B-219801, OCT 10, 1986

B-219801, OCT 10, 1986

MISCELLANEOUS TOPICS - FINANCE INDUSTRY - FINANCIAL INSTITUTIONS - CORPORATE ENTITIES - AUTHORITY - INVESTMENTS MISCELLANEOUS TOPICS - FINANCE INDUSTRY - FINANCIAL INSTITUTIONS - GOVERNMENT CORPORATIONS - CORPORATE OWNERSHIP DIGEST: 1. AFTER THE NATIONAL CONSUMER BANK (NCB) WAS CONVERTED FROM A MIXED- OWNERSHIP GOVERNMENT CORPORATION TO A FEDERALLY-CHARTERED PRIVATE BANKING INSTITUTION OWNED AND CONTROLLED BY ITS COOPERATIVE STOCKHOLDERS, WHICH OCCURRED ON DECEMBER 31, 1981, THE NCB GAINED THE AUTHORITY TO FORM SUBSIDIARIES AND INVEST IN AFFILIATES. IN ADDITION TO NCB'S EXPRESS STATUTORY AUTHORITY TO ACQUIRE REAL AND PERSONAL PROPERTY (INCLUDING CORPORATE STOCK) AND, AFTER ITS CONVERSION TO A PRIVATE INSTITUTION, TO MAKE OTHER INVESTMENTS AS AUTHORIZED BY ITS BOARD OF DIRECTORS, NCB HAS SUCH OTHER INCIDENTAL POWERS AS MAY BE NECESSARY OR EXPEDIENT TO PERFORM ITS DUTIES UNDER THE NCB ACT. THESE PROVISIONS AUTHORIZE NCB TO FORM SUBSIDIARIES AND INVEST IN AFFILIATES IN ORDER TO HELP NCB FULFILL ITS STATUTORY MANDATE. MISCELLANEOUS TOPICS - FINANCE INDUSTRY - FINANCIAL INSTITUTIONS - AFFILIATES - LOANS - PROPRIETY MISCELLANEOUS TOPICS - FINANCE INDUSTRY - FINANCIAL INSTITUTIONS - SUBSIDIARIES - AUTHORITY 2. THE ACTIVITIES ENGAGED IN BY CORPORATE SUBSIDIARIES AND AFFILIATES OF THE NATIONAL CONSUMER COOPERATIVE BANK (NCB) AND NCB'S RELATIONSHIP WITH THEM ARE NOT PROHIBITED BY ANYTHING IN THE NCB ACT. WHILE NCB'S SUBSIDIARIES CANNOT LEGALLY PERFORM ANY ACTIVITIES THAT NCB COULD NOT PERFORM DIRECTLY, ALL OF THE ACTIVITIES THE SUBSIDIARIES HAVE ENGAGED IN ARE ACTIVITIES THAT NCB IS AUTHORIZED BY STATUTE TO PERFORM. IN ADDITION, NCB'S EXTENSION OF A LOAN TO ITS CORPORATE AFFILIATE IS PERMISSIBLE SINCE THE AFFILIATE IS AN ELIGIBLE COOPERATIVE UNDER THE NCB ACT. MISCELLANEOUS TOPICS - FINANCE INDUSTRY - FINANCIAL INSTITUTIONS - CORPORATE ENTITIES - AFFILIATES - CONFLICTS OF INTEREST 3. WHILE SOME OFFICERS AND EMPLOYEES OF THE NATIONAL CONSUMER COOPERATIVE BANK (NCB) ALSO SERVE AS OFFICERS OR DIRECTORS OF THE SHARE LOAN SERVICE CORPORATION (SLSC), AN AFFILIATE OF THE NCB, NO CONFLICT OF INTEREST EXISTS BECAUSE NCB'S BOARD OF DIRECTORS HAS ISSUED AN ADDENDUM TO ITS CONFLICT OF INTEREST RULES THAT SPECIFICALLY EXEMPTS THE SLSC AND ITS OFFICERS AND DIRECTORS FROM THE APPLICATION OF THOSE RULES. CONSIDERING THE SPECIAL RELATIONSHIP BETWEEN THE NCB AND THE SLSC AND THE COMMON PURPOSE OF THE TWO CORPORATIONS, THE BOARD'S ACTIONS ARE WITHIN ITS DISCRETION UNDER THE NCB ACT WHICH AUTHORIZES THE BOARD TO ESTABLISH CONFLICT OF INTEREST RULES THAT ARE NO LESS STRINGENT THAN THOSE SET FORTH IN EXECUTIVE ORDER 11222.

THE HONORABLE FERNAND J. ST GERMAIN:

CHAIRMAN, COMMITTEE ON BANKING, FINANCE AND URBAN AFFAIRS

HOUSE OF REPRESENTATIVES

THIS IS IN RESPONSE TO YOUR JULY 23, 1985 REQUEST FOR OUR LEGAL OPINION CONCERNING THE AUTHORITY OF THE NATIONAL CONSUMER COOPERATIVE BANK (NCB) /1/ TO FORM AND INVEST IN A NUMBER OF "SUBSIDIARIES AND AFFILIATES." IN A 1985 EXAMINATION REPORT PREPARED BY THE FARM CREDIT ADMINISTRATION (FCA) IN ACCORDANCE WITH 12 U.S.C. SEC. 3025, THE FCA RAISED SEVERAL QUESTIONS ABOUT "(1) THE NCB'S AUTHORITY UNDER THE NCCB ACT TO FORM SUCH SUBSIDIARIES AND TO INVEST IN AFFILIATES AND (2) THE PROPER RELATIONSHIP BETWEEN NCCB AND THE AFFILIATES AND SUBSIDIARIES." YOU REQUESTED OUR OFFICE TO EXAMINE THE QUESTIONS RAISED ON THESE POINTS IN THE FCA REPORT AND TO DETERMINE THE LEGALITY OF "THESE ENTITIES" UNDER THE NCB'S ENABLING LEGISLATION AND WHETHER THE ACTIVITIES THEY ENGAGE IN ARE AUTHORIZED UNDER THE ACT. YOU ALSO ASKED THAT WE DETERMINE WHAT CHANGES, IF ANY, "SHOULD BE MADE IN THE STATUTE TO ASSURE APPROPRIATE RELATIONSHIPS BETWEEN THE BANK AND SUCH ENTITIES."

IT IS OUR VIEW, FOR THE REASONS SET FORTH HEREIN, THAT AFTER NCB WAS CONVERTED FROM A MIXED-OWNERSHIP GOVERNMENT CORPORATION TO A FEDERALLY CHARTERED PRIVATE INSTITUTION, OWNED AND CONTROLLED BY ITS COOPERATIVE STOCKHOLDERS, WHICH OCCURRED ON DECEMBER 31, 1981, IT GAINED THE AUTHORITY TO FORM SUBSIDIARIES AND INVEST IN AFFILIATES. MOREOVER, IT IS OUR OPINION THAT THE ACTIVITIES THESE SUBSIDIARIES AND AFFILIATES HAVE ENGAGED IN THE NCB'S RELATIONSHIPS WITH THEM ARE NOT PROHIBITED BY THE NATIONAL CONSUMER COOPERATIVE BANK ACT. 12 U.S.C. SEC. 3001 3051. ACCORDINGLY, WE ARE NOT AWARE OF THE NEED FOR ANY STATUTORY MODIFICATIONS FROM A LEGAL STANDPOINT.

