banks may purchase stock if the activity is

“otherwise permitted by law,” which law includes the incidental powers

authority contained in the powers clause.41

The fifth sentence, in our view, was intended to do more than clarify that

the authority to own debt securities does not authorize national banks to

own stock.42 We believe that the sentence generally prohibits national

banks from owning stock.43 However, we believe that the sentence permits

stock ownership as an incidental power because that activity was within

the powers granted by the powers clause at the time the Congress enacted

section 16 and, therefore, falls within the “otherwise permitted by law”

 41As noted previously, OCC has maintained this position since at least 1966. The

interpretation of section 24(Seventh) on which OCC relied in approving the stock hedging

is essentially the same one that the agency first announced in the Federal Register in 1966

and has adhered to since then. OCC Rules, Policies, and Procedures for Corporate

Activities, 61 Fed. Reg. 60342, 60351 (Nov. 27, 1996); 12 C.F.R. § 7.10 (published at 31 Fed.

Reg. 11459 (Aug. 31, 1966)).

42 Additional evidence that the Congress intended generally to prohibit stock ownership

through the fifth sentence exists in the Banking Act of 1935. Pub. L. No. 74-305, 74 Stat. 684

(1935). In that act, the Congress amended the second and fifth sentences to reflect what

was originally intended by section 16 of the 1933 Act. The fifth sentence language in the

1933 Act said, in pertinent part, that “nothing herein contained shall authorize the purchase

by the association (bank) of any shares of stock of any corporation.” The 1935 Act added

the words “for its own account” after the term “association.” 74 Stat. 709. The purpose of

this provision was to clarify section 24(Seventh) to provide that national banks may not

buy and sell stocks for their own account. S. Rep. No. 74-1007, 74th Cong., 2d Sess. 1935 at

17.

43OCC itself has expressed the view that section 24(Seventh) generally prohibits national

banks from owning stock. For example, in a 1979 interpretive letter OCC stated as follows:

“With limited exceptions for investment securities and certain other named securities, 12

U.S.C. §24(Seventh) prohibits a national bank from purchasing stock for its own account.”

OCC Interpretive Letter No. 96 (May 14, 1979), reprinted in Fed. Banking L. Rep. (CCH) ¶

85,171; See also OCC Interpretive Letter regarding Point of Sale Terminals (Nov. 9, 1992)

(national banks are generally prohibited from purchasing or owning corporate stock by

virtue of 12 U.S.C. § 24(Seventh); whether a bank may acquire and own stock in another

entity will turn on whether such shares are being acquired to facilitate the bank’s

participation in a legitimate banking activity rather than for investment or speculative

purposes). In OCC Interpretive Letter No. 419 at p. 7 (Feb. 16, 1988), reprinted in Fed.

Banking L. Rep. (CCH) P85,643. OCC stated as follows:

Our concern with national banks purchasing stock in a corporation arises from the

language of Section 16 of the Glass-Steagall Act which provides that except as hereinafter

provided or otherwise permitted by law, nothing herein contained shall authorize the

purchase by [a national bank] for its own account of any shares of stock of any corporation

(brackets in the original).
Appendix II: Legal Analysis of

OCC Equity Hedging Decision

Page 43 GAO-01-945 Equity Hedging

exception contained in the sentence. Moreover, such an interpretation is

in harmony with the overall purpose of the section and other provisions of

the 1933 Banking Act, which contained section 16 of the Glass-Steagall

Act.

Interpreting the fifth sentence as a general prohibition that nonetheless

permits stock ownership as an incidental power is consistent with both

the purpose of section 16 and provisions of the 1933 Banking Act.

Incidental powers are, by statutory definition, necessary to the

performance of an activity that constitutes the business of banking.

