04-3
04-3
December 27, 2004
VIA FACSIMILE AND
FIRST CLASS MAIL
Re: Broker/Dealer Activities of a Licensed Securities Firm
Dear Mr. ________:
This responds to your letter of November 29, 2004. You have asked the Department of Financial Institutions (the “Department”) whether a securities broker dealer conducting certain services described below violates any provision of the Banking Law (Division 1 (commencing with Section 99) of the Financial Code). As stated in your letter, your client:
“. . . is a New York based securities firm licensed by the NASD and a member of the New York Stock Exchange. Broker/Dealer [the pseudonym for your client] has brokerage offices throughout the United States including California, and, directly or through affiliates, has extensive international operations as well. . . .
“In a number of Broker/Dealer offices located in California, specially designated brokers of Broker/Dealer (“SDBs”) provide private client investment management/brokerage services to foreign non-resident clients (“NRCs”), most of whom are resident in Asia. Relationships with NRCs are initiated by contacts made outside California by representatives of Broker/Dealer abroad or by SDBs on trips abroad. To open an account with Broker/Dealer and be serviced by an SDB under the Program, a NRC is required to have a minimum initial $500,000 brokerage account balance. These NRC accounts are not solicited through general advertising or media placement in the United States generally, or in California specifically.
“The SDBs provide a full gamut of Broker/Dealer products and services to NRCs, including securities brokerage and money market funds. In addition, NRCs may access, through interaction with the SDB, loan and deposit services of Broker/Dealer’s affiliated bank headquartered in London. . . . Bank is an English licensed Bank, supervised and examined by the U.K. Financial Services Authority. Bank has a representative office license from the New York State Banking Department, which is Bank’s primary United States regulator. However, the Bank does not presently maintain a representative office in New York and has no offices elsewhere in the United States.
“Bank provides a range of banking products and services customary for an English-licensed bank, including dollar and multicurrency deposits, loans and letters of credit. Bank has developed a software system (“System”) to enable SDBs to access, on behalf of its clients, Bank’s products and services on line. . . .
“When an NRC is solicited for a brokerage account, the availability of services from the Bank is presented as one of an array of financial services available through the brokerage account. Further, an NRC may access Bank services only if the NRC maintains a brokerage account with Broker/Dealer.
“NRCs execute account agreements with Broker/Dealer when they open their brokerage accounts (“Account Agreements”). Through the Account Agreements, NRCs authorize SDBs to open accounts with any bank affiliated with Broker/Dealer, including Bank, and authorize Broker/Dealer to provide to Bank all information about the NRCs in Broker/Dealer’s database. All NRC accounts maintained with Broker/Dealer in the United States are subject to know-your-customer regulations and the USA Patriot Act, as applicable to Broker/Dealer.
“When an NRC first requests deposit services from Bank, the SDB transmits to Bank the information Bank requires for new customers. . . . Upon receipt of the NRC customer information, Bank independently reviews the information to confirm that it meets account opening requirements of the Bank, and Bank will request such additional information as it may require. Upon acceptance of an account from the NRC, Bank sends a letter directly to the NRC confirming the terms and conditions of the banking relationship.
“Deposits. As explained above, the SDBs offer NRCs a full gamut of products and services through the Program. The SDBs do not specifically solicit NRCs to invest in bank deposits but do advise NRCs about the availability of deposits with the Bank to meet specific investment needs. . . . The SDB, using the System can review and report on Bank deposit options for . . . “free cash”, and if the NRC wishes to deposit such funds with the Bank, the SDB can input the necessary deposit information on behalf of the NRC. On instructions of the NRC, the SDB can transfer funds directly from the NRCs brokerage account to a deposit account with Bank through the System. . . .
“SDBs may also offer as investment options to NRCs deposits of other, unaffiliated banks.
“Loans. A NRC may from time-to-time need additional funds for investment or other purposes. If an inquiry is made for such facilities, the SDB can review and report on available bank facilities and, if requested, assist the client in preparing a loan application to the Bank through the System. The application is then submitted by the SDB via the System to the Bank on the NRCs behalf. The SDB does not make any credit decision; rather, all credit decisions are made by the Bank in London after review of the application. . . . [Payment of interest and principle on the loan is made by the NRC directly to the Bank.