BACKGROUND

THE NCB WAS CREATED IN 1978 AS A MIXED-OWNERSHIP GOVERNMENT CORPORATION AND "INSTRUMENTALITY OF THE UNITED STATES" BY ENACTMENT OF THE NATIONAL CONSUMER COOPERATIVE BANK ACT (NCB ACT), PUB.L. NO. 95 351, 92 STAT. 499. THE NCB WAS ESTABLISHED TO ENCOURAGE THE DEVELOPMENT OF NEW AND EXISTING COOPERATIVES THAT WOULD BE ELIGIBLE FOR SPECIALIZED CREDIT AND TECHNICAL ASSISTANCE FROM THE NCB AND TO ENCOURAGE BROAD-BASED OWNERSHIP, CONTROL, AND CREATIVE PARTICIPATION BY MEMBERS IN ELIGIBLE COOPERATIVES. 12 U.S.C. SEC. 3011 (1982). WHEN IT WAS ESTABLISHED, THE NCB RECEIVED FEDERAL FUNDING THROUGH TREASURY PURCHASES OF SHARES OF ITS CLASS A STOCK. U.S.C. SEC. 3014 (SUPP. III 1979). SUBSEQUENTLY, THE NCB ACT WAS AMENDED BY THE OMNIBUS BUDGET RECONCILIATION ACT OF 1981, PUB.L. NO. 97-35, TITLE III, 95 STAT. 357, 433, TO PROVIDE THAT ON A DATE DENOMINATED AS THE "FINAL GOVERNMENT EQUITY REDEMPTION DATE," ALL CLASS A STOCK OF THE NCB THEN HELD BY THE SECRETARY OF THE TREASURY "SHALL BE REDEEMED BY THE NCB IN EXCHANGE FOR CLASS A NOTES." 12 U.S.C. SEC. 3026(A)(3)(A). ACCORDANCE WITH 12 U.S.C. SEC. 3026(A)(1)(A), THE DATE OF FINAL REDEMPTION WAS DECEMBER 31, 1981. THE LAW ALSO PROHIBITED THE SECRETARY OF THE TREASURY FROM PURCHASING ANY CLASS A STOCK ISSUED BY NCB AFTER THE DATE OF FINAL REDEMPTION. 12 U.S.C. SEC. 3026(A)(2)(B). ACCORDINGLY, AS OF DECEMBER 31, 1981, THE NCB WAS CONVERTED FROM A MIXED-OWNERSHIP GOVERNMENT CORPORATION, AND INSTRUMENTALITY OF THE UNITED STATES, TO A FEDERALLY CHARTERED PRIVATE BANK OWNED AND CONTROLLED BY ITS COOPERATIVE STOCKHOLDERS. PUB.L. NO. 97-35, SEC. 396(B) AND (H), 95 STAT. 387, 439 40. SEE H.R. REP. NO. 208, 97TH CONG., 1ST SESS. 718 (1981).

DURING 1984 (THE PERIOD COVERED BY THE FCA'S 1985 EXAMINATION REPORT), THE NCB CREATED TWO WHOLLY-OWNED CORPORATE SUBSIDIARIES AND INVESTED CAPITAL IN TWO CORPORATIONS AFFILIATED WITH THE NCB. IT WAS THE NCB'S ESTABLISHMENT OF AN INVESTMENT IN THESE ORGANIZATIONS THAT GAVE RISE TO THE CONCERNS EXPRESSED IN FCA'S 1985 REPORT AND ULTIMATELY TO YOUR REQUEST FOR OUR LEGAL OPINION. AFTER FCA'S 1985 REPORT WAS ISSUED, THE NCB ACQUIRED THE REMAINING OUTSTANDING STOCK OF ONE OF THE TWO CORPORATE AFFILIATES, WHICH IT NOW OPERATES AS A WHOLLY-OWNED SUBSIDIARY. /2/ THE STRUCTURE AND FUNCTION OF EACH OF THOSE FOUR CORPORATIONS, AS DESCRIBED IN FCA'S 1985 REPORT AND IN OTHER DOCUMENTS AND REPORTS FURNISHED TO US, BY NCB, ARE SUMMARIZED BELOW.

1. THE NCB MORTGAGE CORPORATION IS A WHOLLY-OWNED SUBSIDIARY OF NCB. WAS ESTABLISHED IN JANUARY 1984 AS A DELAWARE CORPORATION, UNDER THE NAME CMB FUNDING CORPORATION. WHEN IT WAS ESTABLISHED IT WAS JOINTLY OWNED BY NCB AND THE COOPERATIVE LEAGUE OF THE U.S.A. HOWEVER IN JULY 1985, NCB ACQUIRED THE REMAINING OUTSTANDING STOCK OF THE NCB MORTGAGE CORPORATION, CONVERTING IT FROM AN NCB AFFILIATE INTO A WHOLLY OWNED SUBSIDIARY. THE NCB MORTGAGE CORPORATION PROVIDES DEBT AND EQUITY FINANCING EXPRESSLY FOR COOPERATIVE HOUSING AND REAL ESTATE DEVELOPMENT. ITS RESPONSIBILITIES INCLUDE DEVELOPING, ORIGINATING, AND SERVICING REAL ESTATE LOANS TO COOPERATIVES AND PROVIDING ITS BORROWERS WITH ACCESS TO SECONDARY MARKET INVESTORS.

2. THE NCB BUSINESS CREDIT CORPORATION IS A WHOLLY-OWNED SUBSIDIARY OF THE NCB THAT WAS ESTABLISHED IN DELAWARE IN MARCH 1984 AS THE NCCB LEASING CORPORATION. IT WAS ESTABLISHED FOR THE PURPOSE OF PROVIDING LEASING SERVICES TO ELIGIBLE COOPERATIVES UNDER FINANCING ARRANGEMENTS WITH THE NCB. ACCORDING TO NCB'S 1985 ANNUAL REPORT AND RECENT BROCHURES, THE NCB BUSINESS CREDIT CORPORATION IS A "SPECIALIZED LEASING AND CORPORATE FINANCE COMPANY" WHICH PROVIDES ASSISTANCE TO COOPERATIVES IN CONNECTION WITH LEASING, ASSET-BASED LENDING, PROJECT FINANCING, AND RELATED ACTIVITIES.

