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Release Date: October 21, 1998


For immediate release

The Federal Reserve Board today announced its approval of the notice of KeyCorp, Cleveland, Ohio, to acquire McDonald & Company Investments, Inc., Cleveland, Ohio, and thereby engage in underwriting and dealing, to a limited extent, in all types of debt and equity securities, and in certain other nonbanking activities.

Attached is the Board's Order relating to this action.

KeyCorp
Cleveland, Ohio

Order Approving Notice to Engage in Nonbanking Activities

KeyCorp, Cleveland, Ohio, a bank holding company within the meaning of the Bank Holding Company Act ("BHC Act"), 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 of the Board's Regulation Y (12 C.F.R. 225.24) to merge with McDonald & Company Investments, Inc., Cleveland, Ohio ("McDonald"), and thereby acquire control of its subsidiaries, including McDonald & Company Securities, Inc. ("Company").1 KeyCorp would thereby engage in the following nonbanking activities:

  1. extending credit and servicing loans, pursuant to section 225.28(b)(1) of Regulation Y (12 C.F.R. 225.28(b)(1));

  2. engaging in activities related to extending credit, pursuant to section 225.28(b)(2)(ii), (vi) and (vii) of Regulation Y (12 C.F.R. 225.28(b)(2)(ii), (vi) and (vii));

  3. providing leasing services, pursuant to section 225.28(b)(3) of Regulation Y (12 C.F.R. 225.28(b)(3));

  4. performing functions or activities that may be performed by a trust company, pursuant to section 225.28(b)(5) of Regulation Y (12 C.F.R. 225.28(b)(5));

  5. providing financial and investment advisory services, pursuant to section 225.28(b)(6) of Regulation Y (12 C.F.R. 225.28(b)(6));

  6. providing securities brokerage, riskless principal, private placement, futures commission merchant, and other agency transactional services, pursuant to section 225.28(b)(7) of Regulation Y (12 C.F.R. 225.28(b)(7));

  7. underwriting and dealing in government obligations and money market instruments in which state member banks may underwrite and deal under 12 U.S.C. §§ 335 and 24(7) ("bank-eligible securities"), engaging in investing and trading activities, and buying and selling bullion and related activities, pursuant to section 225.28(b)(8) of Regulation Y (12 C.F.R. 225.28(b)(8));

  8. providing management consulting and employee benefit consulting services, pursuant to section 225.28(b)(9) of Regulation Y (12 C.F.R. 225.28(b)(9));

  9. underwriting and dealing in, to a limited extent, all types of debt and equity securities other than interests in open-end investment companies ("bank-ineligible securities");

  10. providing administrative and other services to open-end investment companies ("mutual funds");2 and

  11. acting as the general partner of private investment limited partnerships that invest in assets in which a bank holding company is permitted to invest.

Notice of the proposal, affording interested persons an opportunity to submit comments, has been published (63 Federal Register 48,509 (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.

KeyCorp, with total consolidated assets of approximately $76 billion, is the 15th largest banking organization in the United States.3 KeyCorp operates subsidiary banks in 13 states, and engages through other subsidiaries in a broad range of permissible nonbanking activities. McDonald, with total consolidated assets of $987 million, engages in a broad range of securities underwriting and dealing, brokerage, investment advisory, and other activities.4

KeyCorp proposes to merge its wholly owned subsidiary, Key Capital Markets, Inc., Cleveland, Ohio ("KCMI"), with and into Company.5 After consummation of the proposal, Company would be renamed McDonald Key Investments, Inc. Company is, and after consummation of the proposal will continue to be, registered as a broker-dealer with the Securities and Exchange Commission ("SEC") under the Securities Exchange Act of 1934 (15 U.S.C. § 78a et seq.), registered as an investment adviser with the SEC under the Investment Advisers Act of 1940 (15 U.S.C. § 80b-1 et seq.), a member of the National Association of Securities Dealers, Inc. ("NASD"), and registered as a futures commission merchant with the Commodity Futures Trading Commission ("CFTC") under the Commodity Exchange Act (7 U.S.C. § 2 et seq.). Accordingly, Company is, and will continue to be, subject to the record-keeping and reporting obligations, fiduciary standards, and other requirements of the Securities Exchange Act of 1934, the Investment Advisers Act of 1940, the Commodity Exchange Act, the SEC, the CFTC, and the NASD.

