Decision relative to the petition of Bank of New York Company, Inc. to acquire 9.99 percent of the stock of State Street Boston Corporation
By the Division of Banks
The Bank of New York Company, Inc., (the "Petitioner" or "BNY Co.") of New York, New York, an out of state bank holding company, has petitioned the Board of Bank Incorporation (the "Board") under sections 2 and 4 of chapter 167A of the General Laws, for permission to acquire up to 9.99% of the outstanding shares of common stock of State Street Boston Corporation ("State Street"), Boston, Massachusetts.
Notice of the petition, which was filed on January 2, 1997, was posted and published as directed by the Board thereby affording interested parties an opportunity to submit comments. A public hearing on the petition was held on February 13, 1997, in Boston, Massachusetts. The period for submitting comments after the hearing expired at 5 o'clock P.M. on February 27, 1997.
The Board has reviewed the application and supplementary submission of the Petitioner, the extensive oral and written testimony received at the public hearing, and the open comment period, as well as all documents and materials filed with, or forwarded to, the Board of Governors of the Federal Reserve System (the "Federal Reserve"). Comments in opposition to the petition were received from State Street, two community organizations and a state industry trade association. A supplementary filing also was submitted by State Street.
Facts
The Petitioner is a bank holding company whose primary banking subsidiary is the Bank of New York (the "Bank"), a New York state-chartered bank. It also has banking subsidiaries operating in the states of Connecticut, Delaware and New Jersey. At September 30, 1996, BNY Co. had total assets of $52.288 billion. State Street is a bank holding company whose primary banking subsidiary is State Street Bank & Trust Company, a state-chartered trust company or commercial bank with its principal place of business in Boston, Massachusetts. State Street had total assets of $28.445 billion as of September 30, 1996. Both BNY Co. and State Street are "well capitalized" institutions under applicable capital standards.
The Petitioner and State Street do not compete in the same commercial banking geographical markets. (State Street is a specialized banking organization with relatively small commercial banking operations. Its primary business is asset custody services and investment management services. It has been designated as a "wholesale" bank under both the Massachusetts and federal Community Reinvestment Acts.) BNY Co. and State Street, however, compete in separate and distinct product lines. The product lines or markets have been described as global "financial asset services" by BNY Co. and "asset custody businesses" by State Street. The latter market has been defined by State Street to include nine separate markets with the domestic mutual funds servicing, domestic master trust/master custody and securities lending markets being the areas of significant overlap between the Petitioner and State Street. (The Petitioner has submitted data showing that on a global basis, the financial asset services market is unconcentrated with BNY Co. holding a 8.87% market share and State Street holding a 7.79% market share of an estimated $33 trillion global financial assets market. ( See, Exhibit 5 to BNY Co.'s February 4, 1997 Final Application to the Federal Reserve ). The Petitioner has also submitted a supplemental exhibit to the Board on market shares of domestic financial custody assets. It shows BNY Co. holding a 15.33% market share and State Street holding a 14.57% market share of an estimated $15.86 trillion domestic financial assets market. On a combined basis the two institutions would control 29.9% of this market. Legal and record keeping considerations favor domestic, rather than foreign, financial institutions serving as custodians for domestic mutual funds and pension plans. State Street estimates that the two institutions would have combined market shares ranging between 30% and 60% of the domestic mutual funds servicing, domestic master trust/master custody and securities lending markets which are dominated by a relatively small number of domestic financial institutions. ( See, Comments of State Street in Opposition to BNY Co.'s Application to the Federal Reserve, pp. 22-41).)
