4000 - Advisory Opinions
Bank's Trust Department Commissions for Discount Brokerage Services
November 3, 1983
Robert E. Feldmen, Attorney
This is in response to your letter of August 26, 1983 in which you request an interpretation of FDIC General Counsel's Opinion No. 6 which would authorize * * * to charge discount brokerage commissions on "non-discretionary accounts" in addition to charging normal account administrative fees to those customers whose account utilize * * * discount brokerage service. Please be advised that this letter simply represents an opinion of the Legal Division. The Legal Division has no authority to "authorize" * * * to do what your letter proposes primarily because the validity of the proposal rests upon state law considerations.
According to your letter, " * * * desires to expand its discount brokerage service [conducted through a contractual relationship with a registered broker/dealer] to include those customers who currently maintain, or might establish, an employee benefit, retirement savings, trust or other type of account relationship." The class of customers within the scope of the proposal "includes only those customer account relationships where the customer, or another party who is unrelated to * * * controls the investment discretion for the particular account and such customer, or other party, controls the power to select the broker/dealer through whom securities transactions are executed." You refer to such account relationships as "non-discretionary accounts."
General Counsel's Opinion No. 6 discusses at length the legality under the Glass-Steagall Act of a contractual arrangement whereby an insured nonmember bank utilizes the discount brokerage services of a particular broker/dealer and the bank shares in the commissions generated by the brokered transactions. The opinion goes beyond an analysis of the Glass-Steagall Act, however, and states, in part, that:
[i]f the bank intends to utilize the contractual arrangement with the broker/dealer for transactions executed in connection with trust department accounts, the bank should not receive any additional compensation with regard to those transactions from the broker/dealer, i.e., the bank's trust department should not share in any commission associated with the transaction. To do so would raise possibilities of a breach of fiduciary obligation toward the bank's trust department customers.
As demonstrated by the above language, FDIC's concern is centered on a possible breach of fiduciary obligation if the bank, as trustee, shares in commissions generated by transactions effected on behalf of trust department accounts. Whether or not a particular act on the part of a trustee will give rise to a breach of fiduciary obligation depends upon the circumstances in any particular case (for example, whether the trust is directed or undirected) and will vary from state to state depending upon local law. Even in the case of a trust department account for which the bank does not act as trustee (for example, managed agency accounts), the bank may have certain performance obligations with respect to the account even though its obligations do not rise to the level of a fiduciary obligation. While the possession of decision-making authority (as to both investment discretion and choice of broker/dealer) by a party unrelated to * * * reduces the potential for breach of fiduciary duty, some states may have statutes prohibiting a bank trustee from sharing in any commission generated by securities transactions effected on behalf of trust department accounts. We are also aware that a court of law, depending upon the facts in any particular instance, may order rescission of the commission despite the authorization.
In the absence of a statutory prohibition, however, and assuming no unusual facts, it would appear that where (1) a trust instrument expressly authorizes the bank trustee to share in commissions generated by securities transactions effected on behalf of the account, and (2) the settlor of the trust entered into the authorization after full disclosure of the facts, the sharing of the commission would not itself give rise to a breach of fiduciary obligation. This is not to say, however, that the administration of that trust account could not give rise to a breach of obligation or not be subject to criticism. For example, if * * * were to recommend the broker/dealer which acts as its clearing agent to the party directing the investment, it may subject itself to a conflict of interest charge. * * * would also need to avoid giving any advice to the unrelated party that would leave the bank open to a charge of "churning" accounts to generate fees. Additionally, a proper accounting must be kept for each account, other records maintained, and all necessary disclosure made in accordance with applicable law. If the broker/dealer is a related company of the bank and that fact is not properly disclosed, a breach of fiduciary obligation could be found.
If the authorization is based not on the trust instrument but on the consent of more than one beneficiary, the consent of all beneficiaries would need to be obtained. This in essence may preclude the commission split for trusts where the beneficial interests are not easily ascertained or where the beneficiary is a minor. Additionally, any securities transactions involving court supervised accounts would need court approval.
With respect to employee benefit accounts, the Employee Retirement Income Security Act of 1974 ("ERISA") has supplanted the applicability of state law. (29 U.S.C. § 1144). Without some exemption, it is evident that a plan fiduciary may not also provide brokerage services or otherwise provide extra services for a fee without violating ERISA section 406. (Id. § 1106) ("Prohibited Transactions'').
Provisions of ERISA which potentially offer an exemption for trust institutions seeking to charge separate "reasonable" fees to their employee benefit trust and agency accounts for securities transactions include 12 U.S.C. § 408(a), (b)(2), and (b)(6). However, of the most closely relevant rulings of the Department of Labor to date (see 29 C.F.R. §§ 2550.408b-2 and b-6, and Prohibited Transaction Class Exemption 79-1), regulation 408b-2 may offer the only (very limited) exemption. Pursuant to this regulation, the fees would have to be authorized by an independent fiduciary, and the trust institution furthermore probably could not hold any fiduciary duties which would affect the placement or volume of the securities transactions for which it will receive separate transactions fees.
Therefore, it is believed that until some further clarification is issued by the Department of Labor, no trust company which is even just a "party-in-interest" with respect to a plan should charge separate or extra fees in connection with securities transactions except based upon independent approvals and as affirmatively determined to conform to an ERISA exemption. No "fiduciary" with discretionary authority involving securities transactions should proceed to levy such extra fees unless a specific ruling is obtained from the Department of Labor on the subject. Because as any number of particulars concerning the manner in which an account is administered can vary and because the nature of the bank's obligation can vary as to the particular type of trust department account, we cannot be any more specific in responding to the initial portion of your request. In short, although given the proper circumstances the bank's trust department could split commissions, a bank would be advised to obtain the opinion of counsel before doing so.
I trust this has been responsive to your inquiry.