3. THE NCB CAPITAL CORPORATION IS A WHOLLY-OWNED SUBSIDIARY OF NCB THAT WAS ESTABLISHED IN DELAWARE IN NOVEMBER 1984 AS THE NCCB CAPITAL CORPORATION. THE PRIMARY PURPOSE OF THIS CORPORATION IS "TO DEVELOP SOURCES OF FUNDING FOR NCB LENDING ACTIVITIES." THE NCB CAPITAL CORPORATION DOES ALL OF THE BORROWING ON BEHALF OF THE NCB IN BOTH NATIONAL AND INTERNATIONAL MONEY MARKETS.

4. THE SHARE LOAN SERVICE CORPORATION (SLSC) IS A COOPERATIVELY OWNED AFFILIATE OF THE NCB THAT WAS ESTABLISHED IN MARYLAND IN JULY 1984. THE NCB IS A MINORITY SHAREHOLDER IN THE SLSC AND MANAGES ITS AFFAIRS THROUGH A CONTRACT WITH THE SLSC BOARD OF DIRECTORS. THE SLSC'S PRIMARY FUNCTION IS TO MAKE LOANS FOR THE PURCHASE OR REFINANCING OF INDIVIDUAL MEMBERSHIP SHARES IN HOUSING COOPERATIVES. IT OBTAINS FUNDS FOR THIS PURPOSE UNDER A LOAN ARRANGEMENT WITH THE NCB.

ANALYSIS

THE PRIMARY ISSUE YOU ASKED US TO ADDRESS IS WHETHER THE NCB HAS THE STATUTORY AUTHORITY TO INVEST IN AFFILIATES AND TO FORM SUBSIDIARIES. CONSIDERING THE INVESTMENT ASPECT FIRST, THE LIST OF NCB'S GENERAL CORPORATE POWERS SET FORTH IN 12 U.S.C. SEC. 3012 CONTAINS TWO PROVISIONS THAT EXPRESSLY AUTHORIZE SUCH INVESTMENTS. NCB IS GRANTED SPECIFIC AUTHORITY TO:

"ACQUIRE, HOLD, LEASE, MORTGAGE, OR DISPOSE OF, AT PUBLIC, OR PRIVATE SALE, REAL AND PERSONAL PROPERTY, AND SELL OR EXCHANGE ANY SECURITIES OR OBLIGATIONS AND OTHERWISE EXERCISE ALL THE USUAL INCIDENTS OF OWNERSHIP OF PROPERTY NECESSARY OR CONVENIENT TO ITS BUSINESS ***; AND TO,

"BUY AND SELL OBLIGATIONS OF, OR INSURED BY, THE UNITED STATES OR ANY AGENCY OR INSTRUMENTALITIES THEREOF *** AND, AFTER THE FINAL GOVERNMENT EQUITY REDEMPTION DATE, MAKE SUCH OTHER INVESTMENTS AS MAY BE AUTHORIZED BY THE BOARD OF DIRECTORS." 12 U.S.C. SEC. 3012(7) AND (16).

AS STATED ABOVE, THE DATE OF FINAL REDEMPTION WAS DECEMBER 31, 1981, AT WHICH TIME THE NCB BECAME A PRIVATE, ALBEIT FEDERALLY-CHARTERED, CORPORATION. ACCORDINGLY, AFTER THAT DATE, NCB'S STATUTORY AUTHORITY TO MAKE SUCH INVESTMENTS AS THE BOARD OF DIRECTORS AUTHORIZES, TOGETHER WITH ITS AUTHORITY TO ACQUIRE AND HOLD PERSONAL PROPERTY, WHICH WOULD INCLUDE CORPORATE STOCK, ARE SUFFICIENTLY BROAD TO ENCOMPASS NCB'S INVESTMENT IN AN AFFILIATE ORGANIZATION. IN REACHING THIS CONCLUSION, WE RECOGNIZE THAT NCB'S INVESTMENT IN ITS AFFILIATE SLSC INVOLVES MORE THAN A MERE FINANCIAL INVESTMENT. AS INDICATED IN A LETTER DATED FEBRUARY 28, 1985, FROM NCB'S VICE PRESIDENT AND GENERAL COUNSEL TO THE FARM CREDIT ADMINISTRATION (COPY ENCLOSED), THE NCB'S BOARD OF DIRECTORS AUTHORIZED THESE INVESTMENTS WITH THE UNDERSTANDING THAT NCB'S AFFILIATES /3/ WOULD "WORK CLOSELY WITH THE BANK TO CARRY ON THE BROAD CO-OPERATIVE DEVELOPMENT AND ASSISTANCE MANDATE OF THE BANK, CLEARLY AUTHORIZED UNDER THE BANK ACT." WE FAIL TO SEE WHY THE NCB'S INVESTMENT IN A CORPORATION, WHICH IS OTHERWISE EXPRESSLY AUTHORIZED BY THE NCB ACT, WOULD NO LONGER BE PERMISSIBLE BECAUSE THE INVESTMENT WAS INTENDED TO HELP THE NCB FULFILL ITS STATUTORY MANDATE.

THE QUESTION OF NCB'S AUTHORITY TO FORM CORPORATE SUBSIDIARIES IS NOT AS EASILY ANSWERED. AS RECOGNIZED IN A LEGAL MEMORANDUM DATED FEBRUARY 1, 1984, FROM NCB'S PRIVATE LEGAL REPRESENTATIVE TO ITS VICE PRESIDENT AND GENERAL COUNSEL (COPY ENCLOSED), "THE ORGANIZATION AND OPERATION OF A NEW SUBSIDIARY CORPORATION REQUIRES MORE THAN MERE INVESTMENT AUTHORITY."

IN ADDITION TO NCB'S EXPRESS STATUTORY AUTHORITY TO ACQUIRE AND HOLD STOCK AND TO MAKE INVESTMENTS, THE NCB HAS "SUCH OTHER INCIDENTAL POWERS AS MAY BE NECESSARY OR EXPEDIENT TO CARRY OUT ITS DUTIES UNDER THIS CHAPTER." 12 U.S.C. SEC. 3012 (18). IT IS NCB'S POSITION, AS SET FORTH IN THE FEBRUARY 1, 1984, LEGAL MEMORANDUM THAT "THE POWER TO CREATE SUBSIDIARY CORPORATIONS MUST BE FOUND IN THE INCIDENTAL POWERS UNDER SUBSECTION (18)." WHILE THIS MATTER IS NOT ENTIRELY FREE FROM DOUBT IN OUR VIEW, WE ARE INCLINED TO AGREE WITH NCB'S POSITION FOR SEVERAL REASONS.

