4000 - Advisory Opinions
Applicability of 12 CFR 337.4 to Foreign Company Affiliates Engaged in Securities Activities Solely Outside the United States
September 27, 1985
Pamela E. F. LeCren, Senior Attorney
The following is in response to your request for the opinion of the Legal Division on the applicability of section 337.4 to foreign companies, affiliated with insured nonmember banks, that engage in the underwriting or distribution of securities solely outside of the United States. You have requested resolution of this issue in connection with a deposit insurance application filed by ***, a proposed state chartered bank that is to be wholly owned by ***. According to your request, the bank's parent has numerous subsidiaries that operate outside the United States three of which engage in the underwriting and distribution of securities solely outside of the United States. Two of the three subsidiaries appear to be banks, however, ***, the third subsidiary, is described by the applicant's counsel as a Swiss company neither subject to Swiss banking regulations nor supervision by Swiss banking authorities even though established with the approval of the Swiss banking authority. None of the subsidiaries will share directors, officers, or employees with the proposed bank.
Section 337.4(c) provides that no insured nonmember bank may become affiliated with a company that directly engages in the sale, distribution, or underwriting of securities unless the following restrictions are met:
(1) The securities business of the affiliate is physically separate and distinct from the operation of the bank;
(2) The bank and affiliate share no common officers;
(3) A majority of the Board of Directors of the bank is composed of persons who are neither directors nor officers of the affiliate;
(4) Any employee of the affiliate who is also an employee of the bank does not conduct any securities activities on behalf of the affiliate on the premises of the bank that involve customer contact;
(5) The bank and affiliate do not share a common name or logo; and
(6) The affiliate conducts business pursuant to independent policies and procedures designed to inform customers and prospective customers of the affiliate that the affiliate is a separate organization for the bank and that investments recommended, offered or sold by the affiliate are not bank deposits, are not insured by the FDIC, and are not guaranteed by the bank nor or otherwise obligations of the bank.
Section 337.4(e) sets forth certain lending and other restrictions that apply in the case of an affiliation between an insured nonmember bank and an affiliate that engages in securities underwriting or distribution activities that would be prohibited to the bank under the Glass-Steagall Act.
The term "affiliate" is defined by section 337.4(a)(1) as any company that directly or indirectly, through one or more intermediaries, controls, or is under common control with, an insured nonmember bank. "Company" is defined in turn by section 337.4(a)(3) to exclude a bank. A brief reading of Section 337.4 therefore reveals that although the proposed bank is apparently under common control with the three subsidiaries referenced above, neither the bank's parent (itself a foreign bank), nor the two subsidiaries of the bank's parent that are themselves banks, are "affiliates" of the proposed bank for the purposes of section 337.4. We will, however, presume based upon the applicant's description of *** that that entity is not a bank and that it therefore falls within the definition of the term "affiliate" as used in section 337.4.
As the Swiss finance company affiliate underwrites and distributes securities, section 337.4(c) appears to apply as do the restrictions in section 337.4(e). Based upon the information provided to this office, the relationship between the proposed bank and its securities affiliate appears to conform to section 337.4(c) in all respects except for the presence of the common name ***. If section 337.4(c) does apply to an affiliate that solely engages in securities underwriting or distribution activities outside of the United States, the proposed bank would be prohibited from obtaining deposit insurance so long as the bank and its securities affiliate share a common name.
Section 337.4 would appear to cover an affiliate of an insured bank whether or not the affiliate is a foreign company that engages solely in securities activities outside of the United States. We have concluded, however, that it was not the intent of the regulation to bring such companies within its scope. The discussion in the supplementary information portion of the Federal Register notice which accompanied the final regulations (49 FR 46709, 46721) which details the regulation's treatment of foreign banks and insured branches of foreign banks reveals that the FDIC sought to prevent the regulation from having an extraterritorial effect. The regulation itself in footnote 10 shows that the FDIC did not wish to disrupt lending relationships between insured nonmember banks and non-U.S. companies whose securities are underwritten or distributed solely outside the United States by non-U.S. affiliates of insured nonmember banks. Based on the above, as well as the fact, that there would appear to be little or no safety or soundness risks to an insured bank under the circumstances presented by the instant application, we conclude that section 337.4 does not apply in the case of a non-U.S. affiliate of an insured bank provided that that affiliate solely operates outside of the United States.