| August 18, 2003 |
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Thomas A. Plant, Esq. You have indicated that the Banks often make loans that are collateralized by marketable securities, and that these securities are generally held in accounts at broker-dealers unaffiliated with National City, subject to collateral agreements. National City requests that the Banks be granted an exception from section 106 to allow them to require borrowers to keep securities pledged as collateral for a loan from the Banks in an account at NCI to give National City more control over the collateral (e.g., to prevent it from being sold or exchanged for different securities) and to allow National City to monitor the value of the collateral more closely than is possible when the securities are held at an unaffiliated institution. Section 106 currently allows the Banks to require borrowers to place securities pledged as collateral in trust accounts at the Banks. Banks may require collateral as an integral part of an extension of credit. In addition, a specific exception in section 106 allows banks to condition the availability of any product, including credit, on the customer obtaining a trust service from the bank.2 You indicate, however, that National City prefers to use the systems for holding and monitoring securities in brokerage accounts at NCI for reasons based on cost, efficiency, and improved monitoring. You contend that the Banks will receive more cooperation when inquiring about the status of securities pledged as collateral from NCI than they now receive from unaffiliated broker-dealers, who have little incentive to help the Banks protect their collateral. Section 106 prohibits a bank from extending or varying the consideration for credit or any other product or service on the condition that the customer obtain a nonbanking product or service from the bank, the bank holding company parent of the bank, or any other subsidiary of the bank holding company.3 Although section 106 does not generally prevent a bank from requiring that a borrower provide collateral to secure a loan to the bank or one of its affiliates,4 section 106 may prevent a bank from conditioning a loan on the requirement that the borrower obtain a brokerage account at an affiliate and place pledged collateral in that account at the affiliate. Section 106 authorizes the Board to grant exceptions to the prohibition if the exception is not contrary to the purposes of this section.5 National City requests an exception to permit the proposed collateral arrangement under certain circumstances detailed in your correspondence. First, the Banks would only require the customer to use an NCI account for the purpose of holding securities that collateralize a loan from the Banks; there would be no requirement to establish or maintain an account at NCI to hold securities that would not secure a loan from one of the Banks. Second, no securities other than those pledged as collateral for a loan from the Banks could be held in these accounts.6 Third, securities held in these accounts could not be traded by the customer without the prior approval of National City's credit department for each trade. National City will not give customers permission to trade generally through these accounts. These restrictions are intended both to protect the Banks' interest in and the value of the collateral and to ensure that the Banks do not require customers to establish brokerage accounts for a purpose other than protecting Bank collateral. The central purpose of section 106 is to prevent banks from using their market power in banking products, including credit, to gain an unfair competitive advantage in markets for nonbanking products and services. However, Congress was aware that to conduct banking in a safe and sound manner, banks customarily impose requirements on borrowers to protect collateral pledged as security for loans. National City proposes to require the use of NCI accounts solely for the purpose of securing and monitoring collateral for loans that its Banks extend to the account holder. As noted, section 106 permits this practice when the securities brokerage accounts are maintained as trust accounts in the Banks or their affiliates or the securities are otherwise provided to and held by the Banks. Thus, the proposal would not appear to give NCI any competitive advantage over other broker-dealers in obtaining general securities brokerage business from customers. Stated another way, with the restrictions described above and in your correspondence, the accounts at NCI would be the functional equivalent of bank trust accounts in which the Banks currently may require borrowers to place securities used to collateralize loans. The Board continues to evaluate whether National City's proposed program is prohibited by section 106. Whether or not the program is prohibited by section 106, however, under the circumstances described above and in your correspondence, the Board believes that granting an exception for the program would not be contrary to the purposes of section 106. The limitations on when an NCI account will be required and how the account will be used help ensure that NCI accounts will only be used to preserve customers' collateral pledged for loans and will not be used to gain a competitive advantage over NCI's competitors, particularly because a customer's ability to trade in the account will be severely restricted. Accordingly, on this basis and in view of the facts outlined in this letter, the Board grants an exception to the restrictions of section 106 for National City's proposed program, subject to the restrictions on the relevant accounts at NCI described in this letter and in your correspondence, and subject also to a potential determination by the Board that the proposed requirement is not in fact subject to section 106. This exception is based on the facts and representations you have provided, and any material change in these facts or representations could result in a different conclusion and should be reported to Board staff. Sincerely, (signed) Robert deV. Frierson Robert deV. Frierson
Footnotes 1. 12 U.S.C. � 1972. Return to text 2. 12 U.S.C. � 1972(1)(A). Return to text 3. 12 U.S.C. � 1972(1)(A) & (B). Return to text 4. 12 U.S.C. � 1972(1)(C); 12 C.F.R. 225.7(b)(1)(ii). Return to text 5. 12 U.S.C. � 1972(1). Return to text 6. You have represented that the accounts would be cash accounts for purposes of the Board's Regulation T (12 C.F.R. Part 220), but would be processed using NCI's margin account systems to monitor the value of the securities in the account. You have also stated that all loans by the Banks will comply with the Board's Regulation U (12 C.F.R. Part 221). Return to text
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