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4000 - Advisory Opinions

Instances When Securities Subsidiary Must Meet Definition of "Bona Fide" Subsidiary


September 6, 1988

Pamela E. F. LeCren, Senior Attorney

The following will confirm our telephone conversation with regard to the proper interpretation of certain provisions of section 337.4 of the FDIC's regulations (12 C.F.R. 337.4).

Section 337.4 provides that in certain instances a securities subsidiary of an insured nonmember bank must meet the definition of "bona fide subsidiary" as defined in paragraph (a)(2) of the regulation. That definition requires among other things that in order to be bona fide the subsidiary "must conduct business pursuant to independent policies and procedures designed to inform customers and prospective customers of the subsidiary that the subsidiary is a separate organization from the bank and that investments recommended, offered or sold by the subsidiary are not bank deposits, are not insured by the FDIC, and are not guaranteed by the bank nor are otherwise obligations of the bank." (Emphasis added.) Although this language would appear to preclude a subsidiary of an insured nonmember bank from brokering deposits (the subsidiary could obviously not inform customers that the brokered deposits are not bank deposits) it is our opinion that the regulation should not be read to preclude such activities.

We come to this conclusion inasmuch as footnote 7 to section 337.4(c) expressly indicates that in the case of a securities company affiliate of an insured nonmember bank the requirement to inform customers that investments recommended, offered or sold by the affiliate are not bank deposits insured by the FDIC "shall not be construed to prohibit the affiliate from brokering deposits to the extent and in the manner as otherwise permitted by statute and regulation." This footnote was added to the regulation in response to public comments received during the development of section 337.4. That a similar footnote was not added to the same language found in the definition of the term bona fide subsidiary seems to have been merely an oversight. In addition, section 337.4(h)(2), which sets forth a requirement for subsidiaries and affiliates to in certain circumstances give their customers a specific disclosure concerning the nature of the investments recommended, offered or sold by the subsidiary or affiliate, indicates that the notice shall state that such investments are not FDIC insured deposits "unless otherwise indicated". Finally, to conclude other than the above would serve no useful purpose and would only create a competitive disadvantage for bank subsidiaries as compared to bank affiliates.

With regard to the second point we discussed, a subsidiary of an insured nonmember bank whose sole securities activities are ones which would be permissible for a national bank under section 16 of the Glass-Steagall Act (12 U.S.C. 24(seventh)) need not be a bona fide subsidiary. Whether a bank's subsidiary may engage in those activities in the first instance, however, is a question of state law. In other words, if state law permits the bank's subsidiary to engage in securities activities that would be permissible for a national bank pursuant to 12 U.S.C. 24(seventh) that subsidiary need not be a bona fide subsidiary regardless of whether state law would authorize the bank itself to engage in those activities.

I hope that the above adequately serves to confirm our telephone conversation. I also wish to remind you that this letter only discusses the interpretation of section 337.4 and does not extend to the application of any other federal statute or regulation that may be germane to the exercise of securities activities on the part of an insured nonmember bank and/or its subsidiaries or affiliates.

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