4000 - Advisory Opinions
Brokerage Services on Premises of State-Chartered Banks
September 15, 1987
Gerald J. Gervino, Senior Attorney
You have asked us to consider your July 29, 1987 letter as an application for *** to provide brokerage services on the premises of state-chartered banks under our jurisdiction ("banks").
Your company is a registered broker/dealer which is properly licensed as a member of the National Association of Securities Dealers, Inc. (NASD). Your company will function solely in a supervisory and operational capacity on behalf of its representatives assigned to the bank. All representatives will be properly licensed with the NASD.
Your company and its representatives will transact business for bank customers in the product areas of equity and debt securities, mutual funds, and limited partnership interests. In addition, option transactions, commodities futures, commodities options, discretionary trading activity and other higher risk transactions will be prohibited when dealing with bank customers. You anticipate that the majority of business transacted on bank premises will consist of conservative products (e.g., mutual funds, unit trusts and limited partnership interests). *** will conduct the required due diligence and provide the representative with a list of approved partnerships.
Neither *** nor its representatives will maintain customer accounts, hold funds/securities for customers or owe funds/securities to customers. These functions will be performed by *** correspondent clearing broker/dealer.
The general securities accounts of *** customers will be carried on a fully disclosed basis by a clearing broker/dealer that has entered into a contract with ***. Whenever a customer wishes to purchase securities, he will send the requisite funds directly to the clearing broker, or to *** to forward to the clearing broker, which will have the securities sent directly to that customer or his designated depository. Conversely, whenever a customer wishes to sell securities, you will place those securities in a "mailer" for shipment to the clearing broker, which will send a check to the customer. All margin loans will be made by the clearing broker. The clearing broker will send customers confirmations and monthly account statements.
All mutual funds and limited partnership transactions will be processed by the representatives on site at the bank. The client's application and check made payable to the mutual fund or partnership will be forwarded directly to the program sponsor, or to *** to forward to the clearing broker. A copy will be kept within the clients' file at the bank and a copy will be sent to the *** home office.
All brokerage business conducted on the premises of the bank will take place in a clearly defined area of the building so as to ensure that brokerage activities are separate from other bank activities.
*** will establish a branch office on site at each designated bank. The branch office will be identified as *** and will be staffed by at least one NASD Series 24 licensed representative who will be the branch manager and responsible for managing the program at that bank. The branch office will be responsible for complying with all SEC, NASD, ***, and various state rules and regulations.
The representative who is the branch manager will train, supervise and monitor the other representatives who are working at the bank. *** will provide all services such as compliance and due diligence support as well as be responsible for the supervision of the representatives and the branch office. All parties involved are expected to comply with NASD, federal and state rules and regulations. The required records will be kept at the *** branch office within the bank.
The banks will not be permitted to engage in other brokerage business, except, as currently permitted (e.g. discount brokerage) including the handling of customer funds and securities.
All advertising and other client communications will clearly indicate that any and all brokerage services are being performed by *** and its representatives and not the bank. Advertising and sales literature must receive *** approval prior to being used. Advertising will refer only to the bank to identify the location of the *** activities.
The bank will bear a portion of the cost of the program and receive from *** a portion of the commissions and fees generated by the business conducted on the premises. The percentage arrangement will be contracted between the bank, *** and its representatives.
In addition to being a representative of *** the individuals will be employees of the bank who will pay a portion of the salary of the representative.
An agreement will be entered into between the bank, *** and its representatives. This agreement will specify the responsibilities and commission sharing arrangement of each.
With respect to bank liability, the bank will be fully indemnified for all liabilities, claims, damages, costs or expenses associated with the program. It should be pointed out, however, that this indemnification does not apply to the actions of bank employees who are not involved with the program. You feel that it is inappropriate for *** to accept responsibility for such employees and their actions. Market making activities and underwriting activities are not involved or permitted in the program, nor will they be.
You asked us to consider your letter an application for your firm to provide brokerage services on the premises of nonmember banks. Our consent is not required for this activity. Thus an application is inappropriate. You also request our review and comments on the matter.
Under somewhat similar circumstances, we have considered the question of whether or not a nonmember bank may participate in a program such as this as a subscribing institution without violating the Glass-Steagall Act. Under some circumstances, we have concluded that a nonmember bank may do so.
However, during the current period ending March 1, 1988, sections 32 and 20 of the Glass-Steagall Act (12 U.S.C. §§ 78, 377) apply to non-member banks under the Competitive Equality Amendments of 1987 (to be codified at 12 U.S.C. § 1828(j)(3)). Section 20 of the Glass-Steagall Act prohibits an affiliation between an insured bank and organizations engaged principally in certain securities activities. Section 32 prohibits certain officers, directors, or employee relationships involving an insured bank and a person or organization primarily engaged in certain securities activities.
Since it appears that employees of securities firms will be serving as officers or employees of an insured nonmember bank, during the period of the effectiveness of section 32, the dual employment situation you have described might be in contravention of 12 U.S.C. § 1828(j)(3). Conceivably, your company would not be primarily engaged in the enumerated "Section 32" securities activities which include the issue, flotation, underwriting, public sale, or distribution, at wholesale or retail, or through syndicate participation of stocks, bonds, or other similar securities. The above observation is based upon our reading of your stated facts and our understanding of the statute. See 12 C.F.R. § 218.108 (1987). We would welcome any additional information that you may have concerning the extent of your company's "Section 32" business.
Regardless of the above temporary legislation, your proposal is beyond the scope of activities upon which we have favorably commented in the past. The primary reason for this is that the securities' company employees/bank employees are being compensated on a per transaction basis. This method of compensation might encourage securities transactions to be favored over deposit transactions or present conflicts of interest or hazardous situations. Further, contractual arrangements and plans of this sort, which we have reviewed, have tended to substantially limit the role of securities companies representatives/bank employees in connection with transactions taking place on the premises of the bank. In your company's case, it would appear that the securities representatives/bank employees will be carrying on the full role of customer representative and securities principal on the premises of the bank. Programs receiving favorable comment from this office in the past have assumed a much more limited role for customer representatives.
Thus, unless it could be shown that this relationship is outside the scope of the newly enacted section 18(j)(3) of the Federal Deposit Insurance Act, compensation is not provided dual employees on a transactional basis, and the role of customers' representatives-securities principals/bank employees is more limited, we cannot provide a favorable comment with respect to the proposed plan.