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Bank Powers. Section 24(Seventh) grants broad powers for banks to engage in the business of banking, including the specific powers recited in the statute and such other incidental powers as are reasonably necessary to perform the business of banking as a whole. The courts have used various tests to determine whether specific banking activities are within the intended scope of Section 24(Seventh), and have found that permissible incidental activities include those that are similar to an express power, relate to an express power, resemble traditional banking functions, or constitute financial activities.*

Banks have authority to buy and sell securities for the accounts of customers as part of the business of banking. This authority under the bank powers clause is evidenced in the history of the years prior to the passage of the Glass-Steagall Act and predecessor provisions of the 1927 McFadden Act. While Section 16 of the Glass Steagall Act placed limitations on certain securities activities of banks, this provision specifically preserved banks' power to broker such securities "solely upon the order, and for the account of, customers, and in no case for its own account. "" Various court opinions confirm the long-established powers of banks to perform brokerage services.' Accordingly, securities brokerage activities are permissible by national bank subsidiaries including the purchase and/or sale, as agent, of shares in mutual funds.

National banks and their subsidiaries have the authority to provide investment advice as part of or incidental to the business of banking." Investment advice is integral to the brokerage

3 (1) Discounting and negotiating promissory notes, drafts, bills of exchange, and other evidences of debt; (2) receiving deposits; (3) buying and selling exchange, coin, and bullion; (4) loaning money on personal security; and (5) obtaining, issuing, and circulating notes.

See Letter No. 494 (December 20, 1989), supra, at 11-16; see also M & M Leasing Corp. v. Seattle First National Bank, 563 F. 2d 1377 (9th Cir. 1977), cert. denied, 436 U. S. 956 (1978); New York State Ass'n of Life Underwriters v. New York State Banking Dept., 598 N.Y.S. 2d 824 (N.Y. App. Div., 1993). (The court found that similar incidental powers clause of New York banking law permitted banks to expand banking services over time consistent with evolving business practices and customers' needs.)

7 See e.g., SIA v. Bd. of Governors of the FRS, 468 U. S. 207 (1984) ("Schwab"); SIA v. Comptroller of the Currency, 577 F. Supp. 252 (D.D.C. 1983), aff'd per curiam, 758 F.2d 739 (D.C. Cir. 1985), cert. denied, 474 U.S. 1054 (1986) (brokerage issue).

8 See e.g., Interpretive Letter No. 622 (April 9, 1993); Interpretive Letter No. 403 (December 9, 1987).

See e.g., Interpretive Letter No. 622 (April 9, 1993) and Interpretive Letter No. 367 (August 19, 1986); see also Bd. of Governors of the FRS v. ICI, 450 U.S. 46 (1981); SIA v. Bd. of Governors of the FRS, 821 F.2d 810 (D.C. Cir. 1987), cert. denied, 484 U.S. 1005 (1988) ("NatWest").

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and trust powers of banks. Banking entities are permitted to recommend mutual funds to customers and to act as investment advisor to the same mutual funds. 10 In finding that a bank holding company may serve as investment advisor to a mutual fund, the Supreme Court recognized in 1981 that the functions of an investment advisor include management activities."

An integral part of investment advisory and brokerage services is the ability to attract customers by advertising and marketing the services and products available. In 1954, the Supreme Court, in considering a restrictive state law, found that under their incidental powers national banks generally can advertise any service that the bank lawfully offers. In 1986, the District of Columbia Circuit Court recognized, albeit in a different context, that the selling of securities necessarily involves finding and soliciting buyers." The court noted that banks must advertise to let their customers know what services are available. Hence, national banks are permitted to publicize their services relating to mutual funds."

Administrative services related to the provision of investment advice and brokerage services are also incidental to those activities. National banks and their operating subsidiaries are permitted to provide a variety of administrative and shareholder services with respect to the operation of a mutual fund. The Federal Reserve Board recently has approved a nonbanking subsidiary of a bank holding company to provide various administrative and advisory services

10 Federal Reserve Board Regulation Y, 12 C.F.R. 225.125; see also Bd. of Governors of the FRS Y. ICI, 450 U.S. 46 (1981); SIA v. Bd. of Governors of the FRS, 821 F.2d 810 (D.C. Cir. 1987), cert. denied, 484 U.S. 1005 (1988) ("NatWest"); Interpretive Letter No. 403 (December 9, 1987).

