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4000 - Advisory Opinions
Treatment of Deposit Insurance Application in Light
of Competitive Equality Banking Act of 1987
FDIC-87-26
October 27, 1987
Pamela E. F. LeCren, Senior Attorney
The following is in response to your request for an opinion with
regard to the subject application as to whether or not the operation of
the proposed bank would be in contravention of sections 20 and 32 of
the Glass-Steagall Act as made applicable to state nonmember banks by
the Competitive Equality Banking Act of 1987. According to the
information provided to the Legal Division, the proposed bank's
principal shareholders and directors would be individuals who are
officers and principal shareholders of *** and several related firms.
*** is involved in clearance and settlement activities, specialist
activities on the Midwest Stock Exchange and the Pacific Stock Exchange
and is also engaged in securities trading for its own account.
Sections 20 and 32 of the Glass-Steagall Act as made applicable to
state nonmember banks by the Competitive Equality Banking Act of 1987
for the period beginning March 5, 1987 through March 1, 1988,
respectively, provide that an insured nonmember bank is prohibited from
being affiliated with the securities company principally engaged in the
underwriting, distribution, or public sale of securities and that
employee, officer, or director interlocks between insured nonmember
banks and companies that are primarily engaged in underwriting,
distribution or the public sale of securities are prohibited.
In order for the FDIC to process the subject deposit insurance
application and approve the grant of deposit insurance, the FDIC would
have to determine that: (1) the activities in which *** engages do not
constitute underwriting, distribution, or the public sale of securities
for the purposes of the Glass-Steagall Act, or (2) if the activities do
involve underwriting or distribution, that *** is not
"principally" engaged in such activities. As section 201(b)(2) of
the Competitive Equality Banking Act provides that a banking agency
"may not authorize or allow by action, inaction, or otherwise
. . . any insured bank or subsidiary or affiliate thereof to engage
. . . in the flotation, underwriting, public sale, dealing in or
distribution of securities in that approval would require the agency to
determine that the entity which would conduct such activities would not
be engaged principally in such activities " . . . [or to
engage] in any securities activity not legally authorized in writing
prior to March 5, 1987 . . .", it is the opinion of the Legal
Division that the FDIC is constrained from making the decisions
necessary in order for the FDIC to accept and process the instant
application.
Although the Office of the Comptroller of the Currency has
determined that execution and clearing activities are not prohibited
under the Glass-Steagall Act to banks, their subsidiaries and
affiliates 1
neither the FDIC, the FRB, nor the OCC has to date
determined
{{4-28-89 p.4269}}that specialist activities are
permissible for banks, their subsidiaries, and their
affiliates. 2
Inasmuch as processing the subject application would thus require the
Legal Division to determine that specialist activities either are or
are not underwriting and if so whether *** is principally engaged
there, it is our opinion that the application should not be taken up
until after the expiration of the
moratorium.
1 "Proposed activities of registered broker-dealer bank
subsidiary allowed under Glass-Steagall Act" Banking L.Rep. (CCH)
¶ 85,604, December 29, 1986. Go Back to Text
2 The bank's counsel cites a Federal Reserve Board
interpretation printed at FRRS 3-909 which counsel indicates purports
to approve specialist activities as essentially being those of an agent
and thus being permissible for banks, their subsidiaries, and their
affiliates. According to my conversations with ***, Federal Reserve
Board, the Board of Governors has not so determined. In fact in
approving the section 20 applications of Citicorp, J.P. Morgan and
Company and Bankers Trust New York Corporation, (73 Federal Reserve
Bulletin 473, June, 1987) the Federal Reserve Board determined that any
dealing activities, i.e., buying and selling for one's own
account for a non-investment purpose, is covered under the
Glass-Steagall Act as underwriting or distribution. Furthermore,
according to ***, the referenced Federal Reserve Board interpretation
refers to a September 13, 1934 opinion of the Board that is limited to
its particular facts. The transaction essentially involved a brokerage
transaction in which a broker placed orders for securities for the
account of customers in odd lots and was required under the rules of
exchange in order to accomplish the buy order to buy in lots of one
hundred or multiples thereof. The broker thus purchased the additional
shares for its own account so as to be able to place the order for its
customer. The letter did not involve a situation in which a company
routinely stands ready to buy or sell particular securities at a stated
bid and offer price. Go Back to Text
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