|
[Main Tabs]
[Table of Contents - 4000]
[Index]
[Previous Page]
[Next Page]
[Search]
4000 - Advisory Opinions
Glass-Stegall Act Does Not Bar Insured Nonmember
Bank Participation as Correspondent in Securities Brokerage and
Investment Advisory Services Offered by Others
FDIC-86-18
June 12, 1986
Pamela E. F. LeCren, Attorney
The following is in response to your request on behalf of your
client, ***, for the FDIC's comments and opinions on whether or not an
insured nonmember bank may, consistent with the Glass-Steagall Act,
participate as a "correspondent" in securities brokerage and
investment advisory services offered by ***.
According to your letter, *** engages in securities brokerage and
investment advisory services through its headquarters in ***, *** and
now intends to offer these services through *** centers to be
established on the premises of financial institutions
("correspondents") that have agreed to participate in the
program. 1
To participate, a correspondent will execute a Brokerage Services
Agreement with *** which provides for, among other things: (1) the
establishment of the *** center on the correspondent's
premises; 2
(2) staffing of the center by employees of the correspondent (the
employees will be registered securities
representatives); 3
(3) the provision of standardized investment advice based on research
conducted by Standard and Poors Value Line or other similar
services; 4
(4) prior approval by *** of any advertisement prepared by the
correspondent with respect to the
centers; 5
(5)
{{4-28-89 p.4218}}indemnification by *** of the
correspondent against any liabilities arising from conduct by *** or
its employees (including the representative); and (6) limitation of the
correspondent's liability under the Brokerage Agreement for any act or
omission by the representative, or failure on the part of a customer to
deposit or maintain adequate margin or to pay for securities, to the
amount due the correspondent from *** in connection with future
transactions, i.e., future payments.
Upon a review of your April 16, 1986 letter and the documentation
submitted therewith, 6
it is our conclusion that the *** program does not materially differ
from the INVEST program offered by ISFA Corporation. In 1983, the ISFA
Corporation requested an opinion from the FDIC as to whether or not an
insured nonmember bank may, consistent with the Glass-Steagall Act,
participate in the INVEST program. In response, the FDIC's Legal
Division issued an opinion which concluded that participation in INVEST
would not violate section 21 of the Glass-Steagall
Act. 7
As we find no material difference between the *** and INVEST programs
insofar as the Glass-Steagall Act is concerned, it is our opinion that
participation by an insured nonmember bank in the *** program is not
barred by the Glass-Steagall Act.
In addition to commenting on the Glass-Steagall Act implications of
the *** program, we wish to draw the following to your attention. We
note that paragraph 10(a) of the Brokerage Services Agreement provides
that the correspondent will furnish any regulatory or financial reports
to *** as *** may from time to time request. You should be advised that
Reports of Examination of an insured nonmember bank are the property of
the FDIC and may not be disclosed by the bank without the FDIC's prior
consent.
The Securities and Exchange Commission ("SEC") recently
adopted Rule 3(b)(9) which requires that any bank which engages in
certain securities brokerage activities must register with the SEC as a
broker/dealer. The rule provides, however, for a number of exceptions.
As we do not feel it is appropriate for the FDIC to venture an opinion
on the applicability of Rule 3(b)(9), we advise *** to directly contact
the SEC for an opinion on whether or not a bank that participates in
the *** program will be required to register as a broker/dealer or
would be exempt from registration.
Although we are not offering any opinion on these issues at this
time, we wish to point out that correspondent's use of *** to
accomplish trades on behalf of fiduciary accounts could raise questions
of a breach of the bank's fiduciary obligation and questions as to
whether the bank has met its best execution obligations as well as
other questions. The FDIC will of course comment upon, and take
appropriate action with respect to, any such problems that may arise in
this area should insured nonmember banks participate in ***.
We note that the documentation submitted to the FDIC is silent as to
the basis of compensation for *** representatives. Conflicts of
interest can arise if compensation is based in some manner upon the
volume of business generated by the representative. Such a practice
could be the subject of criticism by the FDIC. We also note that, in
addition to a
{{4-28-89 p.4219}}share of the commissions generated by
each trade, the correspondent may receive a bonus based upon the volume
of business generated by the *** center. This could also be the subject
of criticism by the FDIC.
