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November 24 , 2004

Winthrop N. Brown, Esq.
Milbank, Tweed, Hadley & McCloy LLP
International Square Building
1825 Eye Street, N.W.
Washington, D.C. 20006-5417

Dear Mr. Brown:

This is in response to your letter on behalf of Commerzbank AG, Frankfurt, Germany (“Commerzbank”), requesting an interpretation of section 4 of the Bank Holding Company Act (“BHC Act”) (12 U.S.C. § 1843) and section 211.23(f)(4) of the Board’s Regulation K (12 C.F.R. 211.23(f)(4)) that would permit two asset management subsidiaries of Commerzbank to sponsor and manage German-based investment trusts that invest in U.S. real estate.

Commerzbank has two subsidiaries, Commerz Grundbesitz Investmentgesellschaft mbH (“CGI”) and Commerz Grundbesitz Spezialfondsgesellschaft (“CGS”), that currently invest in non-U.S. real estate for the benefit of third-party investors. CGI manages only retail investment trusts (beneficial interests in which typically are sold widely to retail investors); CGS manages only institutional investment trusts (beneficial interests in which are sold to 30 or fewer institutional investors).

The asset management services provided by CGI and CGS to their investment trusts are governed by the German Investment Law. Under the German Investment Law, any company that wishes to sponsor, manage, and serve as distributor for one or more retail or institutional investment trusts must obtain a license to act as a Kapitalanlagegesellschaft (“KAG”) from Bundesanstalt für Finanzdienstleistungsaufsicht, the German bank supervisory authority (“BaFin”). Accordingly, we understand that CGI and CGS are licensed as KAGs and, as such, are subject to BaFin regulation and supervision. Amendments to the German Investment Law in 2002 liberalized the ability of investment trusts sponsored and managed by a KAG to invest in real estate outside the European Economic Area, including in the United States.

In light of these recent changes in German law, CGI has established a retail investment trust (the “Retail Trust”) to invest in real estate located in the United States, Europe, and Asia. In addition, CGS is establishing an investment trust for institutional investors (the “Institutional Trust,” and, together with the Retail Trust, the “Trusts”) to invest in U.S. real estate. The Trusts propose to invest in existing commercial real estate properties in major U.S. cities (the “Properties”), but not in undeveloped U.S. real estate. As required by the German Investment Law, title to each of the Properties would be held either directly by CGI or CGS or by a special purpose entity established and controlled by CGI or CGS.

Interests in the Trusts would be sold only to non-U.S. persons. All property management, leasing, real estate brokerage, and refurbishment services obtained by the Properties would be obtained from parties that are unaffiliated with Commerzbank or any of its subsidiaries. For their services to the Trusts, CGI and CGS would receive an annual management fee based primarily on the net asset value of the Trusts.

As a foreign bank that maintains branches in the United States, Commerzbank is subject to the provisions of the BHC Act in the same manner and to the same extent as a U.S. bank holding company.1 Section 4 of the BHC Act prohibits a bank holding company and its subsidiaries from owning or controlling nonbanking assets or shares or engaging in any nonbanking activity unless it qualifies for an exemption.2 Accordingly, Commerzbank may not own nonbanking assets or shares (such as real estate), directly or through any company it controls (such as CGI or CGS), unless it qualifies for an exemption from the nonbanking prohibitions of section 4 of the BHC Act.

Under section 211.23(f)(4) of Regulation K, a qualifying foreign banking organization (such as Commerzbank) may “[o]wn or control voting shares of any company in a fiduciary capacity under circumstances that would entitle such shareholding to an exemption under section 4(c)(4) of the [BHC Act] . . . .”3 Section 225.22(d)(3) of the Board’s Regulation Y (which implements section 4(c)(4) of the BHC Act) provides that the BHC Act’s nonbanking prohibitions shall not apply to “voting securities or assets acquired by a bank or other company (other than a trust that is a company) in good faith in a fiduciary capacity, if the voting securities or assets are . . . held in the ordinary course of business . . . and not acquired for the benefit of the company or its shareholders, employees, or subsidiaries.”4

You contend that the proposed ownership of U.S. real estate by CGI and CGS for the account of the Trusts would qualify for these fiduciary exemptions in Regulation K and Regulation Y. You advance the following arguments in support of this contention.

