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Definition of Terms in and Specific Exemptions for Banks, Savings Associations, and Savings Banks Under Sections 3(a)(4) and 3(a)(5) of the Securities Exchange Act of 1934SECURITIES AND EXCHANGE COMMISSION17 CFR Parts 200 and 240 [Release No. 34-44291; File No. S7-12-01] RIN 3235-AI19 Definition of Terms in and Specific Exemptions for Banks, Savings Associations, and Savings Banks Under Sections 3(a)(4) and 3(a)(5) of the Securities Exchange Act of 1934 AGENCY: Securities and Exchange Commission ACTION: Interim final rules with request for comments SUMMARY: The Securities and Exchange Commission is adopting, as interim final rules, new Rules 3a4-2, 3a4-3, 3a4-4, 3a4-5, 3a4-6, 3a5-1, 3b-17, 3b-18, 15a-7, 15a-8, and 15a-9 under the Securities Exchange Act of 1934 ("Exchange Act"), and amending Rule 30-3 of our Rules of Organization and Program Management. These new rules address the functional exceptions for banks from the definitions of "broker" and "dealer" that were added to the Exchange Act by the Gramm-Leach-Bliley Act and will become effective May 12, 2001. We are promulgating these rules on an interim final basis, effective May 11, 2001, to clarify the terms of the functional exceptions from the definitions of broker and dealer as well as to provide additional exemptions, which will aid banks in complying with the provisions of the Gramm-Leach-Bliley Act when they become effective. We are soliciting comments on all aspects of the interim final rules and will amend these rules as appropriate in response to comments received. DATES: Effective Date: May 11, 2001. Comment Date: Comments on the interim final rules should be submitted by July 17, 2001.
ADDRESSES: Comments should be submitted in triplicate to Jonathan G. Katz, Secretary, Securities and Exchange Commission, 450 5th Street, N.W., Washington, D.C. 20549-0609. Comments also may be submitted electronically at the following E-mail address: rule-comments@sec.gov. All comment letters should refer to File No. S7-12-01; this file number should be included on the subject line if E-mail is used. All comments received will be available for public inspection and copying in the Commission's Public Reference Room, 450 5th Street, N.W., Washington, D.C. 20549-0102. Electronically submitted comment letters will be posted on the Commission's Internet site (http://www.sec.gov).1 FOR FURTHER INFORMATION CONTACT: Catherine McGuire, Chief Counsel; Lourdes Gonzalez, Assistant Chief Counsel; Linda Stamp Sundberg, Banking Fellow; Patricia Albrecht, Special Counsel; or Joseph P. Corcoran, Attorney, (202) 942-0073, Office of the Chief Counsel, Division of Market Regulation, Securities and Exchange Commission, 450 5th Street, N.W., Washington, D. C. 20549-1001. SUPPLEMENTARY INFORMATION: The Securities and Exchange Commission ("Commission") is adopting Rules 3a4-2 [17 CFR 240.3a4-2], 3a4-3 [17 CFR 240.3a4-3], 3a4-4 [17 CFR 240.3a4-4], 3a4-5 [17 CFR 240.3a4-5], 3a4-6 [17 CFR 240.3a4-6], 3a5-1 [17 CFR 240.3a5-1], 3b-17 [17 CFR 240.3b-17], 3b-18 [17 CFR 240.3b-18], 15a-7 [17 CFR 240.15a-7], 15a-8 [17 CFR 240.15a-8], and 15a-9 [17 CFR 240.15a-9] under the Exchange Act as interim final rules clarifying certain terms in Sections 3(a)(4) and 3(a)(5) of the Exchange Act [15 U.S.C. 78c(a)(4) and 78c(a)(5)] and providing exemptions for banks from broker-dealer registration. The Commission is delegating authority to the Division of Market Regulation through an amendment to Rule 30-3 of its Rules of Organization and Program Management [17 CFR 200.30-3] to issue to banks, savings associations, and savings banks additional exemptions from registration and regulation. Table of Contents
On November 12, 1999, the President signed the Gramm-Leach-Bliley Act ("GLBA") into law.2 The GLBA represents the culmination of more than 30 years of Congressional efforts aimed at reforming the regulation of financial services.3 The GLBA changed federal statutes governing the scope of permissible activities and the supervision of banks, bank holding companies, and their affiliates. The GLBA lowers (although does not altogether eliminate) barriers between the banking and securities industries erected by the Banking Act of 1933 (popularly known as the "Glass-Steagall Act")4 and between the banking and the insurance industries erected by the 1982 amendments to the Bank Holding Company Act of 1956 (the "Bank Holding Company Act").5 Some have described the GLBA as the most important piece of federal banking legislation since the Depression.6 When Congress enacted the Exchange Act in l934, it completely exempted banks from the regulatory scheme provided for brokers and dealers. Over the past 60 years, however, evolution of the financial markets driven by competition and technology eroded the separation that previously existed between banks, insurance companies, and securities firms. Regulators responded to these changes with interpretations that increasingly sought to accommodate the market changes. The Board of Governors of the Federal Reserve System ("Federal Reserve"), the Office of the Comptroller of the Currency ("OCC"), and the Federal Deposit Insurance Corporation ("FDIC") have long permitted banks and bank holding companies to engage in retail and institutional securities brokerage and private placement activities. Beginning in the 1980s, these developments, coupled with arguments for competitive equality both domestically and internationally, spurred Congressional action. Congress considered major restructuring of legal restrictions preventing financial services firms from offering a full array of products, while at the same time maintaining the successful system of functional regulation of securities, insurance, and banking that existed under that framework.7 The Commission long supported modernizing the legal framework governing financial services, so long as it was consistent with a system of functional regulation to ensure that investors purchasing securities through banks received the same protections as those when they purchased securities from registered broker-dealers.8 The GLBA is the product of many years of Congressional deliberation and reflects a careful balance between providing investors with the same protections wherever they purchase securities, while not unnecessarily disturbing certain bank securities activities. Sections 201 and 202 of the GLBA substantially amended the Exchange Act's definitions of "broker" and "dealer," respectively.9 The amended definitions become effective on May 12, 2001. Before the amendment, Sections 3(a)(4) and 3(a)(5) of the Exchange Act provided that the terms "broker" and "dealer" did not include a "bank."10 Accordingly, banks11 that engaged in securities activities were excepted from the requirement to register as broker-dealers under the Exchange Act.12 The amended definitions replace this general exception for banks with specific functional exceptions from broker-dealer registration for certain bank securities activities. In particular, the amended definitions create 11 "broker" and 4 "dealer" exceptions for banks. Three of these exceptions are similar for both "broker" and "dealer." The exceptions are outlined briefly below:13 1. Exceptions From Both "Broker" And "Dealer" Definitions:
2. Other Exceptions From "Broker" Definition:
3. Other Exception From "Dealer" Definition:
In recent weeks, we have received an increasing number of inquiries regarding how we will interpret some of the terms in the new specific functional exceptions.14 Because the exceptions from the definitions of broker and dealer are exceptions to the Exchange Act, we are statutorily charged with interpreting these exceptions. In response to interpretive questions that have arisen, we are adopting, as interim final rules,15 new Exchange Act Rules 3b-17 and 3b-18.16 New Rule 3b-17 defines terms applicable to three exceptions from the definition of broker: (1) networking arrangements; (2) trust and fiduciary activities; and (3) sweep accounts. Rule 3b-17 also provides legal certainty to banks regarding the availability of the fiduciary activities exception when they act as indenture trustees or as trustees for tax-deferred accounts. New Rule 3b-18 defines terms for the exception from the definition of dealer for banks that sell asset-backed securities. To alleviate concerns that have been expressed to us in recent months, we also grant five exemptions under which banks may effect transactions in securities without being registered as broker-dealers. New Rule 3a4-2 responds to concerns banks have expressed about calculating the compensation condition in the trust and fiduciary activities exception. This rule permits banks to compute their compensation, for purposes of the compensation condition, based on their total amount of trust and fiduciary activities, subject to a 10% limit and internal maintenance procedures. New Rule 3a4-3 allows banks to effect transactions as indenture trustees in no-load money market funds without meeting the "chiefly compensated" condition in the trust and fiduciary activities exception. New Rule 3a4-4 provides a conditional exemption to allow small banks to effect transactions in investment company securities held in tax-deferred custody accounts and to be compensated for this brokerage activity. We define small banks as banks that had less than $100 million in assets as of December 31 in both of the prior two calendar years, and have not been, since December 31 of the third prior calendar year, an affiliate of a bank holding company or financial holding company that, as of December 31 of both of the prior two calendar years, had total assets of $1 billion or more. Small banks may not rely this exemption if they are affiliated with, or have networking arrangements with, registered broker-dealers. New Rule 3a4-5 conditionally exempts all banks that effect transactions in securities for custody accounts without, directly or indirectly, receiving compensation for providing this service. A bank relying on this exemption may pass on to the customer the broker-dealer's charge for executing the transactions. Like Rule 3a4-4, this exemption imposes conditions on banks' solicitation of transactions. New Rule 3a4-6 provides a conditional exemption that allows banks to continue to execute transactions in investment company securities through the National Securities Clearing Corporation's ("NSCC") Mutual Fund Services, including Fund/SERV, instead of through a registered broker-dealer as required by Exchange Act Section 3(a)(4)(C). This exemption is available only to banks that otherwise meet the conditions of another exception or exemption. New Rule 3a5-1 conditionally exempts from the definition of "dealer" banks engaged in riskless principal transactions if they do not exceed the de minimis transactions exception limit in Exchange Act Section 3(a)(4)(B)(xi). We understand that banks will need time to determine whether any securities activities must be conducted through registered broker-dealers after May 11, 2001. In addition, some banks may not have completed the process of ensuring that securities transactions are conducted through registered broker-dealers, where required. Accordingly, new Rule 15a-7 exempts banks that are engaging in securities activities from the definitions of broker and dealer until October 1, 2001.17 In addition, Rule 15a-7 exempts banks whose compensation arrangements do not meet the compensation conditions of a particular exception or exemption from the definition of broker until January 1, 2002, if they meet the other conditions for an exception or exemption. New Rule 15a-8 exempts banks from the potential voiding under Exchange Act Section 29(b) of contracts entered into before January 1, 2003, because the bank violated the broker-dealer registration requirements or any applicable provision of the Exchange Act and rules thereunder based solely on the bank's status as a broker or dealer at the time the bank entered into the contract. Finally, new Rule 15a-9 exempts savings associations and savings banks18 from the definitions of "broker" and "dealer" under Exchange Act Sections 3(a)(4) and 3(a)(5) on the same terms and conditions that apply to banks. We recognize that banks have developed their particular securities activities under the general exception from broker-dealer registration that existed prior to the passage of the GLBA. Because particular banks may have individual considerations that may be appropriate for additional relief, we are authorizing the Director of the Division of Market Regulation to consider, on a case-by-case basis, individual requests for exemptive relief from banks. We also are directing the staff to consider requests from savings associations