4000 - Advisory Opinions
Nonbank Activities of Nonmember Bank
October 14, 1984
Eugene A. Miller, Regional Counsel
You have written to ask about 13 services that your bank may be interested in performing. The categories of services involve the interplay of state and federal law, significant public policy issues and questions of safety and soundness. I am responding to some of those broad issues. A definite answer to your questions would require a treatise on the performance of so-called nonbank activities by a state nonmember bank. You should consult with counsel in this regard. You should also consult with counsel before you engage in any one of these activities.
There are substantial state law questions about engaging directly in any of the 13 activities. You need to determine whether such activities are directly prohibited by state law or if not prohibited, what state law requirements would have to be satisfied (i.e., real estate or insurance licenses). You should contact the * * * Department of Banking for information concerning specific state law limitations pertaining to banking and the appropriate state agencies which regulate real estate brokers, insurance brokers etc.
Sections 332.1 and 332.2 of the rules and regulations of the FDIC (12 C.F.R. 332.1 and 332.2, respectively) prohibit state nonmember banks from acting as sureties, insuring the fidelity of others and acting to guarantee or become surety upon the obligation of others. This regulation currently would prohibit a state nonmember bank from insurance underwriting. On August 30, 1983 the Board of Directors of the FDIC solicited comments on proposed revisions of Part 332 of the FDIC rules to cover direct and indirect involvements by banks in insurance brokerage and underwriting, real estate brokerage and underwriting, securities brokerage, EDP services and travel services. The Board has not acted upon these comments.
The federal limitations upon banks acting as securities underwriters, both directly and indirectly are fully discussed in the FDIC statement of policy which appeared in the Federal Register on September 3, 1982. A copy is enclosed for your use. Essentially, a state nonmember bank may use a subsidiary for some underwriting activities but may not directly engage in underwriting. Further, specific guidance in this regard is expected from the Board of Directors of the FDIC. Brokerage activities have fewer restrictions. Section 21 of the Glass-Steagall Act (12 U.S.C. 378) permits member and nonmember banks to buy and sell securities solely upon the order of customers. This would permit some securities, commodity and financial futures brokerage activities on a direct basis. Again, see the previously described FDIC statement of policy. Mutual fund management involves a similar issue, the underwriting and advising of a mutual fund (prohibited by the Glass-Steagall Act for banks) are a possibility for a bank subsidiary which registers with the Securities and Exchange Commission under the provisions of the Investment Company Act of 1940 (15 U.S.C. 80a-1 et. seq.).
There is an additional source of authority for state nonmember banks to engage in certain activities through reliance upon the provisions of section 709 of the Garn-St. Germain Depository Institutions Act of 1982 (12 U.S.C. 1861 et seq.). This act authorizes banks to engage in activities through bank service corporations which have been approved by the Board of Governors of the Federal Reserve System for bank holding company subsidiaries. These approved activities may be entered into by bank service corporations in spite of state law to the contrary. Enclosed find a Federal Register notice by the Comptroller of the Currency which explains the general operation of the amendments to the Bank Service Corporation Act. Also enclosed is a list of activities approved by the Board of Governors of the Federal Reserve System.
Your final question asks if you may offer services from non-aligned companies. As example, you refer to the rental of space in a bank office. It is difficult to foresee every variation on this theme. The rental of space which is subdivided from space used by the bank with a clear identification of the non-affiliated company would generally avoid federal legal restrictions. State law could restrict such activities. The more closely the service is identified with the bank and the greater the relationship between the volume and/or profit from the service to compensation for the bank, the more likely there is to be a conflict with federal and/or state law restrictions.
The services to be offered can create a large potential for liability. They can also strain bank management and capital resources. It is important that such pitfalls be thoroughly examined before a bank ventures to offer expanded non-traditional bank services.
I hope that this answered your questions.