Associated Persons/Dual Employees
August 26, 1992
Mr. John Kerr
Office of the Comptroller of the Currency
Division of Investment Securities
250 E Street, S. W.
Washington, D.C. 20219
Dear Mr. Kerr:
This is in response to your letter of November 20, 1991, concerning an arrangement through which associated persons of a government securities dealer that is a national bank (noticed bank) sell government securities on the premises of non-noticed affiliated banks. Specifically, you request a determination of the permissibility of this arrangement under the Treasury regulations implementing the Government Securities Act of 1986 (GSA regulations, 17 CFR 400, et seq.).
On the basis of your letter and conversations with your staff, we understand the facts to be as follows. With respect to at least one multibank holding company, associated persons of its noticed dealer affiliate (a national bank) are also employees of non-noticed affiliated banks (dual employees). These dual employees sell government securities from locations within the non-noticed affiliated banks. All government securities activities conducted by the non-noticed affiliated banks are supervised by the noticed bank. Associated persons of the noticed bank transact government securities sales in the affiliated banks, and their activities are supervised by management of the noticed bank's bond department. The noticed and affiliated banks both publish advertisements promoting government securities sales, but the noticed bank supervisors are responsible for the review of all advertisements.
You represent that similar dual employee programs are used in the sale of municipal securities and are the subject of a January 21, 1986, no-action letter issued by the staff of the Securities and Exchange Commission (SEC). You represent that the no-action letter states that the SEC staff will not recommend enforcement action against any member of a bank holding company system conducting this type of sales program, provided the affiliate forwards customers' orders to the dealer bank, and that the dealer bank's management supervises associated persons employed by the affiliate banks under the Municipal Securities Rulemaking Board rules. You further represent that holding companies have sold municipal securities with this employment structure for a number of years and that the Office of the Comptroller of the Currency has not observed any deficiencies directly associated with this structure to date.
Section 401.3 of the GSA regulations provides an exemption from various requirements of the GSA for financial institutions that are engaged in limited government securities brokerage activities. Paragraph (a)(2)(ii) of section 401.3 provides that notwithstanding that a financial institution may hold itself out as a government securities broker or actively solicit purchases or sales of government securities on an agency basis, it shall not be regarded as acting as a government securities broker if it effects all such transactions (except those involving savings bonds and the submission of customer auction tenders) pursuant to a contractual or other arrangement, as described below, with one or more government securities brokers or dealers each of which has registered or filed notice pursuant to section 15C(a)(1) of the Securities Exchange Act of 1934 (15 U.S.C. 78o-5(a)(1)).
The noticed financial institution (referred to in paragraph 401.3(a)(2)(ii) of the regulations as the transacting government securities broker or dealer) may offer securities services on or off the premises of another financial institution, without the latter having to file notice as a government securities broker, provided: the transacting government securities broker or dealer is clearly identified to customers as the person performing the securities services; financial institution employees perform only clerical and ministerial or order-taking functions in connection with government securities transactions unless such employees are associated persons or registered representatives of the transacting government securities broker or dealer; financial institution employees do not receive compensation for government securities activities other than clerical or ministerial functions unless such employees are associated persons or registered representatives of the transacting government securities broker or dealer; and such services are provided on a fully disclosed basis by the transacting government securities broker or dealer -- i.e., the transacting government securities broker or dealer receives and maintains all required information concerning each customer, its trading and account.
Paragraph 401.3(b)(1) of the rules requires that financial institutions relying on the above exemption nevertheless comply with the requirements of section 450, which govern the custodial holdings of government securities by depository institutions.
In proposing and adopting the exemptions in section 401.3 for such networking arrangements, the Treasury Department recognized that although the government securities market is primarily a dealer market, many financial institutions effect brokerage transactions as an accommodation for their customers. Further, Treasury concluded that financial institutions effecting transactions on a fully disclosed basis are, through existing supervision and the requirements of section 450, adequately regulated to protect investors and do not need to be regulated as government securities brokers.
Based on your representations, we believe the arrangement between the noticed bank and its non-noticed affiliates is consistent with the requirements of paragraph 401.3(a)(2)(ii) of the GSA regulations. However, the aforementioned requirement that the noticed bank be clearly identified as the entity performing the securities services (401.3(a)(2)(ii)(A)) is most effective in protecting customers of the non-noticed affiliated banks when the dual employee clearly informs such customers prior to, or at the time of, the transactions that the securities services are performed by the noticed bank and involve government securities, which are not deposits insured by the Federal Deposit Insurance Corporation (FDIC). Moreover, the requirement that the noticed bank be clearly identified as the entity conducting the transactions applies to advertisements promoting government securities sales. Advertisements that do not clearly identify the role of the noticed bank could lead the customer to conclude that the transactions are performed by the non-noticed affiliated bank. Government securities advertising and promotional material should therefore state that the noticed bank performs the securities services.
Accordingly, pursuant to 15 U.S.C. 78o-5(b), we interpret 17 CFR 401.3(a)(2)(ii) to the effect that, subject to the requirement in paragraph 401.3(b)(1) that financial institutions relying on the networking exemptions in section 401.3(a) comply with section 450, the non-noticed affiliated banks, acting as described, are not required to file notice as government securities brokers. Any change in the facts or circumstances from what you have represented could result in a change to this interpretation.
Pursuant to 17 CFR 400.2(c)(7)(i), this letter and your incoming correspondence will be made immediately available to the public.
Richard L. Gregg