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FEDERAL R E SER V E BANK OF DALLAS
Station K, Dallas, Texas 7 5 2 2 2
C i r c u l a r No. 84-126
December 27, 1984
TO:
All member banks, bank holding companies and others
concerned in the Eleventh Federal Reserve D i s t r i c t
ATTENTION:
Chief Executive Of fic er
SUBJECT:
Board's press release concerning possible violation of
the Glass-Steagall Act by Bankers Trust Company
SUMMARY:
The Board of Governors of the Federal Reserve System
has r e c e n t l y advised Bankers Trust Company t h a t i t has
s u b s t a n t i a l reason to bel ieve t h a t the bank's method
of placing t h i r d par ty commercial paper v i o l a t e s the
Glas s-Ste aga ll Act.
Bankers Trust Company has been
requested to respond to the a l l e g a t i o n s within 45
days. I n t e r e s t e d p a r t i e s will be given an opportunity
to comment on Bankers Trust Company's response fo r 45
days t h e r e a f t e r .
ATTACHMENTS:
Board's press r e l e a s e , including a copy of the Board's
l e t t e r to Bankers Trust Company
MORE INFORMATION:
Legal Department, Extension 6171
ADDITIONAL COPIES:
Public A f f a i r s Department, Extension 6289
Banks and others are encouraged to use the following incoming WATS numbers in contacting this Bank: 1-800-442-7140
(intrastate) and 1-800-527-9200 (interstate). For calls placed locally, please use 651 plus the extension referred to above.
This publication was digitized and made available by the Federal Reserve Bank of Dallas' Historical Library (FedHistory@dal.frb.org)
FEDERAL RESERVE press release
immediate r e l e a s e
December 4, 1984
The Federal Reserve Board today advised Banker's Trust Company, in
t h e attac hed l e t t e r , t h a t i t has s u b s t a n t i a l reason t o beli eve t h a t the
method of placin g t h i r d par ty commercial paper used by the bank c o n s t i t u t e s
" s e l l i n g " and "underwriting" of commercial paper in v i o l a t i o n of the
G l a s s - S te a g a l1 Act.
The Board acted in response t o a court a ct io n d i r e c t i n g t h e Board
t o resolv e th e is s u e — whether Banker's T r u s t ' s method of placing commercial
paper with t h i r d p a r t i e s v i o l a t e s c e r t a i n pr ovisions of th e Gla ss-Steagall
Act — l e f t undecided by a recent decision of the Supreme Court.
The Board's l e t t e r asked Banker's Trust t o provide information
concerning i t s methods of placing commercial paper with t h i r d p a r t i e s .
The Board e s t a b l i s h e d th e following schedule f o r f i n a l r e s o l u t i o n of
t h e is s u e :
—Banker's Trust should within 45 days of th e date of th e Board's
l e t t e r provide the Board with a d e s c r i p t i o n of i t s c u r r e n t , or
planned, commercial placement a c t i v i t i e s and legal arguments
j u s t i f y i n g them.
—The Board will accept comment from i n t e r e s t e d p a r t i e s on the
response by Banker's Trust f o r 45 days t h e r e a f t e r .
—Within 30 days following th e end of t h e comment per io d, the
Board's s t a f f will present the matter t o th e Board fo r f i n a l
deci si on.
Attachment
BOARD DF G O VER NO RS
OF THE
FEDERAL RESERVE SYSTEM
W A S H IN G T O N ,
D.
C.
20551
^
ADDRESS
OrriCIAL
TO
THE
CO R RC SPO N D tN C C
BOARD
December 3, 1984
James Baechle, Esq.
Executive Vice President
and General Counsel
Bankers Trust Company
280 Park Avenue
New York, New York
10015
Re:
A.G. Becker, Inc. v. Board of Governors,
No. 80-2614; Securities Industry Association
v. Board of Governors, No. 80-2730 (D.D.C.)
Dear Mr. Baechle:
This letter is in reference to the order, dated
October 19, 1984, of the United States District Court for the
District of Columbia remanding the above-captioned cases to the
Board for resolution of the issue not decided by the opinion of
the Supreme Court in these cases.
The Supreme Court overturned
the Board's September 1980 ruling that the third party
commercial paper being placed by Bankers Trust Company is not a
"security" for purposes of the Glass-Steagall Act, but
expressed no opinion on whether the methods employed by Bankers
Trust to place the commercial paper constitute "issuing,"
"underwriting," "selling," or "distributing" within the meaning
of the Act, leaving this issue to be decided on remand.
Securities Industry Association v. Board of Governors, No.
82-1766, Slip op. at 22 n.12.
In order to comply with the court's remand order, the
record related to the Board's September 1980 ruling has been
carefully reviewed.
Although this ruling expressed no opinion
on whether Bankers Trust's method of placing commercial paper
constitutes "underwriting," this question was examined by the
staff and was addressed by the parties when the matter was
pending before the Board.