Prior to February 1996, the Petitioner acquired 3,998,800 shares of State Street common stock for its own account. (BNY Co.'s purchases of State Street Common Stock began in late 1995 after State Street rejected a non-U.S. securities processing joint venture orally proposed by BNY Co. The Petitioner's application before the Board was filed on January 2, 1997, several days after State Street rejected on December 19, 1996, an unsolicited oral offer by BNY Co. to enter another joint venture in their asset custody businesses.) As of December 31, 1995, BNY Co. owned 4.84% of State Street's outstanding shares of common stock. In 1996, State Street publicly announced and began to implement a 6 million share stock repurchase plan. State Street also individually notified BNY Co. on two occasions of its stock repurchase plan and its implications to the level of BNY Co.'s stock holdings. At least 2.5 million shares were repurchased by State Street under this repurchase plan, as of September 30, 1996. The Petitioner estimates that its interest, excluding shares held in good faith in a fiduciary capacity, is approximately 4.93% as of December 31, 1996. It has filed this petition in order to avoid the divestiture of its existing shares should they exceed 5% of State Street's outstanding shares as a result of the continuation of State Street's stock repurchase program. BNY Co. also seeks to make "a relatively modest additional investment" up to 9.99% of State Street's outstanding shares. Board approval is required under section 2 of chapter 167A of the General Laws in order for a bank holding company or out of state bank holding company "... to directly or indirectly, own or control more than five percentum of the voting stock ..." of a bank holding company or banking institution.
The Petitioner valued its current holdings of State Street common stock at $317 million as of January 29, 1997. It estimates that its additional investment would cost $299 million based upon State Street's $73 3/8 per share closing price on January 30, 1997. BNY Co.'s existing investment represents 29.98% of its entire equity investment portfolio and 39.14% of its bank equity investment portfolio. If its proposed additional investment were approved and purchased, it would represent 53.88% of its entire equity investment portfolio and 63.7% of its bank equity investment portfolio. According to the Petitioner's oral testimony, this proposed investment would be its first passive bank equity investment to exceed 4.99% and that it would be the largest single passive equity investment ever made by BNY Co. The proposed maximum additional investment would be made within 18-24 months of approval. In its oral testimony, the Petitioner also did not rule out additional investments of up to 100% of State Street's outstanding common stock in the future, subject to state and federal regulatory approval. The Petitioner would become State Street's largest single shareholder once it exceeded approximately 5.04% of State Street's outstanding shares.
Board Review Criteria
The Petitioner seeks the Board's approval of a non-controlling minority investment in the common stock of State Street and has made eleven written "passivity" commitments relative to the proposed investment. (BNY Co.'s written standard commitments are contained in its final Federal Reserve application. BNY Co.'s application to the Board incorporates by reference its Federal Reserve application and the written commitments contained therein.) The commitments are offered to lessen or negate the Petitioner's ability to exercise or attempt to exercise a controlling influence over the management or policies of State Street or any of its subsidiaries. The Board has not previously approved a minority non-controlling investment, in the absence of an agreement between the affected institutions, under General Laws chapter 167A, the Massachusetts Bank Holding Company Act, since its amendment in 1990 and 1996. (Since 1981, there have been only two such petitions before the Board. See, Decision In the Matter of State Street Boston Corporation and Worcester Bancorp, Inc., (September 23, 1981) (The Board's decision approving this petition did not state its rationale); Application of Suffield Bancorporation (Public Hearing, December 22, 1987) (Petition formally withdrawn with Board permission on September 19, 1988, subject to divestiture of stock).) ( See, St. 1990, c.102, St. 1996, c.238).
The Board has initially examined whether a passive or non-controlling minority investment in a banking institution or bank holding company is contemplated and authorized under section 2 of chapter 167A of the General Laws. Since 1981, the Federal Reserve has determined that non-controlling minority investments from 5% to 25% are permitted under section 3 of the federal Bank Holding Company Act (the "BHCA"), (12 USC 1842) in certain circumstances. ( See, e.g., GB Bancorporation, Fed. Res. Press Release (December 18, 1996) and prior Federal Reserve decisions cited therein.) Such investments, however, are not normal acquisitions for a bank holding company and they may raise serious competitive issues which must be answered in light of the special facts of each case. ( See, State Street Boston Corporation, 67 Fed. Res. Bull. 862, 864 (1981); SunTrust Banks, Inc., 76 Fed. Res. Bull. 542, 543-544 (1990).) Section 2 of chapter 167A of the General Laws and section 3 of the BHCA are similar in that they both require regulatory approval of a bank holding company to directly or indirectly acquire between 5% to 25% of the voting stock of a banking institution or bank holding company. The statutory review standards in the Massachusetts and federal bank holding company acts for such acquisitions, however, differ materially. (The Board considers interpretations of the BHCA by the Federal Reserve to be persuasive rather than binding precedent. In cases where the text of later enacted provisions of General Laws chapter 167A differ from comparable earlier enacted provisions of the BHCA, the Board is not bound by Federal Reserve decisional precedent. See, Globe Newspaper Co. v. Boston Retirement Board, 388 Mass. 427 (1983) (Where the state's Freedom of Information Act ("FOIA") statute differs in material respects from a previously enacted analogous federal statute, a legislative decision to reject the legal standards embodied or implicit in the federal FOIA statute may be inferred.); Vasys v. Metropolitan District Commission, 387 Mass. 51 (1982); see generally, 2B Sutherland Statutory Construction ss. 52.02-52.03 (5th edition).) The Board concludes that such investments may be authorized provided that Massachusetts statutory review standards are satisfied by the Petitioner.
