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5000 - Statements of Policy



This statement of policy addresses the applicability of the Glass-Steagall Act to securities activities of subsidiaries of insured nonmember banks. It is not intended to address any other issues that may be raised by such activities.

It is the opinion of the Board of Directors of the FDIC that the Banking Act of 1933, popularly known as the Glass-Steagall Act and codified in various sections of title 12 of the United States Code, does not, by its terms, prohibit an insured nonmember bank from establishing an affiliate relationship with, or organizing or acquiring, a subsidiary corporation that engages in the business of issuing, underwriting, selling or distributing at wholesale or retail, or through syndicate participation, stocks, bonds, debentures, notes, or other securities.2 While the Glass-Steagall Act was intended to protect banks from certain of the risks inherent in particular securities activities it does not reach the securities activities of a bona fide subsidiary of an insured nonmember bank.

Section 21 of the Glass-Steagall Act (12 U.S.C. 378), the only provision of the Act that is applicable by its terms to insured nonmember banks, provides, in part, that it shall be unlawful for: Any person, firm, corporation, association, business trust, or other similar organization, engaged in the business of issuing, underwriting, selling, or distributing * * * stocks, bonds, debentures, notes or other securities, to engage at the same time to any extent whatever in the business of receiving deposits * * *.

This section does not address the actions of subsidiaries or affiliates.

The only provisions of Glass-Steagall that prohibit affiliations between banks and corporations engaged in securities activities apply solely to member banks of the Federal Reserve System. Section 20 (12 U.S.C. 377), for example, specifically provides that no member bank shall be affiliated with any corporation, association, business trust, or other similar organization engaged principally in the issue, flotation, underwriting, public sale, or distribution of stocks, bonds, debentures, notes or other securities. Section 32 (12 U.S.C. 78) prohibits persons who are officers, directors, or employees of corporations that are primarily engaged in certain securities activities, or partners or employees of partnerships so engaged, from serving as directors, officers, or employees of member banks.

In 1981 decision involving section 4(c)(8) of the Bank Holding Company Act, sections 16 and 21 of the Glass-Steagall Act,3 and Federal Reserve Board Regulation Y (12 CFR Part 225) permitting bank holding companies to advise closed-end investment companies, the Supreme Court affirmed that section 21 applies only to banks and not to their nonbank affiliates. Board of Governors of the Federal Reserve System v. Investment Company Institute, 450 U.S. 46 (1981). The Court indicated at footnote 24 that:   We agree with the Court of Appeals that §§ 16 and 21 apply only to banks and not to bank holding companies. Section 21 prohibits firms engaged in the securities business from also receiving deposits. Bank holding companies do not receive deposits, and the language of § 21 cannot be read to include within its prohibition separate organizations related by ownership with a bank, which does receive deposits.

The Court went on in the same footnote to quote the following exchange between Senator Glass, co-sponsor of the bill that became the Glass-Steagall Act, and Senator Robinson:   Mr. Glass: Here [section 21] we prohibit the large private banks whose chief business is investment business, from receiving deposits. We separate them from the deposit banking business.   Mr. Robinson of Arkansas: That means if they wish to receive deposits they must have separate institutions for that purpose?   Mr. Glass: Yes.

The Court also rejected the argument that a bank and its holding company should be treated as a single entity for the purposes of sections 16 and 21, stating that the structure of the Glass-Steagall Act itself indicates the contrary. Id. at n. 24.

Although the Supreme Court in Board of Governors v. ICI did not consider section 21 in the context of a bank and its subsidiary, we are of the opinion that the Court's conclusion regarding section 21 and holding company affiliates is equally applicable in this instance. Thus, the FDIC does not believe that it would be warranted in extending the reach of the prohibitions of section 21 of the Glass-Steagall Act to bona fide subsidiaries of insured nonmember banks. The FDIC intends, however, to continue to monitor closely developments related to the securities activities of bank subsidiaries.

By Order of the Board of Directors, August 23, 1982.

[Source: 47 Fed. Reg. 38984, September 3, 1982]

1 This statement of policy only applies to insured nonmember banks. Moreover, insured nonmember banks that are members of a bank holding company system will also need to take into consideration the restrictions of sections 4(a) and 4(c)(8) of the Bank Holding Company Act (12 U.S.C. 1843(a), 1843(c)(8) and Federal Reserve Board regulations before entering into securities activities through subsidiaries. Go back to Text

2 The FDIC of course recognizes its ongoing responsibility to ensure the safe and sound operation of insured nonmember banks, and, depending on the facts, the potential risks inherent in a bank subsidiary's involvement in certain securities activities. Go back to Text

3 Section 16 (12 U.S.C. 24 Seventh) provides that national banks may not, with certain exceptions, deal in securities except to buy and sell securities solely upon the order and for the account of customers. The exception for dealing in securities upon the order of customers is incorporated into the first paragraph of section 21 and thus applies to member and nonmember banks alike. Go back to Text

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