and savings banks for additional exemptive relief.19 To facilitate the processing of these requests, we have delegated exemptive authority to the staff of the Division of Market Regulation through an amendment to Rule 30-3 of our Rules of Organization and Program Management. We expect the staff to submit novel and complex requests for exemption to us. As a general matter, under the federal securities laws, parties relying on an exception or exemption have the burden of demonstrating that they qualify for such exception or exemption. We would therefore expect banks, as a matter of good business practice, to be able to demonstrate that they meet the terms of a particular exemption. We solicit comment regarding whether the requirements that the bank regulators are required to adopt under Section 18(t) of the FDIA20 will be sufficient for this purpose or whether the Commission itself should adopt record keeping rules relating to these exemptions. We solicit comment on what records banks have or can develop to demonstrate to the Commission that they meet the terms of a particular exemption. We also solicit comment on whether it is necessary for savings association and savings bank regulators to adopt record keeping requirements for savings associations and savings banks analogous to those adopted for banks. We request comment on all aspects of the interim final rules as well as comment on the specific provisions and issues highlighted below. As highlighted above, the GLBA repealed certain provisions of the Glass-Steagall Act21 and other restrictions applicable to banks and bank holding companies. As a result, banks are able to affiliate with securities firms and insurance companies within the same financial holding company. The GLBA codified the concept of functional regulation -- that is, regulation of the same functions, or activities, by the same expert regulator, regardless of the type of entity engaging in those activities. Congress believed that, given the expansion of the activities and affiliations in the financial marketplace, functional regulation was important to building a coherent financial regulatory scheme.22 Accordingly, Title II of the GLBA amended the federal securities laws to provide for functional regulation of securities activities by eliminating the complete exception for banks from the definitions of "broker" and "dealer." As the legislative history noted, prior to the passage of the GLBA, the exception for banks from broker-dealer registration created a competitive disparity by permitting banks to engage in securities activities without being subject to the same regulatory requirements as broker-dealers. In the legislative history, Congress specifically expressed concern that the complete exception had permitted banks to engage in securities activities without being subject to the provisions of the federal securities laws that were designed to protect investors.23 The federal securities laws provide a comprehensive and coordinated system of regulation of securities activities. They are specifically and uniquely designed to assure the protection of investors through full disclosure concerning securities and the prevention of unfair and inequitable practices in the securities markets. The securities laws also have as a goal fair competition among all participants in the securities markets. Broker-dealer registration is an important element of this regulatory system. Absent broker-dealer registration, bank securities activities generally are regulated only under banking law, which has as its primary purposes the protection of depositors and the preservation of the financial soundness of banks.24 Thus, bank securities activities take place outside of the coordinated system of securities regulation that is designed to protect investors, leading to regulatory disparities. For example, to become licensed to sell securities, all persons associated with a broker-dealer are required to pass a qualifications test covering substantive aspects of the securities business.25 Commission and self-regulatory organization ("SRO") rules also assure that those persons associated with broker-dealers who have committed abuses that would make them subject to a statutory disqualification are prohibited from working in the securities industry or are subject to conditions such as enhanced supervision.26 The SROs also require that persons involved in the management of the broker-dealer pass additional examinations relating to supervisory procedures and requirements.27 These qualification requirements are supplemented by continuing education requirements, the broker-dealer's duty to supervise its employees to prevent violations of the federal securities laws, and the specific supervisory procedures imposed by the SROs.28 In addition, our rules and those of the SROs specifically address sales practice abuses.29 By contrast, bank personnel generally are not subject to licensing or other regulations designed to test their knowledge of the securities business. Another area in which banking and securities regulation differ is communications with the public, including advertising. Broker-dealers must comply with specific guidelines concerning the content and review of communications with the public, including advertisements.30 With certain limited exceptions, there are no equivalent rules governing the advertisement of bank securities activities.31 Broker-dealers are subject to inspections and examinations not only by our staff but also by the SROs with our supervision. SRO examinations are designed to assure compliance with the federal securities laws, in particular sales practices and financial responsibility regulations. Banks, on the other hand, are not members of SROs. While bank examiners may review for violations of the banking agencies' securities guidelines, the primary focus is on ensuring the safety and soundness of the bank rather than the protection of investors. Congress considered the different purposes of bank and securities regulation when it eliminated the blanket exception from broker-dealer registration for banks' securities activities.32 The GLBA replaced the general exception with eleven specific functional exceptions to the definition of broker and four specific functional exceptions to the definition of dealer. In replacing the general exception with more narrowly tailored exceptions, the GLBA sought to apply broker-dealer regulation to bank securities activities where appropriate to strengthen investor protection, taking into account the nature of the securities activities being conducted. This approach resulted in the specific exceptions enumerated in the amended definitions of broker and dealer in the Exchange Act that will continue to allow banks to engage directly in many securities activities without conducting those activities through a registered broker or dealer. The new exceptions go into effect on May 12, 2001. II. RULE 3b-17 -- DEFINITIONS RELATED TO EXCEPTION FROM "BROKER" Exchange Act Section 3(a)(4) generally defines a "broker" to be "any person engaged in the business of effecting transactions in securities for the account of others."33 Prior to the passage of the GLBA, this definition was modified by the words "but does not include a bank" (emphasis added).34 The GLBA repealed this exception and replaced it with eleven specific exceptions for certain securities activities that a bank may engage in without being considered a broker.35 We are adopting Rule 3b-1736 to clarify some of the exceptions enumerated in amended Exchange Act Section 3(a)(4).37 Rule 3b-17 defines certain terms that are used in the exceptions regarding third-party brokerage arrangements, trust and fiduciary activities, and sweep accounts. In addition, both in this Part and in Part III of this Release below, we discuss exceptions in Exchange Act Section 3(a)(4) related to safekeeping and custody activities, affiliate transactions, and a de minimis number of securities transactions. Section 3(a)(4)(B)(i) of the Exchange Act provides an exception from the definition of broker for banks that enter into third-party brokerage ("networking") arrangements.38 Under this exception, and subject to certain conditions, a bank will not be considered a broker if it "enters into a contractual or other written arrangement" with a registered broker-dealer through which the broker-dealer "offers brokerage services on or off the premises of the bank."39 Statutorily imposed conditions to the exception address separation of brokerage and banking services, compliance with advertising conditions, functions and compensation of bank employees, conditions to fully disclose the customers' accounts to broker-dealers, and conditions on banks acting as carrying brokers. One particular condition prohibits unregistered bank employees from receiving:
Legislative history indicates that this condition, like the other conditions in the networking exception, was designed to promote investor protection.41 Specifically, Congress included the limitation on incentive compensation to unregistered bank employees to ensure that those people who have a "salesman's stake" in securities transactions are subject to the sales practice standards and other requirements of the federal securities laws.42 We have kept Congress' limit in mind in interpreting two terms in the provision. First, Rule 3b-17(h) defines the term "referral" to mean a bank employee arranging a first securities-related contact between a registered broker-dealer and a bank customer. The term "referral" does not include any activity (including any part of the account opening process) related to effecting transactions in securities beyond arranging that first securities-related contact.43 Second, Rule 3b-17(g) provides two alternative definitions of the term "nominal one-time cash fee of a fixed dollar amount." First, the rule provides that a nominal one-time cash fee of a fixed dollar amount may be a payment that does not exceed one hour of the gross cash wages of the unregistered bank employee making the referral. Second, the rule also provides that a nominal one-time cash fee of a fixed dollar amount may be a payment in the form of points in a system or program that covers a range of bank products and non-securities related services, where the points count toward a bonus that is cash or non-cash, if the points awarded for referrals involving securities are not greater than the points awarded for products or services not involving securities. Banks may use either alternative in setting nominal payments if they meet the requirements discussed below, including the requirement that any payment not be designed as an incentive to a bank employee to solicit particular investors to open accounts or to engage in securities transactions. We provided two alternative ways to measure cash compensation to give banks the flexibility of compensating their employees for securities referrals based either on their current wages or on what the banks pay for referrals of other products and services. By creating two alternative standards, we allow banks to develop a market-based approach to employee compensation that is consistent with the compensation limitation in the networking exception. In either case, as discussed below, we require that any payment not be designed as an incentive to a bank employee to solicit particular investors to open accounts or to solicit investors to engage in securities transactions. We considered choosing a set dollar amount as the measure for a nominal cash payment. We decided against this approach after considering that we would likely have to adjust periodically any set dollar amount to reflect changes in the economy that would affect its real value. We also determined that, given the economic differences across the country, an across-the-board dollar amount may not have a nominal value everywhere or in every part of the bank. For example, what is considered a nominal dollar amount in San Francisco, California may be considered generous in Wichita, Kansas. Similarly, one system may be used for teller referrals and another system for private banker referrals. Using one hour of the cash wages of the unregistered bank employee making a referral should alleviate these concerns. Hourly wages are generally adjusted, not just to reflect the current state of the economy, but also to reflect the economic climate of a particular location and the duties of a particular employee. Also, using one hour of cash wages as the measure for a nominal cash payment, we ensured that the referral fee is proportionate to an employee's overall wages. We understand that bank employees making referrals typically are paid a yearly salary rather than an hourly wage. In these cases, translating