Limiting a bank’s incidental powers also limits the bank’s ability to

conduct its business.44 While section 16 establishes that the Congress

considered stock ownership generally not to be part of the business of

banking, nothing in the section indicates that the Congress also intended

to limit a national bank’s ability to carry on the business of banking. This

principle underlies fundamental banking activities recognized by both

OCC and the Federal Reserve Board.45 For example, both agencies

recognize the authority of the banks they regulate to collateralize for a

loan with stock and to take possession of the stock upon default.46 Both

agencies permit the banks they regulate to own stock in subsidiaries based

on the incidental powers authority in the powers clause.47

 44This principle underlies the early Supreme Court decisions recognizing a national bank’s

authority to own stock as an incidental power even though the business of banking did not

include stock ownership. As demonstrated in the preceding discussion of those decisions,

the Supreme Court observed that banks could not conduct legitimate activities without

such authority.

45Under the Federal Reserve Act, state member banks are “subject to the same limitations

and conditions with respect to the purchasing, selling, underwriting, and holding of

investment securities and stock as are applicable in the case of national banks” under 12

U.S.C. § 24(Seventh). 12 U.S.C. § 335 (1994). In addition, the Federal Deposit Insurance Act

prohibits insured state banks from engaging as principal in any type of activity that is not

permissible for a national bank unless the FDIC determines that the activity would pose no

significant risk to the appropriate deposit insurance fund and the insured state bank

complies with applicable capital standards. 12 U.S.C. § 1831a(a)(1) (Supp. 2000).

4612 C.F.R. § 1.7 (2001) (national banks may own securities held in satisfaction of debts

previously contracted); 12 C.F.R § 225.12 (2001) (state member bank may acquire without

Board approval voting securities of a bank or bank holding company in the regular course

of securing or collecting a debt previously contracted in good faith).

47See 12 C.F.R. § 5.34 (2001) (OCC); 61 Fed. Reg. at 60342 (OCC); 12 C.F.R. § 250.141(c)

(2001) (Federal Reserve); 1968 Fed. Res. Bull. 168 (incidental powers authority in 12 U.S.C.

§ 24(Seventh) authorizes state member banks to own stock in wholly owned subsidiaries

engaged in activities the banks themselves may perform).
Appendix II: Legal Analysis of

OCC Equity Hedging Decision

Page 44 GAO-01-945 Equity Hedging

A review of other provisions of the 1933 Banking Act indicates that the

Congress contemplated stock ownership as an activity incidental to the

business of banking.48 Nothing in the Banking Act of 1933 or elsewhere in

the National Bank Act specifically authorized national banks to own

subsidiaries or interests in affiliates. Owning stock for this purpose was

not listed in section 24(Seventh) as a banking activity. However, in the

1933 act, the Congress specifically recognized the power of national banks

to own corporate stock despite the fifth sentence. Section 2 of the act

defined the term “affiliate” to include “any corporation, business trust,

association, or other similar organization . . . of which a member bank,

directly or indirectly, owns or controls either a majority of the voting

shares or more than 50 per centum of the number of shares voted for the

election of its directors.”49 Section 16 preserved a preexisting provision of

section 24(Seventh) limiting the amount of stock a national bank could

own in a corporation operating a safe deposit business, even though banks

had no specific authority to own such stock.50

 48A fundamental principle of statutory construction is that the various provisions of a

statute should be construed as a whole and that a particular section of a statute may not be

interpreted in isolation without regard to other sections of the statute of which it is a part.

United States v. Morton, 467 U.S. 822, 828 (1984); Philbrook v. Glodgett, 421 U.S. 707, 713

(1975).

49Pub. L. No. 73-66 § 2(b), 12 U.S.C. § 221a (1994).

50See S. Rep. No. 69-473 (69th Cong., 2d Sess. 1926) at 7 (accompanying Pub. L. No. 69-639 §

2 (1927) (McFadden Act)) (safe deposit provision was added to section 24(Seventh) by the

McFadden Act in recognition that conducting safe deposit business and investing in

corporations organized to conduct the business “is a business which is regularly carried on

by national banks”). With regard to this provision, the Supreme Court made the following

observation: “The language of the proviso of § 24, just quoted, is the language suitable to

impose restrictions on a recognized power, not the language that would be used in creating

a new power.” Colorado Nat. Bank of Denver v. Bedford, 310 U.S. 41, 49 (1940). Because

the Congress recognized stock ownership for this purpose as a permissible activity even

though owning stock was not within the activities enumerated in the first sentence and was

prohibited except as an incidental power, it is reasonable to infer that the Congress

considered owning stock in a corporation to have been authorized as an incidental power.

