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4000 - Advisory Opinions


Application of CEBA to Securities Activities Conducted by a Subsidiary

FDIC-88-17

February 24, 1988

Pamela E. F. LeCren, Senior Attorney

On October 16, 1987 *** a New York state chartered savings bank, filed a notice pursuant to section 337.4 of the FDIC's regulations indicating that it is the bank's intent to utilize an indirect wholly-owned subsidiary, *** to distribute interests in limited partnerships formed primarily to own and invest in real estate.1 According to the notice, *** was incorporated under the laws of the state of New York in April 1, 1982, granted broker-dealer registration by the SEC on August 23, 1983, and became a member of NASD on April 16, 1984. In connection with its application for membership in the NASD, *** agreed to restrict its activities to real estate syndication, acting as broker or dealer for oil and gas interests, and acting as broker or dealer for tax shelters or limited partnerships. In 1985 *** acquired all of the stock of *** parent and thus indirect ownership of ***.2 Your office has requested the comments of the Washington Legal Division with respect to the effect of section 106 of the Competitive Equality Banking Act of 1987 ("CEBA") on *** relationship with ***.

Section 106 of CEBA provides that the provisions of section 20 of the Glass-Steagall Act and the provisions of section 32 of the Glass-Steagall Act are to be applicable to every insured institution (as defined in 12 U.S.C. § 1730a(a)(1)(A)) in the same manner and to the same extent as if such insured institution were a member of the Federal Reserve System. This provision is a corollary to section 103 of CEBA which makes sections 20 and 32 of the Glass-Steagall Act applicable to insured nonmember banks through section 18(j)(3) of the FDI Act. Both provisions expire on March 1, 1988.

Section 106 exempts certain types of affiliations from the general prohibition found in section 20 on affiliations between banks and companies principally engaged in the issuance, sale, underwriting, or distribution of securities. The exemption applies not only to insured institutions, but also to institutions which are eligible to become members of a Federal Home Loan bank. Furthermore, the paragraph specifically exempts the latter not only from section 106 but also from section 103 which amends section 18(j)(3) of the FDI Act as described above. Thus, an insured nonmember bank which is eligible to become a member of a Federal Home Loan bank is not subject to the prohibition in section 18(j)(3) if the right set of circumstances exists.

The affiliations that section 106 exempt include, among others, affiliations between an insured institution, or institution eligible to become a member of a Federal Home Loan bank, and an organization engaged principally in the issuance, sale, underwriting, or distribution of interests in partnerships formed primarily to own, operate, manage, or invest in real estate. Section 1424 of Title 12 sets forth the eligibility requirements for becoming a member of a Federal Home Loan bank. As provided by that section,

any building and loan association, savings and loan association, cooperative bank, homestead association, insurance company, or savings bank (emphasis added) shall be eligible to become a member of, or a nonmember borrower of, a federal home loan bank if such institution (1) is duly organized under the laws of any state or of the United states; (2) is subject to inspection and regulation under the banking laws, or under similar laws, of the state or of the United States; (3) makes such home mortgage loans as, in the judgment of the Board, are long-term loans (and in the case of a savings bank if, in the judgment of the Board, its time deposits as defined in section 461 of this title, warrant its making such loans) . . . .

*** would not only appear to be eligible, for membership in a Federal Home Loan Bank under 12 U.S.C. § 1424 but is in fact presently a member of a Federal Home Loan bank. *** is thus eligible despite section 20 of the Glass-Steagall Act, to affiliate with any organization principally engaged in the issuance, sale, underwriting, or distribution of real estate limited partnerships.

*** counsel represents that *** will be principally engaged in the distribution of interests in partnerships formed primarily to own, operate, manage, or invest in real estate. Although the notice to the regional office did not provide any dollar volume or percentage figures with respect to the distribution of real estate limited partnerships by ***, subsequent information provided to the regional office indicated that such activities are currently intended to be ***: only activities and that *** activities selling interests through private placements in grantor trusts which hold title to equipment subject to lease (*** sole business following its registration as a broker dealer) have "largely dried up with the tax changes". We therefore conclude based upon the recent opinion of the Court of Appeals for the Second Circuit (Securities Industry Association v. Board of Governors, 2d Cir., Docket No. 87-4041, February 8, 1988)3 that *** is an organization principally engaged in the issuance, sale, underwriting or distribution of interests in partnerships formed primarily to own, operate, manage or invest in real estate. The affiliation between *** and *** is thus exempt from the reach of section 20 and 32 of the Glass-Steagall Act otherwise made applicable to insured nonmember banks by section 18(j)(3) of the FDI Act as amended by CEBA.

1 By letter of February 9, 1988 counsel for *** informed the New York Regional Office that *** "recently changed its name to *** Securities". Go back to Text

2 The October 16 notice was accompanied by a letter to Regional Director Lutz indicating that at the time of the acquisition *** had inadvertently failed to give the FDIC either the 60-day advance notice or the ten day follow-up notice required by section 337.4(d) of the FDIC's regulations. The letter further indicated that as the October 16 notice was intended to satisfy the 60-day notice requirement *** was undertaking to prohibit *** from engaging in any securities activities with the public for a period of 60 days beginning on the date of the notice.
  The notice was also intended to inform the FDIC in accordance with section 337.4 that the subsidiary intended to commence underwriting activities with respect to securities other than investment quality debt and equity securities. Section 337.4(b)(2) permits a bona fide subsidiary of an insured nonmember bank to engage in underwriting activities with respect to securities that are not investment quality debt or investment quality equity securities provided that the conditions set forth in that paragraph are met. It would appear from the information provided by counsel that the conditions set forth therein are satisfied.
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3 The court upheld the Federal Reserve Board's determination that "principally engaged" for the purposes of section 20 of the Glass-Steagall Act means any substantial activity which includes any activity which accounts for more than 5 to 10 percent of the company's gross revenues over a two-year period. Go back to Text


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