FIRST, AS THE ENTITY RESPONSIBLE FOR ADMINISTERING THIS LEGISLATION, NCB'S INTERPRETATION OF THE STATUTE AND THE EXTENT OF ITS OWN AUTHORITY IS ENTITLED TO GREAT WEIGHT AND SHOULD ORDINARILY BE FOLLOWED UNLESS THERE ARE STRONG INDICATIONS FROM THE LEGISLATIVE HISTORY OR OTHERWISE THAT ITS INTERPRETATION IS ARBITRARY OR INCONSISTENT WITH THE STATUTORY PURPOSE. SEE B-216330, DECEMBER 4, 1984; 58 COMP.GEN. 635, 638 (1979). HAVING EXAMINED THE LEGISLATIVE HISTORY OF THE ORIGINAL NCB ACT, AND ITS 1981 AMENDMENT, PUB.L. NO. 97-35, WE FOUND NOTHING TO INDICATE THAT NCB'S ESTABLISHMENT OF CORPORATE SUBSIDIARIES WAS INCONSISTENT WITH LEGISLATIVE INTENT. MOREOVER, WE ARE CONVINCED THAT NCB'S PRIMARY OBJECTIVE IN ESTABLISHING THESE SUBSIDIARIES WAS TO BETTER ENABLE IT TO ACHIEVE THE STATUTORY PURPOSE OF PROVIDING "FINANCIAL AND TECHNICAL ASSISTANCE TO COOPERATIVES ***." 12 U.S.C. SEC. 3001.

FOR EXAMPLE, IN A LETTER TO OUR OFFICE DATED SEPTEMBER 16, 1985, THE NCB'S LEGAL REPRESENTATIVE EXPLAINED THAT:

"THE USE OF SUBSIDIARY CORPORATIONS BY THE NATIONAL COOPERATIVE BANK TO CONDUCT SPECIALIZED FINANCING SERVICES THAT THE BANK ITSELF IS AUTHORIZED TO CONDUCT WAS MOTIVATED IN SUBSTANTIAL PART BY *** THE BANK'S PERCEPTION THAT POTENTIAL CUSTOMERS OF THOSE SPECIALIZED FINANCING SERVICES ARE ACCUSTOMED TO DEALING WITH BANK SUBSIDIARIES WITH RESPECT TO SUCH MATTERS- - NOTABLY LEASE FINANCING AND MORTGAGE LENDING."

BASED ON INFORMATION NCB FURNISHED US, SHOWING A SUBSTANTIAL INCREASE IN ITS LENDING ACTIVITIES AND ITS ABILITY TO OBTAIN FINANCING FROM PRIVATE CAPITAL MARKETS, IT APPEARS THAT ESTABLISHING SUBSIDIARIES HAS ENABLED NCB TO BETTER FULFILL ITS STATUTORY PURPOSE.

SECOND, THE FINDING THAT NCB IS AUTHORIZED TO FORM CORPORATE SUBSIDIARIES IS CONSISTENT WITH THE ACTION OF CONGRESS IN ENACTING PUB.L. NO. 97-35, WHICH CONVERTED NCB FROM A MIXED-OWNERSHIP GOVERNMENT CORPORATION TO A PRIVATELY-OWNED BANKING INSTITUTION. UNDER 31 U.S.C. SEC. 9102, FORMERLY SECTION 304 OF THE GOVERNMENT CORPORATION CONTROL ACT, AGENCIES, INCLUDING WHOLLY-OWNED AND MIXED-OWNERSHIP GOVERNMENT CORPORATIONS, "MAY ESTABLISH OR ACQUIRE A CORPORATION TO ACT AS AN AGENCY ONLY BY OR UNDER A LAW OF THE UNITED STATES SPECIFICALLY AUTHORIZING THE ACTION." ACCORDINGLY, SO LONG AS THE NCB WAS A MIXED OWNERSHIP GOVERNMENT CORPORATION, THIS PROVISION WOULD HAVE PROHIBITED NCB FROM ESTABLISHING A CORPORATE SUBSIDIARY WITHOUT EXPRESS STATUTORY AUTHORIZATION. ONCE NCB WAS CONVERTED TO PRIVATE STATUS, HOWEVER, THIS PROVISION NO LONGER APPLIED AND NCB DID NOT NEED SPECIFIC STATUTORY AUTHORITY TO ESTABLISH A SUBSIDIARY CORPORATION. /4/

THIRD, THE "INCIDENTAL POWERS" PROVISION IS QUITE BROAD IN GRANTING THE NCB THE AUTHORITY TO TAKE OTHER ACTIONS THAT ARE "NECESSARY OR EXPEDIENT" TO THE PERFORMANCE OF NCB'S MANDATED ACTIVITIES. SIMILAR LANGUAGE IN THE NATIONAL BANK ACT, 12 U.S.C. SEC. 24, HAS BEEN INTERPRETED AS ALLOWING NATIONAL BANKS, WHICH ARE FEDERALLY-CHARTERED AND PRIVATELY-OWNED, TO ESTABLISH OPERATING SUBSIDIARIES TO PERFORM ANY BUSINESS FUNCTION THE PARENT BANK IS PERMITTED TO PERFORM. SEE 12 C.F.R. SEC. 7.7376. IN 1966, THE COMPTROLLER OF THE CURRENCY DETERMINED THAT THE AUTHORITY OF NATIONAL BANKS UNDER 12 U.S.C. SEC. 24 TO EXERCISE "ALL SUCH INCIDENTAL POWERS AS SHALL BE NECESSARY TO CARRY ON THE BUSINESS OF BANKING" INCLUDED AUTHORITY "TO PURCHASE OR OTHERWISE ACQUIRE AND HOLD STOCK OF A SUBSIDIARY OPERATIONS CORPORATION." /5/ IN HIS OPINION, THE COMPTROLLER EXPLAINED HOW THE "USE OF CONTROLLED SUBSIDIARY CORPORATIONS PROVIDES NATIONAL BANKS WITH ADDITIONAL OPTIONS IN STRUCTURING THEIR BUSINESS." THE SAME RATIONALE IS APPLICABLE IN THIS CASE. MOREOVER, WHILE WE ARE NOT AWARE OF ANY JUDICIAL OPINIONS THAT HAVE SPECIFICALLY RULED ON THE VALIDITY OF THE COMPTROLLER'S DETERMINATION THAT NATIONAL BANKS HAVE THE INCIDENTAL AUTHORITY TO ESTABLISH OPERATING SUBSIDIARIES, IT APPEARS THAT THEIR AUTHORITY TO DO SO HAS NEVER BEEN CHALLENGED. /6/ BEFORE TURNING TO THE OTHER ISSUES YOU RAISE, SOME MENTION SHOULD BE MADE OF A CONCERN EXPRESSED IN THE 1985 REPORT OF THE FCA ABOUT NCB'S AUTHORITY TO ESTABLISH CORPORATE SUBSIDIARIES. THE REPORT REFERS TO "A CONSIDERABLE BODY OF GENERAL CORPORATE CASE LAW UPON WHICH AN ARGUMENT CAN BE BASED THAT THE POWER OF A CORPORATION TO ORGANIZE ANOTHER CORPORATION CANNOT BE IMPLIED FROM GENERAL CORPORATE POWERS BUT MUST BE EXPRESSLY GRANTED BY THE ARTICLES OF INCORPORATION OR THE STATUTE UNDER WHICH THE CORPORATION IS ORGANIZED." HAVING CONSIDERED THIS ISSUE WE DO NOT THINK THAT THE BODY OF LAW REFERRED TO PREVENTS US FROM CONCLUDING, AS WE HAVE, THAT NCB'S ESTABLISHMENT OF CORPORATE SUBSIDIARIES IS WITHIN ITS STATUTORY AUTHORITY.

