4000 - Advisory Opinions
Request for Opinion Clarifying Trust Department Utilization of Discount Brokerage Services Offered by Bank's Own Brokerage Department
April 3, 1984
Pamela E. F. LeCren, Senior Attorney
The following is in response to your December 21, 1983 letter requesting an opinion on the above referenced subject matter.
According to your letter, * * * Bank, * * * operates an in-house discount brokerage department which until recently executed transactions on behalf of * * * trust department as well as other accounts. The trust department has ceased trading through * * * brokerage department based upon an opinion of private counsel which questioned the practice under state law. According to that opinion, * * * law prohibits a trustee or other fiduciary from acquiring a benefit by engaging in, transactions that would constitute self-dealing. The opinion also referenced FDIC's General Counsel's Opinion No. 6 regarding the permissi- bility under the Glass-Steagall Act of an arrangement whereby a bank enters into a contract with an unrelated discount broker, the broker executes securities transactions on behalf of bank customers, and the bank shares in commissions generated by those transactions. That opinion in general concluded that a bank may, consistent with the Glass-Steagall Act, purchase and sell securities for the account of a customer without recourse and solely upon the order of the customer and that the bank may publicly advertise that service. As to trust department utilization of the contractual arrangement under consideration in that opinion, it was said that "if 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 trust department should not share in any commission associated with the transaction."
You have requested clarification of General Counsel's Opinion No. 6, specifically that portion quoted above and specifically with reference to the context in which * * * brokerage department operates. In pertinent part, your letter outlines * * * discount brokerage department operations as follows. * * * has an agreement with * * * Corporation (* * *) a registered broker/dealer that is a member of the New York Stock Exchange. * * * brokerage department transmits buy and sell orders on behalf of * * * trust and other customers to * * * for execution and clearing. * * * generates confirmation information that reflects a commission charge set in accordance with a schedule established by * * *. On settlement date the commissions payable by the customer are paid by * * *. At month end * * * and * * * settle as to each other in accordance with their agreement which directs * * * to pay to * * * all commissions collected by * * * net the fees payable to * * *. * * * fees are set on a "per ticket basis" and are based upon a monthly average of tickets, the cost per ticket declining as the average number of tickets per trading day increases. * * * charges its trust department accounts in accordance with the following formula: * * *.
Several FDIC staff opinions have been issued in response to requests for clarification of General Counsel's Opinion No. 6 and the reference therein to retained commissions. These letters are enclosed for your information. You will note that the letters describe FDIC's concern as centering 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 breach arises depends, however, upon, among other things, the particular circumstances and state law. In general, in the absence of a statutory prohibition, 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 commissions would not itself give rise to a breach of fiduciary obligation. In that regard, and with reference to the opinion of private counsel obtained by the bank, we note that the question presented to counsel related "only to those [trust] accounts with respect to which the governing instrument does not specifically authorize the bank as fiduciary to use its discount brokerage services." We agree with private counsel's opinion insofar as it is read to conclude that, with respect to such accounts, the use by the bank's trust department of the bank's brokerage department to effect securities transactions on behalf of fiduciary accounts can raise questions of conflict interest and breach of fiduciary obligation.
As previously stated, whether or not there is a breach depends upon the facts and state law. We do not mean to flatly prohibit a bank trust department from dealing with the bank's brokerage department but merely to remind banks of their duty to do so within the confines of their fiduciary obligation. If the relationship and costs associated therewith (including any fee or commission retained by the trust department) are fully disclosed and the transactions are expressly authorized under the trust instrument, authorized by all the beneficiaries, or authorized by court order or applicable local or federal law, the relationship itself should not be subject to criticism. This is not to say, however, that the bank could not be subject to criticism for "churning" of accounts, failure to keep proper accounting records, failure to meet Part 344 of FDIC's regulations which sets out confirmation and recordkeeping requirements, or failure to meet its best execution obligations, etc.