Underwriting and Dealing in Bank-Ineligible Securities
The Board has determined that, subject to the framework of prudential limitations established in previous decisions to address the potential for conflicts of interests, unsound banking practices, or other adverse effects, underwriting and dealing in bank-ineligible securities is so closely related to banking as to be a proper incident thereto within the meaning of section 4(c)(8) of the BHC Act.6 The Board also has determined that underwriting and dealing in bank-ineligible securities is consistent with section 20 of the Glass-Steagall Act (12 U.S.C. § 377), provided that the company engaged in the activity derives no more than 25 percent of its gross revenues from underwriting and dealing in bank-ineligible securities.7

KeyCorp has committed that Company 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. KeyCorp also has committed that Company will conduct its bank-ineligible securities underwriting and dealing activities subject to the Board's revenue restriction.8 As a condition of this order, KeyCorp is required to conduct its bank-ineligible securities activities subject to the revenue restrictions and Operating Standards established for section 20 subsidiaries ("Operating Standards").9

Mutual Fund Activities
KeyCorp proposes, through Company, to provide to mutual funds ("funds") investment advisory, administrative, and other services that previously have been approved by the Board.10 KeyCorp has committed that the proposed activities will be conducted in compliance with Regulation Y and Board orders governing these activities and subject to the prudential and other limitations established by the Board.11

KeyCorp proposes to have certain director and officer interlocks with the funds. In particular, KeyCorp proposes that up to 25 percent of the directors of a mutual fund would be employees, officers, or directors of KeyCorp or one of its subsidiaries, including Company. KeyCorp proposes that one of these directors may serve as chairman of the board of the fund. In addition, KeyCorp seeks to have up to three directors, officers, or employees of KeyCorp or its subsidiaries, including Company, serve as senior officers of the fund and have other KeyCorp personnel serve as junior-level officers of the fund.12

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.13 The Board noted that the independent directors of the funds would be responsible for the selection and review of the investment adviser, the underwriter, and the other major service contractors of the fund.14

In this case, KeyCorp's personnel would not comprise more than 25 percent of any fund's board of directors. Accordingly, all the funds to which KeyCorp would provide advisory and administrative services would have boards of directors in which 75 percent of the directors are unaffiliated with KeyCorp. In addition, any director of a fund who also serves as a director, officer, or employee of KeyCorp 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 KeyCorp would not appear to affect the independence of the other directors of 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 the proposed director and officer interlocks would not compromise the independence of the boards of the funds or permit KeyCorp to control the funds for purposes of the BHC Act or Glass-Steagall Act.

Other Activities Approved by Regulation or Order
The Board previously has determined that credit and credit-related activities; leasing activities; trust company activities; financial and investment advisory activities; securities brokerage, riskless principal, private placement, futures commission merchant, and other agency transactional activities; bank-eligible securities underwriting and dealing; investing and trading activities; buying and selling bullion and related activities; and management consulting and employee benefits consulting services are closely related to banking within the meaning of section 4(c)(8) of the BHC Act.15 In addition, the Board previously has determined by order that the proposed private investment limited partnership activities are permissible for bank holding companies.16 KeyCorp has committed that it will conduct these activities in accordance with the provisions and limitations set forth in Regulation Y and the Board's orders and interpretations relating to each of the activities.

Other Considerations
In order to approve this notice, the Board also must determine that the proposed activities "can reasonably be expected to produce benefits to the public, such as greater convenience, increased competition, or gains in efficiency, that outweigh possible adverse effects, such as undue concentration of resources, decreased or unfair competition, conflicts of interests, or unsound banking practices."17 As part of its review of these factors, the Board considers the financial and managerial resources of the notificant and its subsidiaries and the effect the transaction would have on such resources.18

In considering the financial resources of the notificant, the Board has reviewed the capitalization of KeyCorp and Company 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 KeyCorp's projections of the volume of Company's underwriting and dealing activities in bank-ineligible securities.

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 Cleveland ("Reserve Bank") has reviewed the policies and procedures of Company to ensure compliance with this order and the Section 20 Orders, including Company's operational and managerial infrastructure, computer, audit, and accounting systems and internal risk management procedures and controls. On the basis of the Reserve Bank's review and all other facts of record, including the commitments provided in this case and the proposed managerial and risk management systems of Company, the Board has concluded that financial and managerial considerations are consistent with approval of the notice.