This conclusion is consistent with another McFadden Act amendment to section

24(Seventh) recognizing bank activities which had been conducted pursuant to the

incidental powers authority. Section 2 of the McFadden Act amended section 24(Seventh)

specifically to permit national banks to engage in the nonrecourse buying and selling of

“investment (debt) securities.” The legislative history states that the Congress made this

amendment to recognize as the business of banking an activity that previously had been

authorized as incidental to banks’ express authority to discount and negotiate promissory

notes. S. Rep. No. 69-473 at 5-7.
Appendix II: Legal Analysis of

OCC Equity Hedging Decision

Page 45 GAO-01-945 Equity Hedging

Considering the specific purposes of section 16 and national banks’

express incidental powers authority, which included stock ownership long

before section 16 was enacted, it is reasonable to interpret the fifth

sentence as recognizing stock ownership to be otherwise permitted by law

pursuant to the incidental powers provision. The legislative history of the

1935 Banking Act contains no congressional explanation of the “otherwise

permitted by law” exception to the general prohibition against stock

ownership. We note, however, that if the Congress had intended to

prohibit stock ownership except as provided in the part of section

24(Seventh) following the fifth sentence and in statutory provisions other

than section 24(Seventh), the exception for stock ownership as otherwise

permitted by law would be redundant. As OCC pointed out in its 1966

interpretation of section 24(Seventh) permitting ownership of subsidiaries,

another statute permitting stock ownership would take effect regardless of

such an exception.51

We agree with OCC’s conclusion that national banks, subject to

supervisory approval, have authority under the National Bank Act to own

corporate stock to hedge their customer-driven equity derivative

transactions. OCC determined that equity derivatives dealing and

managing the risks of that activity are part of the business of banking

based on a reasonable interpretation of GLBA and the application of the

test typically used by courts to determine whether an activity is part of the

business of banking. Applying the generally accepted judicial test for

determining whether an activity is within a national bank’s incidental

powers authority, OCC also reasonably concluded that equity hedging is

incidental to the business of banking. Although 12 U.S.C. § 24(Seventh)

generally prohibits national banks from owning stock, the prohibition does

not limit a bank’s authority to own stock as an incidental power. Since the

early days of the National Bank Act of 1864, the powers clause has been

interpreted to authorize stock ownership as an incidental power. We

concur with OCC that nothing in the stock ownership prohibition restricts

or limits this interpretation. The second sentence of section 24(Seventh)

prohibits national banks from owning stock in order to engage in the

business of dealing in or underwriting securities and stock. The fifth

sentence of the section 24(Seventh) generally prohibits national banks

 511966 Fed. Reg. 11459 n. 4; see, e.g., United States v. Dalcour, 203 U.S. 408, 421 (1906)

(interpreting phrase “unless otherwise provided by law” contained in another federal

statute as “refer[ring] to existing provisions and not to be merely a futile permission to

future legislatures to make a change”).

Conclusion
Appendix II: Legal Analysis of

OCC Equity Hedging Decision

Page 46 GAO-01-945 Equity Hedging

from purchasing stock for their own account, but the sentence recognizes

that national banks may own stock if the activity is otherwise permitted by

law. When the Congress enacted the fifth sentence in 1933, incidental

ownership was permitted by the powers clause. Nothing in the 1933

amendments indicates that the Congress intended to limit the meaning of

the powers clause. Moreover, interpreting section 24(Seventh) to permit

stock ownership as an incidental power is consistent with a reasoned

interpretation of the Banking Act of 1933 in its entirety.
Page 47 GAO-01-945 Equity Hedging

Appendix III: Comments From the

Comptroller of the Currency
Page 48 GAO-01-945 Equity Hedging (250017)
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