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GAO says bank securities activities need more oversight.

Bank regulators need to improve their oversight of bank-direct brokerage operations, according to a report issued by the General Accounting Office. The report, Banks' Securities Activities, Oversight Differs Depending on Activity and Regulator, also said Federal Reserve examiners and bank internal auditors did not sufficiently review or test all applicable firewall procedures that helped insulate banks from credit relationships and intercompany transactions that posed risks to bank safety and soundness.

The report said about 2,400 banks--22% of nearly 11,100 banks nationwide--offered retail securities brokerage services. Almost 12% of these banks--287--provided direct brokerage services. GAO's review of regulatory examinations of 40 of these banks, completed during 1992 through mid-1994, showed that bank regulators had not reviewed the brokerage operations of 29 of the sampled banks, according to the report. The Glass-Steagall Act of 1933 does not prohibit subsidiaries of state-chartered banks from engaging in securities activities if they are not members of the Federal Reserve System. It also does not restrict bank securities brokerage activities, which may take place either within a bank or an affiliate.

The report said that although some steps had been taken to improve oversight and to coordinate examinations of most bank brokerage activities, little had been done to address bank-direct brokerage operations because they were not subject to Securities and Exchange Commission and National Association of Securities Dealers regulation. The report said guidance and proposed regulations were not consistent and not all regulatory procedures used by securities regulators were available to bank regulators. "The lack of consistent regulatory standards for bank-related and nonbank-related brokerages could result in confused investors, ambiguous sales practice standards and inconsistent oversight of sales representatives," said the report.

The Federal Reserve and the FDIC

The GAO said it was the Federal Reserve's policy to inspect the firewall procedures of underwriting subsidiaries. In two instances, the GAO found that Federal Reserve examiners and bank holding companies' internal auditors did not review either the firewalls that restricted credit extensions to the underwriting subsidiary and its clients and customers or the firewalls that prohibited intercompany transactions and transfers of assets between the subsidiary and affiliated insured banks. The report also said Federal Reserve inspections did not always document the extent of their tests and that although the Federal Reserve had imposed few sanctions for firewall noncompliance, it had acted to correct identified compliance-related deficiencies.

Unlike the Federal Reserve, the Federal Deposit Insurance Corporation has no centralized system to oversee the securities activities of bank subsidiaries, according to the GAO report. "Such a system could help FDIC to identify banks that own operating subsidiaries and assess the subsidiaries' financial condition, compliance with firewall restrictions and the overall risks the subsidiaries might pose to the insured banks and the Bank Insurance Fund," said the report. The report recommended that the FDIC establish a system that would provide its examiners guidance and training on how to examine bank and bank subsidiary securities activities.

One free copy of the report (GGD-95-214) can be obtained from the GAO by calling (202) 512-6000 or by faxing (301) 258-4066. To find out how to access GAO reports on the Internet, send an e-mail message with "info" in the body to:
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Title Annotation:General Accounting Office
Publication:Journal of Accountancy
Date:Jan 1, 1996
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