July 12, 2001
VIA E-MAIL AND UPS OVERNIGHT
Mr. Jonathan G. Katz, Secretary
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, DC 20549-0609
Dear Mr. Katz:
The undersigned is General Counsel to the Association of Independent Trust Companies, Inc. (referred to herein at times as "the Association" or "AITCO"), a trade group that represents over 100 trust companies throughout the country. Most of the trust companies that are members of the Association are non-depository trust companies that do not make loans. While we do have a few members that have assets under management in excess of a billion dollars, the typical member of the Association has assets under management of between $50,000,000 and $500,000,000. Therefore, the exemption from the registration requirements under the Exchange Act for broker/dealers should be applicable to most of the members of the Association. However, elimination of the blanket exemption for banks and trust companies from registration as a broker/dealer under Sections 3(a)(4) and 3(a)(5) of the Securities Exchange Act of 1934 (the "Exchange Act") and the vast complexities of the interim regulations will create a significant burden for our members. In light of the business of our members, these complications seem unwarranted.
The Association understands that functional regulation was mandated by the Gramm-Leach-Bliley Act ("GLBA"). Even though the GLBA will be of significant benefit to a number of larger, multifaceted financial organizations, the typical member of AITCO will not be a beneficiary of the allowable affiliations between brokerage, insurance and banking institutions. However, the requirements to either register as a broker/dealer under the Exchange Act or fit within one of the tightly constrained exemptions will require constant monitoring on behalf of our members. While the regulations adopted by the Commission may be applicable in many instances, I intend in this letter to focus specifically on the exemption for trust and fiduciary activities and on the "small bank" exemption applicable to AITCO members. Obviously, because of the makeup of our membership, most of the transactions of our members are done in a trustee or other fiduciary capacity. Our members are chartered as trust companies or banks under various state laws or through the Office of the Comptroller of the Currency ("OCC") or the Office of Thrift Supervision ("OTS"). Further, most of the members of AITCO do not solicit brokerage business but conduct brokerage business as an incidental part of their trust business. The final requirement for the trust and fiduciary exemption contained in the interim regulations, and the one that causes us greatest concern, is that the trustee be "chiefly compensated" for transactions on a "relationship" basis as opposed to a "sales" basis. In addition, the "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" will be difficult for our members to implement on a cost-effective basis.
The requirement to continually calculate and recalculate the compensation received by a trust company to determine whether it is "relationship compensation" or "sales compensation" will impose a meaningful increase in cost and complexity for our members. The further requirement that any fee charged for order processing be capped at an amount equal to the "cost" of the processing also is difficult to obtain. For instance, in most cases, our members do not have one individual who will be spending 100% of their time in this area. Therefore, we suggest that if the regulations are to remain in place, an entity be allowed to demonstrate that a portion of an individual's time dedicated to this process would be able to be counted as a "cost" for purposes of determining a flat or capped per order processing fee.
Most of our members receive fees based upon the amount of assets under management, billed on a monthly or quarterly basis, as opposed to payments based upon the number of securities transactions. However, as trust and investment services is the only business performed by these entities, they should be exempt from the regulations, whether or not they charge additional amounts for execution of what might be deemed "excessive" trades. Most trust companies provide both trustee and custodial services, as well as investment management services. To require these entities to become licensed as a broker/dealer would be inconsistent with the company's reason for existence as a trust company. We appreciate the fact that the definition currently requires only that "relationship compensation" be greater than 50% of the total revenues of the company and greater than "sales compensation" in order for a company to be able to avail itself of the exemption. We would strongly suggest that the amount of "relationship compensation" not be increased to between 75% and 90% as suggested in the regulations. This would make it much more difficult for trust companies to assure themselves that they have an exemption from the burden of reporting to an additional regulator in this regard.
It is interesting to note that banks and trust companies continue to be exempt from the requirements of the Investment Advisors Act of 1940 because of their regulation by a banking regulatory agency as a bank or trust company. Most of our trust company members are state-chartered members and are closely monitored and regulated by their state banking commissioner or superintendent. Unlike brokers who will be reporting to and examined by the Commission, this will create the additional burden of being examined by two or more separate and distinct regulators with potentially conflicting requirements whether they be state or federally-chartered trust companies.
In addition, the release on the regulations notes that 12b-1 fees create a conflict between the bank, as distributor, and investors. While this may be true in many instances, it is not universally true if appropriate disclosure of such fees is made and there is state law supportive of the ability to accept such payments. It seems that the various banking regulations, ERISA standards and Department of Labor regulations already adequately protect clients of trust companies in this regard.
The potential that a trust company would be obligated to add an additional regulator to its already highly regulated industry is extremely distressing to our members. It is assumed that the vast majority of AITCO members will make every effort to attempt to maintain "relationship compensation" in excess of "sales compensation" and otherwise meet the requirements to avail itself of the exemption. Still, structuring and restructuring the business and the methodology by which it charges its clients based solely upon avoidance of registration as a broker/dealer appears to be an inappropriate way to require companies to operate. It seems that the highly regulated area of banking already provides sufficient and adequate protections for the clients of trust companies without the need for additional regulation by the Commission. As GLBA was intended to address the complexities of much larger financial institutions, it is AITCO's position that for trust institutions such as our members, regulation by the Commission as a broker/dealer is an unnecessary additional burden and such companies should be exempted from the regulations.
While the release seems to indicate the opinion of the Commission that most fiduciaries already maintain the type of records necessary to determine the amount of "relationship" and "sales" compensation, this may not be true in many instances. The exemptions contained at Rule 3a4-2 also exempts a bank from the definition of "broker" if it meets the other standards mentioned above and less than 10% of the total amount of relationship compensation is received as "sales" compensation. Again, while this may provide an exemption for certain entities, it requires additional testing and monitoring.
Rule 3a4-4 provides an exemption for small bank custodians effecting transactions in investment company securities for tax deferred custody accounts. While the definition is one generally understandable to the traditional "bank", the definition is confusing in regard to trust companies. The "assets" of a trust company, such as a member of AITCO, are in almost all cases less than $100,000,000, as the entities do not make loans, the traditional "asset" of most true banks. Assets under management may well exceed $100,000,000, but the assets of the entity itself (which is basically the company's capital account) do not exceed that amount. In addition, certain clients of trust companies do avail themselves of open end investment companies as investment vehicles because in some cases they are more cost effective than the selection of individual securities. This "small bank" exemption, on its face seems that it would be available to our members. This may or may not be the intent of the Commission's regulations and is worthy of review. Another problem presented by the definitional requirements is that the bank's compensation related to effecting transactions in securities pursuant to the exemption must be less than 3% of its annual revenue. Again, while this may be appropriate for a true bank, it is not a workable exemption for trust companies which do not earn revenue from loan payments.
While we intend to advise our membership of the potential applicability of these regulations to their business, we hope that the Commission will reconsider implementation of the regulations either in their entirety or as applied to non-depository, limited purpose trust companies such as our members. AITCO members already are subject to myriad regulations from banking and other agencies. For our organizations to be forced to comply with these interim regulations will be burdensome and confusing, and will provide little additional protection for our members' clients. If you have any questions or comments in this regard, please contact me by e-mail at firstname.lastname@example.org or by phone at 419-841-8051. If you would like to learn more about AITCO, please go to our web site at www.aitco.net. On behalf of the Association, thank you for your consideration of this letter. We look forward to further modification and information regarding the regulations.
Thomas C. Blank
General Counsel to
The Association of Independent Trust Companies, Inc.