|For immediate release|
The Federal Reserve Board today announced its approval of the notice of Société Générale, Paris, France, to acquire Cowen & Co. and Cowen Incorporated, both of New York, New York, and thereby engage in underwriting and dealing, to a limited extent, in all types of debt and equity securities (except ownership interests in open-end investment companies) and certain other nonbanking activities.
Attached is the Board's Order relating to this action.
Société Générale ("SoGen"), a foreign bank subject to the provisions of the Bank Holding Company Act ("BHC Act"),1 has requested the Board's approval under section 4(c)(8) of the BHC Act (12 U.S.C. § 1843(c)(8)) and section 225.24(a) of the Board's Regulation Y (12 C.F.R. 225.24(a)) to acquire Cowen & Co. and Cowen Incorporated, both of New York, New York (together "Cowen"), and thereby engage in the following nonbanking activities:
Notice of the proposal, affording interested persons an opportunity to submit comments, has been published (63 Federal Register 17,874 (1998)). The time for filing comments has expired, and the Board has considered the notice and all comments received in light of the factors set forth in section 4(c)(8) of the BHC Act.
SoGen, with total consolidated assets of approximately $413 billion, is the third largest banking organization in France and the 15th largest banking organization in the world.2 In the United States, SoGen operates branches in New York, New York, Chicago, Illinois, and Los Angeles, California; an agency in Dallas, Texas; and representative offices in San Francisco, California, Atlanta, Georgia, and Houston, Texas. SoGen also engages through subsidiaries in a broad range of nonbanking activities in the United States. Cowen, with total consolidated assets of $3.7 billion, engages in a broad range of securities underwriting and dealing, brokerage, investment advisory, and other activities.3
SoGen plans to transfer the business of Cowen to Société Générale Securities Corporation, New York, New York ("SGSC"), a subsidiary of SoGen that engages in a wide range of securities-related activities, including securities underwriting and dealing.4 After consummation of the proposal, SGSC will change its name to SG Cowen Securities Corporation, New York, New York ("SG Cowen"). SG Cowen would continue to engage in most of the current activities of SGSC and the permissible activities of Cowen.
SGSC is currently and, after consummation of the proposal, SG Cowen will continue to be registered with the Securities and Exchange Commission ("SEC") as a broker-dealer under the Securities Exchange Act of 1934 (15 U.S.C. § 78a et seq.) ("1934 Act") and a member of the National Association of Securities Dealers, Inc. ("NASD"). Accordingly, SGSC is and SG Cowen will be subject to the recordkeeping and reporting obligations, fiduciary standards, and other requirements of the 1934 Act, the SEC, and the NASD.
Underwriting and Dealing in Bank-Ineligible Securities
SoGen has committed that SG Cowen will conduct its underwriting and dealing activities using the methods and procedures and subject to the prudential limitations established by the Board in the Section 20 Orders and other previous cases. SoGen also has committed that Company will conduct its bank-ineligible securities underwriting and dealing activities subject to the Board's revenue restriction. As a condition of this order, SoGen is required to conduct its bank-ineligible securities activities subject to the revenue restrictions and Operating Standards established for section 20 subsidiaries ("Operating Standards").7
Mutual Fund Activities
Cowen provides administrative, advisory, brokerage, and other services to mutual funds. SoGen proposes that SG Cowen would continue to provide these services to the funds.10 However, SoGen has committed that distribution activities of mutual funds would be the responsibility of an independent distributor, which would enter into contractual agreements with the mutual funds to serve as "principal underwriter."11 The independent distributor also would be responsible for supervising sales as the principal underwriter for purposes of the federal securities laws.12
SoGen also proposes to have certain director and officer interlocks with the funds. In particular, SoGen proposes that up to 25 percent of the directors of a mutual fund would be employees, officers, or directors of SoGen or one of its subsidiaries, including SG Cowen. SoGen proposes that one of these directors may serve as chairman of the board of the fund. In addition, SoGen seeks to have up to three directors, officers, or employees of SoGen or its subsidiaries, including SG Cowen, serve as senior officers of the fund and have other SoGen personnel serve as junior-level officers of the fund.13
The Board previously has authorized a bank holding company and its nonbank subsidiaries to have limited director and officer interlocks with mutual funds that the bank holding company advises and administers.14 In each of these cases, the Board found that the funds would be controlled by their independent directors.15 The Board noted that the independent directors would be responsible for the selection and review of the investment adviser, the underwriter, and the other major service contractors of the fund.16
In this case, SoGen's personnel would not comprise more than 25 percent of any fund's board of directors. Accordingly, all of the funds to which SoGen provides advisory and administrative services would have boards of directors in which 75 percent of the directors are unaffiliated with SoGen, and the funds would be controlled by those independent directors. In addition, any director of a fund who also serves as a director, officer, or employee of SoGen would be an "interested person" under the 1940 Act and, therefore, would be required to abstain from voting on investment advisory and other major contracts of the fund.