IN A LETTER DATED AUGUST 20, 1985 FROM NCB'S LEGAL REPRESENTATIVE TO NCB'S PRESIDENT (COPY ENCLOSED), THIS ISSUE IS DISCUSSED EXTENSIVELY. AGREE WITH THE THRUST OF THAT LETTER WHICH CONCLUDES THAT "CONTRARY TO THE FCA STAFF'S REPORT, *** THE GENERAL CORPORATE LAW DOES AUTHORIZE THE ORGANIZATION OF CORPORATE SUBSIDIARIES FOR PURPOSES INCIDENTAL TO THE PARENT COMPANY'S BUSINESS." WHILE IT MAY BE TRUE THAT SOME OF THE EARLIER CASES SUGGEST A CONTRARY CONCLUSION, OUR ANALYSIS OF THOSE CASES REVEALS THAT THEY GENERALLY INVOLVED SITUATIONS IN WHICH THE STOCK ACQUISITION EITHER WAS LIKELY TO SUPPRESS COMPETITION OR INVOLVED EFFORTS BY A CORPORATION ORGANIZED FOR ONE PURPOSE TO ACQUIRE STOCK IN A CORPORATION ORGANIZED FOR AN ENTIRELY DIFFERENT PURPOSE. NEITHER OF THESE POTENTIAL HAZARDS ARE APPLICABLE TO NCB'S ESTABLISHMENT AND USE OF CORPORATE SUBSIDIARIES THAT WOULD ONLY PERFORM THOSE ACTIONS NCB ITSELF IS AUTHORIZED TO PERFORM.

THE NEXT ISSUE YOU ASKED US TO CONSIDER CONCERNS THE PROPER RELATIONSHIP BETWEEN NCB AND ITS AFFILIATES AND SUBSIDIARIES, AND WHETHER THE ACTIONS THOSE ENTITIES HAVE ENGAGED IN ARE AUTHORIZED UNDER THE NCB ACT. CONSIDERING THE NCB'S THREE SUBSIDIARIES FIRST, WE CONCLUDE THAT THERE IS NOTHING IMPROPER ABOUT NCB'S RELATIONSHIPS WITH THEM OR THE ACTIVITIES THOSE SUBSIDIARIES HAVE BEEN AUTHORIZED TO PERFORM. NCB'S THREE WHOLLY- OWNED SUBSIDIARIES-- THE NCB BUSINESS CREDIT CORPORATION, THE NCB MORTGAGE CORPORATION, AND THE NCB CAPITAL CORPORATION-- ESSENTIALLY OPERATE AS NCB'S ALTER EGO. THESE SUBSIDIARIES ARE UNDER THE OPERATIONAL CONTROL OF THE PARENT CORPORATION. MANY OF THEIR OFFICERS AND BOARD MEMBERS ARE ALSO OFFICERS OR BOARD MEMBERS OF THE NCB. THE IS PERFECTLY PERMISSIBLE.

BASED ON THE MATERIAL FURNISHED TO US, IT APPEARS THAT ALL OF THE ACTIVITIES THE SUBSIDIARIES ENGAGE IN, INCLUDING BORROWING, MAKING AND SERVICING LOANS TO COOPERATIVES, AND PROVIDING LEASING SERVICES AND OTHER FORMS OF TECHNICAL ASSISTANCE TO COOPERATIVES, ARE ACTIVITIES THAT THE NCB IS AUTHORIZED BY STATUTE TO PERFORM. SEE 12 U.S.C. SECS. 3012 AND 3018. THIS IS CRITICAL IN OUR VIEW. SINCE THESE SUBSIDIARIES ARE BASICALLY EXTENSIONS OF THE NCB, WE DO NOT THINK THAT THEY CAN LAWFULLY PERFORM ANY ACTIVITY THAT NCB IS NOT AUTHORIZED TO PERFORM DIRECTLY. SEE B-216330, DECEMBER 4, 1984; AND B-194153, SEPTEMBER 6, 1974, AS MODIFIED AND EXPLAINED BY 60 COMP.GEN. 464, 465 (1981). THIS IS CONSISTENT WITH NCB'S POSITION AS SET FORTH IN THE FEBRUARY 1, 1984 LEGAL MEMORANDUM PREPARED BY THE NCB'S LEGAL REPRESENTATIVE WHICH READS AS FOLLOWS:

"IT IS ALSO OUR VIEW, HOWEVER, THAT THE BANK IS EMPOWERED TO ORGANIZE SUBSIDIARIES ONLY FOR THE PURPOSE OF CARRYING ON AUTHORIZED ACTIVITIES OF THE BANK. THIS LIMITATION SEEMS TO BE INHERENT IN THE 'INCIDENTAL POWERS' PROVISION OF THE NCCB."

THE SITUATION WITH RESPECT TO NCB'S AFFILIATE ORGANIZATION-- THE SLSC-- IS SOMEWHAT DIFFERENT, AND REQUIRES A DIFFERENT ANALYSIS. UNLIKE A WHOLLY -OWNED SUBSIDIARY, THE SLSC IS A SEPARATE, ALBEIT NOT OPERATIONALLY INDEPENDENT, LEGAL ENTITY. AS EXPLAINED IN NCB'S 1985 ANNUAL REPORT, THE SLSC IS A "COOPERATIVELY-OWNED CORPORATION THAT PROVIDES FINANCING TO INDIVIDUAL MEMBERS OF HOUSING COOPERATIVES." ITS AFFAIRS ARE MANAGED BY NCB, A MINORITY SHAREHOLDER, "THROUGH A CONTRACT WITH THE SLSC BOARD OF DIRECTORS." SINCE THE SLSC CONTRACT IS NOT NCB'S "ALTER EGO", WE THINK THAT RATHER THAN FOCUSING ON THE ACTIVITIES THE SLSC IS AUTHORIZED TO PERFORM, THE ISSUE TO CONSIDER INVOLVES NCB'S, RELATIONSHIP WITH THE SLSC AND WHETHER NCB'S DEALINGS WITH IT ARE WITHIN NCB'S STATUTORY AUTHORITY. VIEWED FROM THIS PERSPECTIVE, TWO SPECIFIC ISSUES, BOTH OF WHICH WERE RAISED BY THE FCA ITS 1985 REPORT, MUST BE RESOLVED.

