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 

May 15, 2006 

David Teitelbaum, Esq. 

Sidley Austin Brown & Wood LLP 

1501 K Street, N.W. 

Washington, DC 20005 

Dear Mr. Teitelbaum: 

This is in response to your letter of December 21, 2005, on behalf of 

Merrill Lynch Bank USA (“ML Bank”), Salt Lake City, Utah, requesting an 

exemption from section 23A of the Federal Reserve Act and the Board’s 

Regulation W to permit the bank to acquire certain credit facilities from its 

affiliate, Merrill Lynch International (“MLI”), London, England. [Footnote 1. 

Begin Footnote 1 text. 12 U.S.C. section 371c; 12 CFR part 223. ML Bank 

is a Utah-chartered industrial loan company (“ILC”). Although ILCs generally 

are not “banks” for purposes of the Bank Holding Company Act, ILCs generally 

are subject to sections 23A and 23B of the Federal Reserve Act because of their 

status as insured depository institutions. See 12 U.S.C. section 1828(j). End 

Footnote 1.] 

You have indicated that Merrill Lynch & Co. (“ML and Co.”), 

New York, New York, proposes to reorganize its hedge fund and “Fund of Funds” 

lending business by having MLI transfer approximately $[ ] in aggregate 

outstanding loans (collectively “Loans” and singularly “Loan”), with a total facility 

amount of $[ ], to its affiliate, ML Bank. The purchase price for the Loans would 

be $[ ], approximately equal to the funded portion of the Loans. 

Section 23A and Regulation W limit the amount of “covered 

transactions” between a bank (including an insured industrial loan company like 

ML 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 
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affiliates to 20 percent of the bank’s capital stock and surplus. “Covered 

transactions” include a bank’s purchase of assets from an affiliate and a bank’s 

extension of credit to an affiliate. The statute and regulation also require a bank to 

secure its extensions of credit to, and certain other covered transactions with, 

affiliates with prescribed amounts of collateral. In addition, section 23A and 

Regulation W prohibit a bank from purchasing low-quality assets from an affiliate 

and require that all covered transactions between a bank and an affiliate be on 

terms that are consistent with safe and sound banking practices. 

As an asset purchase, ML Bank’s purchase of the Loans from MLI 

would be a covered transaction subject to the quantitative and qualitative limits of 

section 23A and Regulation W. [Footnote 2. Begin Footnote 2 text. See 12 U.S.C. 

section 371c(b)(7)(C); 12 CFR 223.3(h)(3). End Footnote 2.] The value of this 

covered transaction for purposes of Regulation W would be approximately $[ ] 

-- the purchase price paid by ML Bank for the Loans plus the unfunded but 

committed portion of the loan facilities. [Footnote 3. Begin Footnote 3 text. 

See 12 CFR 223.22(a). End Footnote 3.] 

To facilitate the reorganization, ML Bank has requested an exemption 

from section 23A and Regulation W to acquire the Loans. Section 23A and 

Regulation W specifically authorize the Board to exempt, in 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. [Footnote 4. Begin Footnote 4 text. 12 U.S.C. 

section 371c(f)(2); 12 CFR 223.43(a). End Footnote 4.] 

The Board has in the past approved exemptions under section 23A for 

one-time asset transfers that are part of a corporate reorganization and that are 

structured to ensure the quality of the transferred assets. [Footnote 5. Begin 

Footnote 5 text. See, e.g., Board letters dated November 22, 2005, to 

Robin J. Maxwell, Esq. (The Royal Bank of Scotland Group plc); May 14, 2004, 

to James E. Scott, Esq. (Citigroup Inc.); and February 10, 2004, to 

David Teitelbaum, Esq. (Merrill Lynch). End Footnote 5.] As in previous cases 

reviewed by the Board, the proposed transaction is part of a one-time corporate 

reorganization. ML and Co. is consolidating its hedge fund and “Fund of Funds” 
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lending business into ML Bank. ML Bank expects that the reorganization would 

allow it to operate more profitably and efficiently, thereby allowing the bank to 

extend additional credit into the market and serve its customers better. 

ML Bank has represented that none of the Loans’ borrowers is a 

hedge fund or “Fund of Funds” managed by ML Bank or by an affiliate of ML 

Bank and that the borrowers are contractually prohibited both from using the 

proceeds of the Loans to purchase shares of funds that are sponsored or advised by 

an affiliate of ML Bank and from pledging such shares as collateral for a Loan. 

ML Bank has also represented that none of the Loans would be a low-quality asset 

(as defined in Regulation W). In addition, directors of ML Bank have reviewed 

and approved the transaction. Moreover, ML and Co. has committed that, for a twoyear period after the asset purchase, it will either (i) make quarterly cash 

contributions to ML Bank equal to the book value, plus any write-downs taken by 

the bank, of any Loan that becomes a low-quality asset (as defined in 

Regulation W) during the quarter; or (ii) repurchase, on a quarterly basis, any Loan 

that becomes a low-quality asset at a price equal to the book value plus any writedowns taken by the bank. 

In light of these considerations and all facts and circumstances of this 

case, the transaction described above appears to be consistent with safe and sound 

banking practices and on terms that would ensure the quality of the assets 

transferred. Accordingly, the proposed transaction appears to be consistent with 

the purposes of section 23A. The Director of the Division of Banking Supervision 

and Regulation, pursuant to authority delegated by the Board, with the concurrence 

of the General Counsel and after consultation with staff of the Federal Deposit 

Insurance Corporation, hereby grants the requested exemption. 

This determination is specifically conditioned on compliance by ML 

Bank, MLI, and ML and Co. 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 in connection with granting the 

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

This determination is based on the specific facts and circumstances surrounding the 

proposed transaction and may be revoked in the event of any material change in 

those facts and circumstances or any failure by ML Bank, MLI, or ML and Co. to 

observe any of its commitments or representations. Granting this exemption does 
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not represent a determination concerning the permissibility of any other 

transactions engaged in by ML Bank, MLI, or ML and Co. that are subject to 

section 23A or Regulation W. 

Sincerely, 

(signed) 

Robert deV. Frierson 

Deputy Secretary of the Board 

cc: Federal Reserve Bank of San Francisco 

Federal Deposit Insurance Corporation