The director and officer interlocks proposed by SoGen would not appear to affect the independence of the other directors on the boards of directors for the funds. The independent members of the boards of directors would continue to have authority to review brokerage, advisory, administrative and other major contracts and would retain authority to change the distributor of fund shares. Based on the foregoing, the Board concludes that control of the mutual funds would rest with the independent members of the boards of directors of the funds and that the proposed director and officer interlocks would not compromise the independence of the boards of the funds or permit SoGen to control the funds.
Other Activities Approved by Regulation or Order
SoGen's capital ratios satisfy applicable risk-based standards under the Basle Accord and are considered equivalent to the capital levels that would be required of a United States banking organization. The Board also has reviewed the capitalization of SGSC and Cowen in accordance with the standards set forth in the Section 20 Orders and finds the capitalization of each to be consistent with approval. This determination is based on all the facts of record, including projections of the volume of SG Cowen's underwriting and dealing activities in bank-ineligible securities. The Board also has reviewed other aspects of the financial condition and resources of SoGen, Cowen, and their respective subsidiaries, including the effect of the proposal on the financial condition and resources of these entities.
The Board also has reviewed the managerial resources of each of the entities involved in this proposal in light of examination reports and other supervisory information. In connection with the proposal, the Federal Reserve Bank of New York has reviewed the policies and procedures of SoGen, SGSC, and Cowen to ensure compliance with this order and the Section 20 Orders, including computer, audit, and accounting systems, internal risk management controls, and the necessary operational and managerial infrastructure. On the basis of this review and the Board's supervisory experience with SoGen and SGSC, the commitments provided in this case, and the proposed managerial and risk management systems of SG Cowen, the Board has determined that financial and managerial considerations are consistent with approval.
The Board also has carefully considered the competitive effects of the proposal. SoGen represents that SGSC and Cowen offer largely complementary services with few overlaps. To the extent that SGSC and Cowen offer different types of products and services, the proposed acquisition would result in no loss of competition. In those markets where the product offerings of SGSC and SoGen's other subsidiaries and Cowen do overlap, there are numerous existing and potential competitors. As a result, consummation of the proposal would have a de minimis effect on competition for these services, and the Board has concluded that the proposal would not result in a significantly adverse effect on competition in any relevant market.
Under the framework established in this and prior decisions, consummation of the proposal is not likely to result in any significantly adverse effects, such as undue concentration of resources, decreased or unfair competition, conflicts of interests, or unsound banking practices that outweigh the public benefits of the proposal. The Board expects that the proposal would enable SoGen to compete more effectively, particularly in underwriting activities, by increasing efficiencies and enabling SoGen to offer a broader range of products and services to its customers.
Accordingly, based on all the facts of record, the Board has determined that the balance of public benefits that it must consider under the proper incident to banking standard of section 4(c)(8) of the BHC Act is favorable and consistent with approval of the proposal.
The Board's determination also is subject to all the terms and conditions set forth in Regulation Y, including those in sections 225.7 and 225.25(c) of Regulation Y (12 C.F.R. 225.7 and 225.25(c)), and to require such modification or termination of the activities of a bank holding company or any of its subsidiaries as the Board finds necessary to ensure compliance with, and to prevent evasion of, the provisions of the BHC Act and the Board's regulations and orders issued thereunder. The Board's decision is specifically conditioned on compliance with all the commitments made in connection with the notice and related correspondence, the conditions established in this order, and the Board's regulations and other orders noted above. The commitments and conditions relied on by the Board in reaching this decision are deemed to be conditions imposed in writing by the Board in connection with its findings and decision and, as such, may be enforced in proceedings under applicable law.
The proposal shall not be consummated later than three months after the effective date of this order, unless such period is extended for good cause by the Board or by the Federal Reserve Bank of New York, acting pursuant to delegated authority.
By order of the Board of Governors,20 effective June 22, 1998.
(signed) Robert deV. Frierson
Robert deV. Frierson
List of Administrative Services
1 As a foreign bank operating branches and an agency in the United States, SoGen is subject to certain provisions of the BHC Act by operation of section 8(a) of the International Banking Act of 1978 (12 U.S.C. § 3106(a)) ("IBA").
2 Asset and foreign ranking data are as of December 31, 1997, and are based on foreign exchange conversion rates as of that date. World ranking data are as of December 31, 1996.
3 Cowen currently engages in certain insurance and real estate activities and controls certain limited partnerships that have investments that are not permissible for bank holding companies. SoGen has committed to conform the activities, investments, and relationships of Cowen to those permissible for bank holding companies within two years of acquiring Cowen.
4 SoGen controls SGSC pursuant to the "grandfather" provisions of section 8(c) of the IBA (12 U.S.C. § 3106(c)). On consummation of the proposal, SoGen's grandfather rights relating to SGSC would end.
