September 4, 2001
Jonathan G. Katz
Securities and Exchange Commission
450 5th Street, N.W.
Washington, D. C. 20549-0609
Re: Bank Broker-Dealer Interim Final Rules: Release No. 34-44291;
File No. S7-12-01
Dear Mr. Katz:
I am writing on behalf of the Virginia Bankers Association ("VBA") to comment on the interim final rules ("Interim Rules") recently issued by the Securities and Exchange Commission ("SEC") concerning the bank broker-dealer registration exceptions under the Gramm-Leach-Bliley Act of 1999 ("GLBA"). The VBA represents over 150 commercial banks, savings associations, and savings banks doing business in the Commonwealth of Virginia.
While we appreciate the hard work the SEC has put into the Interim Rules, we do have a number of serious concerns. In this regard, we believe the SEC has misinterpreted GLBA and its legislative history in certain important instances by setting forth complicated rules where none are called for. Thus, unless revised, the Interim Rules will create significant and costly compliance burdens for banks, which will cause some banks (particularly smaller banks) to exit (or not enter) certain traditional lines of business. Again, we believe this is at odds with congressional intent.
Our specific concerns are as follows:
1. Referral Fees in Connection with Networking Arrangements
GLBA authorizes the payment of referral fees to bank employees in connection with third-party brokerage arrangements "if the compensation is a nominal one-time cash fee of a fixed dollar amount and the payment of the fee is not contingent on whether the referral results in a transaction." (15 U.S.C. §78(c)(a)(4)(B)(i)(VI)). Despite this straightforward statutory provision, the Interim Rule provides that a "nominal one-time cash fee of a fixed dollar amount" is limited to:
(1) Payments that do not exceed one hour of the gross cash wages of the bank employee making the referral; and
(2) Points in a system or program that covers a range of bank products and non-securities-related services where the points count towards a bonus that is cash or non-cash if the points (and their value) awarded for referrals involving securities are not greater than the points (and their value) awarded for activities not involving securities.
The Interim Rules' treatment of referral fees will make it almost impossible for banks to have bank referral fee programs. Rather than having the ability to pay a single nominal amount for any referral by any employee, banks will be forced to calculate on an individual employee basis the amount that can be paid for referrals, and make adjustments to such calculations on an ongoing basis as employees receive salary and other compensation increases. Not only does this create unnecessary complications, it unfairly bases the amount that can be paid as a referral fee on employee rank rather than the referral activity itself. In other words, an officer will be paid more than a front-line employee, even though each performed the same task (i.e., made a referral). This will inhibit the ability of a bank to instill a team approach and negatively affect bank employee morale.
Moreover, the compliance burden associated with tracking each employee's pay for purposes of determining how much can be paid for referrals will be enormous. There is simply no need to create this kind of complicated process.
With respect to the "points" system, we believe the Interim Rule is likewise much too restrictive. There is no need to require that products other than securities be available in any "points" program or that other products be treated the same as securities in determining points earned, since there are, in fact, differences which could justify different treatment in a points system. As long as the points system ultimately leads to the payment of a "nominal one-time cash fee of a fixed amount," it should not make a difference whether the bank's referral program involves other non-security activities or whether the amount of points awarded for securities referral activities is more than for other bank product referrals.
Finally, banks have for some time been operating under existing SEC rules with regard to referral fees that have worked fine. There is no justification now (and certainly none under GLBA) to turn the existing rules on their head with a whole new framework. The existing framework needs no mending.
2. Chiefly Compensated in Connection with Trust and Fiduciary Activities
Even though GLBA contains a clear exemption from the broker-dealer registration requirements for bank trust and fiduciary activities, the Interim Rule diminishes this exception by imposing a complicated "chiefly compensated" test for determining whether the exception would apply. Significantly, banks would have to determine each year on an individual account basis the "relationship compensation" and the "sale compensation" attributable to each such account. This represents an enormous compliance burden which, again, is simply unjustified under the plain meaning of GLBA's trust and fiduciary exception.
In particular, banks will be forced to develop costly and complex systems to track compensation for each trust or fiduciary account. In addition, banks will be subjected to compliance uncertainties through no fault of their own. For example, specialized arrangements could fail the "chiefly compensated" test simply because they do not fit neatly in the "account-by-account" review process.
While we applaud the SEC for providing an exemption from the "account-by-account" analysis where relationship compensation exceeds 90% of all compensation, the threshold (i.e., 90%) is too high for many banks to take advantage of this exemption. Accordingly, we would urge the SEC to revisit this issue to come up with a better approach that will work for all banks. In this regard, we would ask the SEC to adopt a test based on an "aggregate analysis."
3. Safekeeping and Custody Activities
GLBA provides that a bank, as part of its customary banking activities, may provide safekeeping or custody services with respect to securities without being considered a broker. Despite this clear language, the Interim Rule would prohibit banks from accepting securities orders in connection with their custodial IRA and 401(k) plan accounts.
The VBA contends that the Congress clearly intended to exempt "order taking" in connection with the safekeeping and custody exception. Accepting securities orders from their customers has always been a key part of what banks do for their custodial customers. Indeed, the federal banking agencies themselves view order taking as a customary component of a bank's custodial activities. Accordingly, there is no reason to "push out" order taking from the bank, and the plain meaning and background of GLBA does not support the SEC in its treatment of the issue.
We would note that the exceptions to this "push out" requirement would not work: the regulatory exception is too restrictive and the small bank exception is too narrow (limited to banks with $100 million in total assets).
4. Deadline for Compliance
Given the disruptive impact the Interim Rules may have on traditional banking operations, banks will need a great deal of time to comply. Accordingly, we believe mandatory compliance should not be required any earlier than one year from the date of the Interim Rules.
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In conclusion, we would urge the SEC to rework the Interim Rules to address the concerns raised by the VBA, as well as those raised by the federal banking agencies and other bank trade associations. We appreciate your consideration of our views.
Walter C. Ayers
Executive Vice President