the yearly salaries into hourly wages should still be a simple task. We request comment on whether an hour's wages, subject to the limits described below, is a proper measure of a "nominal" fee. Use of a point system under the second alternative reflects our understanding that banks do not always reward employees with a set cash referral fee. Payment of bonuses as part of a point system or program offered to bank employees is not necessarily inconsistent with the networking exception. A point system may do nothing more than translate a nominal one-time cash referral fee into nominal one-time referral points. If the point system is part of an overall system that includes products other than securities and lines of business other than brokerage, and the securities-related referral points have a value that is no greater than the points received under the system for any other product or service, it should have only a nominal value in the system. Accordingly, we have provided this alternative definition in an effort to accommodate existing bank practices. Of course, the program may not be structured in any way that allows unregistered bank employees to be compensated either directly or indirectly for meeting sales targets related to securities products or services. We understand that banks may choose to provide prizes, rather than cash bonuses, to bank employees that meet a certain point goal.44 As long as the point system meets the conditions described above, including the requirement that any payment not be designed as an incentive to a bank employee to solicit particular investors to open accounts or to solicit investors to engage in securities transactions, we would view the system as consistent with the statutory exception.45 Regardless of the form of payment banks decide to use, Rule 3b-17(g) also provides that any payment may not be designed to provide, either directly or indirectly,46 an incentive to a bank employee to solicit investors to open accounts or to solicit investors to engage in securities transactions. Therefore, Rule 3b-17(g) also specifies that payments may not be based on: (1) the size, value, or completion of any securities transaction; (2) the amount of securities-related assets gathered; (3) the size or value of any customer's bank or securities account; or (4) the customer's financial status. This interpretation is consistent with the Commission staff's historical position on networking activities.47 Also, while nominal referral payments that are not based on the success of any securities transactions may provide a limited salesman's stake, we believe these parameters will help ensure that the effect of the stake will be small.48 We are concerned that referral payments, while "nominal" when considered independently, may not be "nominal" when considered in the aggregate. For example, one referral payment to a teller for one referral in one day of work may be "nominal," but twenty referral payments to a teller for twenty referrals in one day may not be "nominal" when considered in the aggregate. "Nominal" payments are to be paid to employees for whom referrals to the broker-dealer constitute an insubstantial part of an employee's duties. If a referral fee system were structured in such a manner that referral fees constituted a substantial portion of an employee's total compensation, it would raise serious questions about whether the payments were designed to encourage the bank employee to solicit securities activities. We solicit comment on whether we need to establish gross compensation standards so that referral payments that are "nominal" do not become incentive compensation when aggregated, and if so, what those limits should be. Banks also have questioned whether bonuses paid in addition to a point system, either in the form of cash or non-cash compensation, are acceptable under the exception. We do not believe that bonuses based on brokerage referrals fall within the compensation limits of the exception.49 While bonuses sometimes fall within the category of a one-time payment, by their very nature they are incentive compensation. The networking exception prohibits unregistered bank employees from receiving incentive compensation for any brokerage-related activity except for nominal one-time cash payments of a fixed dollar amount for a referral. Banks, however, may give bonuses, either in the form of cash or non-cash compensation, to unregistered bank employees based on the overall profitability of the bank regardless of the contribution of employee or employees receiving the bonus. To rely on the third-party brokerage exception, however, banks cannot indirectly pay their unregistered bank employees incentive compensation for securities transactions through a branch, department, or line of business or through a bonus program related to the securities transactions of a branch, department, or line of business. In addition, the language and legislative history of the networking exception indicate that brokerage referral fees can only be paid to natural persons who are bank employees.50 The compensation limit, however, does not interfere with any incentive-based compensation arrangements between the broker-dealer and the bank as a whole. Therefore, a broker-dealer in a third-party brokerage arrangement with a bank may make transaction-related payments to the bank for brokerage transactions conducted by the broker-dealer with the bank's customers.51 We find that the definitions in Rule 3b-17 related to the networking exception are consistent with the provisions and purposes of the Exchange Act.52 We request comment on the interpretation of the limits on incentive compensation in the networking exception. Commenters are specifically requested to identify other issues related to the payment of various types of incentive compensation. B. Trust And Fiduciary Activities Exception Exchange Act Section 3(a)(4)(B)(ii)53 excepts banks that act as trustees or fiduciaries from the definition of "broker," subject to certain conditions. Under the terms of this exception, a bank will not be considered a "broker" if it meets the following conditions in conducting brokerage activities: (1) effects transactions in a trustee or fiduciary capacity; (2) effects such transactions in its trust department or other department that is regularly examined by bank examiners for compliance with fiduciary principles and standards; (3) is chiefly compensated for such transactions, consistent with fiduciary principles and standards, on the basis of an administration or annual fee (payable on a monthly, quarterly, or other basis), a percentage of assets under management, or a flat or capped per order processing fee equal to not more than the cost incurred by the bank in connection with executing such securities transactions or any combination of such fees; and (4) does not publicly solicit brokerage business, other than by advertising that it effects transactions in securities in conjunction with advertising its other trust activities.54 A bank also must execute such transactions through a registered broker-dealer or in a cross trade.55 This exception recognizes the traditional role banks have played in effecting securities transactions for trust customers. These activities generally were inherent in a bank's trust operation itself, or arose as an accommodation to bank customers or through a traditional trust arrangement, rather than through promotion and public solicitation of bank brokerage services.56 Congress expressed the expectation that we would not disturb traditional bank trust activities under this exception.57 Congress, however, did not intend the trust exception to be used to conduct a securities brokerage operation in the bank trust department without the appropriate investor protections provided under the federal securities laws.58 We believe that this legislative history indicates that the trust and fiduciary activities exception was designed not only to preserve these traditional securities-related bank trust activities but also to apply broker-dealer protections to securities activities outside those traditional lines. We have kept that intent in mind in interpreting this exception. 1. Trustee Capacity The trust and fiduciary activities exception excepts banks that act in a "trustee capacity" or in a "fiduciary capacity" from the definition of broker.59 Trustees typically are subject to the strongest of fiduciary duties to trust beneficiaries. We have been asked, however, whether a bank that acts as a "trustee" in three specific situations involving securities accounts directed by others qualify for trust and fiduciary activities exception. This question arises because banks in these situations may not be subject to significant fiduciary responsibilities. These three situations are indenture trustees, Employee Retirement Security Act ("ERISA") and other pension plan trustees, and Individual Retirement Account ("IRA") trustees. In each of these situations, the person who assumes certain ministerial duties for tax, employee benefit, or trust indenture purposes is labeled a trustee, often under a federal statute, but does not actually assume a comprehensive set of fiduciary duties under either state or federal law. a. Indenture Trustees Under certain forms of trust indenture,60 a bank acting as an indenture trustee may invest idle cash in shares of money market mutual funds or other securities.61 Sometimes, the issuer of the bonds actually directs the investments. In this case, an indenture trustee might act as an order-taker at the direction of the bond issuer, within the investment parameters set forth in the indenture. However, an indenture trustee acts in a constrained order-taking capacity, because the indenture trustee is responsible for making sure that any investments it undertakes fall within the investment parameters of the trust indenture. Indenture trustees are subject to the Trust Indenture Act of 1939 ("TIA") when the corporate securities that underlie the indenture are sold to the public by use of the mails or in interstate commerce.62 State law also may provide additional duties in circumstances where the TIA and federal common law are not controlling.63 However, the courts, in expounding and construing the law regarding indenture trustees, have not always agreed on the type and nature of the duties of indenture trustees.64 b. ERISA And Other Similar Trustees ERISA65 Section 403(a) generally requires that "all assets of an employee benefit plan shall be held in trust by one or more trustees," who are to be named in the trust instrument or appointed by a named fiduciary of the plan.66 The term "fiduciary," as defined under ERISA Section 3(21)(A),67 provides that:
Under ERISA, a person performing any of the duties described in the definition of "fiduciary" would be considered a fiduciary.70 A person is a fiduciary, however, only to the extent that he performs "fiduciary" functions.71 For example, a person may be a fiduciary with respect to some plan assets but not others.72 While a trustee can be considered a plan fiduciary if the trustee has discretionary authority over the plan and its assets, depending on the structure of the particular retirement plan, the trustee may be subject to investment direction from the "named fiduciary" of the plan, investment managers, or plan participants.73 Thus, the issue becomes whether an ERISA plan trustee who is subject to another person's investment direction is a fiduciary. Similar issues may arise regarding state and local government plans permitted under Section 457 of the Internal Revenue Code ("IRC").74 Although courts have disagreed regarding whether a trustee subject to investment direction is a fiduciary under ERISA,75 the Department of Labor takes the position that a trustee of an ERISA plan is a fiduciary by the very nature of its position.76 c. IRA Trustees An IRA77 account can be created through a trust or custody agreement with a bank under the IRC.78 Whichever type of agreement is used, an IRA account must be maintained at all times as a domestic trust in the United States.79 The trustee's duties with respect to an account are generally ministerial in nature.80 IRA trustees do not have discretion regarding the management of the IRA assets.81 Courts that have considered IRA trustees in other contexts generally, but not uniformly, have reached the conclusion that an IRA trust does not establish a fiduciary relationship and that an IRA should not be treated as a trust is treated under other law.82 An IRA trustee does not actually assume a comprehensive set of fiduciary duties towards investors under either state or federal law. d. Definitional Exemption Alleviates Uncertainty The law is unclear as to whether banks acting in these three capacities should be covered by the trust and fiduciary activities exception because they are acting, at most, in a limited fiduciary capacity with regard to investors who direct their investments, despite their "trustee" label. To alleviate this legal uncertainty, we are providing an exemption for these trustees if they conduct their securities activities in accordance with all of the other terms of the exception for trustee activities, including being within a "trust department or other department that is regularly examined by bank examiners for compliance with fiduciary principles and standards."83 Specifically, Rule 3b-17(k) defines the term "trustee capacity" in the trust and fiduciary activities exception to include trust indenture trustees and trustees for certain tax-deferred accounts.84 By clarifying that "trustee capacity,"85 as set forth in the trustee and fiduciary activities exception, includes these types of trustees, banks will be able to continue to effect securities transactions for investors free from doubt regarding their broker-dealer status under the trust and fiduciary activities exception.86 We invite comment on the scope of the fiduciary responsibilities of indenture trustees, ERISA trustees, IRA trustees, and trustees for other pension plans. We also invite comment on the scope of the fiduciary responsibilities of indenture trustees that are not subject to the TIA. In addition, we invite comment on the circumstances under which, if any, indenture trustees, ERISA trustees, IRA trustees and trustees for other pension plans may disclaim fiduciary responsibilities, which fiduciary responsibilities they may or may not disclaim, and whether, in such circumstances, this definitional exemption is appropriate. 