Opinion ID: 287861
Heading Depth: 2
Heading Rank: 4

Heading: Allocation of brokerage to existing or potential Bank customers

Text: 60 Former Chairman Cary observed that banks often distribute brokerage to those brokers with whom the Bank has or seeks reciprocal dealings, and that this may be contrary to the best interests of the Account's investors. This is one breed of the 'bird-dog' problem presented when bankers direct investment business toward companies whose banking business they desire in return. Such a practice would, of course, depart from the brokerage policy set forth in the prospectus. The Bank's stated objective in placing orders is to obtain the most favorable prices and execution of orders and, secondarily, to deal with brokers and dealers who provide the Bank as investment adviser with supplementary research and statistical information or market quotations. 61 Reliance on the Bank's representations is not wholly satisfying. Allocation of brokerage for the Bank's benefit is a subtler form of self-dealing than questionable purchases of securities or maintenance of an undue cash balance, and one less amenable to control through disclosure and supervision by the agencies. Nonetheless, brokerage may be improperly distributed in the course of banks' already extensive securities purchases for the account of customers, and it is appropriate to point out that Congress apparently did not consider this threat to be of critical significance when it exempted common trust funds from the Act entirely. See 15 U.S.C. 80a-3(c)(3). 62 The Commission's orders do not rest upon a sanguine assumption that there are no conflicts of interest incident to bank-sponsored investment funds, but rather proceed from a showing that the dangers are significantly different from those involved in other types of bank-investment company affiliations. Because the Bank earns only a regulated fiduciary charge tied to the amount of the Account's assets, the Bank-affiliated directors' interest in attracting more customers coincides with the interests of investors and to some degree counter-acts the incentive to hold the fund's assets in the form of commercial deposits. The restrictions upon Bank underwriting and Bank transactions with the Account make it unlikely that the Bank can profit by using the fund to unload or backstop its bad or indifferent investments, a major function of the bank-dominated securities affiliates of the twenties. To the extent that such hazards as improper brokerage allocation remain, the Commission could reasonably have concluded that two independent directors would perform adequately as watchdogs, with the enforcement powers of the Comptroller adding extra teeth. 63 Finally, the NASD claims that the Commission made an expedient bargain in granting the exemptions in order to head off legislation to exempt bank-sponsored funds from the securities laws. It is true that the Commission's assertion of jurisdiction over such funds generated legislative proposals, along with some friction between agencies of the Executive; 18 but I view the decision differently. Taking due account of the reduced potential for conflicts of interest in bank-sponsored funds and the near-complete coverage of the securities laws, the Commission determined that the supervision of the Comptroller would compensate for the absence of an independent tie-breaker on the Committee of the Account. This was a fair trade. IV