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4000 - Advisory Opinions

Disclosure Requirement for Bank Securities Activities


June 10, 1988

Pamela E. F. LeCren, Senior Attorney

The following is in response to your May 26, 1988 letter to Douglas H. Jones, Deputy General Counsel, requesting the FDIC's concurrence with your interpretation of the scope of the disclosure requirements contained in section 337.4 of the FDIC's regulations (12 C.F.R. 337.4).

Section 337.4(h)(3) provides, among other things, that any affiliate of an insured nonmember bank which directly engages in securities activities of the type which are prohibited to its affiliated bank under Section 21 of the Glass-Steagall Act (12 U.S.C. 378) and which shares the same or a similar name or logo to that of its affiliated bank must make certain disclosures to its "customers" in opening account documents and periodically (at least semiannually) in "customer" statements. As you point out in your letter, section 337.4 does not define the term "customer". It is your stated intent to construe the term "customer" to only extend to persons who have established an account with a securities affiliate of an insured nonmember bank to hold funds or securities. You contrast this situation to one in which a person utilizes the services of a bank's broker-dealer affiliate to obtain a valuation or to arrange a private placement of securities with one or more institutional investors.

It is our opinion that the disclosure requirements of section 337.4 were in large part designed to ensure that persons who invest in securities through a broker-dealer affiliate of an insured nonmember bank are fully aware that those investments are not insured by the FDIC and are not obligations of the affiliated bank (unless otherwise clearly indicated as for example in the case of debt securities issued by the bank or in the case of brokered deposits). We therefore concur in your interpretation of the term "customer", i.e., a customer is a person who maintains an account with a securities company for the purpose of making investments in securities through that company and from whom, or on whose behalf, in connection with that account the company receives, acquires, or holds funds or securities.

In addition to the above, your letter inquires as to whether section 337.4 applies to a securities affiliate of an insured nonmember bank that does business only outside the United States. Please be advised that it has been the longstanding opinion of this office that section 337.4 was not intended to apply to non-U.S. affiliates of an insured nonmember bank provided that the affiliate operates solely outside the United States.

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