2. Fiduciary Capacity The trust and fiduciary activities exception applies to banks acting in a trustee or fiduciary capacity to investors. The term fiduciary capacity is defined in Exchange Act Section 3(a)(4)(D), which identifies several alternative forms of fiduciary capacity. Banks may qualify as acting in a fiduciary capacity if they act as a "trustee, executor, administrator, registrar of stocks and bonds, transfer agent, guardian, assignee, receiver, or custodian under a uniform gift to minor act . . . ."87 Banks also may qualify as acting in a fiduciary capacity if they act as an investment adviser if the bank "receives a fee for its investment advice" or "possess[es] investment discretion on behalf of another."88 Finally, banks may act in a fiduciary capacity if they act "in any other similar capacity."89 In general, we analyze the activities that a person is engaged in, as well as the label used, to determine whether a person is acting in a particular capacity. We take the same approach in considering whether a bank is acting as a fiduciary under the trust and fiduciary activities exception. As Justice Frankfurter stated in another context, "to say that a man is a fiduciary only begins the analysis; it gives direction to further inquiry. To whom is he a fiduciary? What obligations does he owe as a fiduciary?"90 We understand that the exact nature of the fiduciary obligations differ depending on the type and nature of the fiduciary relationship between the customer and the bank.91 Congress intended that banks act in a "strict trustee or fiduciary capacity"92 that provides investors the protection of strong fiduciary principles if conducting securities activities without broker-dealer regulation under the trust and fiduciary activities exception. We address specific situations with respect to the term "fiduciary capacity." a. Transfer Agent One category included in the statutory definition of fiduciary capacity that requires special explanation is "transfer agent."93 In considering the fiduciary capacity role of transfer agents for purposes of the trust and fiduciary activities exception, we must take into account the Exchange Act definition of transfer agent.94 Under the Exchange Act, a transfer agent is generally any person who engages in certain activities "on behalf of an issuer of securities or on behalf of itself as an issuer of securities . . . ." This definition makes clear that the fiduciary relationship of acting as a transfer agent runs primarily to the issuer, and any fiduciary duties that a transfer agent may have to shareholders when carrying out transfer agent activities are the same as the issuer's duty to the shareholder.95 Taken together, the definitions of "fiduciary capacity" and "transfer agent" in the Exchange Act indicate that the trust and fiduciary activities exception in Exchange Act Section 3(a)(4)(B)(ii) does not extend to securities activities that a bank transfer agent conducts with the shareholders of an issuer that resemble those of a broker-dealer. If a bank that is registered as a transfer agent engages in transfer agent activities for shareholders on behalf of the issuer of the type that are specified in the Exchange Act's definition of transfer agent and other similar activities, the bank may rely on the trust and fiduciary activities exception for those particular activities. Other securities activities would not be covered by the fiduciary responsibilities owed to the shareholder that are contemplated under the exception.96 Accordingly, unless another exemption was available,97 broker-dealer registration would be required for bank transfer agents that also effected securities transactions for investors. We request comment on any fiduciary role of transfer agents. We also request comment on any fiduciary responsibilities owed directly to the shareholders. b. Investment Adviser If The Bank Receives A Fee For Its Investment Advice As further described below, if a bank provides its customer with investment advice for a fee for an account, even though the customer is free to accept or reject the bank's advice, the bank may rely on the trust and fiduciary activities exception. In this situation, the bank would be acting as "an investment adviser if the bank receives a fee for its investment advice," as described in the definition of fiduciary capacity.98 For the reasons stated below, Rule 3b-17(d) defines the term "investment adviser if the bank receives a fee for its investment advice" to mean a relationship between the bank and a customer in which the bank: (1) provides, in return for a fee, continuous and regular investment advice to a customer's account that is based upon the individual needs of the customer; and (2) under state law, federal law, contract, or customer agreement owes a duty of loyalty, including an affirmative duty to make full and fair disclosure to the customer of all material facts relating to conflicts. i. Continuous And Regular Investment Advice Banks act in an advisory capacity to varying degrees in non-discretionary accounts. It may be difficult to determine whether a bank that provides some investment advice to a non-discretionary account falls within the fiduciary capacity category of an investment adviser that receives a fee for its advice. Accordingly, we are providing guidance to aid banks in determining which advisory relationships to non-discretionary accounts are covered by the fiduciary category of "investment adviser if the bank receives a fee for its investment advice." Congress did not intend the trust and fiduciary activities exception to allow a bank to administer an account offering primarily brokerage without the investor protections of the federal securities laws.99 At its narrowest, a brokerage relationship comes into existence when "the order has been placed and the broker has consented to execute it" and "ends when the transaction is complete."100 Accordingly, where the responsibilities of a bank to its customer arise only when the customer places an order for his account, and terminate once the transaction is complete,101 that account has the indicia of a brokerage account that the federal securities laws are designed to regulate. The bank's activities, therefore, would not fall within the trust and fiduciary activities exception. We reach the same conclusion even if the bank provides incidental, ancillary investment advice to the account. Because full-service broker-dealers frequently also give incidental, ancillary investment advice,102 such an account would still have the indicia of a brokerage account, and thus, the fees paid would be primarily for brokerage services, not for advice. Accordingly, Rule 3b- 17(c) provides that a bank providing only non-discretionary investment advice must provide the customer's account with "continuous and regular investment advice . . . that is based on the individual needs of the customer" in order for the bank to fall within the definition of an "investment adviser if the bank receives a fee for its investment advice." Rule 3b-17(e) neither purports nor attempts to provide a comprehensive definition of "investment advice" or of the types of investment advice banks may offer their customers. The rule identifies the circumstances where the bank's non-discretionary advisory services to a customer's account for a fee are sufficiently substantial that any brokerage services provided for that fee are merely ancillary to the advice. To state it another way, the rule identifies the circumstances where the fees paid by the account may be viewed properly as for investment advice, rather than for brokerage, when the bank provides both investment advice and brokerage to the account. The rule thus gives effect to Congress' intent, as discussed earlier, that a bank not be permitted to offer what is essentially a brokerage account absent the investor protections of the federal securities laws.103 A bank will provide "continuous and regular" investment advice under Rule 3b-17(e) if the bank has ongoing (as opposed to episodic or periodic) responsibility to select or make recommendations, based upon the needs of the client, as to specific securities or other investments the customer may purchase or sell. We adopted this same standard under Section 203A(a)(2) of the Investment Advisers Act ("Advisers Act"), which uses "continuous and regular" to determine which advisers have $25 million or more of "assets under management" and thus are eligible for Commission registration.104 Congress added this provision to the Advisers Act in 1996, as part of the National Securities Markets Improvement Act ("NSMIA").105 In developing the Commission's rules to implement NSMIA, we faced the question of when are non-discretionary advisory services significant and ongoing enough to constitute "assets under management." Albeit with different import, we face a similar question here - namely, when are the bank's non-discretionary advisory services significant enough that the fee paid "for advice" is for an ongoing advisory relationship with the customer account rather than a brokerage relationship. In both cases, we look to the actual nature of the underlying advisory services that the adviser, or bank, provides and to the duties and responsibilities that the adviser, or bank, accepts.106 If a bank provides continuous and regular guidance for a fee to a non-discretionary account based on the individual needs of that account, the bank would fit the definition of "investment adviser if the bank receives a fee for its investment advice," even if a customer makes self-directed trades in the account independent of the bank's advice. Accordingly, we would consider the bank to be acting in a fiduciary capacity for purposes of the trust and fiduciary activities exception.107 If, however, the bank provides brokerage and ancillary, incidental advice in return for a fee to a self-directed non-discretionary account, such advice would not meet the continuous and regular standard, and the fee would be viewed as payment for brokerage, rather than payment for the advice. For instance, if the bank provides only impersonal advice, such as market newsletters, or provides advice only on an intermittent or periodic basis upon the request of the client or in response to some market event, the bank would not be giving continuous and regular investment advice.108 Also, if a bank offers a certain number of trades for a set fee for an "advisory" account without providing continuous and regular advisory services, we would not consider the account to fall within the trust and fiduciary activities exception. Such an account is more similar to a brokerage account described above than the type of fiduciary account covered under the trust and fiduciary activities exception. Customer agreements outlining an account holder's relationship with a bank will be instructive in distinguishing those non-discretionary accounts for which banks provide continuous and regular investment advice from those for which they provide little investment advice. The nature of the bank's advice and the nature of the trading in the account also will be relevant to the analysis. ii. Full And Fair Disclosure Investment advisers historically have been considered to be fiduciaries with corresponding duties.109 If a bank acts in the capacity of an investment adviser and receives a fee for its advice, the bank will perforce be subject to an investment adviser's duties. The Supreme Court has stated that the most important duty an investment adviser has is a duty of loyalty.110 This includes an affirmative duty to make full and fair disclosure of material facts, thereby eliminating, or at least exposing, conflicts of interest.111 Therefore, the investment adviser must act with "utmost good faith" and "solely" in the best interests of the client.112 By disclosing all of its potential conflicts of interest to a client, the investment adviser enables the client to make an informed decision of whether to enter into or continue in an advisory relationship with the adviser or whether to take some action to protect himself against the specific conflict of interest involved.113 The definition of "investment adviser if the bank receives a fee for its investment advice" in Rule 3b-17(c) acknowledges the importance of this duty by providing that banks giving investment advice for a fee must owe a duty of loyalty that includes making full and fair disclosure to their clients. We find that this definition is consistent with the provisions of the Exchange Act.114 We invite comments on all aspects of this definition. Commenters also are encouraged to suggest alternative ways to evaluate whether a bank meets the definition of "investment adviser if the bank receives a fee for its investment advice." 