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4000 - Advisory Opinions
Request for Interpretation of General Counsel's
Opinion No. 6--"Soft-Dollar" Arrangements and Commission
Splitting on Brokered Transactions Involving Trust Accounts
FDIC-83-15
October 13, 1983
Pamela E. F. LeCren, Senior Attorney
The following is in response to your July 14, 1983 request that the
Legal Division provide further clarification on General Counsel's
Opinion No. 6 which discusses the legality of discount brokerage
services when offered by insured nonmember banks. Your request asks
that the FDIC address two specific questions involving brokerage
services and bank trust departments: (1) whether or not an insured
nonmember bank may share in commissions generated by brokered
transactions involving revocable trust accounts where (a) the settlor
of the trust has consented by separate trust instrument to the bank
trustee sharing commissions with the discount broker or (b) the trust
instrument permits, or has been amended to permit, such commission
sharing; and (2) what is the interrelationship of the use of "soft
dollars" by a bank trustee to obtain research services and General
Counsel's Opinion No. 6. Your questions are answered separately below.
Commission Splitting/Revocable Trusts
General Counsel's Opinion No. 6 discusses at length the legality
under the Glass-Steagall Act of a contractual arrangement whereby an
insured nonmember bank utilizes the discount brokerage services of a
particular broker/dealer and the bank shares in the commissions
generated by the brokered transactions. The opinion goes beyond a
straight Glass-Steagall Act analysis, however, and states in part that,
if the bank intends to utilize the contractual arrangement with
the broker/dealer for transactions executed in connection with trust
department accounts, the bank should not receive any additional
compensation with regard to those transactions from the broker/dealer,
i.e., the bank's trust department should not share in any
commission
{{4-28-89 p.4133}}associated with the transaction. To do
so would raise possibilities of a breach of fiduciary obligation toward
the bank's trust department customers.
Your letter in essence asks the FDIC to reconsider this apparent
total prohibition on commission splitting where any trust department
account is involved.
As shown by the above language, FDIC's concern is centered on a
possible breach of fiduciary obligation if the bank, as trustee, shares
in commissions generated by transactions effected on behalf of trust
department accounts. Whether or not a particular act on the part of a
trustee will give rise to a breach of fiduciary obligation depends upon
the circumstances in any particular case (for example, whether the
trust is directed or undirected) and will vary from state to state
depending upon local. Even in the case of a trust department account
for which the bank does not act as trustee (for example, managed agency
accounts) the bank may have certain performance obligations with
respect to the account even though its obligations do not rise to the
level of a fiduciary obligation. While we do agree with your statement
that, as a general principle of law, a trustee if expressly authorized
by the trust instrument may do or take acts which in the absence of
authorization would give rise to a breach of fiduciary obligation, we
are aware that some state statutes prohibit a bank trustee from sharing
in any commissions generated by securities transactions effected on
behalf of trust department accounts. We are also aware that a court of
law, depending upon the facts in any particular instance, may order
rescission of the commission despite the authorization.
In the absence of a statutory prohibition, however, and assuming no
unusual facts, it would appear that where (1) a revocable trust
instrument expressly authorizes the bank trustee to share in
commissions generated by securities transactions effected on behalf of
the account, and (2) the settlor of the trust entered into the
authorization after full disclosure of the facts the sharing of the
commission would not itself give rise to a breach of fiduciary
obligation. 1
This is not to say, however, that the administration of that trust
account could not give rise to a breach of obligation or not be subject
to criticism. For example, it is possible that the bank trustee by
committing its brokerage business to one broker/dealer may not meet its
best execution obligations. If the bank trustee has discretion over the
account and the commission splitting arrangement is dependent upon the
volume of trades, the bank may be open to a charge of "churning"
accounts to generate fees. A proper accounting must also be kept for
each account, other records maintained, and all necessary disclosures
made in accordance with applicable law. If the broker/dealer is a
related company of the bank and that fact is not properly disclosed, a
breach of fiduciary obligation could be found.
