-------------------- BEGINNING OF PAGE #1 ------------------- UNITED STATES OF AMERICA Before the SECURITIES AND EXCHANGE COMMISSION Securities Exchange Act of 1934 Release No. 36333 / October 4, 1995 Administrative proceeding File No. 3-8863 ______________________________ : In the Matter of : ORDER INSTITUTING : PROCEEDINGS PURSUANT TO FRENCH AMERICAN : SECTION 21C OF BANKING CORPORATION, : THE SECURITIES EXCHANGE ACT : OF 1934, MAKING FINDINGS, AND Respondent. : IMPOSING REMEDIAL SANCTIONS ______________________________: I. The Securities and Exchange Commission ("Commission") deems it appropriate and in the public interest that a public administrative proceeding be instituted pursuant to Section 21C of the Securities Exchange Act of 1934 ("Exchange Act") to determine whether French American Banking Corporation ("FABC") violated Section 7(d) of the Exchange Act and Regulation U promulgated by the Board of Governors of the Federal Reserve System, 12 C.F.R. Sections 221 et seq. II. In anticipation of the institution of this administrative proceeding pursuant to Section 21C of the Exchange Act, FABC has submitted an Offer of Settlement ("Offer") which the Commission has determined to accept. Solely for the purposes of this proceeding, and any other proceeding brought by or on behalf of the Commission or to which the Commission is a party, and without admitting or denying the findings set forth below, except Paragraph III.A.1., which is admitted, FABC consents to the issuance of this Order and the entry of the findings and the imposition of the remedial sanctions set forth below. Accordingly, IT IS ORDERED that an administrative proceeding pursuant to Section 21C of the Exchange Act be, and hereby is, instituted against FABC. -------------------- BEGINNING OF PAGE #2 ------------------- III. On the basis of this Order and the Respondent's Offer, the Commission finds -[1]- the following: A. FACTS 1. Respondent FABC is a domestic banking subsidiary of Banque Nationale de Paris. Its headquarters are located in New York. 2. Background a. From at least September 1992 until January 1994, FABC provided securities clearing services for custodial customers. b. From September 1992 through July 1993, FABC settled securities transactions on a Delivery versus Payment/Receipt versus Payment ("DVP/RVP") basis for a custodial customer called The Funds and received total gross fees of $107,000. 3. Settlement through FABC a. On or about September 29, 1992, The Funds opened a custodial clearing account at FABC with an initial deposit of $150,000. Before the account was closed in or about July 1993, The Funds deposited an additional $51,129 in cash into the account. b. Between September 1992 and July 1993, The Funds' account purchased over $37 million dollars worth of securities for which the account did not have sufficient funds to pay. Virtually all of these securities purchases were offset by a series of matching same-day sales of the same securities. c. To settle The Funds' trades, FABC in many instances extended credit to make payments to the executing brokers for The Funds' securities purchases. Upon settlement of the matching sales of the same securities, FABC delivered the securities to brokers in exchange for the sale proceeds. FABC then debited The Funds' accounts for the cost of purchases and credited the Funds' account with the proceeds from the sales.-[2]- In many instances, the sale proceeds and the balance in The Funds' account were insufficient to cover the cost of the purchases, and The Funds' account became overdrawn. Even while The Funds' account was overdrawn, FABC continued to settle The Funds' securities purchases, in many instances, by financing 100% of the purchase price. d. For example, on October 21, 1992 The Funds' clearing account had a balance of $150,688.76, which included the proceeds from the sale of a long position during the day. That day, FABC settled purchases of $459,130 worth of securities matched by --------- FOOTNOTES --------- --------- FOOTNOTES --------- -[1]- The findings herein are solely for the purposes of these proceedings and are not binding on any other person or any respondent in any other proceeding. -[2]- Offsetting trades settled almost simultaneously through the Depository Trust Company's computerized book entry system. -------------------- BEGINNING OF PAGE #3 ------------------- offsetting sales in The Funds' account. On the morning of October 22, 1992, The Funds' clearing account was overdrawn by $290,026.24, because the account had not timely received the proceeds from the prior day's matching sales. Notwithstanding the overdraft, FABC settled purchases during the day, and credited The Funds' account with proceeds received from the prior day's sales and with proceeds that it received from offsetting sales, raising the balance in the account to $75,095.06 at the end of the day. The next day, October 23, 1992, the balance in the account rose to $84,095.06, after receiving proceeds from the sale of a long position, and FABC settled purchases for The Funds costing $384,700. These purchases were also matched with offsetting sales of the same securities. e. By settling trades in this fashion, FABC unlawfully extended credit in excess of the amounts permitted under Regulation U. f. Since January 1994, FABC has ceased extending credit to any of its custodial customers for the purpose of purchasing or carrying securities. B. APPLICABLE LAW 1. Section 7(d) of the Exchange Act prohibits the extension of credit: for the purpose of purchasing or carrying any security, in contravention of such rules and regulations as the Federal Reserve Board shall prescribe to prevent the excessive use of credit for the purchasing or carrying of or trading in securities in circumvention of the other provisions of this section. 