4000 - Advisory Opinions
Insured Nonmember Bank Participation in Investment Securities Program
January 17, 1989
Pamela E. F. LeCren, Senior Attorney
The following is in response to your December 13, 1988 letter to Doug Jones, Deputy General Counsel, FDIC, requesting that the FDIC review and approve an arrangement your client, *** a registered securities broker and investment adviser, proposes to enter into with subscribing financial institutions.
According to your letter *** will offer securities brokerage and investment advisory services through *** program centers that will be located on the premises of subscribing institutions. *** securities activities will consist of the execution of purchase and sale orders for debt and equity instruments, mutual funds and other financial instruments and products approved for sale (directly or indirectly) by financial institutions. *** will not engage in any underwriting or market making activities. Registered representatives of *** (representatives will be dual employees of the subscribing institution) will provide uniform investment advice and recommendations to customers based upon research conducted by ***. *** will exercise exclusive control over the dual employees with respect to their securities activities. There is to be a strict and total separation of the subscribing financial institution's business and that conducted at the *** Center including separation of records and of physical facilities. All advertising and promotional materials shall make it clear that the *** program is provided by *** and not the subscribing institution. Customers will acknowledge in writing receipt of a notice that ***, and not the subscribing institution, is providing, and is responsible for, the brokerage services. The notice will further indicate that *** is not an affiliate of the subscribing institution.
Initially please be advised that it is not the FDIC's practice to "approve" contractual arrangements into which insured nonmember banks propose to enter. We have in the past, however, reviewed programs similar to that proposed by *** for the sole purpose of determining whether such programs would involve participating insured nonmember banks in a violation of the Glass-Steagall Act and/or a violation of any regulation or statute enforced by the FDIC as to insured nonmember banks. We first did so in 1983 when the FDIC was asked to review and comment upon a program known as "INVEST". (See FDIC letter #83-21, page 4139. It was our conclusion that the INVEST program would not involve a participating institution in a violation of the Glass-Steagall Act based upon the particular facts and in view of the contractual provisions under which the program would operate. We have reviewed the contracts forwarded to this office under cover of your December 13th letter. There does not appear to be any material differences between *** program and the INVEST program that would cause us to come to a different conclusion with respect to ***. We therefore have concluded that an insured nonmember bank could participate in the *** program under the terms you have outlined without violating the Glass-Steagall Act.
As to other statutes or regulations applicable to insured nonmember banks, we note that the *** contract contains a provision for the reduction of revenue sharing payments in the event *** suffers a loss or liability due to a customer's failure to pay for purchased securities or produce securities sold at the customer's direction. As the subscribing institution's liability under this provision is not limited in any fashion, the provision would seem to involve a guarantee of the obligations of another contrary to Part 332 of the FDIC's regulations (12 CFR 332). We understand, however, based upon a telephone conversation, that the reduction of revenue sharing payments provision will be amended to provide that the subscribing institution's liability will in no event exceed the amount of any future revenue sharing payments due to the institution as a result of brokerage transactions entered into after the event of the customer's default. If this amendment is made, the question of an unlawful guarantee would, in our opinion, be removed.
Although we are not offering any opinion on these issues at the present time, we wish to point out that should a subscribing institution utilize *** services to accomplish trades on behalf of its fiduciary accounts, questions regarding the proper disposition of the bank's fiduciary obligations to those accounts could arise. The FDIC will of course comment upon, and take appropriate action with respect to, any such problems that may arise in this area should an insured nonmember bank become a subscribing institution. We also will note in passing that conflicts of interest can arise if compensation to a dual employee is based in some manner upon the volume of business generated by that individual. This area could also be the subject of criticism by the FDIC given the appropriate circumstances.
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 that becomes a subscribing institution administers the program depending upon the facts and circumstances in any particular instance. For example, the *** contract calls for *** to lease space from the subscribing institution in the amount of $1.00 per year "and otherwise on terms reasonably acceptable to *** and Subscriber." Depending upon the facts, the terms of any lease agreed to by *** and a subscribing institution could give rise to criticism.
Lastly, this letter does not constitute a comprehensive review of the *** program in terms of safety and soundness, conformance with any and all applicable laws and regulations, 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.