January 23, 2006 

Courtney D. Allison, Esq. 

Senior Vice President and 

Assistant General Counsel 

Wachovia Corporation 

Legal Division 

One Wachovia Center 

301 South College Street 

Charlotte, North Carolina 28288 

Dear Ms. Allison: 

This responds to your inquiry on behalf of Wachovia Corporation 

(“Wachovia”), Charlotte, North Carolina, regarding the appropriate riskbased capital treatment for Wachovia’s issuance of trust preferred securities 

that are mandatorily convertible into noncumulative perpetual preferred 

securities at a date certain. Specifically, you have requested that the Board 

permit Wachovia, as a bank holding company (BHC), to include in its tier 1 

capital trust preferred securities that mandatorily convert into noncumulative 

perpetual preferred securities on the same terms and subject to the same 

quantitative limit as trust preferred securities that mandatorily convert into 

common stock. 

Background 

Under the Board’s risk-based capital adequacy guidelines for BHCs 

(“Capital Guidelines”), an internationally active BHC generally must limit 

its restricted core capital elements to 15 percent of the sum of all core capital 

elements, including restricted core capital elements, net of goodwill less any 

associated deferred tax liability (“15 percent limit”). [Begin Footnote 1. On 

March 4, 2005, the Board adopted a final rule amending the Capital 

Guidelines to change the criteria for the inclusion of capital instruments 

in BHCs' tier 1 capital (the “tier 1 rule”). The final tier 1 rule changed 

the limits for the inclusion of restricted core capital elements in tier 1 

capital, effective March 31, 2009. See Risk-Based Capital Standards: 

Trust Preferred Securities and the Definition of Capital, 70 Fed. 

Reg. 11827 (March 10, 2005). End Footnote 1.] The Capital 
Guidelines contain an exception to the 15 percent limit, however, for 

restricted core capital elements in the form of qualifying mandatory 

convertible preferred securities. The Capital Guidelines permit an 

internationally active BHC to include restricted core capital elements in 

tier 1 capital up to 25 percent of its tier 1 capital (“25 percent limit”), so 

long as the restricted core capital elements that exceed the 15 percent limit 

are in the form of qualifying mandatory convertible preferred securities. 

[Begin Footnote 2. 12 CFR part 225, App. A, section II.A.1.b. End 

Footnote 2.] 

The Capital Guidelines provide the following flexible regulatory 

definition of qualifying mandatory convertible preferred securities: 

Qualifying mandatory convertible preferred securities generally 

consist of the joint issuance by a bank holding company to investors of 

trust preferred securities and a forward purchase contract, which the 

investors fully collateralize with the securities, that obligates the 

investors to purchase a fixed amount of the bank holding company's 

common stock, generally in three years. [Begin Footnote 3. 12 CFR 

part 225, App. A, section II.A.1.b., fn. 5. End Footnote 3.] 

Supplementary information accompanying the final tier 1 rule explains that 

qualifying mandatory convertible preferred securities: 

provide a source of capital that is generally superior to other restricted 

core capital elements because they are effectively replaced by 

common stock, the highest form of tier 1 capital, within a few years of 

issuance. The high quality of these instruments is indicated by the 

rating agencies’ assignment of greater equity strength to mandatory 

convertible trust preferred securities than to cumulative or 

noncumulative perpetual preferred stock, even though mandatory 

convertible preferred securities, unlike perpetual securities, are not 

included in GAAP equity until the common stock is issued. [Begin 

Footnote 4. See Risk-Based Capital Standards, supra note 1 at 

11831. End Footnote 4.] 

Unlike the mandatory convertible securities described in the Capital 

Guidelines and the supplementary information to the final tier 1 rule, 

Wachovia’s securities would mandatorily convert to noncumulative 

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perpetual preferred stock instead of common stock. Therefore, you have 

asked the Board to clarify whether trust preferred securities that mandatorily 

convert to noncumulative perpetual preferred stock are eligible for the 

exception to the 15 percent limit afforded to qualifying mandatory 

convertible preferred securities under the Capital Guidelines. 

Board Interpretation 

Although the regulatory definition of qualifying mandatory 

convertible preferred securities specifically describes an instrument 

convertible into common stock, that regulatory definition describes the 

typical, and not the exclusive, form of qualifying mandatory convertible 

preferred securities. For the reasons set forth below, the Board believes that 

qualifying mandatory convertible preferred securities also include 

instruments convertible into noncumulative perpetual preferred securities. 

The Board based its favorable treatment of mandatory convertible 

preferred securities principally on the certainty that the issuer will, within a 

relatively short time period, replace the securities with a tier 1 capital 

component that is not a restricted core capital element. Although common 

stock remains the highest form of tier 1 capital, noncumulative perpetual 

preferred stock is also a high form of tier 1 capital and is not a restricted core 

capital element. Like common stock, noncumulative perpetual preferred 

securities are perpetually available to absorb losses incurred by the issuer, 

constitute equity under generally accepted accounting principles, and allow 

the issuer to waive dividends on a noncumulative basis. By allowing the 

noncumulative waiver of dividends, noncumulative perpetual preferred 

securities avoid the accumulation of deferred dividends, which could 

possibly impede an issuer's ability to raise additional equity during times of 

stress. 

Accordingly, the Board has determined that qualifying mandatory 

convertible preferred securities that convert to noncumulative perpetual 

preferred securities qualify for inclusion in the tier 1 capital of 

internationally active BHCs (and other BHCs) in excess of the 15 percent 

limit applicable to the restricted core capital elements of internationally 

active BHCs, provided that all other terms and conditions of the securities 

meet the Board's requirements. Under this interpretation, Wachovia may 

include restricted core capital elements in its tier 1 capital up to the generally 

applicable 25 percent limit, provided that (as of the effective date of 

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the final tier 1 rule) restricted core capital elements in excess of the 

15 percent limit are in the form of qualifying mandatory convertible 

preferred securities converting into common stock or noncumulative 

perpetual preferred securities. Notwithstanding this determination, the 

Board reaffirms its longstanding view that voting common equity is the 

strongest form of tier 1 capital. 

This determination is based on the specific facts and circumstances 

described in your correspondence with Board staff and this letter. Any 

material change in those facts and circumstances could result in a different 

conclusion and should be reported to Board staff. If you have any questions 

about this matter, please contact Norah Barger (202-452-2402) or 

John Connolly (202-452-3621) in the Division of Banking Supervision and 

Regulation, or Mark Van Der Weide (202-452-2263) in the Legal Division. 

Very truly yours, 

(signed) 

Jennifer J. Johnson 

Secretary of the Board 

cc: Federal Reserve Bank of Richmond 

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