THE FIRST ISSUE CONCERNS NCB'S AUTHORITY TO MAKE LOANS TO THE SLSC. OF FEBRUARY 1985, NCB HAD TWO LOANS OUTSTANDING TO THE SLSC, ONE FOR THE PURPOSE OF FUNDING SHARE LOANS TO MEMBERS OF HOUSING COOPERATIVES AND THE OTHER TO FUND THE SLSC'S PURCHASE OF STOCK IN THE NCB. UNDER SECTION 108 OF THE NCB ACT, 12 U.S.C. SEC. 3018, THE NCB CAN ONLY MAKE LOANS TO COOPERATIVES THAT SATISFY THE STATUTORY ELIGIBILITY REQUIREMENTS. THE 1985 REPORT BY THE FCA POINTED OUT THAT THERE WAS NO LEGAL OPINION SUPPORTING SLSC'S ELIGIBILITY AS A COOPERATIVE UNDER THE ACT.

IN RESPONSE TO A SPECIFIC REQUEST FROM OUR OFFICE, THE NCB RECENTLY PROVIDED US A COPY OF A LEGAL MEMORANDUM DATED JULY 17, 1985, SIGNED BY ITS GENERAL COUNSEL AND CORPORATE SECRETARY (COPY ENCLOSED), WHICH CONCLUDED THAT BY THE TIME SLSC WAS INCORPORATED AND INITIALLY APPLIED FOR ASSISTANCE FROM NCB, THE GENERAL COUNSEL HAD DETERMINED THAT THE SLSC WAS AN ELIGIBLE COOPERATIVE UNDER SECTION 105 OF THE NCB ACT, 12 U.S.C. SEC. 3015. ACCORDING TO THAT MEMORANDUM, THE DETERMINATION OF SLSC'S ELIGIBILITY "FOCUSED PRIMARILY ON THE STATUS OF THOSE VOTING STOCKHOLDERS, WHO, AT LEAST FOR THE FORSEEABLE FUTURE, PRIMARILY OWN AND CONTROL SLSC-- THE BANK (NCB) AND GREENBELT HOMES INCORPORATED ('GHI')." THE MEMORANDUM CONCLUDED THAT SINCE BOTH NCB AND GHI "OPERATE ON AN ELIGIBLE COOPERATIVE BASIS", UNDER 12 U.S.C. SEC. 3015, AND TOGETHER OWN 88 PERCENT OF THE CLASS B SLSC VOTING CAPITAL STOCK, THE SLSC "IS ELIGIBLE AS AN ORGANIZATION PRIMARILY OWNED AND CONTROLLED BY ELIGIBLE COOPERATIVE ORGANIZATIONS."

THE BASIC ELIGIBILITY REQUIREMENT THAT MUST BE SATISFIED BY A COOPERATIVE TO QUALIFY FOR LOANS AND OTHER ASSISTANCE FROM NCB IS SET FORTH IN 12 U.S.C. SEC. 3015(A) AS FOLLOWS:

"*** AN ELIGIBLE COOPERATIVE IS AN ORGANIZATION CHARTERED OR OPERATED ON A COOPERATIVE, NOT-FOR-PROFIT BASIS FOR PRODUCING OR FURNISHING GOODS, SERVICES OR FACILITIES, PRIMARILY FOR THE BENEFIT OF ITS MEMBERS OR VOTING STOCKHOLDERS WHO ARE ULTIMATE CONSUMERS OF SUCH GOODS, SERVICES OR FACILITIES, OR A LEGALLY CHARTERED ENTITY PRIMARILY OWNED AND CONTROLLED BY ANY SUCH ORGANIZATION OR ORGANIZATIONS ***."

BASED ON THIS LANGUAGE, WE WOULD AGREE THAT IF THE NCB AND THE GHI, WHICH TOGETHER PRIMARILY OWN AND CONTROL THE SLSC, ARE ELIGIBLE COOPERATIVES, THEN SLSC WOULD BE AN ELIGIBLE COOPERATIVE. WHILE WE HAVE NO INDEPENDENT INFORMATION CONCERNING GHI, WE NOTE THAT IT IS DESCRIBED IN THE 1985 FCA REPORT AND IN SLSC'S BROCHURES AS A "HOUSING COOPERATIVE." THUS, WE HAVE NO BASIS FOR QUESTIONING ITS ELIGIBILITY AS A COOPERATIVE UNDER THE ACT.

SIMILARLY, WE HAVE NO BASIS FOR QUESTIONING THE STATUS OF THE NCB ITSELF AS AN ELIGIBLE COOPERATIVE. UNDER SECTION 109 OF THE NCB ACT, 12 U.S.C. SEC. 3019, THE NCB IS TO BE TREATED "AS A CORPORATION OPERATING ON THE COOPERATIVE BASIS" FOR TAX PURPOSES. MOREOVER, AS SPECIFIED IN H.R. REP. NO. 208, 97TH CONG., 1ST SESS. 718 (1981), THE NCB IS "OWNED AND CONTROLLED BY ITS COOPERATIVE SHAREHOLDERS", ANOTHER INDICATOR OF COOPERATIVE ELIGIBILITY.

FINALLY, WE NOTE THAT OUR OFFICE HAS IN THE PAST HELD THAT NCB HAS BROAD DISCRETION TO DETERMINE WHETHER OR NOT COOPERATIVES ARE ELIGIBLE UNDER THE ACT TO RECEIVE LOANS FROM NCB. THUS, IN B-200951, DECEMBER 16, 1982, WE UPHELD THE INTERPRETATION OF NCB'S GENERAL COUNSEL THAT NEWLY-FORMED, SO- CALLED "EMBRYONIC," COOPERATIVES WERE ELIGIBLE TO RECEIVE LOANS FROM NCB UNDER 12 U.S.C. SEC. 3015. IN THAT CASE, WE SAID THAT NCB'S INTERPRETATION OF COOPERATIVE ELIGIBILITY MUST BE ACCEPTED IF "IT HAS A REASONABLE BASIS AND IS NOT PLAINLY ERRONEOUS." IN OUR VIEW, NCB'S DETERMINATION IN THIS CASE THAT THE SCLC IS AN ELIGIBLE COOPERATIVE SATISFIES THIS STANDARD AND SHOULD BE UPHELD.

