To: Senior Bank Examiner Weisman -- Community and Regional Banks Division
From: Sharon Cherry, Associate Attorney - Legal Division
Date: February 2, 2005
Subject: [ ] - Proposal to Offer Securities Brokerage Services
[ ]Bank (hereinafter the "Bank") notified Anthony Calabrese, Deputy Superintendent, of its intention to offer securities brokerage services to its Bank customers through a contract with an unaffiliated third-party broker-dealer. While there may be supervisory issues regarding the Bank's entry into this new line of business, we are responding as to whether this is legally permissible.
We have no legal objection to the Bank's proposal provided that it operates its program in accordance with the Gramm-Leach-Bliley Act of 1999 ("GLBA") and other applicable laws and regulations, including the rules promulgated by the Securities and Exchange Commission.
Pursuant to the Bank's proposal, the Bank will have a registered representative (registered with NASD as a General Securities Representative) become a dual employee of the Bank and a broker-dealer. As the registered representative of the broker, the dual employee will take orders, make investment recommendations, and execute securities trades through the broker. Customers would have securities accounts with the broker. The Bank will pay all employee compensation to the dual employee. The Bank will receive a percentage of the brokerage commission. Customers will be advised of the total amount of the brokerage commission to be paid to the broker and the amount of the commission that will be paid to the Bank. The registered representative's office will be in the trust department area of the Bank's main office. which is not visible from the area where FDIC insured retail deposits are taken.
The type of networking arrangement described by the Bank is permissible. Section 3(a)(4)(B)(i) of the Securities and Exchange Act of 1934, as amended by the GLBA, provides for contractual arrangements between banks and third party broker-dealers. We expect the Bank to operate its program in accordance with the GLBA, as well as other applicable laws and regulations. We note that the Securities and Exchange Commission has issued a proposed rule, Regulation B, which proposes a number of new exemptions for banks from the definition of the term "broker" under Section 3(a)(4) of the Securities and Exchange Act of 1934, as amended by the GLBA, and defines certain terms used in the GLBA,