3. Other Similar Capacity The definition of fiduciary capacity also provides that a bank may qualify for the trust and fiduciary activities exception if it acts "in any other similar capacity" to the fiduciary relationships already described in the definition.115 We have identified from uniform acts and codes several capacities that are not expressly set forth in the definition of fiduciary capacity that we believe are similar to the fiduciary capacities that are covered by the trust and fiduciary activities exception.116 For example, the Uniform Probate Code, which has been adopted in 18 states,117 uses the term "Personal Representative" and similar successor titles in place of executor or administrator as the representative of a decedent. Under the Uniform Custodial Trust Act, which has been adopted in 14 states,118 the terms that are used for fiduciaries who act for persons who have become incapacitated include "Conservator" and "Custodial trustee." A bank would be eligible to act in any of these capacities under these uniform acts. Exchange Act Section 3(a)(4)(D)(i) references only the capacity of a "custodian under a uniform gift to minor act." In contrast, the Uniform Transfers to Minors Act, which has been adopted in 49 States and the District of Columbia,119 uses both the terms "Conservator" and "Custodian" for fiduciaries that act for minors.120 A bank would be eligible to act in either or both of these capacities for a minor under this uniform act. We consider banks that act as fiduciaries in these representative capacities are acting in similar fiduciary capacities for purposes of the trust and fiduciary activities exception, provided that the other requirements of that exception are met. We invite comment on whether there are additional roles, functions, or relationships of banks that should be considered as being an "other similar capacity" for purposes of this exception. As noted above, courts have raised serious questions regarding whether indenture trustees and trustees for tax-deferred accounts are fiduciaries. Thus, although we have provided legal certainty to permit them to operate within the exception, we do not believe that banks operating in a similar capacity to such exempted entities are necessarily acting in a fiduciary capacity. For example, an IRA custodian is virtually indistinguishable from an IRA trustee, but does not take on the "trustee" label. Thus, it is not eligible for the definitional exemption in Rule 3b-17(k). 4. Other Department That Is Regularly Examined By Bank Examiners For Compliance With Fiduciary Principles And Standards To protect investors, Congress specifically required that the activities conducted by banks under the trust and fiduciary activities exception be "rigorously and regularly examined by bank examiners."121 Because Congress believed that the "examinations of bank trust departments are today rigorous in nature," these examinations would provide customers with "some basic protections" to mitigate the lack of federal securities law protections.122 While the bank trust department is the traditional center of bank fiduciary services, the trust and fiduciary activities exception recognizes that banks may effect transactions in a fiduciary capacity in bank departments other than the trust department, as long as those departments are "regularly examined by bank examiners for compliance with fiduciary principles and standards." This condition is key in affording investors some protection when banks conduct activities under this exception. Some banks place all of their fiduciary activities in the trust department, while others conduct them in different bank departments depending on the nature of the fiduciary service. As a result, the number and type of banking departments that are regularly examined by bank examiners for compliance with fiduciary principles and standards could easily vary from bank to bank. Because of this variance, we intend to rely primarily on the bank regulatory agencies in determining whether the activities are conducted in an area subject to examination by fiduciary examiners and examined on a regular basis.123 We also note that for a bank to be effecting securities transactions in compliance with the trust and fiduciary activities exception, the bank needs to ensure that all aspects of its role in effecting those transactions are conducted in a part of the bank that is regularly examined by bank examiners for compliance with fiduciary principles and standards. Effecting transactions in securities includes more than just executing trades or forwarding securities orders to a broker-dealer for execution. Generally, effecting securities transactions can include participating in the transactions through the following activities: (1) identifying potential purchasers of securities; (2) screening potential participants in a transaction for creditworthiness; (3) soliciting securities transactions;124 (4) routing or matching orders, or facilitating the execution of a securities transaction; (5) handling customer funds and securities;125 and (6) preparing and sending transaction confirmations (other than on behalf of a broker-dealer that executes the trades).126 In other words, for purposes of qualifying for the trust and fiduciary activities exception, the bank must make sure that all of the key points in a transaction that it participates in are in a part of the bank that meets the examination conditions of the exception. We invite comment on this discussion of this prong of the trust and fiduciary activities exception. We particularly invite commenters to provide information on the location within banks of activities related to effecting securities transactions in a trust or fiduciary capacity. 5. Chiefly Compensated To qualify for the trust and fiduciary activities exception from the definition of broker, banks must meet certain compensation limits for transactions effected in a fiduciary capacity. First, banks must be "chiefly compensated . . . on the basis of an administration or annual fee (payable on a monthly, quarterly, or other basis), a percentage of assets under management, or a flat or capped per order processing fee equal to not more than the cost incurred by the bank in connection with executing securities transactions for trustee and fiduciary customers, or any combination of such fees."127 Second, this revenue must be consistent with fiduciary principles and standards.128 The first question that must be addressed, then, is how to determine when a bank is "chiefly" compensated. The term "chiefly" has not been previously defined in the federal securities or banking laws. In choosing the term, Congress not only expected us to interpret it, Congress also expected that our interpretation would limit a bank's ability to receive incentive compensation or similar compensation that could foster a "salesman's stake" in promoting a securities transaction.129 In framing our definition of the term "chiefly compensated," we have sought to apply the purposes of the GLBA so that the broker-dealer requirements of the federal securities laws apply to situations that could foster a salesman's stake in promoting securities transactions.130 This definition is discussed below. a. Account-By-Account Calculations Determining when a bank is "chiefly compensated" requires, ultimately, a comparison of the different types of compensation that a bank receives. We considered several alternatives, but believe that the calculation to determine whether a bank is chiefly compensated by the statutorily enumerated fees should be done on an account-by-account basis. In our view, this calculation is consistent with assuring the protection of each investor and with determinations that trustees must make under state trust law.131 Moreover, fiduciaries often use fee schedules, which should provide a basis to make an account level calculation of compensation. We considered, alternatively, whether this calculation should be made on a transaction-by-transaction or customer-by-customer basis. We concluded, however, that these methods would be unnecessarily burdensome for banks, without providing significantly more protection for investors. We also considered whether the "chiefly compensated" calculation should be made across a bank's entire fiduciary department or on a business line basis. While a department or business line approach would provide administrative convenience to banks, we believe that adopting this approach as a guiding principle is inconsistent with the wording of the statute, which reads "chiefly compensated for such transactions." (emphasis added). In referring to "such transactions," the statute focuses on the compensation at the level at which the transactions occurred, which is the account level, and focuses on protection of investors making such transactions. Making the "chiefly compensated" calculation at the department or business line level would potentially allow a bank to primarily engage in a brokerage relationship, without investor protection, with a large number of customers if the compensation from the statutorily enumerated fees across the department or business line exceeded that from brokerage. Moreover, a department or line of business is difficult to define because lines of business vary from institution to institution. Nonetheless, as discussed below, for administrative simplicity, we are adopting Rule 3a4-2, which provides an exemption to permit banks to compute compensation on the basis of their total fiduciary activities if sales compensation is less than 10% of relationship compensation for these total fiduciary activities.132 To rely on this exemption, however, banks must have in place procedures that are reasonably designed to ensure compliance at certain key times in the life of the account with the condition that they be "chiefly compensated" by relationship compensation. We believe this exemption reduces costs for many banks by avoiding account level calculations where most accounts are likely to satisfy the "chiefly" standard. This exemption also balances Congress's intent that brokerage relationships be administered in a broker-dealer with its desire that we not disturb traditional trust activities. Accordingly, we find that this exemption is necessary or appropriate in the public interest and is consistent with the protection of investors.133 b. Annual Computation The account-by-account "chiefly" calculation should be conducted on a yearly basis. We considered calculations on a more frequent basis, such as quarterly, but concluded that annual calculations would achieve the purposes of the provision with lower burdens for banks. The definition of "chiefly compensated" incorporates this concept by allowing banks to use a calendar year or other fiscal year consistently used by the bank for record keeping and reporting purposes. c. A Flat Or Capped Per Order Processing Fee A bank may count as one of its statutorily enumerated sources of compensation "a