4000 - Advisory Opinions
Guidelines for Bank Discount Brokerage and Trust Activities
May 21, 1985
Pamela E. F. LeCren, Senior Attorney
The following is in response to your April 12, 1985 letter requesting "guidance" on the issue of whether your client bank may: (1) utilize the services of its own discount brokerage department to effect securities transactions on behalf of trust accounts held by the bank, and (2) receive a fee for executing the securities transaction in addition to the fee for administering the trust account. Your question was prompted by the FDIC's most recent report of examination of the bank's trust department in which the examiner indicated that "the receipt of extra fees for discount brokerage services is believed to constitute self dealing . . . It is believed that a bank may receive additional fee income from securities transactions executed on behalf of those trust accounts where specific written consent or authorization is obtained from all interested parties after disclosure of the fee arrangement. Such authorization was not found for the aforementioned transactions."
The FDIC's General Counsel's Opinion #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 an unrelated broker/dealer and the bank shares in the commissions generated by the brokered transactions. The opinion goes beyond a straight Glass-Stegall Act analysis, however, and states in part 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'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.
Although the quoted passage from General Counsel's Opinion #6 specifically addresses a fee splitting arrangement with an unrelated broker/dealer, the issues raised thereby are the same ones that are raised if a bank's trust department generates fee income by utilizing the services of its own discount brokerage department to execute securities transactions on behalf of trust department accounts.
The FDIC has issued several staff interpretive letters on General Counsel's Opinion #6. (Copies of these letters are enclosed for your information.) As you will see from reviewing the letters, the FDIC's primary concerns in this area are self-dealing and possible breaches of fiduciary obligation. Whether or not such a breach has occurred will depend upon all the facts and circumstances as well as upon local and federal law.
The receipt of extra fees in connection with the execution of securities transactions on behalf of trust accounts will, in our opinion, most probably constitute improper self-dealing except where the self-dealing has been fully disclosed; is expressly authorized by the trust agreement, by all interested parties and beneficiaries, or by court order; and the self-dealing is consistent with applicable federal and state law. (In certain instances, local or federal law, e.g., ERISA, may prohibit any self-dealing whatsoever.) The fact that the trust department customer has consented to the use of the bank's discount brokerage department for the execution of securities transactions on behalf of his/her trust account may not necessarily mean that the bank has fully discharged its fiduciary obligation with respect to the transaction. The bank could still be subject to criticism for churning of accounts, failure to keep proper accounting records, failure to meet Part 344 of the FDIC's regulations which sets forth confirmation and recordkeeping requirements, or failure to meet its best execution obligations, etc.
Because of the above, we cannot simply say that customer authorization, in and of itself, resolves any potential conflict of interest. We will agree, however, that insofar as authorization is a factor in any exception to the general prohibition against self-dealing, express authorization in the trust agreement is not the only manner in which the authorization requirement may be satisfied.