11 Bd. of Governors of the FRS v. ICI, 450 U.S. 46, 55 (1981); see also OCC Letter from William B. Glidden (January 14, 1988) (national bank investment advisors manage and supervise the investment and reinvestment of cash, securities or other properties comprising the assets of the mutual funds).

12

See Franklin National Bank v. New York, 347 U.S. 373, 378 (1954).

13 SIA v. Bd. of Governors of the FRS, 807 F.2d 1052, 1062 (D.C. Cir. 1986), cert. denied, 483 U.S. 1005 (1987) ("Bankers Trust II").

14 See Interpretive Letter No. 622 (April 9, 1993) (making lobby materials available on services, placing newspaper advertisements, sending statement stuffers and providing other descriptions of the variety of services that are available); Glidden Letter (January 14, 1988) (furnishing prospectus or sales literature on funds upon request, having advertisements and brochures listing mutual funds available through the bank and the bank's services); see also Interagency Statement on Retail Sales of Nondeposit Investment Products (acknowledges banks advertise and market uninsured investment products to customers and provides for full disclosure).

15 See e... Glidden Letter (January 14, 1988) (providing various administrative services and acting as investment advisor to mutual funds); Interpretive Letter No. 386 (January 19, 1987) (providing recordkeeping, accounting, and other services in connection with 12b-1 and similar plans); Interpretive Letter No. 332 (March 8, 1985) (recordkeeping, order execution functions, and shareholder information).

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to mutual funds.16 The Board reasoned that such administrative activities generally are ministerial or clerical in nature and do not impart impermissible "control" or policy-making authority over the mutual fund. As the Board noted, mutual funds are governed by a disinterested board of directors dictated by various independence requirements of the Investment Company Act of 1940, and ultimate control over the funds rests with their boards of directors.

Glass-Steagall. The Glass-Steagall Act imposes limits on banks' involvement in certain securities activities. Section 16 of the Act (12 U.S.C. § 24(7)) places limits on national banks underwriting and dealing in securities and stock and generally prohibits national banks from purchasing or selling securities except upon the order and for the account of customers. Section 20 (12 U.S.C. § 377) prohibits Federal Reserve member bank affiliation with a company engaged principally in underwriting and other securities activities. Section 21 (12 U.S.C. § 378) prohibits organizations that are engaged in underwriting and other securities activities from simultaneously engaging in the business of receiving deposits. Section 32 (12 U.S.C. § 78), prohibits officer, director, or employee interlocks between member banks and companies that are primarily engaged in the securities activities listed in section 20.

The courts have affirmed that activities that are part of, or incidental to, the business of banking are not prohibited by the Glass-Steagall Act." The mutual fund activities in which national banks and their operating subsidiaries engage do not involve underwriting and dealing, so they are not prohibited by section 16. Underwriting and dealing typically refer to a banking entity's purchase of shares for its own account, thereby incurring a principal risk. National banks generally may not engage in distribution or sponsorship of mutual funds and typically employ independent distributors to assume these functions. Activities permitted by Section 16 are not prohibited by section 21.18 Mutual funds do not take deposits; and while a bank and its subsidiary may receive deposits, they are not engaged in issuing, underwriting, or distributing securities. A bank's sale of mutual funds as agent does not constitute Glass-Steagall distribution, even if the bank also acts as the advisor and/or administrator to the funds. 19

Section 20 also does not prohibit national banks from engaging in many mutual fund activities because permissible activities do not involve "issue, flotation, public sale, or distribution" of securities. Public sale does not mean sale as a broker but rather sale as an

16

17

See Mellon Bank Corporation, 79 Fed. Res. Bull. 626 (1993).

See Securities Industry Ass'n v. Clarke, 885 F.2d 1034, 1049 (2d Cir.), cert. denied, 493 U.S. 1070 (1990); OCC Interpretive Letter No. 388.

18 SIA v. Bd. of Governors of the FRB, 468 U.S. 137, 149 (1984) ("Bankers Trust I"); Bankers Trust II, 807 F.2d at 1057.

19 See Glidden Letter (January 14, 1988); Interpretive Letter No. 332 (March 8, 1985); see also Federal Reserve Board Sovran Letter (July 1, 1986).

