Source: http://www.dfs.ny.gov/legal/interpret/lo100105.htm
Timestamp: 2017-11-21 06:15:39
Document Index: 237183080

Matched Legal Cases: ['art 14', 'art 14', 'art 14', 'art 14', 'art 14', '§14', '§5', 'art 225', '§225', '§ 225', '§235', '§235', '§85', '§85', '§234', 'art:\n5']

NYS DFS - Banking Interpretations - Banking Law and General Regulations of the Banking Board: Memorandum/Letter of January 5, 2010
To: Supervising Examiner Lee
[---] Operating Subsidiary
Whether the subject notice ("Notice") of [---] (the "Bank") to establish [---] ("Art Management") as an operating subsidiary is sufficient under Part 14 of the General Regulations of the Banking Board ("GRBB")1?
Yes. The proposed activities of Art Management that are described in the Notice may be conducted by either a New York-chartered savings bank with fiduciary powers or an operating subsidiary of such a savings bank.
The Bank is a New York-chartered savings bank. Under Section 234-b of the New York Banking Law (the "Banking Law"), the New York State Banking Board (the "Banking Board") on November 4, 2004 approved without limitation the application of the Bank to exercise the powers specified in Sections 100, 100-a, 100-b and 100-c of the Banking Law -i.e. "fiduciary powers." Similarly, the Federal Deposit Insurance Corporation approved an application of the Bank to exercise trust powers on October 7, 2004.
Art Finance is an operating subsidiary of the Bank engaged in extending credit secured by art and antiques.2 The Bank owns 67.5 percent of Art Finance. The other owners of Art Finance are [---] Family Investors LLC ("Family Investors") which holds 22.5 percent of Art Finance, and [---] ("Art Partners") which holds 10 percent. In this regard, the Bank also owns 60% of Art Partners.
Pursuant to an agreement, the Bank holds a 75 percent voting interest in Art Finance, and Family Investors holds the remaining 25 percent voting interest. Although Art Finance established Art Management as a wholly-owned subsidiary on January 30, 2009, Art Management has remained inactive.
The Notice advises that the proposed activities of Art Management will include providing the following services:
Advice on valuation and review of third-party appraisals.
Advice on sales planning and execution, including liquidation planning and management.
Review of adjustments, claim assessments, loss of value determinations and "agreed values" for insurance purposes.
Provenance research and documentation, including forensic provenance research.
In depth research and analysis of the art market and of individual artists (including forecasting trends for planning purposes).
Advice on philanthropic issues.
Preparation of art collections for estate planning purposes (including documentation of insurance, provenance, liquidation instructions, and importation).
Due diligence for acquisitions and divestitures.
Art collections management. The Notice elaborates and explains that:
“Collections management documents artwork descriptions, provenance, bills of sale, digital images, and all information relating to the pieces. Sometimes large collections are also managed using specialized art database software. Such service assists art owners to maintain the value of their collections and improve their ability to enter into transactions related to art pieces.”
Real estate advice to art industry participants (dealers looking for storage/gallery/office accommodations). This would include providing:
Analyses of buying versus renting property;
Market rents and prices for space and the advantages and disadvantages various locations;
Transactional structures that are financeable; and
The general outlook for the real estate market.
Capitalization and partnership advice to art dealers and other art industry participants. This would consist of providing advice to art dealers, collectors and institutions on:
The types of entities that might be appropriate ownership vehicles;
The capitalization of these entities including, e.g., their long-term capital;
Transferring ownership from one entity to another; and
General advice regarding the structure of such entities.
