Our objectives were to assess the extent to which banks provide securities brokerage services and how these services are regulated; the Federal Reserve’s supervision of bank holding company subsidiaries that the agency authorizes to underwrite and deal in securities, including the completeness and results of its inspections; and
FDIC’s regulation of bona fide subsidiaries that underwrite and deal in securities. 2). In the past, bank regulators did not always review the bank-direct brokerage operations as part of bank examinations, but they issued new guidance and examination procedures in 1994 that have increased emphasis on such reviews. Most Bank Brokerage Services Were Provided Through Subsidiaries and Third-Party Arrangements

As table 2.1 shows, 12 percent of the banks that offered securities brokerage services (287 banks, or about 3 percent of banks nationwide) provided only bank-direct brokerage services. However, as of September 1994, FDIC had no formal examiner training program that focused on oversight of securities activities of state nonmember banks and their subsidiaries. Under the current regulatory structure the same type of securities activities can be overseen by different regulators depending on how banks organize their securities activities. Nevertheless, securities activities can pose risks to banking organizations, just as they can to securities firms. Federal Reserve examiners or bank holding company internal auditors usually reviewed and tested for compliance with all applicable firewalls. However, the agency has not fully prepared its examiners to examine these activities and does not have other procedures for monitoring the subsidiaries’ activities. 3(a). 4. 5(a). Bona fide subsidiaries are required to register with the Securities and Exchange Commission as broker-dealers and be members in good standing of the National Association of Securities Dealers. GAO Comment

1. 6. 2. 4. Address Correction Requested
Why GAO Did This Study

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.

What GAO Found

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.