The Board made no detailed findings
on the nature of Bankers Trust's placement methods, but the
record indicates that the bank's placement activities operate
essentially as follows.
James Baechle, Esq.
-2-
The bank provides financial advice to issuers of
commercial paper and 6olicit6 purchasers for the commercial
paper of these issuers, usually from among the bank's
established list of institutional customers that regularly
purchase other short-term money market instruments.
The bank
does not purchase the commercial paper from the issuer and
resell it, but solicits purchasers as the agent of the issuer.
On some occasions, Bankers Trust extends short-term credit
(without any prior commitment) at or near the commercial paper
rate of interest to the issuers of commercial paper being
placed by the bank in an amount equivalent to part of the
unsold portion of the issue sought to be placed and takes back
commercial paper notes.
The commercial paper representing
these transactions may then be resold.
Based on this general description of Bankers Trust's
activities as conducted in 1980, the Board has substantial
reason to believe that the marketing activity described above
constitutes the "selling" and "underwriting" of commercial
paper securities within the meaning of the Glass-Steagall Act.
Because this tentative conclusion is premised on a relatively
general description of Bankers Trust's activities as conducted
in 1980, the Board believes that Bankers Trust should be
provided an opportunity to provide additional or more detailed
information concerning its current commercial paper placement
activities.
The Board also believes that it is appropriate to
afford
Bankers
Trust
and
the
securities
industry
representatives that petitioned the Board to halt Bankers
T r u s t ’s activities an opportunity to provide the Board with
additional or supplemental legal arguments.
As the Supreme Court's opinion in these cases makes
clear, the permissible scope of Bankers Trust's activities with
respect to securities is governed by sections 16 and 21 of the
Act.
Section 16 (12 U.S.C. § 24 Seventh), in relevant part,
provides that the business of dealing in securities by a
national bank shall be limited to purchasing and selling
securities "solely upon the order, and for the account of
customers, and in no case for its own account."
Section 16
further provides that a national bank "shall not underwrite any
issue" of securities.
State member banks are subject to the
limitations of section 16 with respect to dealing in
securities.
12 U.S.C. § 335.
Section 21 (12 U.S.C. § 378)
prohibits any organization engaged in the business of receiving
deposits from engaging at the same time in the business of
"issuing, underwriting, selling, or distributing" securities.
James Baechle, Esq.
-3-
For purposes of the Glass-Steagall Act, the term
"underwriter" has been interpreted as referring to a person who
purchases securities from an issuer for the purpose of selling
them to third parties or who agrees to use his }?est efforts to
achieve a sale of the issue to third parties
The
definition of "underwriter" for purposes of the federal
securities laws has been limited to persons who are involved in
a "distribution," i.e., a public offering, of securities.2/
The Board staff's Private Placement Study concluded that bank
private placement services, which involve a negotiated
placement of securities with a limited number of sophisticated
investors, do not constitute "underwriting" or "distributing"
securities, provided that the bank does not offer the
securities to the public and does not use bank funds to
purchase the securities to be placed from the issuer.
With respect to the "selling" of securities for
purposes of section 21 of the Act, the term has been
interpreted as encompassing a bank's activities as a principal,
such as selling securities owned by the bank or for the bank's
own account.!/
Similarly, section 16 authorizes a bank to
engage in the business of "selling" securities on the order of
and for the account of customers, but not for the bank's own
account.
Applying these principles to the general description
of Bankers Trust's commercial paper placement activities as
conducted in 1980, the Board believes that such activities
appear to constitute the "selling" of securities prohibited by
the Act.
Tne fact that the bank from time to time extends
short-term credit to issuers of commercial paper to cover any
1/ E ^ ,
1 L. Loss, Securities Regulation 159-72 (2d ed.
1961); Securities Act of 1933, § 2(11), 15 U.S.C. § 77b(ll);
Dale v. Rosenfeld, 229 F.2d 855 (2d Cir. 1956); Federal Reserve
Board Staff, Commercial Bank Private Placement Activities 87-89
(June 1977) [hereinafter cited as Private Placement Study].
2/ 1 L. Loss, supra, at 547,
88-91; see 15 U.S.C. § 77d(2).
654;
Private Placement
Study
3/ 20 Fed. Res. Bull. 393; Private Placement Study 91-2; see
also Securities Industry Ass'n v. Board of Governors(Schwab),
104 S. Ct. 3003, 3010 (1984) ("public sale" as used in section
20 of the Glass-Steagall Act should be read to refer to
securities activities in which a bank affiliate "normally acts
as principal").
James Baechle, Esq.
-4-
unsold portion of the issue at or near the rate of interest of
the commercial paper, takes back a commercial paper note, and
then sells that commercial paper appears, in the Board's view,
to be the economic equivalent of the bank's buying some of the
unsold issue with its own funds with a view to subsequent
resale, a method of marketing that would be deemed to
constitute "selling" for purposes of the Act.