Testimony as expert witnesses. The Notice points out that Art Management will provide a range of services:
“These services will require [Art Management] to conduct detailed analysis of the worth and marketability of the art at issue, or in some cases, of the artist. Such analysis will include examining past sales and reviews, and consideration of the current and future market for the art, maintenance costs, etc
We expect that the above analysis will result in a written report or other report to be provided to the customer. Where a dispute arises between the [Art Management] customer and the third party that is dealing with the customer, it is conceivable that the customer may request that the [Art Management] agent testify as to the methodologies and conclusions underlying the agent’s appraisal report. Moreover, in addition to providing appraisal and expert witness services to customers prior to a dispute arising as to a piece of art, [Art Management] will also be available to provide appraisal and expert witness services for customers who have already found themselves in a dispute. In other words, the obtaining of appraisal and expert witness services as to the valuation of an art piece in response to pending or existing litigation may, in some cases, be the primary purpose for a customer engaging [Art Management] . . . .
[Art Management] will avoid possible conflicts of interest by refraining from offering its appraisal or expert witness services on collateral securing loans that are originated by or refinanced through the Bank”.3.
Consulting on optimal art industry practices in insurance, storage, conservation, appraisal, and evaluation. This would include advice on the art storage facilities in the tri-state area — focusing on such factors such as convenience of location, climate control, security, ease of arranging viewings, the organization and management of the facilities, costs, insurance, etc. With regard to the conservation or physical condition, Art Management would not give advice on actions to be taken or methods to be followed. Instead, Art Management would refer clients to conservators or specialized experts in whom it has confidence.
“Acting as a contract custodial for specific art pieces.” The Notice explains this phrase and points out that this custodial activity would not entail Art Management’s taking actual physical custody of artwork. The Notice states:
“Custodial contract arrangements refer to consignment/bailment arrangements to museums, dealers, art auctioneers, or storage facilities. In addition, this activity includes arranging for the proper art handlers, insurance provisions and all other specialized arrangements regarding the re-location of art work.”
The Notice sets forth the names of the proposed officers and employees of Art Management, the qualifications of such persons and a proposed organization chart. The Bank also describes the business goals of Art Management and how the activities of Art Management are anticipated to enhance the business of Art Finance. The Notice, however, does not specify quantitatively the anticipated effects of the activities of Art Management on the income statement, balance sheet and cash flow statement of Art Finance, Art Partners or the Bank.
Although Art Management will be indirectly controlled by the Bank, it will not be wholly-owned. Nevertheless, the Bank commits that it will limit the activities of Art Management to those permissible for a New York state-chartered bank.4
The Notice has addressed the management of risk at Art Management — particularly legal risk. The Notice states that “documentation for the business [of Art Management] has been prepared by both the Bank’s in-house counsel and specialized art legal counsel.” Further, the Notice has provided a number documents which are to be used by Art Management in its business, including:
A form Engagement Letter under which Art Management would provide appraisals.
A Statement of Assumptions and Limiting Conditions/Disclaimers.
An Insurance Policy for Professional Liability Errors and Omissions Insurance.
The Notice asserts that proposed activities of Art Management would optimize the use of the art valuation expertise that currently exists at the Bank or its subsidiaries. Accordingly, the bank believes that these proposed activities would avoid possible underutilization of the Bank’s resources.
A Savings Bank may form an Operating Subsidiary.
Under Section 97.4–a of the Banking Law and Part 14 of the GRBB, New York State­chartered banks and trust companies may invest in the stock and other equity of "operating subsidiaries" — i.e., subsidiaries engaged in the transaction of any business in which the bank or trust company could engage directly. Similarly, a New York State­chartered savings bank may establish operating subsidiaries pursuant to Sections 234.1 and 234.23 of the Banking Law, provided that such operating subsidiaries only engage in those activities in which the savings bank could engage directly.5
A Savings Bank or an Operating Subsidiary thereof may provide advice with respect to art as an investment.
Both New York State-chartered banks and savings banks may provide investment and other financial advice to their customers. 6 The concept of financial advice is quite broad. For example, an operating subsidiary of New York State-chartered bank is permitted to engage in the following activity under the “preapproved notice procedures” of Part 14:
“providing financial and transactional advice to customers and assisting customers in structuring, arranging and executing various financial transactions (provided that the bank and its affiliates do not participate as a principal), including mergers, acquisitions, divestitures, joint ventures, leveraged buyouts, recapitalizations, capital structurings and financial transactions (including private and public financings and loan syndications); conducting financial feasibility studies; and arranging commercial real estate equity financing”.
