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4000 - Advisory Opinions


Would a Part 362 application would be necessary in order for a state-chartered nonmember bank to acquire as a subsidiary a sports agency that would represent professional athletes and coaches

FDIC--03--04 August 20, 2003 Pamela E. F. LeCren, Counsel

The following is in response to your June 25, 2003 letter to Douglass H. Jones, Deputy General Counsel, Federal Deposit Insurance Corporation (FDIC) requesting "confirmation that under the provisions of Section 24 [of the Federal Deposit Insurance Act, (FDI Act)] a state-chartered bank may engage in activities as agent, even if not permissible for national banks, so long as such activities are permitted by state law for state-chartered banks."

Your request to the FDIC was prompted by a determination by the Federal Reserve Bank of Atlanta that the activities of Management Co. (M) (a subsidiary of Financial Corp. (R), a financial holding company) are not permissible for a subsidiary of a financial holding company. As a result of that determination R is considering transferring M to (Bank) a state chartered bank that is a subsidiary of R. The Atlanta Federal Reserve Bank requested that R obtain confirmation from the FDIC that ownership of M by a state chartered bank is permissible under the FDI Act and FDIC's regulations, in particular, section 24 of the FDI Act and Part 362 of the FDIC's regulations (12 CFR 362) which implements section 24 of the FDI Act.

The conclusion presented in your letter is that "Because M acts as agent, and not as principal, in its sports agency bases, and because the Alabama Banking Department has determined that the activity is permissible for Alabama-chartered banks, no application or approval is required under Section 24."

Subject to certain statutory and regulatory exceptions section 24 of the FDI Act and Part 362 of the FDIC's regulations prohibits an insured state bank, and its majority owned subsidiaries, from engaging "as principal" in any activity that is not permissible for a national bank, or a subsidiary of a national bank, unless the bank meets its regulatory capital requirements and the FDIC determines that the activity does not present a significant risk to the deposit insurance funds. Thus, if the activities in which M engages are permissible for a subsidiary of a national bank, there is no need to inquire further, i.e., M may be transferred to the Bank without the need for an application. Even if the activities are not ones in which a subsidiary of a national bank may engage, there is no need to obtain consent for the transfer if the activities in which M engages are not "as principal" activities within the meaning of section 24 of the FDI Act and Part 362 of the FDIC's regulations.

According to your letter, M "represents professional baseball, football and basketball players and coaches." Its services are described to "include negotiating contracts and endorsements, providing a variety of personal financial services (budgeting, bill paying, and financial planning), arranging for tax, legal and investment advice, and assisting with major purchase[s] such as home or automobile purchases and providing certain incidental services as may be requested from time to time such as assisting with travel arrangements."

The Office of the Comptroller of the Currency (OCC) has determined that it is within the authority of a national bank and its subsidiaries to provide financial planning, consulting and advisory services to the general public and to offer full service brokerage services.1 The OCC has also determined that national banks may offer tax planning and tax preparation services2 (but not act as an expert tax consultant) and may act as finder (i.e., bring parties together for a transaction that the parties themselves negotiate and consummate).3 Bill paying is something that banks typically offer and would seem to be encompassed within cash management and payment services that the OCC recognizes as permissible for national banks.4 We note that national banks have also been permitted to invest in internet electronic payment systems as a complement to existing internet bill presentment services.5

It therefore appears that the personal financial services specifically identified in your letter (budgeting, bill paying and financial planning) would not necessitate an application to the FDIC because these services are national bank permissible. Investment advisory services would not require an application for the same reason. Although we need not determine whether these activities are "as principal" for the purposes of Part 362 since the activities are ones that are permissible for a national bank and its subsidiaries, we would conclude that those activities are not conducted as principal if we were to reach that question.6

As a national bank may provide investment advice and may act as a finder, it follows that "arranging" for investment advice is permissible for a national bank. Although national banks are not permitted to provide legal advice, and are not permitted to act as an expert tax consultant, "arranging" for such services should fall within the finder authority of a national bank. Without additional information on exactly how M "arranges" for those services, however, we are not able to offer an opinion on whether these services in fact fall within the recognized finder authority of national banks and their subsidiaries as set out in OCC's regulations. In any event, we would consider "arranging" for legal advice to be done other than "as principal" for the purposes of Part 362.7 We have had a previous occasion in connection with another matter to determine that rendering tax opinions is not "as principal". Having done so, there is little reason for us to conclude that "arranging" for tax advice is an "as principal" activity.

It is not entirely clear just what may be involved when M provides "assistance" with major purchases (such as homes and automobiles). If the services that M is providing fall within the OCC's interpretive guidance on the finder authority of national banks, then those activities would not trigger an application.8 If by "assisting" in the purchases M is not providing any services other than those typically provided by a real estate agent or insurance agent in connection with the purchase of property, goods or services, then even if those activities do not qualify as finder activities, we would consider them to be conducted other than "as principal" for the purposes of Part 362 (especially in the case of assisting in the purchase of a home).9

National banks are not permitted to act as travel agents but the OCC has recognized certain limited travel services as within the authority of a national bank.10 If M's travel activities are limited to those which the OCC has recognized as permissible for a national bank, making travel arrangements for clients would not trigger an application under FDIC's regulations. In any event, as Part 362 of the FDIC's regulations expressly indicates that acting as a travel agent in not considered to be an "as principal" activity, we would consider "assisting with travel arrangements" not to be covered by Part 362 provided that the assistance is nothing more than that typically provided by a travel agent.

