Board of Governors of the federal reserve 

system seal BOARD DF GOVERNORS 

OF THE 

FEDERAL RESERVE SYSTEM 

WASHINGTON, D. C.2055 1 

ADDRESS OFFICIAL CORRESPONDENCE 

TO THE BOARD 

October 3, 2005 

Ignacio Alvarez, Esq. 

Pietrantoni Mendez & Alvarez LLP 

Banco Popular Center – Suite 1901 

209 Mu oz Rivera Avenue 

San Juan, Puerto Rico 00918 

Dear Mr. Alvarez: 

This is in response to the request by Banco Popular de Puerto Rico, 

San Juan, Puerto Rico (“Banco Popular”), for an exemption from the quantitative 

limits of section 23A of the Federal Reserve Act and the Board’s Regulation W for 

extensions of credit (the “Proposed Credits”) by Banco Popular to unaffiliated 

customers that are secured, in whole or in part, by shares of two investment fund 

affiliates of the bank (“Fund” or collectively the “Funds”).footnot e

1 

The Funds whose shares would serve as collateral for the Proposed 

Credits are (i) the Popular Total Return Fund, an investment fund that seeks to 

invest 50 to 80 percent of its assets in equity securities (with the remaining assets 

invested in fixed-income securities); and (ii) the Popular High Grade Fixed-Income 

Fund, an investment fund that seeks to invest at least 90 percent of its assets in 

fixed-income securities. Banco Popular serves as investment adviser, transfer 

agent, custodian, and administrative agent for each Fund. The bank’s securities 

affiliate, Popular Securities, Inc., serves as the distributor of each Fund. 

footnote

1

 12 U.S.C. section 371c; 12 C.F.R. Part 223. Banco Popular also has requested a 

broader exemption that would apply to any substantially similar funds that it may 

form in the future. 
- 2 -

Section 23A and Regulation W limit the aggregate amount of 

“covered transactions” between a bank and any single affiliate to 10 percent of the 

bank’s capital stock and surplus and limit the aggregate amount of covered 

transactions with all affiliates to 20 percent of the bank’s capital stock and 

surplus.footnot e

2

 “Covered transactions” include, among other things, the extension of 

credit by a bank to an affiliate and “the acceptance of a security issued by the 

affiliate as collateral for an extension of credit to any person or company.”footnot e

3 

“Affiliates” include, among other entities, any investment company for which the 

bank or any affiliate serves as an investment adviser.footnot e

4

 Accordingly, each of the 

Proposed Credits would be a covered transaction under section 23A and 

Regulation W and would be subject to the quantitative limits of the statute and 

rule. 

Section 23A and Regulation W specifically authorize the Board to 

exempt, at its discretion, transactions or relationships from the requirements of the 

statute and rule if the Board finds the exemption to be in the public interest and 

consistent with the purposes of section 23A.footnot e

5

 Banco Popular has requested the 

exemption to enhance its ability to provide the Proposed Credits. The Board 

believes that exempting the Proposed Credits from the quantitative limits of 

section 23A and Regulation W would be appropriate for the reasons discussed 

below. 

The Board has granted by rule an exemption in analogous situations 

for transactions involving certain U.S. mutual funds. Regulation W provides an 

exemption from the quantitative limits of section 23A and the rule for extensions 

of credit by a bank to customers that are secured by eligible affiliated mutual fund 

securities (the “Mutual Fund Exemption”). A bank’s eligible affiliated mutual 

fund securities are securities issued by an affiliated open-end investment company 

registered with the Securities and Exchange Commission (“SEC”) under the 

footnote

2

 12 U.S.C. section 371c(a)(1) and 12 C.F.R. 223.11 and 223.12. 

footnote

3

 12 U.S.C. section 371c(b)(7) and 12 C.F.R. 223.3(h). 

footnote

4

 12 U.S.C. section 371c(b)(1)(D)(ii) and 12 C.F.R. 223.2(a)(6)(i). 

footnote

5

 12 U.S.C. section 371c(f)(2); 12 C.F.R. 223.43. 
- 3 -

Investment Company Act of 1940 (“Investment Company Act”)footnot e

6

 if (i) the 

securities have a publicly available price and (ii) the bank and its affiliates own 

