4000 - Advisory Opinions
Unrelated Third Party Non-Banking Activities on Insured Nonmember Bank Premises
June 21, 1988
Pamela E. F. LeCren, Senior Attorney
The following is in response to your June 2, 1988 letter wherein you inquire as to the FDIC's guidelines if any regarding the conduct of "non-banking" activities on the premises of an insured nonmember bank by an unrelated third party.
Your letter indicates that your client, *** is forming a relationship with whereby which will occupy space in the bank, will offer securities, life insurance, financial planning services, and employee benefits packages to the bank's customers. These services will be provided by a licensed *** agent. This same individual will also act as an agent in the sale of real estate, however, the real estate services will be offered under a different name than that of ***. Bank salaried employees may be used from time to time on an as needed basis by *** for secretarial services. According to your letter the bank will identify "the *** outlet" as a separate and distinct entity from the bank and will utilize "prominent signage and other necessary safeguards to prevent confusion by customers as to *** relationship to the bank." It is presently contemplated that the bank will receive 30% of all the commissions generated by *** through the sale of financial products in lieu of rent for the use of the bank's facilities.
Initially let me indicate that the FDIC does not have any rules or regulation which generally govern the conduct of "non-banking" activities on the premises of an insured nonmember bank by an unrelated third party. This is true regardless of the nature of those activities. Whether or not a bank may lease space to a third party to conduct business activities on the premises of the bank is therefore dependent upon state law. The FDIC would, of course, at a minimum, evaluate any leasing or other arrangement with a third party for conformance with safe and sound banking practice. Each situation will be evaluated on the basis of the particular facts and in view of applicable laws and regulations of the state in which the bank is located.
Generally speaking, the utilization of bank space, equipment and personnel in connection with the operation of any business which is not an integral part of the bank would require that the bank be adequately compensated. What constitutes adequate compensation will vary with the circumstances. Full details regarding the lease or other arrangement should be disclosed to the bank's shareholders and should of course be approved by the bank's board of directors. Lastly, the FDIC would like to see steps taken to ensure that customers of the third party lessee are fully apprised that they are dealing with a separate and completely independent entity from the bank. Moreover, as any such relationship is one which could generate conflicts of interest, the lease or other arrangement would probably be the subject of careful review during an examination of the bank. (In connection with the foregoing I have enclosed a portion of the FDIC's Manual of Examination Policies which discusses the topic of nonbanking activities conducted on a bank's premises.)
Section 337.4 of the FDIC's regulations (12 C.F.R. 337.4) which you mention in your letter, governs the relationship between an insured nonmember bank and its subsidiary or affiliate which engages in securities activities of the type in which a bank is prohibited by section 21 of the Glass-Steagall Act (12 U.S.C. 378) from engaging. That particular provision of the FDIC's regulations does not govern a situation in which a bank allows an unrelated third party to utilize its premises to offer services to the bank's customers. We have no reason to conclude, based on the information in your letter, that *** is an affiliate or subsidiary of your client bank.
As your letter provides few details regarding the proposed relationship between the bank and *** our comments must be limited to those set forth above. You should be advised that it is generally not the practice of the Legal Division to approve transactions in which an insured nonmember bank proposes to enter. We can, provided we are given sufficient information, opine or whether a particular transaction conforms with FDIC's regulations as well as the various federal laws which the FDIC enforces as to insured nonmember banks. In this vein we are enclosing for your review a copy of a 1983 staff opinion dealing with a program known as INVEST which was reviewed by the Legal Division for conformance with the Glass-Steagall Act. As you may be aware, INVEST involves a situation in which a broker-dealer offers securities and limited investment advice on the premises of unrelated financial institutions. We are also enclosing a copy of another staff opinion reviewing a program similar to INVEST. You will note that the second opinion contains a number of disclaimers. We are enclosing this letter in order to make clear that the letters which are being forwarding to you are limited in their scope to the Glass-Steagall Act question.