AABD Publications: Letter to the Honorable Richard Baker

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LETTER TO THE HONORABLE RICHARD BAKER

Dated: January 10, 2001

The Honorable Richard Baker
Chairman
Subcommittee on Capital Markets, Securities and Government Sponsored Enterprises
House Committee on Banking and Financial Services
Washington, D.C.20515

Dear Chairman Baker:

I am writing to seek your support for a change in the interim rule on merchant banking activities published at 65 Federal Register 16459 (March 28, 2000).

The American Association of Bank Directors("AABD") appreciates your raising many important issues regarding the merchant banking proposal with the Federal Reserve Board. We also urge you to oppose aprovision in the interim rule that may prevent most community bank organizations from offering merchant banking services.

In order to utilize the merchant banking powers under Section 4(k)(4)(H) of the Bank Holding Company Act, a financial holding company must have either a "securities affiliate" or an insurance affiliate with any investment advisor affiliate. The Gramm-Leach-Bliley Act does not define "securities affiliate." Section 225.170(f)(1) of the interim rule defines "securities affiliate" as a company that is registered with the Securities and Exchange Commission ("SEC") as a broker or dealer under the Securities Exchange Act of 1934. In the prefatory material to the interim rule, the Board of Governors and the Secretary of Treasury requested comment on whether this or another definition is appropriate, and whether expertise or policies developed in the course of conducting specific types of securities activities may be necessary or appropriate for making merchant banking investments in a safe and sound manner.

For most community bank organizations, the establishment and maintenance of a broker-dealer registered with the SEC would be unduly burdensome, expensive and unnecessary in order to carry out the merchant banking activities authorized by law. As the enclosed May 22, 2000 letter to the Federal Reserve Board explains, such a requirement also is not required by law or by principles of bank safety and soundness.

We request that you write a letter to the Federal Reserve Board supporting the elimination of the provision requiring financial holding companies to have an affiliate registered as a broker-dealer and the adoption of a definition that broadly defines a securities affiliate in a manner that will permit both large and community based financial holding companies to establish merchant banking activities in accordance with safe and sound banking practices.

AABD is a non-profit trade association based in Bethesda, Maryland serving the needs of directors of banks and saving institutions throughout the United States. It advocates the position that boards of directors of commercial banks and savings institutions, whether serving in large or community organizations, should be permitted to be as free as possible to exercise their good faith judgment in supervising their institutions, within the constraints of safe and sound banking, including deciding on the financial activities appropriate for their institutions.

Thank you for your consideration.

Sincerely,

David Baris
Executive Director

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