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5000 - Statements of Policy
{{4-30-99 p.5225}}
FDIC STATEMENT OF POLICY ON THE APPLICABILITY OF THE
GLASS-STEAGALL ACT TO SECURITIES ACTIVITIES OF SUBSIDIARIES OF
INSURED NONMEMBER BANKS 1
This statement of policy addresses the applicability of the
Glass-Steagall Act to securities activities of subsidiaries of insured
nonmember banks. It is not intended to address any other issues that
may be raised by such activities.
It is the opinion of the Board of Directors of the FDIC that the
Banking Act of 1933, popularly known as the Glass-Steagall Act and
codified in various sections of title 12 of the United States Code,
does not, by its terms, prohibit an insured nonmember bank from
establishing an affiliate relationship with, or organizing or
acquiring, a subsidiary corporation that engages in the business of
issuing, underwriting, selling or distributing at wholesale or retail,
or through syndicate participation, stocks, bonds, debentures, notes,
or other securities. 2
While the Glass-Steagall Act was intended to protect banks from certain
of the risks inherent in particular securities activities it does not
reach the securities activities of a bona fide subsidiary of
an insured nonmember bank.
Section 21 of the Glass-Steagall Act (12 U.S.C. 378), the only
provision of the Act that is applicable by its terms to insured
nonmember banks, provides, in part, that it shall be unlawful for: Any person, firm, corporation, association, business trust, or
other similar organization, engaged in the business of issuing,
underwriting, selling, or distributing * * * stocks, bonds,
debentures, notes or other securities, to engage at the same time to
any extent whatever in the business of receiving deposits * * *.
This section does not address the actions of subsidiaries or
affiliates.
The only provisions of Glass-Steagall that prohibit affiliations
between banks and corporations engaged in securities activities apply
solely to member banks of the Federal Reserve System. Section 20 (12
U.S.C. 377), for example, specifically provides that no member
bank shall be affiliated with any corporation, association,
business trust, or other similar organization engaged principally in
the issue, flotation, underwriting, public sale, or distribution of
stocks, bonds, debentures, notes or other securities. Section 32 (12
U.S.C. 78) prohibits persons who are officers, directors, or employees
of corporations that are primarily engaged in certain securities
activities, or partners or employees of partnerships so engaged, from
serving as directors, officers, or employees of member
banks.
In 1981 decision involving section 4(c)(8) of the Bank Holding
Company Act, sections 16 and 21 of the Glass-Steagall
Act, 3
and Federal Reserve Board Regulation Y
(12 CFR Part 225) permitting
bank holding companies to advise closed-end investment companies, the
Supreme Court affirmed that section 21 applies only to banks and
not to their nonbank affiliates. Board of Governors of
the Federal Reserve System v. Investment Company Institute, 450
U.S. 46 (1981). The Court indicated at footnote 24 that: We agree with the Court of Appeals that §§ 16 and 21 apply
only to banks and not to bank holding companies. Section 21 prohibits
firms engaged in the securities business from also receiving deposits.
Bank holding companies do not receive deposits, and the language of
§ 21 cannot be read to include within its prohibition separate
organizations related by ownership with a bank, which does receive
deposits.
{{4-30-99 p.5226}}
The Court went on in the same footnote to quote the following
exchange between Senator Glass, co-sponsor of the bill that became the
Glass-Steagall Act, and Senator Robinson: Mr. Glass: Here [section 21] we prohibit the large private
banks whose chief business is investment business, from receiving
deposits. We separate them from the deposit banking business. Mr. Robinson of Arkansas: That means if they wish to receive
deposits they must have separate institutions for that purpose? Mr. Glass: Yes.
The Court also rejected the argument that a bank and its holding
company should be treated as a single entity for the purposes of
sections 16 and 21, stating that the structure of the Glass-Steagall
Act itself indicates the contrary. Id. at n. 24.
Although the Supreme Court in Board of Governors v. ICI
did not consider section 21 in the context of a bank and its
subsidiary, we are of the opinion that the Court's conclusion regarding
section 21 and holding company affiliates is equally applicable in this
instance. Thus, the FDIC does not believe that it would be warranted in
extending the reach of the prohibitions of section 21 of the
Glass-Steagall Act to bona fide subsidiaries of insured
nonmember banks. The FDIC intends, however, to continue to monitor
closely developments related to the securities activities of bank
subsidiaries.
By Order of the Board of Directors, August 23, 1982.
[Source: 47 Fed. Reg. 38984, September 3, 1982]
[The page following this is 5249.]
1 This statement of policy only applies to insured nonmember
banks. Moreover, insured nonmember banks that are members of a bank
holding company system will also need to take into consideration the
restrictions of sections 4(a) and 4(c)(8) of the Bank Holding Company
Act (12 U.S.C. 1843(a),
1843(c)(8) and Federal Reserve
Board regulations before entering into securities activities through
subsidiaries. Go Back to Text
2 The FDIC of course recognizes its ongoing responsibility to
ensure the safe and sound operation of insured nonmember banks, and,
depending on the facts, the potential risks inherent in a bank
subsidiary's involvement in certain securities activities. Go Back to Text
3 Section 16 (12 U.S.C. 24 Seventh) provides that national
banks may not, with certain exceptions, deal in securities except to
buy and sell securities solely upon the order and for the account of
customers. The exception for dealing in securities upon the order of
customers is incorporated into the first paragraph of section 21 and
thus applies to member and nonmember banks alike. Go Back to Text
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