“The question is raised as to whether the availability of the Bank’s loan and deposit products to NRCs through the Program violates the prohibitions contained in Section 1750(a) prohibiting a foreign (other nation) bank from transacting business in California other than through a federal or state licensed agency or branch office (the “Section 1750 Prohibition”) or the prohibition on the “solicitation” of loans or deposits in California for purposes of the California Financial Code, including Sections 1728 and 3390.”
Upon reviewing the law and your arguments, we agree with your view that in light of purposes sought to be served by the California Financial Codes provisions prohibiting solicitation of loans or deposits in California, the availability of loan deposit products from the Bank through the Program does not violate any of the provisions of law discussed in your letter. This view is based, among other reasons, on the following characteristics of the Program:
· The relationship of the NRCs to the Broker/Dealer occurs outside of California.
· All of the core banking activities occur outside of California and may be attributed to the Bank’s office in London.
· There are no general advertisements, media placements or other public solicitation in California to attract customers for the Program.
· The primary program relationship is a general brokerage relationship, and the Bank’s loan and deposit products are offered only as a part of an integrated menu of full financial services offered by Broker/Dealer.
· Finally, the NRCs are not residents or citizens of California. As a general rule, the Banking Law is intended to protect the citizens of this state.
I trust this has been responsive to your request.
Very truly yours,
KENNETH SAYRE-PETERSON
Assistant General Counsel
KSP74:pjp
cc: Howard Gould
November 29, 2004
Kenneth Sayre-Peterson, Esq.
Assistant General Counsel
California Department of Financial Institutions
801 “‘K” Street Suite 2124
Sacramento, CA 95814
Dear Ken:
This letter is intended to summarize the conversations I have had with the Commissioner and you to confirm that the Department of Financial Institutions does not regard the program described below (the “Program”) as violating potentially applicable provisions of the California Financial Code.
Our client ________ (“Broker/Dealer”) is a New-York-based securities firm licensed by the NASD and a member of the New York Stock Exchange. Broker/Dealer has brokerage offices throughout the United States, including in California, and, directly or through affiliates, has extensive international operations as well. Broker/Dealer is a wholly owned subsidiary of ________, a publicly traded company.
In a number of Broker/Dealer offices located in California, specially designated brokers of Broker/Dealer (“SDBs”) provide private client investment management/brokerage services to foreign non-resident clients (“NRCs”), most of whom are resident in Asia. Relationships with NRCs are initiated by contacts made outside California by representatives of Broker/Dealer abroad or bv SDBs on trips abroad. To open an account with Broker/Dealer and be serviced by an SDB under the Program, a NRC is required to have a minimum initial $500,000 brokerage account balance. These NRC accounts are not solicited through general advertising or media placements in the United States generally, or in California specifically.
The SDBs provide the full gamut of Broker/Dealer products and services to NRCS, including securities brokerage and money market funds. In addition, NRCs mav access, through interaction with the SDB, loan and deposit services of Broker/Dealer’s affiliated bank headquartered in London, ________ (“Bank”). Bank is an English licensed Bank, supervised and examined by the U.K. Financial Services Authority. Bank has a representative office license from the New York State Banking Department, which is Bank’s primary United States regulator. However, the Bank does not presently maintain a representative office in New York and has no offices elsewhere in the United States.
Bank provides a range of banking products and services customary for an English-licensed bank, including dollar and multi-currency deposits, loans and letters of credit. Bank has developed a software system (“System”) to enable SDBs to access, on behalf of its clients, Bank’s products and services online. Svstem access already exists in Broker/Dealer’s brokerage offices in such states as New York, Florida and Texas where it has been determined that there are no regulatory restrictions on the use of the System by SDBS.
When an NRC is solicited for a brokerage account, the availability of services from the Bank is presented as one of an array of financial services available through the brokerage account. Further, an NRC may access Bank services onlv if the NRC maintains a brokerage account with Broker/Dealer.
