Definition of securities subsidiary

company controlled by a bank holding company or Financial Holding Company that underwrites commercial paper, and government and corporate securities for distribution to investors. These companies, also known as Section 20 companies (named after a section of the glass-steagall act relating to securities underwriting), came into existence in 1987 when the Federal Reserve Board permitted bank-owned securities firms to underwrite and deal in limited amounts of commercial paper and municipal revenue bonds. In 1990, the Fed authorized the firms to deal in corporate stocks and bonds. Bank underwriting of corporate securities was at first limited to 5% of bank revenues, a ceiling that was eventually raised to 25% of total revenues in 1996. The gramm-leach-bliley act of 1999 removed these volume limits on corporate underwriting, as long as banking companies involved satisfied bank regulatory capital requirements. The modernization act also imposed limits on bank holding company investments in a securities subsidiary to 45% of consolidated assets or $50 billion, whichever is less. In 1999, there were 51 bankowned securities firms operating in the United States.