The Board has carefully considered the competitive effects of the proposal. KeyCorp represents that KCMI and Company offer largely complementary services with few significant overlaps. KeyCorp has indicated that KCMI has not developed the type of equity underwriting and other equity-based capital markets products, private client brokerage, and high-yield debt underwriting services offered by Company. To the extent that KCMI and Company 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 KeyCorp's nonbanking subsidiaries and McDonald overlap, such as securities brokerage, investment advisory, trust, and insurance agency activities, there are numerous existing and potential competitors. Consummation of the proposal, therefore, would have a de minimis effect on competition in the market for these services, and the Board has concluded that the proposal would not have significantly adverse competitive effects in any relevant market.

In order to approve the proposal, the Board also must find that the performance of the proposed activities by KeyCorp can reasonably be expected to produce benefits that would outweigh possible adverse effects under the proper incident to banking standard of section 4(c)(8) of the BHC Act. 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 consummation of the proposal would provide added convenience to the customers of KeyCorp and McDonald. KeyCorp has indicated that consummation of the proposal would expand the range of products and services available to its customers and those of McDonald. KeyCorp also has stated that the acquisition would permit it to improve the operating efficiency of KCMI and further diversify its nonbanking operations, thereby making it less vulnerable to economic fluctuations in individual business lines.

Based on all the facts of record, the Board has determined that performance of the proposed activities by KeyCorp can reasonably be expected to produce public benefits that outweigh any adverse effects of the proposal. Accordingly, the Board has determined that the performance of the proposed activities by KeyCorp is a proper incident to banking for purposes of section 4(c)(8) of the BHC Act.

Conclusion
On the basis of all the facts of record, the Board has determined that the notice should be, and hereby is, approved, subject to all the terms and conditions described in this order. The Board's approval of the proposal extends only to activities conducted within the limitations of this order, including the Board's reservation of authority to establish additional limitations to ensure that Company's activities are consistent with safety and soundness, avoidance of conflicts of interests, and other relevant considerations under the BHC Act. Underwriting and dealing in any manner other than as approved in this order is not within the scope of the Board's approval and is not authorized for Company.

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) (12 C.F.R. 225.7 and 225.25(c)), and to the Board's authority to require 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, or to prevent evasion of, the provisions and purposes 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 this notice, including the commitments discussed in this order and the conditions set forth in this order and the Board regulations and orders noted above. The commitments and conditions 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.

This 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 the Reserve Bank, acting pursuant to delegated authority.

By order of the Board of Governors,19 effective October 21, 1998 .

(signed) Robert deV. Frierson

Robert deV. Frierson

Associate Secretary of the Board

Appendix

List of Administrative Services

  1. Maintaining and preserving certain records of the funds, including financial and corporate records;

  2. Computing net asset value, dividends, performance data and financial information regarding the funds;

  3. Furnishing statistical and research data to the funds;

  4. Preparing and filing with the SEC and state securities regulators registration statements, notices, reports, and other materials required to be filed under applicable laws;

  5. Preparing reports and other informational materials regarding the funds, including prospectuses, proxies, and other shareholder communications;

  6. Providing legal and other regulatory advice to the funds in connection with their other administrative functions;

  7. Providing office facilities and clerical support for the funds;

  8. Developing and implementing procedures for monitoring compliance with regulatory requirements and compliance with the funds' investment objectives, policies, and restrictions as established by the boards of directors of the funds;

  9. Providing routine fund accounting services to the funds and liaison with outside auditors;

  10. Preparing and filing tax returns, and monitoring tax compliance;

  11. Reviewing and arranging for payment of fund expenses;

  12. Providing communication and coordination services with regard to the funds' investment advisors, transfer agent, custodian, distributor, and other service organizations that render distribution, recordkeeping, or shareholder communication services;

  13. Reviewing and providing advice to the distributor, the funds, and the investment advisors regarding sales literature and marketing plans for the funds;

  14. Providing information to the distributor's personnel concerning performance and administration of the funds;

  15. Providing marketing support with respect to sales of the funds through financial intermediaries, including participating in seminars, meetings, and conferences designed to present information concerning the funds;

  16. Assisting in the development of additional funds;

  17. Providing reports to the boards of directors of the funds with regard to the activities of the funds; and

  18. Providing telephone shareholder services through a toll-free number.

Footnotes

1 KeyCorp also has requested the Board's approval to hold and exercise an option to acquire up to 19.9 percent of the voting shares of McDonald if certain events occur. The option would expire on consummation of the proposal.

