OFFICIAL SEAL OF THE BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM 

OFFICIAL LETTERHEAD STATIONARY FOR ROBERT DEV. FRIERSON, DEPUTY SECRETARY OF THE BOARD 

BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM 

WASHINGTON, D.C. 20551 

September 29, 2006 

Courtney D. Allison, Esq. 

Senior Vice President and 

Assistant General Counsel 

Wachovia Corporation 

Legal Division 

NC0630 

One Wachovia Center 

301 South College Street 

Charlotte, North Carolina 28288 

Dear Ms. Allison: 

This is in response to the request by Wachovia Corporation 

(“Wachovia”), Charlotte, North Carolina, for an exemption from section 23A 

of the Federal Reserve Act and the Board’s Regulation W. [Footnote 1. Begin 

Footnote 1 text. 12 U.S.C. section 371c; 12 CFR part 223. End Footnote 1.] 

The exemption would allow Wachovia’s subsidiary bank, Wachovia Bank, 

National Association (“Bank”) to make certain guarantees on behalf of, and 

extensions of credit to, its affiliated U.S. broker-dealers, including Wachovia 

Capital Markets, LLC and Wachovia Securities, LLC (together “Wachovia 

Borrowers”), all also of Charlotte, in connection with Bank’s securities lending 

program. 

In Bank’s securities lending program, Bank, as agent for a customer, 

lends securities in a customer’s portfolio (“Borrowed Securities”) to another 

company, typically a securities broker-dealer (“Borrower”). The Borrower may 

use the Borrowed Securities for its own purposes but generally must return the 

securities on demand by Bank’s customer. The Borrower provides collateral to 

Bank, as agent for the customer, in the form of cash or U.S. government securities. 

The value of the collateral equals or exceeds the value of the Borrowed Securities 
- 2 -

throughout the transaction. Bank actively engages in securities lending 

transactions with a number of unaffiliated securities broker-dealers. 

Section 23A and Regulation W limit the 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 amount of covered transactions between a 

bank and all its affiliates to 20 percent of the bank’s capital stock and surplus. 

“Covered transactions” include the purchase of assets by a bank from an affiliate, 

the extension of credit by a bank to an affiliate, the issuance of a guarantee by a 

bank on behalf of an affiliate, and certain other transactions. In addition, the 

statute and regulation require a bank to secure its extensions of credit to, and 

guarantees on behalf of, affiliates with prescribed amounts of collateral. The 

statute and the regulation also have an “attribution rule” that treats as a transaction 

between a bank and an affiliate any transaction between a bank and a nonaffiliate 

to the extent that the proceeds of the transaction are used for the benefit of, or 

transferred to, an affiliate. 

Several aspects of the program, either as currently structured or as it 

might be structured in the future, expose Bank to credit risk in a manner that raises 

section 23A and Regulation W issues when the Borrower is an affiliate of the bank. 

First, in the agreements between Bank and its customers, Bank undertakes to return 

the Borrowed Securities to the customer whether or not the securities are returned 

to the bank by the Borrower. This indemnity is limited, however, to the amount by 

which the value of the Borrowed Securities exceeds the value of the collateral 

posted by the Borrower. The bank limits its exposure on this indemnity by 

marking to market daily the Borrowed Securities and any securities collateral and 

by calling for additional collateral if the value of the collateral posted by the 

Borrower drops below the value of the Borrowed Securities. 

In addition, Wachovia has indicated that during the term of a 

securities loan, the Borrower has an obligation promptly to transmit to Bank’s 

customer any dividends, interest payments, or other similar distributions made by 

issuers on the Borrowed Securities. In the future, the bank may credit the 

customer’s account with these distributions on the date the distributions are 

payable by the issuer, regardless of whether the Borrower has forwarded the 

distribution amounts to the bank for the account of the customer. In such an event, 

the bank would have a short-term credit exposure to the Borrower in the amount of 
- 3 -

any distributions that the bank has credited to a customer’s account in advance of 

having received the distribution from the Borrower. 

Finally, Wachovia has stated that during the term of a securities loan, 

Bank has discretion to advance funds to a Borrower, on behalf of a customer, to 

pay fees owed by the customer to the Borrower or to return excess collateral to the 

Borrower. 

Bank proposes to engage in securities lending transactions with its 

U.S. broker-dealer affiliates, including Wachovia Borrowers, on the same terms 

and conditions, including lending limits, that the bank lends customer securities to 

unaffiliated broker-dealers. Because these transactions would involve guarantees 

by the bank on behalf of Wachovia Borrowers, and may in the future involve 

extensions of credit by the bank to or for the benefit of Wachovia Borrowers, 

Wachovia Borrowers’ participation in the securities lending program would be 

subject to the quantitative, collateral, and other requirements in section 23A and 

Regulation W. Wachovia has requested an exemption from the statute and 

regulation for these covered transactions to allow Bank to conduct its securities 

lending program with Wachovia Borrowers in the same manner as the bank 

conducts this program with unaffiliated securities broker-dealers. 

