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4000 - Advisory Opinions

Treatment of Deposit Insurance Application in Light of Competitive Equality Banking Act of 1987


October 27, 1987

Pamela E. F. LeCren, Senior Attorney

The following is in response to your request for an opinion with regard to the subject application as to whether or not the operation of the proposed bank would be in contravention of sections 20 and 32 of the Glass-Steagall Act as made applicable to state nonmember banks by the Competitive Equality Banking Act of 1987. According to the information provided to the Legal Division, the proposed bank's principal shareholders and directors would be individuals who are officers and principal shareholders of *** and several related firms. *** is involved in clearance and settlement activities, specialist activities on the Midwest Stock Exchange and the Pacific Stock Exchange and is also engaged in securities trading for its own account.

Sections 20 and 32 of the Glass-Steagall Act as made applicable to state nonmember banks by the Competitive Equality Banking Act of 1987 for the period beginning March 5, 1987 through March 1, 1988, respectively, provide that an insured nonmember bank is prohibited from being affiliated with the securities company principally engaged in the underwriting, distribution, or public sale of securities and that employee, officer, or director interlocks between insured nonmember banks and companies that are primarily engaged in underwriting, distribution or the public sale of securities are prohibited.

In order for the FDIC to process the subject deposit insurance application and approve the grant of deposit insurance, the FDIC would have to determine that: (1) the activities in which *** engages do not constitute underwriting, distribution, or the public sale of securities for the purposes of the Glass-Steagall Act, or (2) if the activities do involve underwriting or distribution, that *** is not "principally" engaged in such activities. As section 201(b)(2) of the Competitive Equality Banking Act provides that a banking agency "may not authorize or allow by action, inaction, or otherwise . . . any insured bank or subsidiary or affiliate thereof to engage . . . in the flotation, underwriting, public sale, dealing in or distribution of securities in that approval would require the agency to determine that the entity which would conduct such activities would not be engaged principally in such activities " . . . [or to engage] in any securities activity not legally authorized in writing prior to March 5, 1987 . . .", it is the opinion of the Legal Division that the FDIC is constrained from making the decisions necessary in order for the FDIC to accept and process the instant application.

Although the Office of the Comptroller of the Currency has determined that execution and clearing activities are not prohibited under the Glass-Steagall Act to banks, their subsidiaries and affiliates1 neither the FDIC, the FRB, nor the OCC has to date determined that specialist activities are permissible for banks, their subsidiaries, and their affiliates.2 Inasmuch as processing the subject application would thus require the Legal Division to determine that specialist activities either are or are not underwriting and if so whether *** is principally engaged there, it is our opinion that the application should not be taken up until after the expiration of the moratorium.

1 "Proposed activities of registered broker-dealer bank subsidiary allowed under Glass-Steagall Act" Banking L.Rep. (CCH) ¶ 85,604, December 29, 1986. Go back to Text

2 The bank's counsel cites a Federal Reserve Board interpretation printed at FRRS 3-909 which counsel indicates purports to approve specialist activities as essentially being those of an agent and thus being permissible for banks, their subsidiaries, and their affiliates. According to my conversations with ***, Federal Reserve Board, the Board of Governors has not so determined. In fact in approving the section 20 applications of Citicorp, J.P. Morgan and Company and Bankers Trust New York Corporation, (73 Federal Reserve Bulletin 473, June, 1987) the Federal Reserve Board determined that any dealing activities, i.e., buying and selling for one's own account for a non-investment purpose, is covered under the Glass-Steagall Act as underwriting or distribution. Furthermore, according to ***, the referenced Federal Reserve Board interpretation refers to a September 13, 1934 opinion of the Board that is limited to its particular facts. The transaction essentially involved a brokerage transaction in which a broker placed orders for securities for the account of customers in odd lots and was required under the rules of exchange in order to accomplish the buy order to buy in lots of one hundred or multiples thereof. The broker thus purchased the additional shares for its own account so as to be able to place the order for its customer. The letter did not involve a situation in which a company routinely stands ready to buy or sell particular securities at a stated bid and offer price. Go back to Text

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