Moreover, to the same extent as a New York State-chartered trust company or bank with fiduciary powers, the Bank may provide discretionary as well as nondiscretionary investment advisory and management services.8 Unless the grant of powers is limited by the Banking Board, the fiduciary powers of a savings bank under Section 234–b of the Banking Law are identical to those of a trust company or of a bank with fiduciary powers chartered under Article III of the Banking Law. In the present case, the application of the Bank to exercise fiduciary powers was approved without limitation.
The activities described in Items 1 through 13 above would clearly fall within the concept of providing investment, financial or transactional advice as long as fine art is treated as an investment vehicle similar to stocks and bonds. There is little precedent on whether fine art should be so treated by a New York bank or savings bank. On the other hand, the Comptroller of the Currency (the “OCC”) has determined that art is an alternate investment vehicle with respect to which national banks may provide advisory and management services.9 In this regard, a number of banking institutions provide art advisory services including, among others: Citigroup Inc.10, HSBC11 and Deutsche Bank.12 Accordingly, the activities described in Items 1 through 13 would be permissible for Art Management as an operating subsidiary of a New York-chartered savings bank.13
The activities of Art Management described in Item 13 above would not amount to Management Consulting.
The ability of a New York-chartered savings bank to engage in “management consulting” would appear to be limited to providing such consulting to other financial institutions and not to "art dealers and other art industry participants.” New York State-chartered banks have not been permitted to engage in management consulting without restriction.14 In this regard, only providing “management consulting, operational advice and specialized services for other depository institutions“ is listed as an activity that qualifies for the preapproved notice procedures of Section 14(3)(c) of the GRBB. Similarly, in the case of operating subsidiaries of national banks only “[p]roviding management consulting, operational advice, and services for other financial institutions“ is a activity that qualifies for the notice procedures under the Regulations of the OCC.15 Analogous limitations apply to those activities that have been determined to be permissible for nonbank subsidiaries of bank holding companies16 or authorized for “service corporation” subsidiaries of New York State-chartered savings banks.17
In contrast to providing investment advice, general economic advice or financial and transactional advice on structuring, arranging and executing financial transactions18, “management consulting” focuses upon providing analyses and advice on the operations of an enterprise.19 In the present case, Art Management would not providing advice on how its clients should conduct their operations. The proposed activities would not cause Art Management to engage in “management consulting”.
A Savings Bank with fiduciary powers may act as a custodian or bailee of tangible personal property.
In describing the activities in Item 14, the Notice states that Art Management would not take actual physical custody of artwork. Still, it is possible that artwork might be physically in the possession of a third party, but under a contractual relationship where Art Management would be considered the custodian of such artwork and the third party Art Management’s sub-custodian.
An attachment to the Notice asserts that the activity of safekeeping artwork is within the power of a New York-chartered savings bank to “engage in the safe deposit business” under Section 234.9 of the Banking Law. In the past, this section has been interpreted as not authorizing a savings bank “to conduct either a general storage business or become a bailee for hire”.20
However, the powers and activities of savings banks and commercial banks have become far less distinguishable in the more than fifty years since those interpretations were issued. A more contemporary view of the powers of a savings bank might, therefore, include the authority to act as a custodian or bailee of tangible personal property.21 Still, it is not necessary at this point to determine whether a savings bank without fiduciary powers may accept the custody of tangible personal property generally. Arguably, the Bank would have the authority to act as a custodian or bailee of artwork as a power incidental to its providing art advisory services.22 Moreover, under its fiduciary powers, the Bank would clearly have the authority to act as a custodian or bailee. 23
The Notice complies with Part 14.
