Banks' Securities Activities:

Oversight Differs Depending on Activity and Regulator

GGD-95-214: Published: Sep 21, 1995. Publicly Released: Sep 26, 1995.

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Pursuant to a congressional request, GAO reviewed federal bank regulators' oversight of banks' securities activities, focusing on the: (1) extent to which banks provide securities brokerage services; (2) how those services are regulated; (3) results of Federal Reserve inspections of bank holding company subsidiaries authorized to underwrite and deal in securities; and (4) Federal Deposit Insurance Corporation's (FDIC) regulation of bank subsidiaries that can underwrite and deal in securities.

GAO found that: (1) about 22 percent of U.S. banks offered securities brokerage services to their customers in 1994; (2) the Securities and Exchange Commission (SEC) and the National Association of Securities Dealers (NASD) regulated the securities activities of 88 percent of these 2,400 banks by providing these services through broker dealers, while 287 banks provided bank-direct brokerage services; (3) federal bank regulators did not always review bank-direct brokerage operations routinely, but the regulators jointly issued new guidance and examination procedures in 1994 that emphasized these reviews; (4) securities activities can be overseen by different regulators depending on how the banks organize their securities activities, creating the potential for inconsistent oversight; (5) although Federal Reserve examiners usually met their inspection schedules, addressed inspection procedures, and tested securities subsidiaries for compliance with applicable firewalls, there were a few cases of insufficient documentation; and (6) FDIC had no centralized program to oversee the activities of the bona fide securities subsidiaries and had not fully prepared its examiners to examine securities activities, posing risks to affiliated banks.

Status Legend:

More Info
  • Review Pending-GAO has not yet assessed implementation status.
  • Open-Actions to satisfy the intent of the recommendation have not been taken or are being planned, or actions that partially satisfy the intent of the recommendation have been taken.
  • Closed-implemented-Actions that satisfy the intent of the recommendation have been taken.
  • Closed-not implemented-While the intent of the recommendation has not been satisfied, time or circumstances have rendered the recommendation invalid.
    • Review Pending
    • Open
    • Closed - implemented
    • Closed - not implemented

    Recommendations for Executive Action

    Recommendation: The Chairman of the Board of Governors of the Federal Reserve System should ensure that either Federal Reserve examiners or internal auditors review and test all applicable firewalls at least once annually and document in inspection workpapers the work performed by Federal Reserve examiners or bank holding company internal auditors. Federal Reserve workpapers should document Federal Reserve examiners' testing of the work of internal auditors as a basis for reliance on internal audit.

    Agency Affected: United States Securities and Exchange Commission

    Status: Closed - Implemented

    Comments: A program was established.

    Recommendation: The heads of the Federal Reserve, FDIC, the Office of the Comptroller of the Currency, SEC, and NASD should require their respective staffs to work together to develop and implement an approach for regulating bank-direct securities activities that provides consistent and effective standards for investor protection while ensuring bank safety and soundness.

    Agency Affected: Department of the Treasury: Office of the Comptroller of the Currency

    Status: Closed - Not Implemented

    Comments: Banking and securities regulators are still working on a proposed agreement under which bank employees would take NASD and NYSE qualification examinations and would be listed in CRD. An agreement has been worked out among the regulators and a proposed rule has been drafted and public comments obtained. Regulators, however, have decided not to act any further to approve the rule pending the outcome of H.R. 10, which would mandate broader financial system modernization.

    Recommendation: The heads of the Federal Reserve, FDIC, the Office of the Comptroller of the Currency, SEC, and NASD should require their respective staffs to work together to develop and implement an approach for regulating bank-direct securities activities that provides consistent and effective standards for investor protection while ensuring bank safety and soundness.

    Agency Affected: United States Securities and Exchange Commission

    Status: Closed - Not Implemented

    Comments: Banking and securities regulators are still working on a proposed agreement under which bank employees would take NASD and NYSE qualification examinations and would be listed in CRD. An agreement has been worked out among the regulators and a proposed rule has been drafted and public comments obtained. Regulators, however, have decided not to act any further to approve the rule pending the outcome of H.R. 10, which would mandate broader financial system modernization.

    Recommendation: The heads of the Federal Reserve, FDIC, the Office of the Comptroller of the Currency, SEC, and NASD should require their respective staffs to work together to develop and implement an approach for regulating bank-direct securities activities that provides consistent and effective standards for investor protection while ensuring bank safety and soundness.

    Agency Affected: Federal Deposit Insurance Corporation

    Status: Closed - Not Implemented

    Comments: Banking and securities regulators are still working on a proposed agreement under which bank employees would take NASD and NYSE qualification examinations and would be listed in CRD. An agreement has been worked out among the regulators and a proposed rule has been drafted and public comments obtained. Regulators, however, have decided not to act any further to approve the rule pending the outcome of H.R. 10, which would mandate broader financial system modernization.

    Recommendation: The heads of the Federal Reserve, FDIC, the Office of the Comptroller of the Currency, SEC, and NASD should require their respective staffs to work together to develop and implement an approach for regulating bank-direct securities activities that provides consistent and effective standards for investor protection while ensuring bank safety and soundness.

    Agency Affected: Federal Reserve System

    Status: Closed - Not Implemented

    Comments: Banking and securities regulators are still working on a proposed agreement under which bank employees would take NASD and NYSE qualification examinations and would be listed in CRD. An agreement has been worked out among the regulators and a proposed rule has been drafted and public comments obtained. Regulators, however, have decided not to act any further to approve the rule pending the outcome of H.R. 10, which would mandate broader financial system modernization.

    Recommendation: The heads of the Federal Reserve, FDIC, the Office of the Comptroller of the Currency, SEC, and NASD should require their respective staffs to work together to develop and implement an approach for regulating bank-direct securities activities that provides consistent and effective standards for investor protection while ensuring bank safety and soundness.

    Agency Affected: Department of the Treasury: Office of the Comptroller of the Currency

    Status: Closed - Not Implemented

    Comments: Banking and securities regulators are still working on a proposed agreement under which bank employees would take NASD and NYSE qualification examinations and would be listed in the Central Registration Depository (CRD). An agreement has been worked out among the regulators and a proposed rule has been drafted and public comments obtained. Regulators, however, have decided not to act any further to approve the rule pending the outcome of H.R. 10, which would mandate broader financial system modernization.

    Recommendation: The Chairman, FDIC, should establish a program to identify and routinely review the securities activities and the financial condition and performance of bona fide subsidiaries under FDIC jurisdiction to assess the overall risks posed by the activities on federally insured banks and ensure compliance with firewalls. The program should provide FDIC examiners guidance and training on how to examine bank and bank subsidiary securities activities.

    Agency Affected: National Association of Securities Dealers

    Status: Closed - Implemented

    Comments: A program was established.

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