2. Regulation U promulgated by the Board of Governors of the Federal Reserve System, 12 C.F.R. Sections 221 et seq. provides: No bank shall extend any purpose credit, secured directly or indirectly by margin stock, in an amount that exceeds the maximum loan value of the collateral securing the credit. 12 C.F.R. Section 221.3. 3. "Purpose credit" is defined as any credit for the purpose of buying or carrying margin stock, 12 C.F.R. Section 221.2(k), and "margin stock" includes, among other things, equity securities traded on national stock exchanges and in the over- the-counter market. 12 C.F.R. Section 221.2(h). "Maximum loan value" of the collateral securing the credit means the percentage of current market value assigned by the Federal Reserve Board under Section 221.8 of Regulation U. 12 C.F.R. Section 221.2(i). Section 221.8 of Regulation U provides that the maximum loan value of any margin stock, except options, is fifty percent (50%) of its current market value. 12 C.F.R. Section 221.8(a). "Indirectly secured" includes any arrangement between the bank and its customer under which "the customer's right or ability to sell, pledge, or otherwise dispose of margin stock owned by the -------------------- BEGINNING OF PAGE #4 ------------------- customer is in any way restricted while the credit remains outstanding." 12 C.F.R. Section 221.2(g)(1)(i). 4. The credit that FABC extended to The Funds to purchase securities was secured by the proceeds from the offsetting sale of these same securities.-[3]- 5. FABC violated Regulation U by extending "purpose credit," in excess of the amounts permitted under Regulation U for purchases of securities by The Funds. The purchased securities were principally exchange-listed or OTC-traded "margin stocks," within the meaning of Regulation U. IV. Based on the above, the Commission finds that FABC violated Section 7(d) of the Exchange Act and Regulation U in connection with its securities clearing operations. V. ORDER Accordingly, IT IS HEREBY ORDERED, pursuant to Section 21C of the Exchange Act, that FABC cease and desist from committing or causing any violation, and any future violation, of Section 7(d) of the Exchange Act and Regulation U. IT IS FURTHER ORDERED that FABC shall pay disgorgement in the amount of $107,000, plus reasonable interest of $15,918.84 to the United States Treasury. The $122,918.84 shall be paid within 10 days after the entry of this Order and shall be paid to the Treasury by postal money order, certified check, bank cashier's check or bank money order, payable to the order of the United States Securities and Exchange Commission. The payment shall be transmitted to the Comptroller, Securities and Exchange Commission, 450 Fifth Street, N.W., Washington D.C. 20549, under cover of a letter identifying the name of and number of this administrative proceeding. A copy of the cover letter and payment shall be simultaneously transmitted to Richard H. Walker, Esq., Regional Director, Securities and Exchange Commission, 7 World Trade Center, New York, New York 10048, Attn: Lamond W. Kearse, Esq. IT IS FURTHER ORDERED, that FABC shall comply with the undertakings set forth in its Offer of Settlement: A. FABC shall maintain policies and procedures reasonably designed to ensure that FABC complies with Regulation U. In particular, FABC shall maintain policies and procedures reasonably designed to ensure that purchases of securities in FABC's custodial accounts are not paid for with proceeds from sales of the same securities in violation of Regulation U. B. In the event that FABC determines to resume extending purpose credit to custodial customers, FABC shall promptly notify the Commission by letter to the --------- FOOTNOTES --------- --------- FOOTNOTES --------- -[3]- Reliance on the proceeds from the sale of a security as collateral is the same as reliance on the security itself. SEC v. Hansen, 726 F. Supp. 74, 79 n.21 (S.D.N.Y 1989). -------------------- BEGINNING OF PAGE #5 ------------------- Commission's Northeast Regional Office, 13th Floor, New York, New York 10048, to the attention of Lamond W. Kearse, Esq. (the "Notification") before resuming those operations. In that event, FABC shall also retain an independent consultant not unacceptable to the Commission's staff, who shall review FABC's clearing operations and who shall make such recommendations as are necessary with respect to FABC's policies and procedures so that they may be reasonably designed to ensure that FABC complies with Regulation U in connection with such operations. The independent consultant shall issue a final report setting forth its findings and recommendations and shall forward the same to the Commission's New York Regional Office, 13th Floor, New York, New York 10048, to the attention of Lamond W. Kearse, Esq. To the extent FABC disagreed with any of the consultant's preliminary recommendations, the final report shall describe such disagreements. Before resuming extending purpose credit to custodial customers, FABC shall implement all of the recommendations contained in the independent consultant's final report. By the Commission. Jonathan G. Katz Secretary