The Notice substantially contains the information required by Section 14.3(a) of the GRBB, and there is no legal impediment to allowing the Art Management to engage in the activities proposed.
Technically, Part 14 of the GRBB applies to banks and trust companies and not savings banks. However, savings banks seeking to establish operating subsidiaries have been advised to follow the procedures applicable to banks and trust companies in Section 14.3
Presumably, this restriction would apply to all extensions of credit that are originated by or refinanced through the Bank or its affiliates including Art Finance.
Although the Bank is not a member of the Federal Reserve System, the Notice cites to a letter dated November 2, 1996 from J. Virgil Mattingly, General Counsel of the Board of Governors of the Federal Reserve System to Ronald C. Mayer, Vice President and Senior Associate Counsel of The Chase Manhattan Bank (“Chase”), which was then a New York State-chartered bank. The letter allowed an operating subsidiary of Chase to acquire a non-controlling membership interest in a limited liability company (“LLC”) that would engage in activities permissible both for Chase as a New York State-chartered bank and for a national bank. The letter was predicated on the structure of the LLC insulating Chase and its operating subsidiary from exposure to loss and on the operating agreement of the LLC limiting the activities of the LLC to those permissible for a bank. At the time of the letter from Mr. Mattingly, a bank’s acquiring interest in an LLC was still relatively novel. Moreover, there was a need for assurance that an entity which Chase would not control would not engage in activities that were not permissible for a bank. In the present case, the Bank will indirectly control Art Management, and therefore, be able to prevent Art Management from engaging in activities not permissible for the Bank.
Letter dated February 21, 1991 from Kathleen A. Scott of the Banking Department to James H. Ellis.
GRBB at §14.3(d)(9).
A bank lacking such powers may provide investment advice only on a nondiscretionary basis — i.e., where all investment decisions are made by the clients to whom the bank provides advice. Letter dated January 11, 1993 from Raymond L. Bruce of the Banking Department to Benjamin Raphan of Tenzer, Greenblatt, Fallon & Kaplan.
The Comptroller’s Handbook for Investment Management Services, August, 2001, states:
"National banks manage and provide advice on all types of assets for their clients. Besides managing portfolios of publicly traded stocks and bonds, national banks also manage and provide advice for portfolios that include a broad range of investment alternatives such as financial derivatives, hedge funds, real estate, private equity and debt securities, mineral interests, and art." Id. at p.6.
The Citi Family Office Art Advisory Service is a service of Citi Private Bank whose products and services are provided through bank and non-bank affiliates of Citigroup Inc. Accordingly, it is not clear what parts of the Citi Family Office Art Advisory Service are provided through banks. A brochure describing the service is available at the following webpage: https://www.privatebank.citibank.com/aas/citi-main.htm
The HSBC Private Bank provides design and art advisory service. Some of the services are, however, apparently outsourced, and again, it is not clear what parts of the design and art advisory service are provided through banks. The service is described at: http://www.hsbcprivatebank.com/services/design-and-art-advisory.html
A description of the art advisory services provided by Deutsche Bank Private Wealth Management is available at: http://www.db.com/pwm/en/select-services-art-advisory.html Again, it is not clear what parts of these art advisory services are provided by a bank and what parts are provided by affiliates of a bank.
In support of the proposal for Art Management to engage in providing testimony as an expert witness, the Notice cited an unpublished interpretive letter of the OCC dated September 9, 1999, which letter permitted a national bank to engage in the activity of conducting property tax appeals based on the valuation of specific properties. The OCC reasoned that such activity was legitimate extension of the national bank’s ability to offer real estate appraisal services.
Here, the proposed activities would not include Art Management’s conducting or prosecuting administrative or judicial proceedings, but merely its providing testimony about various artwork, artists and ancillary matters. Such testimony would be well within the expertise that Art Management should have in order to conduct its other proposed activities. Accordingly, there is no need to address the issue of whether it would be appropriate for Art Management to conduct or prosecute a legal proceeding in the manner described in the OCC letter.
