New York Codes, Rules and Regulations
Title 3 - BANKING
Legal Interpretations
LI 9 - Miscellaneous-Other
Section LI 9.1 - Back office operations

A foreign banking corporation licensed to do business in New York asked whether it could conduct a municipal bond operation at a so-called "back-office location" without special branch authorization. The operation would have involved underwriting and trading municipal securities as a dealer with other dealers, and purchasing and selling municipal securities, as an agent.

The Department responded that the construction given to Sections 200 and 396 of the Banking Law which govern the licensing of offices for the transaction of business by foreign banking corporations and savings and loan associations is similar to the construction given Sections 105 and 240(2) of the Banking Law which prohibit banking organizations from transacting all or any part of the "usual business of banking" from any place other than a principal office or duly authorized branch. In construing these sections, the Department has historically distinguished the activities which may be conducted solely from a duly authorized office or branch from the so-called "back office", loan production office and representative office operations for which no special approval is required.

The "back office" exception would not apply unless the activities and functions of the back office were carefully circumscribed. The bank's services could not be marketed from such office, and any contact with the members of the public to whom or for whom such services are normally directed or performed would have to take place at either the authorized office or branch or, to the limited extent permitted by Supervisory Policy CB 121, a loan production office or representative office, and not at the "back office".

The loan production office and representative office exceptions would not apply unless the activities and functions conducted thereat were carefully circumscribed and the bank had submitted the information required by CB 121. To qualify as a loan production office, the activities would have to be limited to the solicitation of loans on behalf of the bank, the solicitation of investors to purchase loans from the bank, and the search for servicers of the bank's loans. Although limited contact with members of the public could occur in connection with such solicitations, the activities of the loan production office could not be so broad as to constitute the business of banking within the meaning of the New York State Banking Law. See Section 121.2(a) of Supervisory Policy CB 121.

Likewise, to qualify as a representative office, the activities of the office would have to be limited to the solicitation of new business, to research, to the servicing of home office needs, and to the acting as a liaison between the home office and its customers in New York State. See Section 121.b(2) of the Supervisory Policy CB 121.

The information provided to the department indicated that the activities of the so-called "back office" would entail substantially more than the mere solicitation of business for the Municipal Bond Department. Through its proposed underwriting activities, dealer activities and agency activities in municipal securities, the bank would have been unequivocally engaged in the business of banking. In this connection, the department referred to a ruling of the New York Attorney General, 1914 Op. Atty. Gen. 147, in which the Attorney General held that the purchase, sale, and delivery of investment securities by a trust company constituted the transaction of the business of the company and that such activity could be conducted solely at an authorized location.

In light of the foregoing, the department concluded that the proposed Municipal Bond Department operations would not fall within the "back office," loan production office or representative office exceptions, and that such operations could be conducted solely at a duly authorized branch.

DATED: July 1, 1976