NRCs execute account agreements with Broker/Dealer when they open their brokerage accounts (“Account Agreements”). Through the Account Agreements, NRCs authorize SDBs to open accounts with any bank affiliated with Broker/Dealer, including Bank, and authorize Broker/Dealer to provide to Bank all information about the NRCs in Broker/Dealer’s database. All NRC accounts maintained with Broker/Dealer in the United States are subject to know-your-customer regulations and the USA Patriot Act, as applicable to Broker/Dealer.
When an NRC first requests deposit services from Bank, the SDB transmits to Bank the formation Bank requires for new customers. This information generally is contained in Broker/Dealer’s information database about the NRC. Upon receipt of the NRC customer information, Bank independently reviews the information to confirm that it meets account opening requirements of the Bank, and Bank will request such additional information as it may require. Upon acceptance of an account from the NRC, Bank sends a letter directly to the NRC confirming the terms and conditions of the banking relationship.
Deposits. As explained above, the SDBs offer NRCs a full gamut of products and services throuch the Program. The SDBs do not specifically solicit NRCs to invest in Bank deposits but do advise NRCs about the availability of deposits with the Bank to meet specific investment needs. For example, an NRC may have proceeds from the sale of securities that it wishes to invest pending their further utilization. The SDB, using the System, can review and report on Bank deposit options for this “free cash,” and if the NRC wishes to deposit such funds with Bank, the SDB can input the necessary deposit information on behalf of the NRC. On the instruction of the NRC, the SDB can transfer funds directly from the NRCs brokerage account to a deposit account with Bank through the Svstem. Further the SDB may handle deposit renewals or liquidation of deposit accounts on behalf of the NRC.
SDBs may also offer as investment options to NRCs deposits of other, unaffiliated banks.
Loans. A NRC may from time to time need additional funds for investment or other purposes. If an inquiry is made for such facilities, the SDB can review and report on available Bank facilities and, if requested, assist the client in preparing a loan application to the Bank through the System. The application is then submitted by the SDB via the System to the Bank on the NRCs behalf. The SDB does not make anv credit decision; rather all credit decisions are made by the Bank in London after review of the application. Loans granted by Bank to clients are generally secured by the securities held in the brokerage account. If the loan is made, the SDB may monitor the status of the loan, report to the NRC interest rate options, payment dates, and collateral maintenance requirements, as administered through the System. However, payment of interest and principal on the loan is made by the NRC directly to the Bank.
The question is raised as to whether the availability of the Bank’s loan and deposit products to NRCs through the Program violates the prohibition contained in Section 1750(a) prohibiting a foreign (other nation) bank from transacting business in California other than through a federal or state-licensed agency or branch office (the “Section 1750 Prohibition”) or the prohibition on the “solicitation” of loans or deposits in California for purposes of the California Financial Code, including Sections 1728 and 3390.
We are of the view that, in light of the purposes sought to be served by the Section 1750 Prohibition and the California Financial Code provisions prohibiting solicitation, the availability of loan and deposit products from the Bank through the Program should not violate the Section 1750 Prohibition or constitute “solicitation” within the meaning of such provisions. Our view is based, among other reasons, on the following characteristics of the Program:
. The customers are not residents of California.
. NRCs are contacted by representatives of Broker/Dealer outside of California to become customers of Broker/Dealer.
. There are no general advertisements, media placements or other public solicitation in California to attract customers for the Program.
. Because of the high initial balance requirement for opening an account with Broker/Dealer, the Program is not made generally available to the public.
. The primary Program relationship is a general brokerage relationship, and the Bank’s loan and deposit products are offered only as part of an integrated menu of full financial services offered by Broker/Dealer. The availability of deposit and loan products from the Bank is ancillary to the primary financial services relationship.
. Bank loans and deposits can be accessed by NRCs only if they have a brokerage account with Broker/Dealer.
Based on the foregoing, we would kindly appreciate your acknowledgment that the Program does not violate the Section 1750 Prohibition or involve the “solicitation” of deposits or loans in California in violation of potentially applicable provisions of the Financial Code.
Sincerely,
cc: __________, Esq.