We have not found any OCC Interpretive Letters which specifically address whether it is permissible for a national bank or its subsidiary to negotiate contracts and endorsements for the public. An OCC regulation does permit national banks to provide advice and assistance in structuring, arranging and executing mergers, acquisitions, joint ventures, leveraged buyouts, swaps, foreign exchange and other listed financial transactions11 but there is no indication that the OCC would interpret the regulation to permit a national bank to negotiate those transactions for a customer. Financial subsidiaries of national banks are permitted, with certain exceptions, to engage in activities that are financial in nature as defined in section 4(k)(4) of the Bank Holding Company Act (12 U.S.C. 1843(k)(4)). Section 4(k)(4)(F) provides that any activity that the Federal Reserve Board determined prior to November 12, 1999 to be closed related to banking or managing or controlling banks is financial in nature. Section 225.28(a)(6) of the Federal Reserve Board's regulations (12 CFR 225.28(a)(6)) (Regulation Y) has a provision which, similar to the OCC's regulation, lists as closely related to banking providing investment and financial advise in connection with mergers, acquisitions, divestitutes, investments, joint ventures, buyouts, recapitalizations, capital structuring, financial transactions and similar transactions. Again, there is no indication that Regulation Y would include negotiating contracts and endorsements as closely related to banking. In light thereof, we do not consider negotiating contracts and endorsements to be permissible for a national bank or its subsidiaries for the purposes of Part 362. As a result, even if all of the other activities to be conducted by M are either national bank permissible or are conducted other than as principal, the transfer of M to the Bank will require the FDIC's prior consent unless we determine that negotiating contracts and endorsements is not an "as principal" activity within the meaning of section 24 of the FDI Act and Part 362.

Section 24 of the FDI Act does not define the term "as principal". The scope and purpose section of Part 362 (§ 362.1(b)(l)) provides that the regulation does not cover activities conducted in a capacity "other than as principal". Activities are "other than as principal" for purposes of the regulation if they are "conducted as agent for a customer, conducted in a brokerage, custodial, advisory, or administrative capacity, or conducted as trustee, or in any substantially similar capacity." [emphasis added]. Section 362.1(b)(l) provides the following "examples" of activities that are not covered by the regulation because they are conducted "other than as principal": acting solely as agent for the sale of insurance, securities, real estate, or travel services; acting as trustee providing personal financial planning advice in safekeeping services. The list, as well as the definition of "other than as principal" activities, is illustrative and not exhaustive. The preamble which accompanied the final regulation when it was published in the Federal Register indicates that "We intend to continue to interpret section 24 and part 362 as excluding any coverage of activities being conducted as agent". The preamble also reflects that the FDIC was concerned that without the addition of the language "or in any substantially similar capacity" the list of activities excluded from the scope of the regulation "may exclude certain agency-like roles" which should also be considered "other than as principal."

Provided that M does not exercise discretion when negotiating employment and endorsements contracts, we are prepared to conclude that M, is acting in a capacity that is substantially similar to at least one or more of the capacities identified in § 362.1(b)(l) which are excluded from the scope of Part 362. We note that real estate agents typically negotiate contracts on behalf of their clients and do not exercise their own discretion when doing so. In addition, we expect that M offers its clients financial advice in connection employment and endorsement contracts and for M to serve as the go between with the prospective employer in connection with contracts and endorsements could be described simply as the execution of that advice. Full service securities brokers offer advice to clients about securities purchases and then execute the orders placed with them by those clients in reliance upon advice received from their broker. We see little difference if any here.

In light of the above, it is our conclusion that the R may transfer M to the Bank without obtaining the FDIC's consent under section 24 of the FDI Act and Part 362 of the FDIC's regulations. Please be advised, however, that our opinion is solely based upon the description of M's activities as provided in your June 25, 2003 letter and is further limited to those activities specifically identified in that letter. Your letter mentions that M will provide certain "incidental services as may be requested from time to time." We cannot and do not offer any opinion on whether those incidental services would cause our opinion to change. The most we can say is that if those services are not permissible for a subsidiary of a national bank and are not conducted other than as principal, then ARM would need to obtain the FDIC's consent prior to offering those services unless a statutory or regulatory exception applies.

112 C.F.R. 5.34(e)(5)(v)(I); OCC Interpretive Letter No. 238 (2/9/82); 12 U.S.C. 24 (Seventh). Go back to Text

212 C.F.R. 7.1008; OCC Interpretive Letter No. 437 (7/28/88). Go back to Text

312 C.F.R. 7.1002. Go back to Text

4OCC Interpretive Letter N. 756 (11/5/96). Go back to Text

5OCC Conditional Approval No. 389 (5/19/00). Go back to Text

6The meaning of "as principal" for purposes of Part 362 is discussed below. Go back to Text

7The meaning of "as principal" for purposes of Part 362 is discussed below. Go back to Text

8We also note that your letter describes M's activities as "including" those listed and that the parenthetical which identifies budgeting, bill paying and financial planning among M's activities appears to set out examples of the "variety" of personal financial services M provides to its clients. We of course do not offer any opinion with respect to activities other than those that are specifically identified in your letter. Go back to Text

9The meaning of "as principal" for purposes of Part 362 is discussed below. Go back to Text

10OCC interpretive Letter No. 437 (7/27/98) (assisting customers in placing orders for tickets with a travel agency). Go back to Text

1112 C.F.R. 5.34(e)(5)(v)(K). Go back to Text


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