4000 - Advisory Opinions
Contract to Provide Securities Brokerage Services at Branch Offices of Participating Financial Institutions
October 20, 1986
This is in response to your letter of September 22, 1986, to Senior Attorney Pamela E. F. LeCren inquiring whether a contract *** *** intends to enter into with insured nonmember banks would contravene any statute of regulation enforced by the FDIC.
According to the "Three-Way Contract" enclosed with your letter, *** will provide securities brokerage services (referred to as the "Program") at certain branch offices of participating financial institutions ("FI"). This opinion has no applicability to financial institutions other than insured state nonmember banks entering into the contract. The third party to the contract, ***, will provide certain consulting services to implement the brokerage plan.
*** is to open brokerage service offices at FIs participating in the Program under a plan submitted by *** to each FI. According to your July 8, 1986, letter, brokerage services will be performed in a totally separate and distinct area of the bank which will be clearly identified as a branch office of ***. *** will provide investment advice incidental to brokerage services to FI's depositors and other customers as well as to the general public. The types of securities involved in the brokerage service program are equity securities, debt securities, open-end/closed-end mutual funds, public limited partnerships, and annuities.
*** is solely responsible for the accuracy of all Program marketing, advertising, and promotional materials. Such materials must have the written approval of both *** and FI prior to use. In addition *** will provide compliance and procedures manuals for the Program and be responsible for the training and supervision of the licensed registered representatives of *** conducting brokerage services at the designated FI locations.
*** responsibilities under the contract include the (1) design and drafting of the Program's marketing and advertising materials, while bearing the cost of producing and advertising the initial supply of such materials for designated FI locations, (2) the provision for the training of employees acceptable to ***, including the payment of their licensing fees, (3) the design and payment for office signs and display racks and the initial supply of stationery and the like to be used at participating FIs, and (4) the provision of computer hardware and software to be used in the program.
Each FI participating in the program is to provide office facilities for the brokerage service. Each FI will assist in the selection of employees necessary to implement the program. Salaries of the registered representatives are to be paid from funds remitted to FI by *** after *** has deducted its fee from commissions from correspondent broker/dealers and contracted vendors. After payment of employee salaries, *** and the FI divide any remaining balance equally during the first year of the contract while during each subsequent year of the contract, *** retains 40% of any balance and forwards 60% to the FI. Each FI also agrees to provide to the Program customer account information essential to the successful functioning of the Program and the contract in conjunction with the marketing of the Program.
Each person selected to serve as a registered representative enters into an employment agreement with the FI. Either the FI, after first notifying *** and ***, or *** can terminate the employment. While such employees are to be considered employees of FI, they must be licensed as registered representatives of *** and be under the direct control and supervision of *** for all securities related activities.
Finally, FI agrees under the contract to indemnify and hold *** and *** harmless from any liability arising out of any illegal activity by FI's non-Program employees up to the amount of revenues earned in the program.
After review of the contract and your July 8, 1986, letter to Senior Attorney LeCren, we conclude that the Program does not materially differ from the INVEST program offered by IFSA Corporation. In 1983, the IFSA Corporation requested an opinion from the FDIC about whether an insured nonmember bank may, consistent with the Glass-Steagall Act, participate in the INVEST program. As you know from having seen the FDIC's response to ISFA's counsel (forwarded to you under cover of Ms. LeCren's August 1, 1986, letter to you), the FDIC's Legal Division concluded that participation in INVEST would not violate section 21 of the Glass-Steagall Act. Because we find no material difference between the Program and the INVEST program insofar as the Glass-Steagall Act is concerned, it is our opinion that participation by an insured state nonmember bank in the Program is not barred by the Glass-Steagall Act.
While the Program does not materially differ from the Invest program, we note the information you have provided us does not state whether or not all *** advertisements and promotional material to be disseminated by FI clearly state that the brokerage and advisory services are being provided by *** and not the FI. This was the case in the INVEST scenario. Nor does the contract state that each *** customer is given a notice that he or she must sign indicating that the securities services are being offered by and are the sole responsibility of *** and *** clearing broker. Finally, we have seen no statements that investment advice is formulated by *** or *** main office personnel and that the registered representatives are not authorized to offer investment advice which differs from that generated by the main office. We assume that ***, and INVEST do not differ in these regards and that we simply have not received sufficient information to show this.
The Securities and Exchange Commission ("SEC") recently adopted Rule 3(b)(9) which requires that any bank which engages in certain securities brokerage activities must register with the SEC as a broker/dealer. The rule provides, however, for a number of exceptions. As we do not feel it is appropriate for the FDIC to venture an opinion on the applicability of Rule 3(b)(9), we advise you to contact the SEC directly for an opinion on whether or not a bank that participates in the Program will be required to register as a broker/dealer or would be exempt from registration.
Although we are not offering any opinion on these issues at this time, we wish to point out that FI's use of *** to accomplish trades on behalf of fiduciary accounts could raise questions of a breach of the bank's fiduciary obligation and questions as to whether the bank has met its best execution obligations as well as other questions. The FDIC will of course comment upon, and take appropriate action with respect to, any such problems that may arise in this area should insured nonmember banks participate in the Program.
In closing, we wish to stress that this letter in no way constitutes an endorsement or approval of participation in the Program by any insured nonmember bank. The FDIC reserves the right to take issue with the manner in which any particular insured nonmember bank administers the Program depending upon the facts in any particular instance. Our opinion on the Glass-Steagall Act is based solely upon the facts as we understand them to be. Should the facts differ from that described, or circumstances change in the future, our opinion on the Glass-Steagall Act issue is subject to change.
Lastly, this letter does not constitute a comprehensive review of the Program in terms of safety and soundness, conformance with any applicable law or regulation, conflicts of interest, etc. The failure or omission of this letter to raise or comment upon any such issue should not be read to constitute a conclusion on the part of the FDIC that no such issue exists.