5 See Canadian Imperial Bank of Commerce, et al., 76 Federal Reserve Bulletin 158 (1990); J.P. Morgan & Co. Incorporated, et al., 75 Federal Reserve Bulletin 192 (1989), aff'd sub nom. Securities Industries Ass'n v. Board of Governors of the Federal Reserve System, 900 F.2d 360 (D.C. Cir. 1990); Citicorp, et al., 73 Federal Reserve Bulletin 473 (1987), aff'd sub nom. Securities Industry Ass'n v. Board of Governors of the Federal Reserve System, 839 F.2d 47 (2d Cir.), cert. denied, 486 U.S. 1059 (1988); as modified by Review of Restrictions on Director, Officer and Employee Interlocks, Cross-Marketing Activities, and the Purchase and Sale of Financial Assets Between a Section 20 Subsidiary and an Affiliated Bank or Thrift, 61 Federal Register 57,679 (1996); Amendments to Restrictions in the Board's Section 20 Orders, 62 Federal Register 45,295 (1997); and Clarification to the Board's Section 20 Orders, 63 Federal Register 14,803 (1998) (collectively, "Section 20 Orders").
6 Compliance with the revenue limitation shall be calculated in accordance with the method stated in the Section 20 Orders, as modified by the Order Approving Modifications to the Section 20 Orders, 75 Federal Reserve Bulletin 751 (1989), and 10 Percent Revenue Limit on Bank-Ineligible Activities of Subsidiaries of Bank Holding Companies Engaged in Underwriting and Dealing in Securities, 61 Federal Register 48,953 (1996) (collectively, "Modification Orders"). SoGen has requested that SG Cowen be permitted to calculate compliance with the revenue limitation on an annualized basis during the first year after consummation of the proposed acquisition. The Board believes that allowing SG Cowen to calculate compliance with the revenue limitation on an annualized basis during the first year of its operations and thereafter on a rolling quarterly average basis is consistent with the Section 20 Orders. See Dauphin Deposit Corporation, 77 Federal Reserve Bulletin 672 (1991).
7 12 C.F.R. 225.200. SG Cowen may provide services that are necessary incidents to the proposed underwriting and dealing activities. Unless SG Cowen receives specific approval under section 4(c)(8) of the BHC Act to conduct the activities independently, any revenues from the incidental activities must be treated as ineligible revenues subject to the Board's revenue limitation.
8 See, e.g., Bankers Trust New York Corporation, 83 Federal Reserve Bulletin 780 (1997) ("BTNY"); Commerzbank AG, 83 Federal Reserve Bulletin 679 (1997).
9 See, e.g., BTNY. The administrative services that SoGen would provide to mutual funds through SG Cowen and other SoGen subsidiaries include computing the fund's financial data, maintaining and preserving the records of the fund, providing office facilities and clerical support for the fund, and preparing and filing tax returns for the funds. The services are listed in the Appendix.
10 The Board previously has determined that the Glass-Steagall Act does not prohibit a bank holding company from providing advisory and administrative services to a mutual fund. See 12 C.F.R. 225.125. Although SoGen does not own a member bank, SoGen is subject to the limitations applicable to domestic banking organizations under the principle of national treatment. See, e.g., Canadian Imperial Bank of Commerce, et al., 76 Federal Reserve Bulletin 158 (1990).
11 As defined under the Investment Company Act of 1940 ("1940 Act"), a principal underwriter is any underwriter who, as principal, purchases from a mutual fund any security for distribution, or who as agent for such fund sells or has the right to sell the fund's securities to a dealer and/or to the public. 15 U.S.C. § 80a-2(a)(29).
12 An independent distributor would enter into any sales agreements with brokers or other financial intermediaries to sell shares of mutual funds. The independent distributor also would have legal responsibility under the rules of the NASD for the form and use of all advertising and sales literature and also would be responsible for filing these materials with the NASD or the SEC.
13 Senior officers include the president, secretary, treasurer, and vice presidents with policy-making functions. Junior officers include assistant secretaries, assistant treasurers, or assistant vice-presidents of the funds. Junior officers are fund employees who have no authority or responsibility to make policy.
14 See, e.g., BTNY; Lloyds TSB Group plc, 84 Federal Reserve Bulletin 116 (1998); BankAmerica Corporation, 83 Federal Reserve Bulletin 913 (1997); The Governor and Company of the Bank of Ireland, 82 Federal Reserve Bulletin 1129 (1996).
15 Under the 1940 Act, at least 40 percent of the board of directors of a mutual fund must be individuals who are not affiliated with the mutual fund, investment adviser, or any other major contractor to the fund.
16 The 1940 Act and related regulatory provisions require that independent directors annually review and approve the mutual fund's investment advisory contract and any plan of distribution or related agreement.
17 See 12 C.F.R. 225.28(b)(1), (2), (5), (6), (7), (8)(i), (8)(ii); Sovran Financial Corporation, 73 Federal Reserve Bulletin 225 (1987); Dresdner Bank AG, 84 Federal Reserve Bulletin 361 (1998).
18 See 12 U.S.C. § 1843(c)(8).
19 See 12 C.F.R. 225.26(b); see also The Fuji Bank, Limited, 75 Federal Reserve Bulletin 94 (1989); Bayerische Vereinsbank AG, 73 Federal Reserve Bulletin 155 (1987).
20 Voting for this action: Chairman Greenspan, Vice Chair Rivlin, and Governors Phillips, Meyer, and Gramlich. Absent and not voting: Governors Kelley and Ferguson.
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1998 Orders on banking applications