Memorandum dated January 11, 1993 from Assistant Counsel Evelyn Miller to Examiner Simmons.
12 CFR §5.34(e)(5)(v)(F).
In its Regulation Y, 12 C.F.R. Part 225, the Federal Reserve Board has placed the following on its “laundry list” of activities that are “so closely related to banking or managing or controlling banks as to be a proper incident thereto,” and therefore, are permissible for nonbank subsidiaries of bank holding companies:
“Providing management consulting advice:
1) On any matter to unaffiliated depository institutions, including commercial banks, savings and loan associations, savings banks, credit unions, industrial banks, Morris Plan banks, cooperative banks, industrial loan companies, trust companies, and branches or agencies of foreign banks;
2) On any financial, economic, accounting, or audit matter to any other company.” Id. at §225.28(b)(9).
Conversely, the Federal Reserve Board has determined that providing of general management consulting advice to nonfinancial institutions is not “closely related to banking.” Id. at § 225.126(f).
Under Section 235–d of the Banking Law, savings banks are permitted to invest up to an amount equal to three percent of their assets in “service corporations.” Id. at §235–d.1. Such service corporations may engage, inter alia, in those activities that have been authorized by general regulation of the Banking Board. Id. at §235–d.2
The Banking Board has adopted regulations prescribing permitted activities for such service corporations, which activities are somewhat broader than those allowed for an operating subsidiary. GRBB §85.2. Nevertheless, a service corporation is only permitted to provide “managerial” services to “other financial institutions” and not to business enterprises generally. Id. at §85.2(b)(2). .
See text at Note 5, supra.
The Banking Department has not extensively defined “management consulting” for the purposes of the Banking Law. In determining whether an activity constituted “management consulting” under the Bank Holding Company Act, the Federal Reserve Board has stated:
“ Management consulting . . . includes but is not limited to, the provision of analysis or advice as to a firm's (i) purchasing operations, such as inventory control, sources of supply, and cost minimization subject to constraints; (ii) production operations, such as quality control, work measurement, product methods, scheduling shifts, time and motion studies, and safety standards; (iii) marketing operations, such as market testing, advertising programs, market development, packaging, and brand development; (iv) planning operations, such as demand and cost projections, plant location, program planning, corporate acquisitions and mergers, and determination of long-term and short-term goals; (v) personnel operations, such as recruitment, training, incentive programs, employee compensation, and management-personnel relations; (vi) internal operations, such as taxes, corporate organization, budgeting systems, budget control, data processing systems evaluation, and efficiency evaluation; or (vii) research operations, such as product development, basic research, and product design and innovation.” 58 Fed. Res. Bull. 674 (1972).
Memorandum dated May 7, 1957 from Senior Attorney Houlihan to Deputy Power, which memorandum advised that a savings bank had “no authority to store microfilm as a depository for hire” under Banking Law Section 234.9; memorandum dated February 16, 1945 from Principal Attorney Parker to Deputy Ludeman, which memorandum stated that a savings bank could not “engage in the business of fur storage” under Section 234.9.
New York-chartered (commercial) banks have the authority to act as a custodian or bailee of tangible personal property under Banking Law Section 96.3(a).
See letter dated August 17, 1990 from Associate Attorney Salvatore A. Fiorella, which advised that a savings bank without fiduciary powers that was acting as “servicer of mortgage portfolios for others under Banking Law §234.16” would have the authority act as custodian of the mortgage documents.
The Bank has been granted the authority to exercise the powers specified in Sections 100 of the Banking Law, and Section 100 reads in relevant part:
5. To take, accept and execute any and all such . . . duties and powers of whatever nature or description as may be conferred upon or entrusted or committed to it by any . . . and to receive, take, manage, hold and dispose of according to the terms of such . . . duty or power, any property . . . real or personal, which may be the subject of any such . . . duty or power.”