Ronald C. Mayer, Esq.
Senior Vice President and
   Associate General Counsel
The Chase Manhattan Bank
270 Park Avenue, 39th Floor
New York, New York 10017-2070

Dear Mr. Mayer:

This is in response to the request by The Chase Manhattan Corporation, New York, New York ("Chase"), a registered bank holding company, for exemptions from section 23A of the Federal Reserve Act and relief from section 211.5(d)(14)(iii) of the Board's Regulation K to facilitate the reorganization of Chase's foreign banking business after Chase acquires Robert Fleming Holdings Limited, London, England ("Fleming").¹ Chase has requested that the Board (i) exempt from section 23A the purchase from Chase by its subsidiary state member bank, The Chase Manhattan Bank, New York, New York ("Chase Bank"), of certain investment banking businesses (the "Fleming Bank Businesses") acquired by Chase in connection with its acquisition of Fleming; and (ii) exempt from the collateral requirements of section 23A, for a period of six months, certain outstanding lines of credit from the Fleming Bank Businesses to various investment funds sponsored and advised by Fleming (the "Fleming Funds"). Chase also has requested a period of six months in which to conform its foreign equity dealing operations to the Regulation K limits.

Chase acquired all the capital stock of Fleming, a global asset management and investment banking company, on August 1, 2000. Chase intends to sell the Fleming Bank Businesses to Chase Bank's Edge corporation subsidiary, Chase Manhattan International Finance, Ltd., within three months of the acquisition of Fleming by Chase. Chase intends to retain the asset management businesses of Fleming, including the Fleming Funds, at the holding company level.

The Section 23A Requests

Section 23A limits the amount of "covered transactions" between a bank and any single affiliate to 10 percent of the bank's capital stock and surplus and limits 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 a bank's purchase of assets from an affiliate and a bank's extension of credit to an affiliate. The statute also requires 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 prohibits a bank from purchasing low-quality assets from an affiliate.

Chase Bank's purchase of the Fleming Bank Businesses from Chase is an asset purchase subject to the quantitative and qualitative limits of section 23A. Moreover, because the Fleming Bank Businesses already have extended credit to the Fleming Funds, these extensions of credit would become subject to the collateral requirements as well as the quantitative and qualitative limits of section 23A when the Fleming Bank Businesses become subsidiaries of Chase Bank. To facilitate the reorganization, Chase has requested the two exemptions from section 23A described above. Section 23A specifically authorizes the Board to exempt "at its discretion . . . transactions or relationships from the requirements of this section if it finds such exemptions to be in the public interest and consistent with the purposes of this section."²

A. Chase Bank's Purchase of the Fleming Bank Businesses

The Board has approved exemptions in similar cases for one-time transfers that are part of a corporate reorganization and that are structured to ensure the quality of the transferred assets.³ As in previous cases reviewed by the Board, the proposed transaction is a by-product of a one-time corporate reorganization.

Unlike previous cases reviewed by the Board, however, this proposed transaction does not involve a bank purchasing assets from an affiliate that has held the assets for an extended period of time. Instead, Chase Bank would be purchasing assets that its holding company recently acquired from a third party. Because Chase Bank proposes to purchase assets that would have been held by Chase at the holding company level for only three months, Chase has requested that the Board not require the asset quality commitments that the Board typically requires as a condition for granting section 23A exemptions for one-time corporate reorganizations. Chase argues that providing the typical asset quality commitments in this case would be highly burdensome, given the size and complexity of the Fleming organization and the fact that the Fleming Bank Businesses would be held by Chase at the holding company level for only a short time. Instead, Chase has committed that:

(i) At the time of the reorganization, the Fleming Bank Businesses will not own or hold any low-quality assets that became low-quality assets after Chase's purchase of the Fleming shares.

(ii) For two years after the reorganization, Chase will repurchase any transferred assets that become low-quality assets after the reorganization, if the assets were originated or acquired by a Fleming Bank Business during the period between Chase's acquisition of the Fleming shares and the reorganization. These repurchases would be done quarterly, at book value plus any write-downs taken by Chase Bank.

(iii) If Chase fails to consummate the reorganization within three months of its acquisition of the Fleming shares, Chase will abide by the asset quality assurances that the Board typically obtains as a condition to granting section 23A exemptions for one-time corporate reorganizations.