flat or capped per order processing fee equal to not more than the cost incurred by the bank in connection with executing securities transactions for trustee and fiduciary customers."134 New Rule 3b-17(b) defines this term as a fee that is no more than the amount a broker-dealer charged the bank for executing the transaction, plus the costs of any resources of the bank that are solely dedicated to transaction execution, comparison, and settlement for trust and fiduciary customers. Per transaction charges are a hallmark of a brokerage relationship, and Congress explicitly limited a bank trust department to cost recovery for these charges.135 These dedicated resources would include the salary of a bank trust department employee whose sole responsibility is working on a trading desk that is exclusively dedicated to executing and comparing trades for trust or fiduciary customers. These dedicated resources would also include information technology resources exclusively related to trade execution, comparison, and settlement for trust or fiduciary customers, such as trade execution and comparison software that links a bank trust department trading desk with broker-dealers. In contrast, these dedicated resources would not include the cost of an employee's incentive based compensation related to the number, size, or value of trades executed. Such incentive payments typically do not reflect costs incurred to execute trades, but rather are inducements to encourage trades. These dedicated resources also would not include the cost of shared resources, general overhead allocation, or a return on capital. If a per order processing fee exceeds the broker-dealer charges and the costs of dedicated resources, that entire fee would be excluded from the "per order processing fee" source of revenue. We also believe that brokerage commissions paid to execute trust and fiduciary transactions would not fall within the "flat or capped per order processing fee" definition if they result in cash rebates or soft dollar benefits to the bank other than for brokerage, research, or expenses covered by this definition.136 Soft dollar benefits are, on their face, more than the cost of executing a trade.137 However, commissions resulting in payments for general research and brokerage expenses of the trust department that are strictly within the safe harbor of Exchange Act Section 28(e) would not need to be deducted from the costs that are permitted to be passed through to customers.138 We note that, consistent with fiduciary principles and standards, banks may send trades to be executed by affiliated broker-dealers under the trust and fiduciary activities exception. However, banking regulators have recognized that sending trust customer trades to an affiliated broker-dealer raises issues regarding the bank's fiduciary obligation to its trust customers.139 In addition, we note that fees charged to fiduciary accounts, including brokerage commissions, must be consistent with fiduciary principles. We intend to rely primarily on the banking regulators' supervision of whether these fees are in fact consistent with fiduciary principles. d. "Relationship Compensation," "Sales Compensation," And "Unrelated Compensation" To calculate whether banks are "chiefly compensated" for effecting transactions in a manner consistent with the terms of the trust and fiduciary activities exception, we compare two categories of bank compensation related to transactions, which we call "sales" compensation and "relationship" compensation. "Relationship" compensation, which is based on the statutorily enumerated sources of compensation, must exceed "sales" compensation for the account to be "chiefly compensated." We exclude other compensation not related to transactions in making the "chiefly compensated" calculation.140 i. Relationship Compensation We have defined the term "relationship compensation" in Rule 3b-17(i) to include the eligible statutory fees, which are generally charged based on an account relationship. As defined in the rule, relationship compensation must be received directly from the customer or beneficiary, or directly from the assets of the trust or fiduciary account. An annual or administrative account fee, or an account fee that is based on a percentage of assets under management, received from these sources would be relationship compensation. We interpret a percentage of assets under management fee as a fee for the bank's managing or otherwise caring for the assets of a trust or fiduciary account. Assets under management fees would not include payments from other persons, such as investment companies, that are based on the amount of assets maintained by the bank's trust and fiduciary accounts with those other persons. We believe this interpretation is consistent with the intent of the trust and fiduciary activities exception.141 In addition, relationship compensation would include a flat or capped per order processing fee equal to not more than the cost incurred by the bank in connection with executing securities transactions for trustee and fiduciary customers. ii. Sales Compensation We also define the term "sales compensation" in Rule 3b-17(j) for purposes of determining whether a bank is "chiefly compensated."142 Sales compensation includes: (1) a fee for effecting a transaction in securities that is not a flat or capped per order processing fee equal to not more than the cost incurred by the bank in connection with executing securities transactions for trustee and fiduciary customers; (2) compensation that if paid to a broker or dealer would be payment for order flow;143 (3) a fee received in connection with a securities transaction or account, except for those finders' fees received pursuant to the networking exception in Exchange Act Section 3(a)(4)(B)(i);144 (4) fees paid for an offering of securities that are not received directly from a customer or beneficiary, or directly from the assets of the trust or fiduciary account; (5) fees paid pursuant to a Rule 12b-1 plan under the Investment Company Act of 1940 ("Investment Company Act");145 and (6) "service fees" paid by an investment company for personal service or the maintenance of shareholder accounts.146 We understand that some banks acting as trustees or fiduciaries may charge customers an annual or asset-based fee that includes a specified number of securities transactions, or even unlimited trading on an irregular and occasional basis. If a bank charges an annual fee for effecting a certain number of securities transactions, this fee should be scrutinized to determine whether the fee is for transactions or fiduciary services. We believe that this approach is consistent with the statutory intent to separate compensation giving rise to sales incentives from non-sales oriented compensation. For example, if the bank effects transactions in a trustee or other fiduciary capacity where the bank is exercising investment discretion, in addition to offering trades for the annual fee, we believe the entire annual fee should be counted as relationship revenue. If a bank offers continuous and regular investment advice and a specified number of trades for a fee but separately charges for additional trades, we believe that the fees for combined advice/trading would be relationship revenues. The separate charges for trades, however, must be evaluated under the "per order processing fee" definition to determine their status. If the bank acts as an IRA trustee and offers a specified number of trades for a fee, this fee should be evaluated under the "per order processing fee" definition unless the fee permits an unlimited number of trades. If a fiduciary provides an unlimited number of transactions for an annual or assets under management fee, this fee would be considered relationship compensation. Paying banks to distribute securities, such as when an investment company pays a bank to distribute its shares through Rule 12b-1 fees, creates a conflict of interest between the bank distributor and investors. Rule 12b-1 fees are fees for distributing investment company securities and not for managing investors' assets.147 We view Rule 12b-1 fees as commissions, and in fact, these fees are often described as trail commissions.148 Unlike fees for assets under management by the bank, which do not differ depending on the investment selected by the bank but are paid for the management role of the bank, the Rule 12b-1 fees differ based on the particular investment company securities in which the assets are invested and maintained. These differing fees create incentives to distribute particular investment company securities and raise conflicts between the bank and investors. Similarly, finders' fees create incentives for bank trust departments to solicit trust customers to engage in securities transactions with other entities.149 It is precisely these divided loyalties or conflicts of interest faced by securities salesmen that drive much of broker-dealer regulation, and particularly rules governing securities practice standards.150 Therefore, these fees are defined as sales compensation. iii. Unrelated Compensation Compensation that does not fall within the definitions of "sales compensation" or "relationship compensation," we call "unrelated compensation." Unrelated compensation should not be used to determine whether banks are "chiefly compensated" in a manner consistent with the terms of the trust and fiduciary activities exception. For example, unrelated compensation includes fees charged separately for any activity of the bank that is not related to securities transactions, such as taking deposits, lending funds (including margin lending), managing non-securities assets, or providing other services that are not related to managing securities accounts pursuant to the trust and fiduciary activities exception. Unrelated compensation also includes compensation received pursuant to another exception under the GLBA, such as a fee received pursuant to the networking exception, except for a referral fee listed in that exception.151 In addition, unrelated compensation includes other compensation received by the bank, such as when the bank acts as an investment adviser, transfer agent, or custodian to an investment company, or receives administrative fees from an investment company, including payments for providing subtransfer agent, subaccounting, or administrative services for securities accounts.152 As stated previously, where the customer is charged an annual or assets under management fee by a bank that meets the conditions of acting in a trustee or fiduciary capacity or as an investment adviser for a fee, the entire annual or assets under management fee would be relationship compensation. This would also be the case if the fee included compensation for an unlimited number of transactions, even though the investor may only effect a few transactions. e. "Chiefly Compensated" Computation To calculate whether it is "chiefly compensated," Rule 3b-17(a) requires that a bank must first set aside any compensation received from an account that does not fall within the definitions of "relationship compensation" or "sales compensation," in Rules 3b-17(i) and (j), respectively. In other words, the bank must set aside "unrelated compensation." The bank then must identify the remaining compensation received from the account either as "relationship compensation" or "sales compensation," again based on the definitions of those terms in Rule 3b-17. To meet the definition of "chiefly compensated" in Rule 3b-17(a) for this account, the bank's relationship compensation from the account must exceed its sales compensation for that account in the immediately preceding year, which can be either a calendar year or other fiscal year consistently used by the bank for recordkeeping and reporting purposes.153 A simple chart providing an example of the "chiefly" calculation is set forth below. This chart is based on a trust customer with $1,000,000 in trust assets, all of which are invested in investment company securities. In this chart, the bank trust department charges a $1,000 annual base fee plus 1.235% of the first $1,000,000 under management. For the $1,000 annual base fee, the bank provides continuous and regular investment advice and allows the customer to effect securities transactions on an occasional and irregular basis. Because the bank also provides fiduciary services in addition to trades for this fee, this fee would be relationship compensation. The 1.235% of assets under management fee is not related to the customer's self-directed trades, and therefore would be relationship compensation.154 The bank also receives 41 basis points as sales compensation in the form of Rule 12b-1 fees from the investment company.