In reviewing petitions under section 2 of chapter 167A of the General Laws, the Board is required to apply the review standards found in section 4 of said chapter 167A. This section provides in pertinent part: "In determining whether or not to approve said petition [under section 2], the decision of the board shall be based on a finding whether or not competition among banking institutions will be unreasonably affected and whether public convenience and advantage will be promoted. In making such determination, the board shall consider, but not be limited to a showing of net new benefits." (Emphasis supplied.) The statute then proceeds to define the term 'net new benefits' and to prescribe additional requirements relative to reciprocity; the affordable housing loan programs of the Massachusetts Housing Partnership Fund; executive officer residency requirements; and, a two year asset retention requirement. Consequently, the Board is required to consider both (a) the competitive impacts of the proposed acquisition; and, (b) whether public convenience and advantage will be promoted.
A. Competition
In reviewing the record, the Board has serious concerns regarding the potentially negative competitive effects of this petition. The Board has specific reservations about the effect on competition in the asset custody business, especially in the domestic mutual funds servicing, domestic master trust/master custody and securities lending markets. ( See, Supra at p. 3, note 2.) It also questions whether BNY Co.'s unusually large proposed investment in State Street, a major competitor, may lessen the independence of action by State Street going forward notwithstanding the Petitioner's passivity commitments. (State Street has asserted that BNY Co.'s written commitments do not preclude it from exercising a controlling influence over it. State Street argues that the written commitments do not preclude BNY Co. from: (a) abandoning its passivity commitments at a later date or within any specified time period; (b) voting its shares, in any manner, including against State Street's management; (c) communicating with or attempting to influence other shareholders; (d) disrupting employee and client relations or recruiting its key personnel; (e) exercising dissenters rights in corporate transactions and business actions receiving shareholder approval; and, (f) making further overtures to State Street on business combinations. ( See, Comment of State Street in Opposition to the Application of BNY Co. to the Federal Reserve, p. 18. )The Board also notes the timing and substantial size of BNY Co.'s initial stock purchases and the filing of this petition. Both actions coincide with the initiation or termination of two preliminary discussions between BNY Co. and State Street on certain proposed joint ventures. The Board cannot rule out an intent by BNY Co. to influence or coerce State Street into future joint venture or combination proposals in the future. ( See, Supra, at p. 3, note 3.)) The Board notes that the Petitioner and State Street directly compete against one another head to head for domestic mutual funds servicing, domestic master trust/master custody contracts and that these markets are dominated by a relatively small number of domestic financial institutions. (The Board acknowledges that BNY Co. would be both State Street's largest shareholder and its direct competitor. It also notes that stock analysts have recently speculated as to State Street's long term independence,. The Board believes that these facts may adversely impact State Street's ability to retain and attract clients in its mutual funds servicing, master trust/master custody and securities lending businesses and to retain and attract qualified personnel. Long term relationships and reputational considerations are valued by institutional clients such as mutual funds and public and private pension fund administrators.) The Board, however, is reluctant to make the required first determination under section 4 of chapter 167A of the General Laws on whether "competition among banking institutions will be unreasonably affected" based upon the Petitioner's and State Street's conflicting identification of the appropriate market and their assessments of the competitive effect of this proposed investment on that market without first determining whether the second prong of the review standard has been met by BNY Co.
