4000 - Advisory Opinions
Discount Brokerage Activities under the Glass-Steagall Act
October 11, 1983
Pamela E.F. LeCren, Senior Attorney
This office has reviewed the information provided to us by your letters of June 9, 1983 and August 18, 1983 in which you set out certain particulars about * * * plan to provide its customers with access to the * * * Tax Exempt Bond Fund, a closed end mutual fund (the "Fund"). You have requested that the FDIC comment on the bank's plans with reference to General Counsel's Opinion No. 6. Our opinion is sought in view of the fact that Legal Counsel for * * * Department of Banking has opined that the plan would involve the bank in underwriting of securities in violation of the Glass-Steagall Act.
According to your letter, * * * is presently offering a discount brokerage service to its customers some of whom have asked the bank to effect purchases of the Fund on their behalf. As a result of those requests, the bank is investigating the possibility of acting as agent for such customers in the purchase of units in the Fund. Acting as agent would entail forwarding a completed purchase order form along with the customer's check to * * *. Presumably * * * is one of the Fund's distributors as the Fund's prospectus describes * * * as the Fund's sole underwriter. The bank will not purchase any units of the Fund in its own name; will not advertise or promote the Fund; nor have any liability for any unsold portion of the Fund. The bank also will not enter into any contract or agreement with * * *, * * *, or * * *.
General Counsel's Opinion No. 6 discusses the legality of discount brokerage services under the Glass-Steagall Act when those services are offered by an insured nonmember bank. The opinion concludes that a nonmember insured bank may lawfully offer discount brokerage services, i.e., buy and sell securities for the account of a customer, provided however that:
(1) The bank clearly solely acts at the customer's direction;
(2) The transactions are for the account of the customer and not the account of the bank;
(3) The transactions are without recourse;
(4) The bank makes no warranty as to the performance or quality of any securities; and
(5) The bank does not advise the customer to make any particular investment decision.
While not commenting upon the * * * Banking Department's opinion that the bank would be engaged in underwriting but assuming for the purposes of argument that the activity does constitute underwriting under the Glass-Steagall Act, we conclude that the activity as described is not one that is prohibited. This conclusion is of course dependent upon the bank complying with the five restrictions outlined above.