5 percent or less of the fund’s shares.footnot e

7

 The Board adopted the Mutual Fund 

Exemption in Regulation W principally because (i) transactions that qualify for the 

exemption do not involve direct bank funding of an affiliate and are unlikely to 

involve indirect bank funding of an affiliate; (ii) tracking transactions that involve 

loans secured by shares of specific mutual funds is highly burdensome; (iii) the 

assets of the affiliated mutual funds generally are shares of nonaffiliates; and 

(iv) mutual funds are highly regulated, their shares are liquid, and they are required 

by law to have boards of directors that are largely independent of the bank and its 

affiliates.footnot e

8 

The shares issued by the Funds that would serve as collateral for the 

Proposed Credits meet the public-price requirement of the Mutual Fund 

Exemption, and each Fund is an open-end investment companyfootnot e

9

 that satisfies the 

5 percent-ownership limit of the Exemption. The Proposed Credits would 

automatically qualify for the Mutual Fund Exemption if the Funds were registered 

with the SEC under the Investment Company Act.footnot e

10 

Although the Funds are not registered with the SEC under the 

Investment Company Act, the Funds are registered with the Securities Division of 

the Office of the Commissioner of Financial Institutions of the Commonwealth of 

footnote 6 15 U.S.C. section 80a-1 et seq. 

footnote

7

 12 C.F.R. 223.24(c). 

footnote

8

 See 67 Federal Register 76,583 (Dec. 12, 2002). 

footnote

9

 Although not required to do so by Puerto Rican law, Banco Popular has 

represented that each Fund will sell and redeem its shares consistent with the 

requirements imposed on open-end investment companies by sections 2(a)(32) and 

22(e) of the Investment Company Act and SEC Rule 22c-1 thereunder. 

See 15 U.S.C. section s 80a-2(a)(32) and 80a-22(e); 17 C.F.R. 270.22c-1. 

footnote

10

 As investment companies that are organized under the laws of Puerto Rico and 

offer and sell interests only to residents of Puerto Rico, the Funds qualify for an 

exemption from SEC registration under section 6(a)(1) of the Investment Company 

Act. 15 U.S.C. section s 80a-6(a)(1). 
- 4 -

Puerto Rico (“Puerto Rico Commissioner”) as open-end investment companies 

under the Investment Companies Act of Puerto Rico. In analyzing the exemption 

request, the Board has considered the nature and scope of the system of mutual 

fund regulation in Puerto Rico and the mutual fund supervisory and examination 

practices of the Puerto Rico Commissioner. Through discussions with you and the 

Puerto Rico Commissioner, the Board understands that the offering and 

redemption of the shares of common stock of the Funds and the operation of the 

Funds are subject to comprehensive regulation by the Puerto Rico Commissioner.footnote11 

Under Puerto Rican law and regulation, through commitments to the Puerto Rico 

Commissioner, and by contract with shareholders, the Funds are subject to 

restrictions similar to those imposed on SEC-registered mutual funds. In fact, each 

Fund has received a no-action letter from SEC staff confirming that the Fund 

would be treated as an SEC-registered mutual fund for purposes of SEC Rule 11d2 under the Securities Exchange Act of 1934 (“1934 Act”). footnot e

12 

In addition to the regulatory environment, the Funds are similar to 

SEC-registered mutual funds in their operation and liquidity. The shares of each 

Fund are held by thousands of investors in Puerto Rico. Each Fund has adopted a 

policy of redeeming its shares on each business day at a price per share equal to the 

Fund’s net asset value per share determined at the close of business on the 

redemption date and calculated generally in the same manner as SEC-registered 

mutual funds. Information concerning each Fund’s share price is published each 

business day in a newspaper of general circulation in Puerto Rico. In addition, as 

with most SEC-registered mutual funds, a majority of the board of directors of 

footnote11 In addition, Popular Securities, the distributor of the Funds, is an SEC-registered 

broker-dealer and a member of the NASD and, accordingly, is subject to 

supervision and regulation by the SEC and NASD. 

footnote12 Section 11(d)(1) of the 1934 Act prohibits a broker-dealer from extending, 

maintaining, or arranging for credit to a customer with respect to any security 

within 30 days of its underwriting if the broker-dealer was part of the selling 

syndicate for the security. See 15 U.S.C. section 78k(d)(1). SEC Rule 11d1-2 provides 

an exception to the prohibition in section 11(d)(1) for securities issued by an 

SEC-registered open-end investment company (provided the person to whom 

credit is being extended has owned the fund shares for 30 days or more). 