In light of these considerations and all the facts you have presented, the transaction appears to be consistent with safe and sound banking practices and on terms that would ensure the quality of the assets transferred. Accordingly, the transaction appears to be consistent with the purposes of section 23A and the Board hereby grants the requested exemption.

B. Chase Bank's Extensions of Credit to the Fleming Funds

The outstanding extensions of credit from the Fleming Bank Businesses to the Fleming Funds are not currently subject to section 23A because the Fleming Bank Businesses, as foreign banks, are not institutions subject to section 23A.⁴ Immediately on the transfer of the Fleming Bank Businesses to Chase Bank, however, Chase Bank would be deemed to have made extensions of credit to the Fleming Funds, which would be affiliates of Chase Bank for purposes of section 23A. As of May 31, 2000, the aggregate outstanding amount of funding provided by the Fleming Bank Businesses to the Fleming Funds was [amount redacted].

Chase has requested that the Board grant Chase a period of six months from the date of Chase's acquisition of the Fleming shares in which to conform these credit extensions to the collateral requirements of section 23A. In support of its request, Chase has guaranteed, for a period of six months, the performance of any loans made pursuant to such extensions of credit. In addition, Chase has committed that any amount of financing provided by Chase Bank to the Fleming Funds that exceeds the lesser of [amount redacted] or the aggregate amount of outstanding financing provided by the Fleming Bank Businesses to all the Fleming Funds on the date of consummation of Chase's acquisition of the Fleming shares will comply with the requirements (including the collateral requirements) of section 23A. Finally, Chase has committed that any amount of financing provided by Chase Bank to any individual Fleming Fund that exceeds the amount of financing provided by the Fleming Bank Businesses to such Fleming Fund on the date of consummation of Chase's acquisition of the Fleming shares will comply with the requirements (including the collateral requirements) of section 23A.

Granting the requested exemption would provide Chase with a reasonable period of time either to arrange replacement financing for the Fleming Funds or to meet the collateral requirements of section 23A, and would not compromise the purposes of section 23A. The request is limited to six months, and the extensions of credit would at all times be subject to the quantitative limits and the safety and soundness requirements of section 23A and to the fair-market-terms requirement of section 23B.

In light of these considerations and all the facts you have presented, the extensions of credit appear to be consistent with safe and sound banking practices and with the purposes of section 23A. Accordingly, the Board hereby grants the requested exemption.

Regulation K Relief

The Board also has considered Chase's request that the Board permit the Fleming entities, for a period of six months, to calculate compliance with the $30 million equity dealing limits of section 211.5(d)(14)(iii) of Regulation K on a mark-to-market basis, rather than at historical cost. Based on all the facts of record, the Board has determined to grant Chase's request.

These determinations are specifically conditioned on compliance by Chase with all the commitments and representations it made in connection with the exemption and relief requests. These commitments and representations are deemed to be conditions imposed in writing by the Board in connection with granting the requests and, as such, may be enforced in proceedings under applicable law. These determinations are based on the specific circumstances surrounding these transactions, and may be revoked in the event of any material change in those circumstances or any failure by Chase to observe any of its commitments or representations. This grant of exemptions and relief does not represent a determination concerning the permissibility of any other transactions that are subject to section 23A or Regulation K, or concerning any other affiliates of Chase.

Very truly yours,

(Signed) Jennifer J. Johnson

Jennifer J. Johnson

cc: Federal Reserve Bank of New York

1. 12 U.S.C. � 371c; 12 C.F.R. 211.5(d)(14)(iii). Return to text

2. 12 U.S.C. � 371c(f)(2) (emphasis added). Return to text

3. See Travelers Group Inc. and Citicorp, 84 Federal Reserve Bulletin 985, 1013-14 (1998); Letter dated November 14, 1996, from William W. Wiles to John Byam; Letter dated April 19, 1988, from James McAfee to Timothy C. Roach; Letter dated August 6, 1987, from William W. Wiles to Timothy McGinnis. Return to text

4. Section 23A applies only to national banks, state member banks, insured state nonmember banks, and insured savings associations. See 12 U.S.C. �� 371c(a), 1468, and 1828(j). Return to text