NYSBL Sections 96(1)
To: Senior Bank Examiner Weisman — Community and Regional Banks Division
From: Alan Weinberg, Assistant Counsel — Legal Division
Date: April 24, 2006
Subject: [ ] - Securities Brokerage Services — Proposed Change to Disclosure of Commissions
[ ] Bank (hereinafter the "Bank") offers securities brokerage services to its Bank customers through a contract with an unaffiliated third-party broker-dealer. Among other things, the Bank currently discloses to its customers the total amount of the brokerage commission and the percentage of the commission that will be paid to the Bank. The Bank proposes some changes to its customer disclosures (in particular, to no longer disclose to customers the percentage of the brokerage commission that the Bank receives) and to offer and sell shares in mutual funds. Is the Bank's proposal legally sufficient?
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.
In December 2004 the Bank proposed to offer securities brokerage services to its Bank customers through a contract with an unaffiliated third-party broker-dealer. The Department, following a legal review, issued a "no-objection" letter to that proposal, which can be summarized as follows:
- 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 Bank, in a letter of 1/24/06 supplementing its earlier proposal, proposes some changes to its customer account agreements relating to the arrangements with the broker and proposes to offer and sell shares in mutual funds.
Notably, under the new agreements, the Bank would no longer disclose to customers the percentage of the brokerage commission that the Bank receives. However, the Bank would disclose that
- the Bank may choose or change the broker from time to time
- the bank obtains revenue from sharing commissions paid to the broker
- the sharing will not cause commissions paid to be materially different from the Bank using any other broker
The customer will have the opportunity to authorize the disclosed arrangement under the new agreements or to specify other instructions for the account.
The type of arrangement proposed by the Bank is permissible. Section 3(a)(4)(A) of the Securities and Exchange Act of 1934, as amended by the GLBA, defines the term "broker" and Section 3(a)(4)(B)(i) excepts a bank from being considered a "broker" and provides for contractual arrangements between banks and third party broker-dealers as follows:
(4) Broker. ----
(A) In general.— The term "broker" means any person engaged in the business of effecting transactions in securities for the account of others.(B) Exception for certain bank activities.— A bank shall not be considered to be a broker because the bank engages in any one or more of the following activities under the conditions described:
(i) Third party brokerage arrangements.— The bank enters into a contractual or other written arrangement with a broker or dealer registered under this chapter under which the broker or dealer offers brokerage services on or off the premises of the bank if---
(I) such broker or dealer is clearly identified as the person performing the brokerage services;
(II) the broker or dealer performs brokerage services in an area that is clearly marked and, to the extent practicable, physically separate from the routine deposit-taking activities of the bank;
(III) any materials used by the bank to advertise or promote generally the availability of brokerage services under the arrangement clearly indicate that the brokerage services are being provided by the broker or dealer and not by the bank;
(IV) any materials used by the bank to advertise or promote generally the availability of brokerage services under the arrangement are in compliance with the Federal securities laws before distribution
(V) bank employees (other than associated persons of a broker or dealer who are qualified pursuant to the rules of a self-regulatory organization) perform only clerical or ministerial functions in connection with brokerage transactions including scheduling appointments with the associated persons of a broker or dealer, except that bank employees may forward customer funds or securities and may describe in general terms the types of investment vehicles available from the bank and the broker or dealer under the arrangement;
(VI) bank employees do not receive incentive compensation for any brokerage transaction unless such employees are associated persons of a broker or dealer and are qualified pursuant to the rules of a self-regulatory organization, except that the bank employees may receive compensation for the referral of any customer if the compensation is a nominal one-time cash fee of a fixed dollar amount and the payment of the fee is not contingent on whether the referral results in a transaction;
(VII) such services are provided by the broker or dealer on a basis in which all customers that receive any services are fully disclosed to the broker or dealer;
(VIII) the bank does not carry a securities account of the customer except as permitted under clause (ii) or (viii) of this subparagraph; and
(IX) the bank, broker, or dealer informs each customer that the brokerage services are provided by the broker or dealer and not by the bank and that the securities are not deposits or other obligations of the bank, are not guaranteed by the bank, and are not insured by the Federal Deposit Insurance Corporation.
There is nothing in this section of the Securities Exchange Act of 1934, as amended by GLBA, that prohibits the Bank from continuing with the program of securities brokerage services under the revised proposal. In particular, we find nothing that requires a disclosure to customers of the percentage of the brokerage commission that a bank may receive or that limits the ability of the Bank to offer and sell shares in mutual funds in accordance with the proposal.
We expect the Bank to operate its program in accordance with 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 Exchange Act of 1934, as amended by GLBA, and defines certain terms used in GLBA.
Noted: _____________ S.A.K.