As noted above, German law requires CGI and CGS to obtain a banking license from BaFin to establish and manage the Trusts and, accordingly, subjects CGI and CGS to ongoing supervision and regulation by BaFin. The powers and duties of CGI and CGS with respect to the Trusts are established by the German Investment Law and a trust agreement entered into between CGI or CGS, on the one hand, and the investor, on the other hand (the “Trust Agreement”). Compliance by CGI and CGS with the German Investment Law and the Trust Agreement would be monitored and enforced by BaFin.

In addition, although CGI and CGS hold title to the assets acquired on behalf of the Trusts and their beneficial owners, the German Investment Law and the Trust Agreement create a “management trust” pursuant to which the assets of each Trust are held by CGI or CGS as trustee, exclusively for the account of the Trust and for the benefit of the Trust’s investors. The German Investment Law and the Trust Agreement subject CGI and CGS to fiduciary duties closely resembling those of a trustee in the United States. In particular, CGI and CGS must segregate all assets of the Trusts from their other assets, must manage the assets of the Trusts exclusively for the benefit of the investors, must manage the assets of the Trusts with “the due care and diligence of a prudent businessman,” and must provide investors with periodic reports on the performance of the Trusts.

Moreover, under the German Investment Law, the Trusts would not be legal entities separate from CGI and CGS. Investors in the Trusts would not have voting rights or any ability to influence the management of the Trusts by CGI and CGS.

Although the Trusts would not be legal entities separate from CGI and CGS, German law makes clear that the Trusts would not be liable for the general obligations of CGI or CGS. All monies contributed by investors to a Trust and all assets acquired by CGI or CGS on behalf of a Trust would be legally segregated from the other assets of CGI and CGS. In the event of the insolvency of CGI or CGS, the assets of the Trusts would not constitute part of the estate of CGI or CGS and would not be subject to the claims of any of the creditors of CGI or CGS. In addition, despite the fact that CGI and CGS would directly or indirectly hold title to the Properties, the assets of the Trusts would not be included in Commerzbank’s consolidated balance sheet.5

Furthermore, Commerzbank has committed that neither Commerzbank nor any of its subsidiaries would own any interests in the Trusts. In addition, no pension, profit-sharing, or similar benefit plan sponsored by Commerzbank for the benefit of its or its subsidiaries’ employees will own interests in the Trusts.6 Moreover, although the shareholders and employees of Commerzbank may purchase interests in the Retail Trust in their individual capacities, these interests would have no voting rights and are not expected at any time to exceed 5 percent of the total interests in the Retail Trust.

CGI and CGS also have represented that all of the assets that they will acquire on behalf of the Trusts will be acquired in good faith and in the ordinary course of business.

Thus, CGI and CGS are acting in a manner, and under authority and a set of fiduciary obligations, that is substantially identical to that of a trustee of a collective investment fund or other trust in the United States.

Based on all the facts of record, including all the representations and commitments made by or on behalf of Commerzbank, CGI, and CGS (whether noted in this letter or otherwise contained in correspondence with the Board), staff would not recommend that the Board disagree with your interpretation of the fiduciary exemptions in section 211.23(f)(4) of Regulation K and section 225.22(d)(3) of Regulation Y. Any change in the terms or circumstances of the proposed transactions and relationships may result in a different decision. In this regard, you should advise my staff before making any material modification to the proposal.

This determination is limited solely to the fiduciary exemptions in section 211.23(f)(4) of Regulation K and section 225.22(d)(3) of Regulation Y. If you have further questions, please contact Mark E. Van Der Weide (202-452-2263) or Ann E. Misback (202-452-3788) of my staff.


(signed) Scott G. Alvarez

Scott G. Alvarez
General Counsel


1. 12 U.S.C. § 3106(a). Return to text

2. 12 U.S.C. § 1843. Return to text

3. 12 C.F.R. 211.23(f)(4). Return to text

4. 12 C.F.R. 225.22(d)(3). Return to text

5. The assets would be included, however, as “assets under management” in footnote disclosure in Commerzbank’s financial statements.Return to text

6. Commerzbank is a member of an association of 557 banks founded in 1909 to invest collectively contributions from its members in a pension fund for member employees. Employees of Commerzbank represent about 10 percent of the beneficiaries of the pension fund. The pension fund has invested in an institutional fund sponsored by CGS. Commerzbank, however, has no role in directing the association’s investment decisions. Return to text

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