See 17 C.F.R. 240.11d1-2. 
- 5 -

each Fund, consistent with a requirement of the Puerto Rico Commissioner, must 

be individuals who are not employed by or otherwise associated with Banco 

Popular or its affiliates. Moreover, as with SEC-registered mutual funds, the 

financial statements of the Funds are kept in accordance with U.S. generally 

accepted accounting principles and are audited annually by an independent 

certified public accounting firm in accordance with U.S. generally accepted 

auditing standards. 

To help safeguard against misuse of the exemption to provide funding 

to affiliates, Banco Popular has agreed that (i) Fund shares securing a Proposed 

Credit must have been held by the borrower for more than 30 days before the 

borrower may receive any loan proceeds; and (ii) Banco Popular must not know or 

have reason to know that the loan proceeds will be used for the benefit of, or will 

be transferred to, an affiliate of the bank. footnot e

13

 In addition, no more than 10 percent of 

the assets of a particular Fund will be (i) obligations or securities issued by an 

affiliate of bank or (ii) assets purchased by the Fund from an affiliate of the bank. 

Moreover, the Funds will not own more than 10 percent of a class of voting 

securities of any affiliate of Banco Popular. Furthermore, the exemption would not 

apply to credit extended to directors or executive officers of Banco Popular or its 

affiliates. 

Banco Popular also has committed to the Board that the aggregate 

amount of the Proposed Credits will not exceed 25 percent of the aggregate net 

assets of each Fund. In addition, Banco Popular has stated that the maximum loanto-value ratio for the Proposed Credits will be 50 percent for loans secured by 

shares of the Popular Total Return Fund (and any other equity-based funds), and 

70 percent for loans secured by shares of the Popular High Grade Fixed-Income 

Fund (and any other fixed-income funds). 

Granting the requested exemption would have the public benefit of 

increasing the eligible collateral set for potential borrowers from Banco Popular in 

a manner that does not impose safety and soundness risks to the bank. The Board 

notes that Banco Popular would continue to be subject to the market terms 

footnote13 This condition is designed to ensure that the Proposed Credits do not trigger the 

attribution rule in section 23A and Regulation W. See 12 U.S.C. section 371c(a)(2); 

12 C.F.R. 223.16(a) and 223.24(c)(1). 
- 6 -

requirement of section 23B of the Federal Reserve Act with respect to the 

Proposed Credits. Section 23B requires that the Proposed Credits be on terms that 

are substantially the same, or at least as favorable to the bank, as those prevailing 

at the time for comparable credit transactions secured by nonaffiliate collateral.footnot e

14 

For the reasons stated above, and in light of all the facts of record, 

including the unique circumstances and regulatory framework in Puerto Rico, 

granting the proposed exemption, subject to the limitations and conditions noted in 

this letter and your correspondence, appears to be consistent with safe and sound 

banking practices and the purposes of section 23A. Accordingly, the Board hereby 

grants the requested exemption. The Board also grants your request that any funds 

that Banco Popular may form in the future that are substantially similar to the 

Funds may rely on this exemption, subject to the same limitations and conditions 

imposed on the Funds. 

This determination is specifically conditioned on compliance by 

Banco Popular with all the commitments and representations made in connection 

with the exemption request. These commitments and representations are deemed 

to be conditions imposed in writing by the Board in connection with granting the 

request and, as such, may be enforced in proceedings under applicable law. Any 

material change in the facts or circumstances described in your correspondence and 

this letter or any failure by Banco Popular to observe any of its commitments or 

representations may result in a different view or in a revocation of the exemption. 

Sincerely yours, 

Robert deV. Frierson 

Deputy Secretary of the Board 

cc: Jay Bernstein 

Federal Reserve Bank of New York 

Federal Deposit Insurance Corporation 

footnote

 14

 See 12 U.S.C. 371c-1(a)(1); 12 C.F.R. 223.51.