B. Public Convenience and Advantage
Under section 4 of chapter 167A of the General Laws, the Board must also determine that the "... public convenience and advantage will be promoted." This requirement is not limited to acquisitions involving full control. This component of the statutory review standard applies to "... any authority to act under the provisions of section two..." and includes a petition to acquire more than 5% of the voting stock of a banking institution or bank holding company. None of the transactions specified in section 2 of chapter 167A are exempt from this requirement. (Express exemptions to the Massachusetts Bank Holding Company Act are found in section 3 of chapter 167 of the General Laws. These exemptions do not apply to this petition.) The burden of proof is placed squarely upon the applicant to satisfy this test. ( See, Massachusetts Co-operative Bank League v. Board of Bank Incorporation, 348 Mass. 134, 137 (1964).)
The Petitioner's application and supplementary materials filed with the Board assert that it has complied with all applicable statutory requirements. BNY Co.'s position is that the nature of its non-controlling investment "... does not have an impact on the convenience and needs of the community." ( See, BNY Co.'s, Application to the Board, pp. 3 and 7 (January 2, 1997).) BNY Co. specifically states that its proposed investment would not put it in a position to influence State Street's existing community-based programs. The Petitioner also asserts that an affirmative demonstration of public convenience and advantage is not required and that at most it is just one factor to be balanced with other relevant factors relating to the proposed investment. ( See, BNY Co.'s Supplemental Submission to the Board, pp. 1-2, 11-13 (February 27, 1997).) It further argues that the related "net new benefits" statutory language is "... only a factor for consideration by the Board in evaluating applications." ( Id. at 2.) At the Board's February 13, 1997 public hearing, the Petitioner was specifically asked how the public convenience and advantage and net new benefits statutory standard was satisfied. In response, the Petitioner only cited potential increases in the market price of State Street's common stock as a possible benefit of BNY Co.'s proposed investment.
The Board declines to adopt the Petitioner's interpretation of the public convenience and advantage standard found in section 4 of chapter 167A of the General Laws. The statute clearly requires the Board to make a specific determination that "... public convenience and advantage will be promoted ." (Emphasis supplied.) It is not simply a factor or consideration to be balanced but rather a required finding by the Board. ( See, Chicopee Co-operative Bank v. Board of Bank Incorporation, 347 Mass. 744, 753 (1964) (Interpreting the statutory phrase 'public convenience and advantage' found in the then General Laws chapter 170, section 49.) ) Public convenience and advantage requires an affirmative showing that a proposed transaction will better serve the community and the public interest and not just benefit the applicant and its shareholders. ( Id.) The requirement that a public benefit be demonstrated was further reinforced by the 1990 amendments to section 4 of chapter 167A of the General Laws. ( See, St. 1990, c.102, s.16.) As a result, the Board now is required to consider and assess whether "net new benefits" will or are likely to be derived from a particular proposed transaction. "Net new benefits" requires an applicant to identify tangible, immediate or prospective benefits in the areas of capital investment, employment, credit, banking services and other matters the Board deems necessary or advisable. The Board does not believe that this requirement precludes all minority, non-controlling investments.
Based upon the extensive factual record before it, the Board finds and concludes that the Petitioner has failed to meet its burden to demonstrate that the public convenience and advantage will be promoted within the meaning of section 4 of chapter 167A of the General Laws by its proposed acquisition of up to 9.99% of the voting stock of State Street. As a result, the Board need not reach a determination on whether or not competition among banking institutions will be unreasonably affected by this petition. (For the same reasons, the Board need not determine whether other statutory provisions regarding reciprocity, participation in Massachusetts Housing Partnership Fund loan programs, executive officer residency, and asset retention requirements have been satisfied.)
Therefore, in accordance with its findings above and pursuant to sections 2 and 4 of chapter 167A of the General Laws, the Board hereby denies the Petitioner Bank of New York Company Inc.'s application to directly or indirectly own or control up to 9.99% of the voting stock of State Street Boston Corporation. The Petitioner may appeal this decision of the Board to the Supreme Judicial Court pursuant to section 7 of chapter 167A of the General Laws.
| Thomas J. Curry Commissioner of Banks | |
| Frederick A. Laskey Senior Deputy Commissioner of Revenue | Board |
| Joseph D. Malone Treasurer and Receiver-General | |
| March 14, 1997 Date |