In closing, we wish to stress that this letter in no way constitutes
an endorsement or approval of participation in the *** program by any
insured nonmember bank. The FDIC reserves the right to take issue with
the manner in which any particular insured nonmember bank administers
the *** program depending upon the facts in any particular instance.
Our opinion on the Glass-Steagall Act is based solely upon the facts as
we understand them to be. Should the facts differ from that described,
or circumstances change in the future, our opinion on the
Glass-Steagall Act issue is subject to change.
Lastly, this letter does not constitute a comprehensive review of
the *** program in terms of safety and soundness, conformance with any
applicable law or regulation, conflicts of interest, etc. The failure
or omission of this letter to raise or comment upon any such issue
should not be read to constitute a conclusion on the part of the FDIC
that no such issue exists.
1 In addition to the provision of standardized investment
advice, the activities to be conducted through the *** centers are to
be comprised of the sale and purchase of debt and equities securities
and mutual fund shares. Securities transactions will be effected on a
fully disclosed basis through a clearing broker selected and paid by
*** will neither purchase nor sell securities for its own account nor
engage in underwriting or market making activities. Go Back to Text
2 The *** Policies and Procedures Manual specifies that the
center will be in a separate office that is clearly distinguished from
the remainder of the correspondent's premises. The Brokerage Services
Agreement provides that the correspondent shall maintain strict and
total separation of its business from the business conducted at the ***
center so as not to lead to confusion between the business conducted by
the correspondent and the securities activities conducted by ***. Go Back to Text
3 Representatives may not perform any duties on behalf of the
correspondent or any affiliate of the correspondent other than serving
as a registered representative for *** without the consent of ***.
Representatives are under the sole control and influence of *** with
respect to brokerage services offered through the centers and the
correspondent has no obligation to monitor the conduct of
representatives. No correspondent employee other than the
representative may proffer or disseminate investment advice or engage
in any activity that may be construed as a securities sales
conversation. Representatives are compensated by the correspondent. ***
retains all commissions and fees charged to customer accounts and will
reimburse correspondent for the use of correspondent's facilities,
premises, and personnel in accordance with the schedule of payments
contained in Exhibit A to the Brokerage Agreement. The schedule
provides that a percentage of the commission generated from the center,
minus certain transactions fees, will go to the correspondent. This
amount can be augmented by bonuses keyed to the volume of business. Go Back to Text
4 *** will provide portfolio evaluations and other specialized
investment advice through its main office only. Go Back to Text
5 The Policies and Procedures Manual provides that all
advertisements and promotions must disclose that *** and not the
correspondent, is providing the brokerage and investment advisory
services. Go Back to Text
6 Your letters of August 16 and 23, the Brokerage Services
Agreement, Exhibits A and B to the Brokerage Services Agreement, and
the Policies and Procedures Manual for Participating Financial
Institutions form the sole basis of our opinion and remarks. Go Back to Text
7 See December 9, 1983 letter from Pamela E.F. LeCren, Senior
Attorney, to Thomas A. Russo, Counsel to ISFA Corporation.
A nonmember bank as a subscribing institution
would not appear to be engaged in selling, distributing, underwriting,
or issuing securities within the meaning of section 21 as a result of
its contractual agreement with ISFA. Even if we were to assume that the
activities in question could not lawfully be conducted by a bank, under
the circumstances as described at length above, it is ISFA and not the
bank that is buying and selling securities. The fact that a dual
employee of the bank is staffing the INVEST service center would not
appear, under the closely defined roles established by contract and
otherwise, to cause the bank to be buying and selling
securities nor cause the bank to be in the business of
giving investment advice. Neither the bank nor any of its employees are
responsible for the development of the investment advice nor does the
bank or any of its employees represent that the bank is recommending
any investment decisions. On the contrary, stringent measures are
prescribed to make INVEST customers aware that ISFA, and not the bank,
is conducting, and is responsible for, the securities activities. Go Back to Text
[Main Tabs]
[Table of Contents - 4000]
[Index]
[Previous Page]
[Next Page]
[Search]
|
