4000 - Advisory Opinions
Application of Section 344.4: Sale of Securities Through Banks
November 17, 1994
Christeena G. Naser, Attorney
This letter is in response to your recent inquiry to Ms. Jen Hickson concerning the application of section 344.4 of the FDIC's regulations to sales of securities through banks.
Please be advised that the obligations specified in section 344.4 run to the bank, not the broker-dealer, although the broker-dealer may have virtually identical responsibilities under SEC Rule 10b--10. Section 344.4 requires banks to notify customers of the relevant details of their securities transactions either 1) by insuring that the customer receives a copy of the broker-dealer confirmation (section 344.4(a)) or 2) by providing to the customer directly information similar to that contained in the confirmation (section 344.4(b)). In addition, if the bank is to receive remuneration in connection with the transaction, the bank must disclose the source and amount of that remuneration unless that has already been disclosed to the customer in a prior written agreement. Under section 344.4(a), the bank may arrange with the broker-dealer to disclose that information on the broker-dealer's confirmation by means of a statement such as "ABC Bank has received 50 percent of the sales commission you paid on this transaction".
Section 344.4 applies in cases where the bank receives transaction-related compensation, i.e., remuneration based on the amount of the transaction--typically, a share of the commission. (By contrast, if the bank receives only a flat rent for use of its space, section 344.4 does not apply.) It applies whether the broker-dealer receives all of the commission and then rebates a portion to the bank, or vice versa. This section also applies regardless of whether the person actually selling the securities is a bank employee, a dual employee, or solely the employee of a registered broker-dealer. Finally, it applies to sales of all types of securities, not merely to bank products such as proprietary mutual funds.
With respect to your question concerning the obligation of the broker-dealer to explain the breakdown of commission splits, as noted above, any obligations on the broker-dealer arise from state and federal securities laws and SEC/NASD regulations. Any such requirements must be satisfied whether or not section 344.4 comes into play. Section 344.4 requires the bank to make sure that customers are notified of the amount of any transaction-related compensation received by the bank; the bank, in turn, may contract with the broker-dealer to disclose on the confirmation the bank's compensation. This is the typical means by which banks comply with section 344.4
I hope the above information has answered your inquiry. However, if you have additional questions, please do not hesitate to telephone me at (202) 898-3587.