4000 - Advisory Opinions
Request for Clarification of General Counsel's Opinion No. 6 as It Relates to "Commission Splitting"
November 9, 1983
This is in response to your September 2, 1983 letter requesting 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. 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 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 requests that the FDIC draw a distinction between bank managed accounts and nonbank managed accounts with respect to whether or not commissions may be shared between the bank and the discount broker.
The concern the FDIC was addressing in the above-referenced portion of General Counsel's Opinion No. 6 centers on a possible breach of fiduciary obligation if the bank, as trustee, shares in the commissions generated by transactions effected on behalf of trust department accounts. We recognize that there are trust department accounts with regard to which the bank does not act as trustee and with regard to which the bank would therefore not have any fiduciary obligation. The bank would have certain performance obligations, however, with respect to such accounts even though those obligations would not rise to the level of a fiduciary obligation. Whether or not a bank in the administration of its trust department violates any of its obligations to its various accounts will of course depend upon the facts in any given circumstances and local law.
Where the decision-making authority as to investments and choice of broker/dealer reside in a party unrelated to the bank, the potential for a breach of any of the bank's obligations is reduced. Some states, however, may have statutes prohibiting the sharing of commissions generated by securities transactions effected on behalf of any trust department account. Additionally, a court of law, depending upon the facts in any particular instance, may order rescission of the commissions retained by the bank despite the direction of the independent outside party. Such a circumstance might include an instance where a bank influenced the decision of the independent outside party to select the broker/dealer with whom the bank splits commissions to handle transactions on behalf of the account and such commission splitting arrangement is not disclosed.
While we agree with the statement in your letter that the bank would not be in a position to churn an account where the investment decision resides in an independent outside party and that the possibility of a breach of fiduciary obligation is substantially reduced in such an instance, for the reasons stated above, we do not feel that we are in a position to merely endorse such an arrangement. The bank would be best advised to obtain an opinion of private counsel regarding the administration of nondiscretionary accounts that addresses local law and the question of commission splitting.
We are enclosing for your information a copy of a letter response to a similar request for an interpretation of General Counsel's Opinion No. 6 that may be of interest to you. Should you have any further questions or comments regarding this issue, please do not hesitate to contact me.