THE OTHER ISSUE INVOLVING THE SCLC THAT WAS RAISED IN THE FCA REPORT CONCERNS THE POSSIBLE VIOLATION OF THE NCB'S CONFLICT OF INTEREST RULES. THIS ISSUE ARISES BECAUSE SEVERAL OF THE NCB'S OFFICERS ALSO SERVE AS OFFICERS OR DIRECTORS OF THE SLSC. AS PREVIOUSLY NOTED, THE NCB MANAGES THE AFFAIRS OF THE SLSC THROUGH A CONTRACT WITH THE SCLC'S BOARD OF DIRECTORS. WHILE THE NCB'S THREE WHOLLY-OWNED SUBSIDIARIES OPERATE IN A SIMILAR FASHION, THERE IS A CRITICAL DISTINCTION. AS STATED PREVIOUSLY, A WHOLLY-OWNED SUBSIDIARY ESSENTIALLY OPERATES AS THE "ALTER EGO" OF THE PARENT CORPORATION. AS SUCH, THE POTENTIAL OF A CONFLICT OF INTEREST IS ELIMINATED SINCE A CONFLICT CANNOT EXIST UNLESS TWO SEPARATE ENTITIES ARE INVOLVED. HOWEVER, SINCE THE NCB AND THE SLSC ARE SEPARATE ENTITIES, ANY INDIVIDUAL WHO PERFORMS FUNCTIONS FOR BOTH CORPORATIONS COULD, IN THEORY, VIOLATE NCB'S CONFLICT OF INTEREST RULES. THE 1985 FCA REPORT RAISED THIS POSSIBILITY WHEN IT STATED THAT IT MIGHT "BE VERY DIFFICULT FOR BANK EMPLOYEES TO SERVE AS OFFICERS AND DIRECTORS OF THESE (AFFILIATE) CORPORATIONS WITHOUT VIOLATING THE NCB'S CONFLICT-OF-INTEREST REGULATIONS."

SECTION 114 OF THE NCB ACT, 12 U.S.C. SEC. 3024, REQUIRES THE NCB TO ADOPT ITS OWN RULES PROHIBITING CONFLICTS OF INTEREST BY ITS OFFICERS AND EMPLOYEES AS FOLLOWS:

"THE BOARD OF DIRECTORS SHALL ADOPT AND PUBLISH ITS OWN CONFLICT OF INTEREST RULES WHICH SHALL BE NO LESS STRINGENT IN EFFECT THAN THE FEDERAL EXECUTIVE CONFLICT OF INTEREST RULES CONTAINED IN EXECUTIVE ORDER NUMBERED 11222 IN PROHIBITING PARTICIPATION OR ACTION OR THE USE OF INSIDE INFORMATION FOR PERSONAL ADVANTAGE ON ANY MATTER INVOLVING A CORPORATION, TRUST, PARTNERSHIP, OR COOPERATIVE ORGANIZATION IN WHICH A BOARD MEMBER, OFFICER, OR EMPLOYEE HOLDS A SUBSTANTIAL FINANCIAL INTEREST OR HOLDS A POSITION AS BOARD MEMBER OR SENIOR OFFICER, THE ACTIVITIES OF WHICH ORGANIZATION MIGHT BE RELEVANT TO, BE COMPETITIVE WITH, OR BE INCONSISTENT WITH THE OBJECTIVES OF ANY BANK CREATED UNDER THIS CHAPTER."

IN ACCORDANCE WITH THIS PROVISION, NCB HAS ADOPTED A CONFLICT-OF INTEREST POLICY THAT PROVIDES AS FOLLOWS:

"A. A CONFLICT OF INTEREST EXISTS WHENEVER THE PERFORMANCE OF OR FAILURE TO PERFORM AN EMPLOYEE'S DUTIES FOR THE BANK RELATES, IN ANY MANNER, TO THE BUSINESS AFFAIRS OF ANY RELATIVE OF THE EMPLOYEE, OF ANY ORGANIZATION WITH WHICH THE EMPLOYEE OR RELATIVE IS ASSOCIATED, OR ANY ORGANIZATION WITH WHICH THE EMPLOYEE OR RELATIVE IS SEEKING TO BECOME EMPLOYED OR ASSOCIATED.

"B. A CONFLICT OF INTEREST MAY EXIST WHENEVER ANY EMPLOYEE, HIS OR HER RELATIVE, OR ANY ORGANIZATION WITH WHICH THE EMPLOYEE OR RELATIVE IS ASSOCIATED (INCLUDING ANY BENEFICIARY ORGANIZATION OR RELATED ORGANIZATION), HAS OR IS SEEKING TO HAVE ANY BUSINESS RELATIONSHIP WITH THE BANK IN ADDITION TO THE EMPLOYMENT RELATIONSHIP OF THE EMPLOYEE."

THE REGULATIONS DEFINE "ASSOCIATED" AND "ASSOCIATED WITH" AS INCLUDING ANY INDIVIDUAL THAT HOLDS A POSITION AS AN EMPLOYEE, OFFICER, OR BOARD MEMBER OF ANOTHER ORGANIZATION OR CORPORATION. IN ADDITION, THE REGULATIONS DEFINE "RELATED ORGANIZATION" TO MEAN "ANY ORGANIZATION THE ACTIVITIES OF WHICH ARE RELEVANT TO, COMPETITIVE WITH, OR INCONSISTENT WITH THE OBJECTIVES OF THE BANK ***."

ON THE BASIS OF THESE RULES AND DEFINITIONS IT IS NOT EASY TO REFUTE THE IMPLICATION OF THE 1985 FCA REPORT, THAT WHENEVER NCB OFFICERS AND EMPLOYEES WHO SERVE AS OFFICERS OR DIRECTORS OF THE SLSC MAKE DECISIONS THAT AFFECT THE BUSINESS AFFAIRS OF BOTH CORPORATIONS, A CONFLICT OF INTEREST EXISTS. HOWEVER, IN RESPONSE TO A SPECIFIC REQUEST FROM OUR OFFICE, NCB'S LEGAL REPRESENTATIVE RECENTLY PROVIDED US WITH A COPY OF AN "ADDENDUM" TO ITS CONFLICT OF INTEREST POLICY ADOPTED ON OCTOBER 10, 1985 (COPY ENCLOSED), THAT ADDRESSES AND ATTEMPTS TO RESOLVE THIS PROBLEM. AFTER POINTING OUT THAT THE SLSC IS AN AFFILIATE OF THE NCB THAT PERFORMS VARIOUS ACTIVITIES THAT ARE CONSISTENT WITH AND FURTHER NCB'S OBJECTIVES AND THAT NCB EXERTS SUBSTANTIAL INFLUENCE OVER SLSC, THE ADDENDUM READS AS FOLLOWS:

"RECOGNIZING THE EXISTING RELATIONSHIP BETWEEN AND COMMON PURPOSE SHARED BY THE BANK AND SLSC AS WELL AS THE SUBSTANTIAL INFLUENCE EXERCISED BY THE BANK OVER SLSC, THE AUDIT COMMITTEE OF THE BOARD HAS MADE THE DETERMINATION THAT THE CONFLICT OF INTEREST POSED FOR EMPLOYEES OF THE BANK AS A RESULT OF THIS RELATIONSHIP IS NOT A PROHIBITED CONFLICT OF INTEREST UNDER THE BANK'S CONFLICT OF INTEREST POLICY. BASED UPON THIS DETERMINATION, THE COMMITTEE RECOMMENDS THE BOARD SPECIFICALLY EXEMPT THE SHARE LOAN SERVICE CORPORATION FROM THE PROVISION IN THE POLICY WHICH DEFINES A 'RELATED' ORGANIZATION THEREBY REMOVING SLSC FROM FURTHER CONFLICT OF INTEREST CONSIDERATION. THIS EXEMPTION SHALL CONTINUE IN FORCE UNTIL DETERMINATION IS MADE THAT THE BANK NO LONGER EXERCISES SUBSTANTIAL INFLUENCE OVER THE ACTIVITIES OF THE SHARE LOAN SERVICE CORPORATION OR AT ANY TIME WHEN THE BOARD OF DIRECTORS DEEMS THIS EXEMPTION TO BE NO LONGER IN THE BANK'S INTEREST OR OTHERWISE APPROPRIATE." THUS, NCB'S BOARD OF DIRECTORS AGREED TO EXEMPT THE SLSC AND ITS OFFICERS AND BOARD MEMBERS FROM THE APPLICATION OF NCB'S CONFLICT OF INTEREST RULES. CONSIDERING THE SPECIAL RELATIONSHIP BETWEEN NCB AND SLSC AND THE COMMON PURPOSE OF THE TWO CORPORATIONS, WE CONSIDER THE BOARD'S ACTION IN THIS RESPECT TO BE WITHIN ITS DISCRETION UNDER 12 U.S.C. SEC. 3024, WHICH AUTHORIZES THE BOARD TO ADOPT CONFLICT OF INTEREST RULES THAT ARE "NO LESS STRINGENT" THAN THOSE SET FORTH IN EXECUTIVE ORDER 11222, MAY 8, 1965, AS AMENDED. SEE B-200951, DECEMBER 16, 1982. WE NOTE THAT UNDER SECTION 201(B) OF EXECUTIVE ORDER 11222, THE CONFLICT OF INTEREST RULES ADOPTED BY AN AGENCY HEAD (OR IN THIS CASE, THE NCB BOARD OF DIRECTORS) CAN PROVIDE FOR "SUCH EXCEPTIONS *** AS MAY BE NECESSARY AND APPROPRIATE IN VIEW OF THE NATURE OF THE AGENCY'S WORK AND THE DUTIES AND RESPONSIBILITIES OF THEIR EMPLOYEES." ACCORDINGLY, THOSE NCB OFFICERS AND EMPLOYEES WHO ALSO SERVE AS OFFICERS AND DIRECTORS OF THE SLSC DO NOT VIOLATE THE NCB'S CONFLICT OF INTEREST RULES AS A RESULT OF THE DUAL POSITIONS THEY HOLD AND THEIR CONCOMITANT RESPONSIBILITIES FOR EACH ORGANIZATION.

YOUR LETTER ALSO ASKED US TO CONSIDER WHAT CHANGES IF ANY SHOULD BE MADE IN THE STATUTE TO ASSURE "APPROPRIATE RELATIONSHIPS" BETWEEN NCB AND ITS SUBSIDIARIES AND AFFILIATES IN THE FUTURE. IN LIGHT OF OUR DETERMINATION THAT THE ACTIVITIES OF THESE ENTITIES, AS WELL AS NCBS RELATIONSHIP WITH THEM, WERE NOT IMPROPER OR UNAUTHORIZED, WE ARE NOT AWARE OF ANY STATUTORY MODIFICATIONS THAT WOULD BE NECESSARY FROM A LEGAL STANDPOINT. HOWEVER, IN THE EVENT THAT YOU OR YOUR COMMITTEE CONCLUDE THAT ANY SUCH CHANGES WOULD BE DESIRABLE, WE WOULD BE WILLING TO PROVIDE WHATEVER ASSISTANCE IS NECESSARY.

WE TRUST THAT THIS LETTER HAS BEEN RESPONSIVE TO YOUR INQUIRY. ACCORDANCE WITH THE AGREEMENT REACHED WITH A MEMBER OF YOUR STAFF, THIS LETTER WILL BE AVAILABLE TO THE PUBLIC 5 DAYS FROM TODAY.

/1/ IN NOVEMBER 1984, THE NATIONAL CONSUMER COOPERATIVE BANK ADOPTED AS A TRADE NAME THE TITLE "NATIONAL COOPERATIVE BANK" (NCB) ALTHOUGH ITS FORMAL NAME HAS NEVER BEEN CHANGED. FOR PURPOSES OF CONSISTENCY, WE SHALL REFER TO THE BANK USING ITS TRADE NAME.

/2/ WE NOTE THAT NCB CHANGED THE NAMES OF ITS THREE WHOLLY-OWNED SUBSIDIARIES AFTER FCA ISSUED ITS 1985 REPORT. THE CMB FUNDING CORPORATION WAS RENAMED THE NCB MORTGAGE CORPORATION, THE NCCB LEASING CORPORATION WAS RENAMED THE NCB BUSINESS CREDIT CORPORATION AND THE NCCB CAPITAL COOPERATION WAS RENAMED THE NCB CAPITAL CORPORATION. HEREAFTER, WE SHALL REFER TO THESE CORPORATIONS USING THEIR REVISED NAMES.

/3/ ON THE DATE THIS LETTER WAS WRITTEN, ONE OF NCB'S NOW WHOLLY OWNED SUBSIDIARIES WAS STILL OPERATING AS NCB'S AFFILIATE.

/4/ BY WAY OF CONTRAST, BANKS IN THE FARM CREDIT SYSTEM, WHICH INCLUDE THE FEDERAL LAND BANKS, INTERMEDIATE CREDIT BANKS AND BANKS FOR COOPERATIVES ARE WHOLLY-OWNED GOVERNMENT CORPORATIONS, GOVERNED BY THE RESTRICTION CONTAINED IN 31 U.S.C. SEC. 9102. THEREFORE, WHEN CONGRESS WANTED TO AUTHORIZE FARM CREDIT SYSTEM BANKS TO ORGANIZE SUBSIDIARY CORPORATIONS TO PERFORM FUNCTIONS THE BANKS WERE AUTHORIZED TO PERFORM, SPECIFIC STATUTORY AUTHORITY WAS REQUIRED. 12 U.S.C. SEC. 2212. SEE H.R. REP. NO. 1287, 96TH CONG., 2ND SESS. 13, 23, 42 (1980).

/5/ THE COMPTROLLER'S OPINION (COPY ENCLOSED) IS PUBLISHED AT 31 FED.REG. 11459 (1966). SEE ALSO 7 C.F.R. SEC. 7.10 (1967).

/6/IN FACT, IN 1984 THE FEDERAL HOME LOAN BANK BOARD ISSUED A FINAL REGULATION UPHOLDING THE INCIDENTAL AUTHORITY OF FEDERAL ASSOCIATIONS TO ESTABLISH FINANCE SUBSIDIARIES TO ISSUE ANY SECURITIES THAT THE ASSOCIATION ITSELF IS OR COULD BE AUTHORIZED TO ISSUE. SEE 12 C.F.R. SEC. 545.82. THE EXISTENCE OF SUCH INCIDENTAL AUTHORITY WAS RECOGNIZED IN THAT INSTANCE, EVEN THOUGH THE UNDERLYING STATUTE DID NOT CONTAIN AN EXPRESS "INCIDENTAL POWERS" PROVISION.