The account meets the "chiefly compensated" definition because the $13,350 in relationship compensation exceeds the $4,100 in sales compensation. In defining "chiefly compensated," we have taken a conservative approach by adopting a definition that requires that the "relationship compensation" simply exceed the "sales compensation" on an annual basis. This definition depends upon all of the imbedded definitions and interpretations, including our definitions of the terms "relationship compensation," "sales compensation," and "flat or capped per order processing fee equal to not more than the cost incurred by the bank in connection with executing securities transactions for trustee and fiduciary customers." In addition, the items included within each of the categories of compensation were carefully chosen in consideration of the test that simply requires that the "relationship compensation" exceed the "sales compensation." We considered requiring a higher level of relationship compensation in interpreting this phrase as we did in interpreting "predominantly" with respect to the origination of asset-backed transactions in Rule 3b-18.155 Requiring a higher level of relationship compensation, at least initially, also would have been consistent with the approach taken by the Federal Reserve as the revenue test for so-called section 20 subsidiaries developed.156 We chose the more than 50% approach for the purposes of this interim final rule. We solicit comment on whether the chiefly test should be higher, such as 75% or 90%. f. RULE 3a4-2 - Exemption For Banks That Are Compensated By Relationship Compensation
We are particularly sensitive to the concerns expressed by banks regarding the compensation computations required under the trust and fiduciary activities exception. Therefore, we are adopting Rule 3a4-2157 to permit banks that are compensated almost entirely by relationship compensation to avoid making calculations on an account-by-account basis. We find that this exception is necessary or appropriate in the public interest and is consistent with the protection of investors.158 It should minimize the costs and regulatory burdens on banks arising from the GLBA requirements relating to the trust and fiduciary compensation computations discussed above. New Rule 3a4-2 exempts a bank from the definition of "broker" if it: (1) complies with the trust and fiduciary activities exception, except for the "chiefly compensated" condition; (2) can demonstrate that sales compensation, as that term is defined in Rule 3b-17, received during the immediately preceding year for its total fiduciary activities is less than 10% of the total amount of relationship compensation, as that term is defined in Rule 3b-17, received for its total fiduciary activities during the same year; (3) maintains procedures reasonably designed to ensure compliance with the definition of "chiefly compensated" with respect to a trust or fiduciary account: (i) when the account is opened, (ii) when the compensation arrangement for the account is changed, and (iii) when sales compensation received from the account is reviewed by the bank for purposes of determining an employee's compensation; and (4) complies with the requirement that resulting orders be executed through a broker-dealer (or in a cross trade). A bank must first determine whether a trust or fiduciary account involves activities for which the bank relies on the trust and fiduciary activities exception. Compensation from accounts that do not hold securities would not be included in the 10% calculation because the definitions of relationship compensation and sales compensation are based on securities activities conducted under the trust and fiduciary activities exception. Similarly, compensation received by the bank for activities covered by another exception or exemption would not be included in the 10% calculation. Once a bank determines which accounts contain securities, which should be done at the same time as the 10% calculation, the bank can use the total compensation received from these accounts for the 10% calculation. A simple chart providing an example of the 10% calculation is set forth below. The bank's total revenue is $1,000,000 from its trust and fiduciary accounts that contain securities. The bank acts as a personal trustee, and as an ERISA trustee. Asset under management and annual fees from its personal trusts and ERISA trusts are the bank's main source of revenue. The bank also receives sales compensation in the form of Rule 12b-1 fees and fees for executing trades that are not flat or capped per order processing fees.
The bank would meet the 10% calculation because its sales compensation, $20,000, is less than 10% of its relationship compensation, $980,000 ($20,000 / $980,000 = 2 %). A second chart using the example of a bank acting as an indenture trustee illustrates the interaction of this exemption with other exemptions, statutory exceptions, and non-securities income. An indenture trustee receives income from five sources: annual fees, fees for effecting transactions in government securities that are not flat or capped per order fees, fees for non-securities related services, Rule 12b-1 fees for investing in no-load money market funds, and non-flat or capped per order fees for effecting transactions in securities that are not covered by another exception. Even though the bank is charging the indenture trusts transaction fees for government securities that are not flat or capped per order processing fees, these fees would count as unrelated compensation for purposes of the 10% calculation because the transactions are covered by the permissible securities transactions exception.159 Similarly, the Rule 12b-1 fees for no-load money funds (which are sales compensation) would count as unrelated compensation for purposes of the 10% calculation because the bank is exempt for effecting transactions in no-load money funds when acting as an indenture trustee under Rule 3a4-3. Fees for non-securities related services would also be excluded from the 10% calculation as unrelated compensation.
The bank would meet the 10% calculation because its sales compensation, $50,000, is less than 10% of its relationship compensation, $5,000,000 ($50,000 / $5,000,000 = 1 %). As discussed above, the bank must maintain procedures reasonably designed to ensure compliance with the chiefly compensated condition with respect to a trust or fiduciary account: (1) when the account is opened; (2) when the compensation arrangement for the account is changed; (3) and when sales compensation received from the account is reviewed by the bank for purposes of determining an employee's compensation. We do not believe that these procedures will be unduly burdensome to banks. Rather, the procedures need to be reasonably designed to ensure compliance with the definition of "chiefly compensated" with respect to a trust or fiduciary account in the three described situations. For new accounts, bank employees could project on a prospective basis whether an account, depending on the type and activity of the account, is likely to generate more of its revenue from relationship compensation than sales compensation. For existing accounts, bank employees could review whether an account, depending on the type and activity of the account, generated more of its revenue from relationship compensation than sales compensation. In addition, under the compensation element of the requirement, the bank needs to maintain procedures for situations in which the bank uses sales compensation received from accounts in determining the compensation of an employee. The bank does not need these procedures if it only uses relationship compensation received from accounts in determining an employee's compensation. If, after reviewing an account, a bank determines that the account either is likely to exceed the compensation limits or has done so in the past, the bank must follow its procedures to bring the account into compliance with the "chiefly compensated" definition. For example, a bank can do this by revising the compensation schedule or shifting the securities trades into the client's brokerage account. We believe this exemption, which permits banks to avoid calculations on a continuous basis in much of their traditional trust business, is consistent with Congress' dual intents of not disturbing traditional trust activities and requiring securities business that has been conducted in the trust department to be administered in the future by a broker-dealer that is subject to the investor protections available under the federal securities laws. g. RULE 3a4-3 - Exemption From "Chiefly Computation" For Indenture Trustees We are adopting Rule 3a4-3160 to provide an exemption to address the use of the trust and fiduciary activities exception from the broker registration for banks that serve as indenture trustees. As discussed previously, banks may serve as indenture trustees in accordance with the requirements of the TIA. The issuer of a bond indenture may be a state, a municipality, a quasi-public authority, a school, a church, or any organization that needs to raise cash through the sale of bonds. Bonds may be sold to the general public, to a limited investor group, or to a single investor such as an insurance company or governmental agency. As a part of its duties as an indenture trustee, a bank also may invest otherwise idle cash in shares of money market investment companies or other securities, solely at the direction of the issuer of the bonds. Commonly, compensation that may be received from an investment company or its distributor for investments of mutual funds is considered when the terms of the trust indenture, including the bank's compensation, are negotiated. The trust and fiduciary activities exception requires banks to compute for each trustee or fiduciary account whether the bank meets the "chiefly compensated" condition. A bank acting as a trustee under an indenture may not meet the condition that it receive more of its compensation from relationship compensation than from sales compensation because of fee structures individually negotiated with the issuers. Therefore, we are adopting, in Rule 3a4-3, an exemption from the definition of broker for banks acting in the narrow role of indenture trustees investing in no-load money market funds. Rule 3a4-3 provides that, if a bank, acting in its capacity as a bond indenture trustee, complies with all of the conditions of the trust and fiduciary activities exception, other than the compensation condition, the bank is exempt from the definition of the term "broker" solely for effecting transactions as an indenture trustee in no-load money market funds.161 Granting banks acting as indenture trustees an exemption to directly place idle cash in a no-load money market fund, an investment vehicle with a constant net asset value per shares and without a sales load, does not create any serious risk of abuse. In addition, the limit in the exemption to no-load, money market funds is consistent with the sweep accounts exception, which provides that a bank may invest depositors' funds through a sweep program without being considered a broker as long as the bank limits its sweep program to no-load, money market funds. Also, granting such an exemption relieves banks acting as indenture trustees of the task of continually watching the maturity of an instrument with the draw schedule of a project financed by bond proceeds. Therefore, we find that this exception is necessary or appropriate in the public interest and is consistent with the protection of investors.162 h. Solicitation Of Comment We invite comment on the definition of "chiefly compensated," including whether other methods of calculation would accurately assess whether a bank is meeting the "chiefly compensated" condition, consistent with the investor protection concerns that we have expressed. We also request comment on whether we set the threshold test for being "chiefly compensated" too low and whether we should consider raising that test to a higher level, such as 75% or 90%. In addition, we request comment on whether the definition of "chiefly compensated" also should be changed to require a higher relative amount of "relationship compensation" in the event that any of the underlying definitions were to be changed. Further, we seek comment on the definition of "a flat or capped per order processing fee equal to not more than the cost incurred by the bank in connection with executing securities transactions for trustee and fiduciary customers." In particular, we are interested in whether we have struck an appropriate balance between accuracy and simplicity by permitting banks to pass on costs of resources exclusively dedicated to trustee and fiduciary transactions, but not pass on the proportional allocations of costs of shared resources. If