4000 - Advisory Opinions
Thrift Institution--Bank Space/Lease Compensation Agreement with Company Marketing Life Insurance and Fixed Annuity Products
November 6, 1987
Pamela E. F. LeCren, Senior Attorney
We are in receipt of your October 13, 1987 letter to Roger Hood, Assistant General Counsel, requesting the FDIC to issue a no objection letter to the *** proposed compensation arrangement for sale of securities in which *** ***, a company currently marketing life insurance and fixed annuity products nationwide in lobbies of thrift institutions using licensed employees of the host institutions, will arrange with a nationally prominent NASD member securities firm ("participating broker-dealer") to make available mutual funds, variable annuities, unit investment trusts and other financial products through a space/lease compensation agreement with thrift institutions and banks.
The FDIC's Legal Division is not in the habit of issuing no objection letters in response to inquiries such as yours. The FDIC can and does, however, undertake to respond to requests for an opinion as to whether or not a particular act or practice on the part of an insured nonmember bank constitutes a violation of any FDIC regulation or federal statute which the FDIC administers. Any opinion issued is not binding on the Board of Directors and, in the case of an inquiry such as yours, would not constitute an "approval" of any program or arrangement in which an insured nonmember bank may seek to participate.
We have reviewed the information presented in your letter and although we have not had the opportunity to review the underlying contracts, employees manuals, etc., the program as described in your letter appears to be substantially similar to the INVEST Program which the FDIC considered in a 1980 staff opinion letter (copy enclosed) for the purpose of determining whether or not participation in the program would involve a violation of the Glass-Steagall Act. Our conclusion was that participation in the INVEST program would not contravene that Act. Therefore, as we have with respect to other similar inquiries, we can indicate that participation by an insured nonmember bank in the *** would not seem to involve the bank in underwriting, distribution or the public sale of securities in contravention of the Glass-Steagall Act.
We note, however, that with the passage of the Competitive Equality Banking Act of 1987 insured nonmember banks became subject to the prohibitions of section 32 of the Glass-Steagall Act (12 U.S.C. 78) which prohibits employee, officer, or director interlocks between member banks and companies primarily engaged in the underwriting, the distribution or the public sale of securities. The *** as described in your letter would involve dual employees of the participating bank and the participating broker-dealer. Our 1980 letter with respect to INVEST did not assess this question as when that opinion was rendered section 32 was inapplicable to the employee, officer, or director interlocks between insured nonmember banks and securities firms.
Upon review of this matter, we are of the opinion that, provided so long as the participating broker-dealer's activities are restricted to solely executing orders for the purchase and sale of securities on behalf of others, the existence of a dual employee relationship will not present a problem under section 32. (See Federal Reserve Board Regulations 12 C.F.R. 218). The Supreme Court in Securities Industry Association v. Board of Governors, 468 U.S. 207 (1984)("Schwab") determined that brokerage activities do not constitute underwriting, distribution or the public sale of securities. Additionally, a recent decision by the D.C. Court of Appeals (Securities Industry Association v. Board of Governors, 821 F.2d 810 (D.C. Cir. 1987)("Nat West") held that the provision of investment advice coupled with brokerage activities does not transform the brokerage activities into underwriting, distribution, or the public sale securities. We are, therefore, of the opinion that the employee interlocks would not be subject to section 32 of the Glass-Steagall Act even though investment advice is offered through the *** in addition to brokerage.
We wish to stress that this letter in no way constitutes an endorsement or approval of the participation in the *** by any insured nonmember bank. The FDIC reserves the right to take issue with the manner in which any particular insured nonmember bank administers the *** depending upon the facts. Our opinion on the Glass-Steagall Act is based solely upon the facts as we understand them to be based upon your letter of October 13, 1987. Should the facts differ from that described, or circumstances change in the future, our opinion on the Glass-Steagall Act issue is subject to change.
Lastly, this letter does not constitute a comprehensive review of the *** in terms of safety and soundness, conflicts of interest, etc. The failure or omission of this letter to raise or comment upon any such issue should not be read to constitute a conclusion on the part of the FDIC that no such issue exists.