Securities Underwriting and Dealing Subsidiaries

About Securities Underwriting and Dealing Subsidiaries

Here is a brief description of the circumstances under which an institution may acquire a securities underwriting and dealing subsidiary.

Section 20 Subsidiaries

The Board may, on a case-by-case basis, grant prior approval to a bank holding company or a foreign bank to engage to a limited extent through a so-called section 20 subsidiary in underwriting and dealing in securities that a member bank may not underwrite or deal in directly (bank-ineligible securities).  Such a subsidiary is called a section 20 subsidiary in reference to a repealed section of the Glass-Steagall Act that limited affiliations between certain securities companies and member banks.  A section 20 subsidiary is subject to eight prudential limitations or operating standards designed to address certain safety and soundness concerns.  A section 20 subsidiary is also limited to deriving no more than 25 percent of its gross revenue from underwriting or dealing in bank-ineligible securities.  A section 20 subsidiary may be limited by the terms of its Board approval in the types of securities that it may underwrite or deal in.  No section 20 subsidiary may underwrite or deal in shares of an open-end investment company or mutual fund.

Section 4(k)(4)(E) Securities Subsidiaries

A bank holding company or a foreign bank that elects to become or be treated as a financial holding company pursuant to provisions of the Gramm-Leach-Bliley Act that amended section 4(k)(4)(E) of the Bank Holding Company Act, may engage in securities underwriting, dealing, or market-making activities. The financial holding company must notify the Board within thirty days after commencing these activities.  The Board has adopted an interim rule subjecting these activities to two of the section 20 operating standards.

Financial Subsidiaries of State Member Banks

A state member bank that qualifies to control a financial subsidiary under provisions of the Gramm-Leach-Bliley Act may engage through the subsidiary in securities underwriting, dealing, or market-making activities fifteen days after providing prior notice to the Board.