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4000 - Advisory Opinions
Application of CEBA to Securities Activities
Conducted by a Subsidiary
FDIC-88-17
February 24, 1988
Pamela E. F. LeCren, Senior Attorney
On October 16, 1987 *** a New York state chartered savings bank,
filed a notice pursuant to section 337.4 of the FDIC's regulations
indicating that it is the bank's intent to utilize an indirect
wholly-owned subsidiary, *** to distribute interests in limited
partnerships formed primarily to own and invest in real
estate. 1
According to the notice, *** was incorporated under the laws of the
state of New York in April 1, 1982, granted
{{4-28-89 p.4313}}broker-dealer registration by the SEC
on August 23, 1983, and became a member of NASD on April 16, 1984. In
connection with its application for membership in the NASD, *** agreed
to restrict its activities to real estate syndication, acting as broker
or dealer for oil and gas interests, and acting as broker or dealer for
tax shelters or limited partnerships. In 1985 *** acquired all of the
stock of *** parent and thus indirect ownership of
***. 2
Your office has requested the comments of the Washington Legal Division
with respect to the effect of section 106 of the Competitive Equality
Banking Act of 1987 ("CEBA") on *** relationship with ***.
Section 106 of CEBA provides that the provisions of section 20 of
the Glass-Steagall Act and the provisions of section 32 of the
Glass-Steagall Act are to be applicable to every insured institution
(as defined in 12 U.S.C. § 1730a(a)(1)(A)) in the same manner and to
the same extent as if such insured institution were a member of the
Federal Reserve System. This provision is a corollary to section 103 of
CEBA which makes sections 20 and 32 of the Glass-Steagall Act
applicable to insured nonmember banks through section 18(j)(3) of the
FDI Act. Both provisions expire on March 1, 1988.
Section 106 exempts certain types of affiliations from the general
prohibition found in section 20 on affiliations between banks and
companies principally engaged in the issuance, sale, underwriting, or
distribution of securities. The exemption applies not only to insured
institutions, but also to institutions which are eligible to become
members of a Federal Home Loan bank. Furthermore, the paragraph
specifically exempts the latter not only from section 106 but also from
section 103 which amends section 18(j)(3) of the FDI Act as described
above. Thus, an insured nonmember bank which is eligible to become a
member of a Federal Home Loan bank is not subject to the prohibition in
section 18(j)(3) if the right set of circumstances exists.
The affiliations that section 106 exempt include, among others,
affiliations between an insured institution, or institution eligible to
become a member of a Federal Home Loan bank, and an organization
engaged principally in the issuance, sale, underwriting, or
distribution of interests in partnerships formed primarily to own,
operate, manage, or invest in real estate. Section 1424 of Title 12
sets forth the eligibility requirements for becoming a member of a
Federal Home Loan bank. As provided by that section,
any building and loan association, savings and loan
association, cooperative bank, homestead association, insurance
company, or savings bank (emphasis added) shall be eligible
to become a member of, or a nonmember borrower of, a federal home loan
bank if such institution (1) is duly organized under the laws of any
state or of the United states; (2) is subject to inspection and
regulation under the banking laws, or under similar laws, of the state
or of the United States; (3) makes such home mortgage loans as, in the
judgment of the Board, are long-term loans (and in the case of a
savings bank if, in the judgment of the Board, its time deposits as
defined in section 461 of this title, warrant its making such
loans) . . . .
*** would not only appear to be eligible, for membership in a
Federal Home Loan Bank under 12 U.S.C. § 1424 but is in fact
presently a member of a Federal Home Loan bank. *** is thus eligible
despite section 20 of the Glass-Steagall Act, to affiliate with
any
{{4-28-89 p.4314}}organization principally engaged in the
issuance, sale, underwriting, or distribution of real estate limited
partnerships.
*** counsel represents that *** will be principally engaged in the
distribution of interests in partnerships formed primarily to own,
operate, manage, or invest in real estate. Although the notice to the
regional office did not provide any dollar volume or percentage figures
with respect to the distribution of real estate limited partnerships by
***, subsequent information provided to the regional office indicated
that such activities are currently intended to be ***: only activities
and that *** activities selling interests through private placements in
grantor trusts which hold title to equipment subject to lease (*** sole
business following its registration as a broker dealer) have
"largely dried up with the tax changes". We therefore conclude
based upon the recent opinion of the Court of Appeals for the Second
Circuit (Securities Industry Association v. Board of Governors,
2d Cir., Docket No. 87-4041, February 8,
1988) 3
that *** is an organization principally engaged in the issuance, sale,
underwriting or distribution of interests in partnerships formed
primarily to own, operate, manage or invest in real estate. The
affiliation between *** and *** is thus exempt from the reach of
section 20 and 32 of the Glass-Steagall Act otherwise made applicable
to insured nonmember banks by section 18(j)(3) of the FDI Act as
amended by CEBA.
1 By letter of February 9, 1988 counsel for *** informed the
New York Regional Office that *** "recently changed its name to ***
Securities". Go Back to Text
2 The October 16 notice was accompanied by a letter to Regional
Director Lutz indicating that at the time of the acquisition *** had
inadvertently failed to give the FDIC either the 60-day advance notice
or the ten day follow-up notice required by section 337.4(d) of the
FDIC's regulations. The letter further indicated that as the October 16
notice was intended to satisfy the 60-day notice requirement *** was
undertaking to prohibit *** from engaging in any securities activities
with the public for a period of 60 days beginning on the date of the
notice.
The notice was also intended to inform the FDIC in accordance with
section 337.4 that the subsidiary intended to commence underwriting
activities with respect to securities other than investment quality
debt and equity securities. Section 337.4(b)(2) permits a bona fide
subsidiary of an insured nonmember bank to engage in underwriting
activities with respect to securities that are not investment quality
debt or investment quality equity securities provided that the
conditions set forth in that paragraph are met. It would appear from
the information provided by counsel that the conditions set forth
therein are satisfied. Go Back to Text
3 The court upheld the Federal Reserve Board's determination
that "principally engaged" for the purposes of section 20 of the
Glass-Steagall Act means any substantial activity which includes any
activity which accounts for more than 5 to 10 percent of the company's
gross revenues over a two-year period. Go Back to Text
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