2 A list of the administrative services that KeyCorp would provide to mutual funds is included in the Appendix.

3 Asset and ranking data are as of June 30, 1998.

4 McDonald currently engages in certain insurance and real estate activities and has, and controls certain limited partnerships and corporations that have, investments that are not permissible for bank holding companies. KeyCorp has committed to conform the activities, investments, and relationships of McDonald to those permissible for bank holding companies within two years of acquiring McDonald.

5 KCMI currently engages in limited underwriting and dealing in bank-ineligible securities, as permitted under section 20 of the Glass-Steagall Act (12 U.S.C. � 377). See KeyCorp, 83 Federal Reserve Bulletin 921 (1997). KCMI also is authorized to engage in a variety of other nonbanking activities. See id.

6 See J.P. Morgan & Co. Inc., et al., 75 Federal Reserve Bulletin 192 (1989), aff'd sub nom. Securities Industry Ass'n v. Board of Governors of the Federal Reserve System, 900 F.2d 360 (D.C. Cir. 1990); Citicorp, 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").

7 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); 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); and Revenue Limit on Bank-Ineligible Activities of Subsidiaries of Bank Holding Companies Engaged in Underwriting and Dealing in Securities, 61 Federal Register 68,750 (1996) (collectively, "Modification Orders"). In light of the fact that KeyCorp proposes to acquire a going concern, the Board believes that allowing Company to calculate compliance with the revenue limitation on an annualized basis during the first year after consummation of the acquisition and thereafter on a rolling quarterly average basis would be consistent with the Section 20 Orders. See U.S. Bancorp, 84 Federal Reserve Bulletin 483 (1998); Dauphin Deposit Corporation, 77 Federal Reserve Bulletin 672 (1991).

8 KeyCorp intends to merge KCMI with and into Company within a few weeks of the consummation of the KeyCorp/McDonald merger. Until the merger of KCMI and Company occurs, KeyCorp will operate Company as a separate corporate entity and both KCMI and Company will be independently subject to the 25-percent revenue limitation on underwriting and dealing in bank-ineligible securities. See Citicorp, 73 Federal Reserve Bulletin 473, 486 n.45 (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). In view of the fact that Company is significantly larger than KCMI and will survive the merger with KCMI, the management structure of the proposed merged company, the activities of the merging companies and the proposed merged company, and the other aspects of this case, the Board believes the merger would not disqualify Company from calculating compliance with the revenue test in conformance with the annualized treatment described in this order.

9 12 C.F.R. 225.200. Company may provide services that are necessary incidents to the proposed underwriting and dealing activities. Unless Company 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.

10 The Board previously has determined that providing administrative services to mutual funds is closely related to banking within the meaning of section 4(c)(8) of the BHC Act. See, e.g., Bankers Trust New York Corporation, 83 Federal Reserve Bulletin 780 (1997) ("BTNY"); Commerzbank AG, 83 Federal Reserve Bulletin 679 (1997). In addition, 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.

11 See, e.g., BTNY. The administrative services that KeyCorp would provide to mutual funds through Company include computing the funds' financial data, maintaining and preserving the records of the funds, providing office facilities and clerical support for the funds, and preparing and filing tax returns for the funds. The services are listed in the Appendix.

KeyCorp has committed that, on consummation of the acquisition of Company, Company will cease serving as a distributor for mutual funds and 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." As defined in 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). The independent distributor also would be responsible for supervising sales as the principal underwriter for purposes of the federal securities laws. An independent distributor would enter into any sales agreements with brokers or other financial intermediaries to sell shares of mutual funds. The independent distributor would have legal responsibility under the rules of the NASD for the form and use of all advertising and sales literature and would be responsible for filing these materials with the NASD or the SEC.

12 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.

13 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).

14 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. 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.

15 See 12 C.F.R. 225.28(b)(1), (2), (3), (5), (6), (7), (8), and (9).

16 See Dresdner Bank AG, 84 Federal Reserve Bulletin 361 (1998); Meridian Bancorp, Inc., 80 Federal Reserve Bulletin 736 (1994).

17 12 U.S.C. § 1843(c)(8).

18 See 12 C.F.R. 225.26.

19 Voting for this action: Chairman Greenspan, Vice Chair Rivlin, and Governors Kelley and Meyer. Absent and not voting: Governors Ferguson and Gramlich.

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