4000 - Advisory Opinions
Sublease of Office Space in Bank Branch to Securities Broker-Dealer Does Not Violate Glass-Steagall Act
November 23, 1990
Roger A. Hood, Assistant General Counsel
This responds to your October 1, 1990 letter in which you request permission on behalf your client, *** ("[Bank]"), a New York State chartered branch of a foreign bank, to sublease space at a [Bank] branch to a branch office of *** ("[Securities Broker]"), a broker-dealer registered with the Securities and Exchange Commission.
You state that [Securities Broker] intends to use the subleased space to provide certain services to [Bank]'s customers. These services include brokerage services relating to securities transactions and margin loans, account administration (IRA/pension), financial planning, insurance/annuities, investment advisory services, private placements, municipal bonds, unit investment trusts, compliance, and OTC trading and research.
You further state that the sublease will provide for the payment of a base amount of rent together with an additional sum for rent that is determined, in part, by reference to the net income of [Securities Broker] after the subtraction of various costs and expenses incurred by [Securities Broker] in connection with its business. In addition, the sublease agreement provides that personnel of [Bank] will be required to perform certain clerical functions on behalf of [Securities Broker] that essentially relate to the distribution of material concerning the services provided by [Securities Broker], forwarding materials to [Securities Broker] given to [Bank] by its customers, receiving securities from customers to be delivered to [Securities Broker], and other general clerical work.
As a preliminary matter, you should be aware that the FDIC does not have any rules or regulations which generally govern the conduct of "non-banking" activities on the premises of an insured nonmember bank by an unrelated third party. This is true regardless of the nature of those activities. Whether a bank may lease space to a third party to conduct business activities on the premises of the bank is therefore dependent upon state law. The FDIC would, of course, evaluate any leasing or other arrangement with a third party for conformance with safe and sound banking practices. Each situation is evaluated on the basis of the particular facts and in view of applicable laws and regulations of the state in which the bank is located.
As described in your letter, the agreement does not seem to raise any Glass-Steagall Act questions because [Bank] would not be engaged in any securities activities, but would simply be a lessor, some of whose own employees would perform strictly clerical functions for the lessee.
The utilization of bank space, equipment and personnel in connection with the operation of any business which is not an integral part of the bank would require that the bank be adequately compensated. What constitutes adequate compensation will vary with the circumstances. Full details regarding the lease or other arrangements should be disclosed to the bank's shareholders and should be approved by the bank's board of directors. Steps should be taken to ensure that customers of the third party lessee are fully apprised that they are dealing with a separate and independent entity from the bank. Moreover, as any such relationship is one which could generate conflicts of interest, the lease or other arrangement would probably be the subject of careful review during an examination of the bank. In connection with these matters I have enclosed a portion of the FDIC's Manual of Examination Policies which discusses the topic of nonbanking activities conducted on a bank's premises.
As your letter provides few details regarding the proposed relationship between [Bank] and [Securities Broker], our comments are necessarily limited to those set forth above. Our review of your letter does not represent a comprehensive safety and soundness evaluation of the proposed arrangement. Accordingly, the FDIC is not precluded in the future from commenting on, or criticizing the leasing arrangement or the manner in which [Bank] and [Securities Broker] interact. You should also be advised that it is generally not the practice of the Legal Division to approve transactions in which an insured nonmember bank proposes to enter. We can, provided we are given sufficient information, opine on whether a particular transaction conforms with FDIC regulations as well as the various federal laws which the FDIC enforces as to insured nonmember banks. In this regard I am enclosing for your information a copy of a 1983 staff opinion dealing with a program known as INVEST which was reviewed by the Legal Division for conformance with the Glass-Steagall Act. INVEST involves a situation in which a broker-dealer offers securities and limited investment advice on the premises of unrelated financial institutions. I am also enclosing a copy of another staff opinion reviewing a program similar to INVEST. You will note that the second opinion contains a number of disclaimers. I enclose this letter in order to make clear that the opinions provided herewith are limited in scope to the Glass-Steagall Act.
I trust the foregoing responds to your inquiry. Thank you for writing to the FDIC.