Section 23A and Regulation W specifically authorize the Board to 

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

statute and regulation if it finds such exemptions to be in the public interest and 

consistent with the purposes of section 23A. [Footnote 2. Begin Footnote 2 text. 

12 U.S.C. section 371c(f)(2); 12 CFR 223.43. End Footnote 2.] Granting an exempti

from the 

generated by the inclusion of Wachovia Borrowers as Borrowers in Bank’s 

securities lending program would be appropriate and consistent with Board 

precedent. [Footnote 3. Begin Footnote 3 text. See Board letters dated 

June 7, 2005, to Michael M. Wiseman, Sullivan & Cromwell LLP (The Bank of 

New York Company); and October 31, 2001, to Marjorie Gross, J.P. Morgan 

Chase & Co. End Footnote 3.] 
- 4 -

Under the indemnity given by Bank to its customers, the risk of loss to 

the bank does not appear to be substantial due to the daily mark-to-market and 

remargining procedures employed by the bank and the predominant use of cash 

and U.S. government securities as collateral to mitigate the bank’s exposure to 

Wachovia Borrowers on the indemnity. In addition, the risk of loss to the bank 

from any future advances by the bank to customers on behalf of Wachovia 

Borrowers would be small because, among other things, the advances generally 

would be repaid on an intraday basis. Moreover, any future advances by the bank 

to Wachovia Borrowers on behalf of a customer generally would be short-term and 

secured by all the investment securities in the customer’s accounts with the bank. 

In light of the higher risks often associated with securities lending 

transactions collateralized by assets other than cash or U.S. government securities, 

and consistent with Board precedent, the Board believes that securities lending 

transactions between Bank and Wachovia Borrowers that are secured by property 

other than cash or U.S. government securities should be exempt from section 23A 

and Regulation W only to the extent that the total market value of Borrowed 

Securities lent to Wachovia Borrowers by Bank’s customers against such collateral 

does not in the aggregate exceed the lesser of (i) 5 percent of the bank’s capital 

stock and surplus or (ii) 5 percent of the total market value of Borrowed Securities 

lent to Wachovia Borrowers by the bank’s customers. [Footnote 4. Begin 

Footnote 4 text. If the total market value of Borrowed Securities lent to 

Wachovia Borrowers by the bank’s customers against property other than cash 

or U.S. government securities exceeds this threshold, the marginal amount would 

be treated as a nonexempt guarantee by the bank on behalf of an affiliate under 

section 23A and Regulation W and, accordingly, would be subject to the 

quantitative limits and collateral and other requirements of the statute and the 

regulation. End Footnote 4.] 

In the case of each of the three types of exposure, as well as other 

aspects of the transaction that involve payments by Bank to or on behalf of 

Wachovia Borrowers, the bank would continue to be subject to the market-terms 

requirement of section 23B and Regulation W. Because numerous unaffiliated 

Borrowers participate in Bank’s securities lending program, examiners would be 

able to verify on an ongoing basis whether the bank’s covered transactions with 

Wachovia Borrowers in the program are on substantially the same terms as those 

prevailing with nonaffiliates. Likewise, section 23B prevents the bank from 
- 5 -

agreeing to indemnify or make an advance to a customer on behalf of Wachovia 

Borrowers, unless the bank would agree to make the same indemnity or advance 

on behalf of a nonaffiliate and prevents the bank from making an advance to 

Wachovia Borrowers on behalf of a customer, unless the bank would make the 

advance to a nonaffiliate on behalf of the customer. 

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

presented, the transactions appear to be consistent with safe and sound banking 

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

the requested exemptions, subject to the conditions and limits on securities lending 

transactions collateralized by property other than cash or U.S. government 

securities discussed above. The Board also reserves the right to rescind this 

exemption if it is used by Bank to evade section 23A or Regulation W. 

These determinations are specifically conditioned on compliance by 

Wachovia and Bank with all the commitments and representations they made to 

the Board 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. These determinations are based on the specific facts and 

circumstances of the securities lending program described in your correspondence 

and this letter. Any material change in those facts and circumstances or any failure 

by Wachovia, Bank, or any other company relying on the exemption granted in this 

letter to observe any of its commitments or representations may result in a different 

conclusion or in revocation of the exemption. 

Sincerely yours, 

(signed) 

Robert deV. Frierson 

Deputy Secretary of the Board 

cc: Federal Reserve Bank of Richmond 

Federal Deposit Insurance Corporation 

Office of the Comptroller of the Currency