Althougn the
bank's extensions of credit to commercial paper issuers have
been described as loans and not the outright purchase of
commercial paper, the fact that these loans bear interest at or
near the commercial paper rate and that the amount of credit
extended is linked to the amount of commercial paper the bank
is unable to place indicate that in effect the bank is
purchasing a portion of the commercial paper issue the bank has
agreed to place, not a note representing a loan independent of
the bank's placement activity.
To the extent that the bank's funds are committed to
support its placement activity, the bank is acting as principal
and for its own account in its commercial paper activities, and
the exception in section 16 for sales of securities as *v '
agent for, and on the account of, customers does not appe^«i to
apply.
Moreover, because the bank is in effect purchasing
commercial paper from the issuer for resale, the bank's
activity supports the conclusion that it is engaged in
"underwriting" in the ordinary, conventional sense of that term.
The Board expresses no opinion at this time with
respect to whether Bankers Trust's activities are exempt from
the Act's prohibitions against underwriting because no public
offering is involved.
However, even absent any use of bank
funds to meet funding shortages occasioned by unsold commercial
paper, there is a question as to whether Bankers Trust's
commercial paper activities may be viewed as falling within the
private placement exemption from the Glass-Steagall Act
recognized in the Private Placement Study.
Bankers Trust is
requested to provide information with respect to whether its
method of placing commercial paper would comply with Regulation
D of the Securities and Exchange Commission (17 C.F.R.
§§ 230.501-506) and a discussion on the relevance of the
requirements of Regulation D for purposes of the Glass-Steagall
Act.
The Board recognizes that Bankers Trust may have
modified its commercial paper operations since 1980.
In
addition, because the Board's inquiry in connection with its
1980 ruling to a large extent focused on the status of
commercial paper as a security and its resemblance to
traditional banking functions, it is possible that the record
does not contain all of the relevant facts necessary to resolve
whether the bank's method of placing commercial paper
constitutes "underwriting," "distributing," or "selling" for
purposes of the Act. Accordingly, the Board btxieves that
James Baechle, Esq.
-5-
Bankers Trust should be permitted an opportunity to provide the
Board with a comprehensive description of its current or
proposed commercial paper placement activities.
The Board's
conclusions expressed in this letter will be reviewed in light
of any relevant additional facts submitted.
In addition, the Board notes that the Supreme Court's
opinion on commercial paper, although expressing no conclusion
on the "underwriting" issue, noted that Bankers Trust's placing
of commercial paper may give rise to some of the concerns that
prompted the passage of the Act.
(Slip op. at 17-18).
For
example, the Supreme Court found that commercial paper
activities might impair the bank's ability to serve as an
impartial source of credit, since the bank might be under
pressure to extend back-up lines of credit to the issuer to
enhance the creditworthiness of a particular commercial paper
issue.
(Slip op. at 17). The Court also stated that a bank
might be tempted to purchase unsold notes in order to
demonstrate the reliability of its distribution system, even if
the paper does not meet the bank's usual credit standards.
(I_d.).
The Court also identified the possiole danger that
confidence in a ban* could
be
jeopardized in the event ofa
default if the bank sold commercial paper to large bank
depositors.
(Id_.) . Finally, the Court's opinion finds an
especially acute conflict of interest if the bank were to sell
commercial paper the proceeds of which will be used to retire a
debt owed by the issuer to the bank.
(Slip op. at 18).
The
Board requests Bankers Trust to address these concerns of the
Supreme Court.
Any description by Bankers Trust of its current
commercial paper activities or of any proposed modifications in
its current activities should at a minimum address all of the
aspects of the bank's activity examined by the Board's staff
during the initial consideration of this matter.
However,
particular aspects of the bang's activity may be described in
general
terms,
and individual
transactions,
particular
customers, the amount of revenue derived from the activity, and
other information generally regarded as confidential business
data need not be provided.
If deemed appropriate, earlier
submissions by Bankers Trust may be incorporated by reference.
In remanding this case to the Board, the district
court confirmed the need for an expeditious resolution of the
matters left undecided by the Supreme Court's opinion.
Accordingly, Bankers Trust should provide to the Secretary of
the Board any description of its current commercial paper
placement activities and accompanying legal justification
within 45 days from the date of this letter.
The Board will
consider written comments on Bankers Trust's response submitted
by the interested parties within 45 days thereafter.
Within 30
days after the deadline for submission of comments, the staff
James Baechle, Esq
-6-
will present the matter to the Board for a final decision,
which in the ordinary course of business should be forthcoming
shortly thereafter.
The Board expects that Bankers Trust will
conform its commercial paper placement activities to the final
decision of the Board in this matter.
William W. Wiles
Secretary of the Board
cc:
John B. Liftin, Esq.
Harvey L. Pitt, Esq.
@FedFRASER