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underwriter or dealer.20 The mutual funds (ie, investment companies) to which banks and operating subsidiaries provide advice and services may engage in these activities, but they are not "affiliates" of the bank under the meaning of that term in section 20.21 With respect to section 32, the OCC has not permitted interlocks between the bank and its operating subsidiaries and any entity engaged in "issue, flotation, underwriting, public sale, or distribution" of securities. The directors, officers, and employees of mutual funds and the independent distributor have not overlapped with those of the bank and the operating subsidiaries.

In addition, courts traditionally engage in an analysis based on the legislative history of the Glass-Steagall Act to determine whether the "subtle hazards" that the law was designed to prevent are posed by any proposed activity. These "subtle hazards," which include investor confusion and conflicts of interest, are controlled by the terms of the Investment Company Act, the Interagency Statement on Retail Sales of Nondeposit Investment Products, sections 23A and 23B of the Federal Reserve Act, safety and soundness requirements, and supervisory conditions imposed by the OCC.

Operating Subsidiaries. National banks have established operating subsidiaries for approximately 28 years under OCC regulations first issued in 1966. Operating subsidiaries enable banks to use a different organizational structure to conduct permissible activities. The operating subsidiary is subject to OCC examination and supervision and to the same banking laws and regulations as the parent bank, unless otherwise provided by statute or regulation.

The authority for national banks to establish operating subsidiaries is based on the National Bank Act. That Act allows banks to exercise certain enumerated powers and "all such incidental powers as shall be necessary to carry on the business of banking."22 The Act gives banks broad authority to engage in the business of banking and to exercise powers reasonably necessary to conduct that business.23

The incidental powers of national banks include, at a minimum, all powers that are "convenient and useful" to express powers.24 Many courts and the OCC believe that incidental powers are broader and include activities similar to traditional banking functions. As the Ninth

20 SIA v. Bd. of Governors of the FRB, 468 U.S. 207, 218 (1984) ("Schwab").

23 See OCC Letter No. 494 (December 20, 1989), reprinted in [1989-1990 Transfer Binder] Fed. Banking L. Rep. (CCH) ¶ 83,083.

24

See Arnold Tours, Inc. v. Camp, 472 F.2d 427, 432 (1st Cir. 1972).

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Circuit held in 1977, the incidental powers standard "must be construed so as to permit new ways of conducting the very old business of banking. "25

The establishment of operating subsidiaries that carry on the business of banking falls squarely within the incidental powers of banks under both the narrow and broader view. These subsidiaries are a "convenient and useful" means of conducting banking business.26 Because establishment of operating subsidiaries is part of the business of banking, it is not proscribed by 12 U.S.C. § 24(7) provisions prohibiting purchases of corporate stock.

Supervision of Bank Mutual Fund Activities

The OCC has for many years conducted fiduciary examinations of banks that act as investment advisor, transfer agent, or custodian for mutual funds through their trust departments. In addition, bank sales (as agent) of mutual funds are governed by a number of provisions, including 12 C.F.R. 12, which deals with such issues as recordkeeping and notification to customers of securities transactions. OCC examiners have reviewed these activities in conjunction with their examination of banks' investment securities activities. More recently, this aspect of supervision has become part of the OCC's Compliance Program.

While the OCC's experience in supervising the fiduciary and broker/dealer activities of national banks provided a valuable base from which to build, I came to the conclusion shortly after taking office as Comptroller that there was a need for more comprehensive policy guidance. In the past year, the OCC has devoted considerable resources to putting in place procedures for the systematic supervision and examination of the mutual fund activities of national banks. The other federal banking agencies have been grappling with the same issues, and we have coordinated our efforts in order to adopt consistent interagency guidelines.

The interagency statement, entitled Interagency Statement on Retail Sales of Nondeposit Investment Products, covers all aspects of a national bank's retail mutual fund sales operation, including sales by bank employees and sales by employees of third-party vendors on bank premises. It makes it clear that banks should view customers' interests as critical to all aspects of their sales programs, and that the federal banking regulators will take appropriate actions to address unsafe and unsound banking practices and violations of law and regulations associated with bank-related sales of mutual funds and other retail nondeposit investment products. Those actions could include civil money penalties, cease and desist orders, and payments of restitution to bank customers.

25

M & M Leasing Corp. v. Seattle First National Bank, 563 F.2d 1377, 1382 (9th Cir. 1977), cert. denied, 436 U.S. 956 (1978).

26

See 12 C.F.R. § 5.34, and see also 12 C.F.R. § 7.10(c)(2) (repealed).

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