As any number of particulars can vary concerning the manner in which
an account is administered and the nature of the bank's obligation can
vary as to the particular type of trust department account, we cannot
be any more specific in responding to the initial portion of your
request. In short, although given the proper circumstances the bank's
trust department could split commissions, a bank would be advised to
obtain the opinion of counsel before doing so.
Soft Dollar Arrangements
"Soft dollars" is a term typically used to describe an
arrangement whereby a bank purchases products or services and pays for
them with brokerage commissions arising from securities transactions.
Section 28(e) of the Securities and Exchange Act of 1934 (15 U.S.C.
78bb) established a so-called "safe harbor" for bank trustees
that cause trust accounts to pay a broker/dealer a commission for
brokerage transactions that is higher than another broker would charge.
Where the bank trustee determines in good faith that the
commission
{{4-28-89 p.4134}}is reasonable in relation to the value
of the brokerage and research services provided by the broker, the
trustee will not be said to have breached his/her fiduciary
obligation. 2
In essence, section 28(e) overrides preexisting concepts of fiduciary
obligation and states that under appropriate circumstances it does not
give rise to a breach of fiduciary obligation for a trustee to cause a
trust account to incur a greater expense than otherwise might be
incurred.
Your letter requests that the FDIC comment upon the
interrelationship of General Counsel's Opinion No. 6 and section
28(e). 3
Presumably, you read the above passage quoted from General Counsel's
Opinion No. 6 as limiting, or somehow affecting, the reach of section
28(e). In response to your inquiry, we can only say that General
Counsel's Opinion No. 6 does not address section 28(e) nor do we see
any correlation between a "soft dollar" arrangement and a
situation where a bank shares commissions with a discount broker. A
discount broker by definition does not "provide" research
services. Although under section 28(e) the broker to whom commissions
are paid need not produce the research services in-house, according to
the Securities and Exchange Commission the broker is not
"providing" services within the meaning of section 28(e) where
the broker is merely paying the obligation of the bank to a third
party. (See Securities and Exchange Release No. 16679, March 19, 1980).
Such would seem to be the case if a bank that shares in commissions
with a discount broker has the discount broker remit the portion of the
commission that would be otherwise retained by the bank to a research
service.
1 Although you have not expressly indicated, we assume that
"revocable trust" refers to a trust where the settlor of the
trust is also the beneficiary. If there is more than one beneficial
interest involved, the consent of all beneficiaries would need to be
obtained. This in essence may preclude the commission split for trusts
where the beneficial interests are not easily ascertained or where the
beneficiary is a minor. Additionally, any securities transactions
involving court supervised accounts would need court approval. Go Back to Text
2 Section 28(e) provides in relevant part as follows: (e)(1) No
person using the mails, or any means or instrumentality of interstate
commerce, in the exercise of investment discretion with respect to an
account shall be deemed to have acted unlawfully or to have breached a
fiduciary duty under State or Federal law unless expressly provided to
the contrary by a law enacted by the Congress or any State subsequent
to the date of enactment of the Securities Act Amendments in 1975
solely by reason of his having caused the account to pay a member of an
exchange, broker, or dealer an amount of commission for effecting a
securities transaction in excess of the amount of commission another
member of an exchange, broker, or dealer would have charged for
effecting that transaction, if such person determined in good faith
that such amount of commission was reasonable in relation to the value
of the brokerage and research services provided by such member, broker,
or dealer, viewed in terms of either that particular transaction or his
overall responsibility with respect to the accounts with which he
exercises investment discretion. Go Back to Text
3 A portion of your letter describes a program your client is
considering entering into relating to the use of soft-dollars by the
bank as trustee to obtain research services. You conclude that the
arrangement would be protected by section 28(e). The protection of that
section is available only under "limited circumstances"
(See Office of the Comptroller of the Currency, Trust
Department Circular No. 17, March 1980). We cannot comment on whether
or not the program under consideration falls within the protections of
section 28(e) as we do not have sufficient information. Go Back to Text
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