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4000 - Advisory Opinions


Contractual Activities of Wholly Owned Subsidiary with Registered Broker-Dealer Do Not Constitute Underwriting for the Purposes of the Glass-Steagall Act and 12 CFR 337.4

FDIC-89-1

January 4, 1989

Pamela E. F. LeCren, Senior Attorney

The following is in response to your December 16, 1988 request to Roger Hood, Assistant General Counsel, Federal Deposit Insurance Corporation, that the FDIC review and comment upon a "no action" letter drafted by you concerning certain activities that a wholly-owned subsidiary of an insured nonmember bank wishes to undertake. According to the no action letter, ***, a wholly-owned subsidiary of ***, wishes to enter into a contract with ***, a registered broker-dealer that acts as administrator and distributor to five mutual funds. Under the contract *** would provide *** with certain services in support of *** distribution efforts. As distributor, *** manages each of the five mutual fund's distribution efforts and provides assistance in the development of marketing plans and materials. *** has a non-exclusive right to sell shares in each of the five funds and is obligated to use reasonable efforts to sell shares in the funds. *** does not purchase and re-sell shares of the funds for its own account.

It is proposed that ***: (1) conduct market research for the five funds; (2) assist in the preparation of marketing materials; (3) solicit broker-dealers to become part of *** distribution network; (4) provide sales training and product education to broker-dealers in the network; (5) act as liaison between broker-dealers in the network, the funds and the funds' service providers; and (6) provide *** with quarterly updates outlining the activities undertaken by *** during the prior quarter. *** compensation would be based upon the total sales commission for shares sold by the network minus payments to the broker-dealers minus certain other expenses associated with the five funds.

The "no action" letter addresses the issue of the application of section 337.4 of the FDIC's regulations to the above facts.

Specifically the letter expresses the opinion that *** is not subject to the restrictions of paragraphs (b)(1) and (b)(2) of section 337.4 as the services *** will perform do not constitute underwriting for the purposes of the Glass-Steagall Act and section 337.4. Upon carefully weighing the arguments and representations contained in your letter, we concur with the position set forth therein.


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