proportional allocations of costs were permitted, would the record keeping costs exceed the benefits of permitting the allocations? We also solicit comment on both exemptions, and are especially interested other ways to exempt banks that receive small amounts of sales compensation and whether a line of business calculation is feasible. In addition, some banking industry representatives have told us that banks may charge one comprehensive fee for several accounts of an individual or members of one family. We seek comment on how to treat clusters of accounts for which a bank may charge a single fee attributable to all of the accounts in that cluster. We also seek comment on how to determine a nexus among such accounts to consider the scope of any additional relief that may be necessary. Section 3(a)(4)(B)(v) of the Exchange Act163 provides an exception from the definition of broker for sweep account activities. Under the exception, a bank will not be considered a broker if it "effects transactions as part of a program for the investment or reinvestment of deposit funds into any no-load, open-end management investment company registered under the Investment Company Act that holds itself out as a money market fund." The sweep accounts exception is intended to continue to allow banks to sweep funds into no-load money market funds without having to register as broker-dealers. Payments by investment companies of asset-based fees to distributors of their securities create a conflict of interest for the brokers and banks that are distributing these shares. The sweep account exception protects sweep customers from conflicts of interest created by compensation arrangements by limiting banks that are not registered as broker-dealers to sweeping deposit accounts into no-load, money market funds that pay minimal distribution fees. In addition, the sweep accounts exception's limitation to no-load money market funds results in limited risks to bank customers because of the constant net asset value of the funds, the absence of a sales load, and the minimal distribution fees that funds may pay to the banks. The term "no-load" is not defined in the GLBA or in the federal securities laws. Historically, the term "no-load" was viewed as meaning that neither investors in the fund, nor the fund itself, bore the costs of distributing the fund's shares, including making payments to broker-dealers.164 The Commission's adoption in 1980 of Investment Company Act Rule 12b-1, which for the first time permitted funds to use their assets to finance distribution expenses, created some confusion as to the meaning of the term.165 To address this confusion, the National Association of Securities Dealers, Inc. ("NASD") adopted Rule 2830(d)(4), which describes what a "no-load" investment company is. Rule 2830(d)(4) allows an NASD member broker-dealer to describe an investment company as being "no-load" or as having "no sales charge" if the investment company does not have a front-end or deferred sales charge, and if its total charges against net assets to provide for sales related expenses and/or service fees do not exceed 0.25 of 1% of average net assets per annum.166 Although the rules of the NASD expressly apply only to the conduct of NASD member broker-dealers and their associated persons, our Division of Investment Management has endorsed the NASD's definition of "no load" regardless of whether an investment company is associated with an NASD member. We believe that the NASD's definition of "no load in NASD Rule 2830(d)(4) is reasonable, and we have adopted this definition in Rule 3b-17(f). This definition should help clarify the sweep accounts exception. We also are adopting a definition of "money market fund." Specifically, Rule 3b-17(e) defines that term as an open-end management investment company registered under the Investment Company Act that is regulated as a money market fund pursuant to Rule 2a-7 under the Investment Company Act. Rule 3b-17(f) provides that an investment company registered under the Investment Company Act is "no-load" if: (1) purchases of the investment company's securities are not subject either to a sales load (as that term is defined in Section 2(a)(35) of the Investment Company Act) or a deferred sales load (as that term is defined in Rule 6c-10 under the Investment Company Act); and (2) its total charges against net assets that provide for sales or sales promotion expenses167 and for personal services or the maintenance of shareholder accounts do not exceed 0.25 of 1% of average net assets annually and are disclosed in the mutual fund's prospectus.168 A bank can meet the conditions of the sweep accounts exception contained in Exchange Act Section 3(a)(4)(B)(v) if it invests customer assets through its sweep program in money market funds that meet the definition contained in new Rule 3b-17(e). All charges against fund assets that fall within the definition count toward the 0.25 of 1% limit, whether they are disclosed as an item in the fund's fee table or as part of the fund's miscellaneous or aggregate expenses. Rule 3b-17(f) gives effect to the "no-load money market fund" condition of the sweep account exception by reflecting current industry and public understanding of what "no-load" means. The rule would not prevent a bank from directly charging its customers for the bank's sweep services, because such direct charges would have no effect on whether the fund is a "no-load" fund. The rule also would not prevent a bank from sweeping accounts into a money market fund that charges more than 0.25 of 1% of net assets under its Rule 12b-1 plan, provided that it charges a total of no more than 0.25 of 1% of the fund's net assets for sales or sales-related expenses and fees for personal service or the maintenance of the shareholder accounts.169 We find that our definitions of the terms "no-load" and "money market fund" used in the sweep accounts exception are consistent with the provisions and puroses of the Exchange Act.170 D. Safekeeping And Custody Activities Exception Exchange Act Section 3(a)(4)(B)(viii) provides an exception from the definition of broker for certain safekeeping and custody activities.171 Under the exception, a bank will not be considered a "broker" because, as part of customary bank activities, it engages in certain specified types of safekeeping and custody services with respect to securities on behalf of its customers.172 Traditionally, activities that have been identified as the type of activity requiring broker-dealer registration include, among other things, executing securities transactions and holding customer funds and securities.173 The safekeeping and custody exception makes clear that banks, as part of customary banking activities, may hold customer funds and securities without being considered a broker if, except with respect to government securities, they do not act as a carrying broker.174 In addition, the safekeeping and custody exception explicitly allows banks that hold securities for their customers, on behalf of their customers, to exercise warrants or other rights, facilitate the transfer of funds or securities in connection with the clearance and settlement of the customers' transactions, effect securities lending or borrowing transactions when the securities are in the custody of the bank, invest cash collateral pledged in connection with securities lending or borrowing transactions, and facilitate the pledging or transfer of securities that involve the sale of those securities.175 Moreover, banks may provide custody and related administrative services to IRAs, pension, retirement, profit sharing, bonus, thrift savings, incentive, or other similar benefit plans without being considered a broker.176 Securities trades conducted under the safekeeping and custody exception must still be executed in compliance with Exchange Act Section 3(a)(4)(C). Exchange Act Section 3(a)(4)(C) requires banks that accept orders to the extent they engage in transactions under a specified safekeeping and custody function either to transmit orders to be executed to a registered broker-dealer or to internally cross those orders. Exchange Act Section 3(a)(4)(C) ensures that when investors purchase or sell securities through banks under the trust and fiduciary activities exception, safekeeping and custody exception, and certain stock purchase plans exception, registered broker-dealers, rather than unregulated market intermediaries, ultimately execute those transactions. Exchange Act Section 3(a)(4)(C) does not require all orders to purchase and sell a security to be sent to a registered broker-dealer. To read the section otherwise would mean that a bank would always be required to purchase or sell the underlying securities through a registered broker-dealer in connection with, for example, an investor's exercise of rights or warrants. This would preclude a bank from filling an investors' exercise of rights or warrants by delivery of shares from the issuer - a commonly used method. However, if a bank does purchase or sell the underlying securities in the open market, Exchange Act Section 3(a)(4)(C) requires banks either to execute the transactions through a registered broker-dealer or internally to cross the trade. Furthermore, Exchange Act Section 3(a)(4)(C) should not be read to permit a bank to accept orders for the purchase or sale of securities in situations not specifically provided for under the safekeeping and custody exception. In this regard, it does not expand a bank's ability to accept orders for the purchase or sale of securities without registering as a broker-dealer. Congress also did not intend the safekeeping and custody activities exception to allow banks to engage in broader securities activities.177 For example, although the safekeeping and custody exception permits banks to provide custody and related administrative services to IRAs and various benefit plans,178 as one of the limited securities-related activities that can be conducted under the safekeeping and custody activities exception, the exception does not allow banks, under the rubric of providing these "related administrative services,"179 to accept orders to purchase and sell securities. The point at which orders are accepted from customers and routed for execution represents a critical juncture for an investment decision and results in the consummation of the sale. Therefore, it is important that the customer protections, such as employee sales practice and training requirements, that flow from broker-dealer registration and application of the federal securities laws apply at this juncture.180 Accepting orders necessarily involves communication with customers. The risks inherent in communication with customers relating to securities transactions -- sales practice abuses and customer confusion -- as well as related order taking risks, are risks that the securities laws are uniquely designed to address. Accepting orders to buy and sell securities also implicates concerns traditionally covered by the federal securities laws and the requirement of best execution.181 For these reasons and the others discussed above, we have determined that "custody" or "related administrative services" do not include accepting orders from investors to purchase or sell securities. In particular, we do not believe that by its terms the safekeeping and custody exception covers a bank that accepts orders from investors to purchase or sell securities other than those specifically permitted in the exception, such as with respect to securities lending and borrowing or investing collateral. We are supported in our conclusion by a comprehensive reading of the GLBA broker exceptions. An interpretation that banks engaged in safekeeping and custody services may accept orders without being required to register as broker-dealers would contradict the comprehensive statutory scheme of limited brokerage exceptions with the attendant conditions that Congress established for banks to be able to effect securities transactions without any of the investor protections available under the federal securities laws.182 Bankers have asserted that the custody exception was intended to preserve all "customary" activities involving custody accounts. This exception, however, just like the other exceptions from broker-dealer registration, was not designed to protect from the federal securities laws every existing bank brokerage activity. Prior to the passage of the GLBA, banks could operate a brokerage business without any conditions and still be excepted from broker-dealer registration. By replacing the blanket exception with specific exceptions, the GLBA limited the range of excluded bank securities activities. Therefore, the terms of a specific exception and the purpose of the exceptions must be examined to determine what bank securities activities were, in fac |