FDIC Law, Regulations, Related Acts
4000 - Advisory Opinions
Glass-Stegall Act Does Not Bar Insured Nonmember Bank Participation as Correspondent in Securities Brokerage and Investment Advisory Services Offered by Others
June 12, 1986
Pamela E. F. LeCren, Attorney
The following is in response to your request on behalf of your client, ***, for the FDIC's comments and opinions on whether or not an insured nonmember bank may, consistent with the Glass-Steagall Act, participate as a "correspondent" in securities brokerage and investment advisory services offered by ***.
According to your letter, *** engages in securities brokerage and investment advisory services through its headquarters in ***, *** and now intends to offer these services through *** centers to be established on the premises of financial institutions ("correspondents") that have agreed to participate in the program.1 To participate, a correspondent will execute a Brokerage Services Agreement with *** which provides for, among other things: (1) the establishment of the *** center on the correspondent's premises;2 (2) staffing of the center by employees of the correspondent (the employees will be registered securities representatives);3 (3) the provision of standardized investment advice based on research conducted by Standard and Poors Value Line or other similar services;4 (4) prior approval by *** of any advertisement prepared by the correspondent with respect to the centers;5 (5) indemnification by *** of the correspondent against any liabilities arising from conduct by *** or its employees (including the representative); and (6) limitation of the correspondent's liability under the Brokerage Agreement for any act or omission by the representative, or failure on the part of a customer to deposit or maintain adequate margin or to pay for securities, to the amount due the correspondent from *** in connection with future transactions, i.e., future payments.
Upon a review of your April 16, 1986 letter and the documentation submitted therewith,6 it is our conclusion that the *** program does not materially differ from the INVEST program offered by ISFA Corporation. In 1983, the ISFA Corporation requested an opinion from the FDIC as to whether or not an insured nonmember bank may, consistent with the Glass-Steagall Act, participate in the INVEST program. In response, the FDIC's Legal Division issued an opinion which concluded that participation in INVEST would not violate section 21 of the Glass-Steagall Act.7 As we find no material difference between the *** and INVEST programs insofar as the Glass-Steagall Act is concerned, it is our opinion that participation by an insured nonmember bank in the *** program is not barred by the Glass-Steagall Act.
In addition to commenting on the Glass-Steagall Act implications of the *** program, we wish to draw the following to your attention. We note that paragraph 10(a) of the Brokerage Services Agreement provides that the correspondent will furnish any regulatory or financial reports to *** as *** may from time to time request. You should be advised that Reports of Examination of an insured nonmember bank are the property of the FDIC and may not be disclosed by the bank without the FDIC's prior consent.
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 *** to directly contact the SEC 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 correspondent'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 ***.
We note that the documentation submitted to the FDIC is silent as to the basis of compensation for *** representatives. Conflicts of interest can arise if compensation is based in some manner upon the volume of business generated by the representative. Such a practice could be the subject of criticism by the FDIC. We also note that, in addition to a share of the commissions generated by each trade, the correspondent may receive a bonus based upon the volume of business generated by the *** center. This could also be the subject of criticism by the FDIC.
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.
1 In addition to the provision of standardized investment advice, the activities to be conducted through the *** centers are to be comprised of the sale and purchase of debt and equities securities and mutual fund shares. Securities transactions will be effected on a fully disclosed basis through a clearing broker selected and paid by *** will neither purchase nor sell securities for its own account nor engage in underwriting or market making activities. Go back to Text
2 The *** Policies and Procedures Manual specifies that the center will be in a separate office that is clearly distinguished from the remainder of the correspondent's premises. The Brokerage Services Agreement provides that the correspondent shall maintain strict and total separation of its business from the business conducted at the *** center so as not to lead to confusion between the business conducted by the correspondent and the securities activities conducted by ***. Go back to Text
3 Representatives may not perform any duties on behalf of the correspondent or any affiliate of the correspondent other than serving as a registered representative for *** without the consent of ***. Representatives are under the sole control and influence of *** with respect to brokerage services offered through the centers and the correspondent has no obligation to monitor the conduct of representatives. No correspondent employee other than the representative may proffer or disseminate investment advice or engage in any activity that may be construed as a securities sales conversation. Representatives are compensated by the correspondent. *** retains all commissions and fees charged to customer accounts and will reimburse correspondent for the use of correspondent's facilities, premises, and personnel in accordance with the schedule of payments contained in Exhibit A to the Brokerage Agreement. The schedule provides that a percentage of the commission generated from the center, minus certain transactions fees, will go to the correspondent. This amount can be augmented by bonuses keyed to the volume of business. Go back to Text
4 *** will provide portfolio evaluations and other specialized investment advice through its main office only. Go back to Text
5 The Policies and Procedures Manual provides that all advertisements and promotions must disclose that *** and not the correspondent, is providing the brokerage and investment advisory services. Go back to Text
6 Your letters of August 16 and 23, the Brokerage Services Agreement, Exhibits A and B to the Brokerage Services Agreement, and the Policies and Procedures Manual for Participating Financial Institutions form the sole basis of our opinion and remarks. Go back to Text
7 See December 9, 1983 letter from Pamela E.F. LeCren, Senior
Attorney, to Thomas A. Russo, Counsel to ISFA Corporation.
A nonmember bank as a subscribing institution would not appear to be engaged in selling, distributing, underwriting, or issuing securities within the meaning of section 21 as a result of its contractual agreement with ISFA. Even if we were to assume that the activities in question could not lawfully be conducted by a bank, under the circumstances as described at length above, it is ISFA and not the bank that is buying and selling securities. The fact that a dual employee of the bank is staffing the INVEST service center would not appear, under the closely defined roles established by contract and otherwise, to cause the bank to be buying and selling securities nor cause the bank to be in the business of giving investment advice. Neither the bank nor any of its employees are responsible for the development of the investment advice nor does the bank or any of its employees represent that the bank is recommending any investment decisions. On the contrary, stringent measures are prescribed to make INVEST customers aware that ISFA, and not the bank, is conducting, and is responsible for, the securities activities. Go back to Text