Teachers Insurance and Annuity Association
College Retirement Equities Fund

730 Third Avenue/New York, NY 10017-3206
212 490-9000
Stewart P. Greene
Chief Counsel, Securities Law
(212) 916-5954

July 17, 2001

Via Overnight Courier

Mr. Jonathan G. Katz
Secretary
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549-0609

Re: Interim Final Rules under Sections 3(a)(4) and 3(a)(5)
of the Securities Exchange Act (File No. S7-12-01)

Dear Mr. Katz:

Teachers Insurance and Annuity Association-College Retirement Equities Fund ("TIAA-CREF") is pleased to submit comments on the Securities and Exchange Commission's Release No. 34-44291 (the "Release") which established interim final rules (the "Interim Rules") regarding the definition of terms in and specific exemptions for banks and savings associations under the Securities Exchange Act of 1934 (the "Exchange Act").

We commend the staff for recognizing the need to clarify certain aspects of the changes to the Exchange Act contained in the Gramm-Leach-Bliley Act ("GLB Act") and we appreciate the significant efforts of the staff in preparing these proposals. We believe that the Interim Rules successfully address many of the issues raised by the GLB Act and we in particular support the recognition of savings associations as banks under the Interim Rules. We, however, believe that certain aspects of the Interim Rules are more restrictive than intended by the GLB Act and could be modified to better reflect the GLB Act's principles of functional regulation. Certain suggested clarifications and modifications are discussed below.

Introduction and Background

TIAA is a non-profit stock life insurance company. Its companion organization, CREF, is a non-profit corporation registered with the Commission as an investment company. Together, through the issuance of fixed and variable annuities, TIAA-CREF comprises the principal retirement system for the nation's education and research communities. TIAA-CREF serves over 2 million people at over 10,000 institutions and jointly manage over $270 billion in assets.

In addition to offering fixed and variable annuities, we offer a series of retail and institutional mutual funds with approximately $3.8 billion in assets. Affiliates of TIAA alsomanage tuition savings programs for fourteen states. A federal savings bank subsidiary of TIAA provides trust and asset management services to institutions and individuals and is registered as an investment adviser with the Commission.

Comments on the Interim Rules

I. Treatment of Savings Banks

We strongly support Rule 15a-9 of the Interim Rules which grants savings associations and savings banks an exemption from the definitions of "broker" and "dealer" on the same terms and conditions that banks are exempted from broker-dealer regulation. We believe this treatment is supported by the principles of functional regulation underlying the GLB Act as well as principles of competitive equality. In our experience, federal savings banks are subject to as comprehensive regulatory supervision by the Office of Thrift Supervision ("OTS") as provided by the Office of the Comptroller of the Currency to national banks. Indeed, in many aspects the activities of federal savings banks (and the applicable regulations of the OTS) are virtually identical to those of national banks (and the applicable regulations of the Comptroller of the Currency). For instance, with regard to fiduciary activities, the substantive requirement of 12 C.F.R. Part 550 mirror those of 12 C.F.R Part 9.

We would request that the Commission clarify that federal savings banks that engage exclusively in fiduciary activities and do not accept deposits from the public are still eligible for the exemption granted by Rule 15a-9. These entities are functionally equivalent to trust-only trust companies chartered under state or federal law and we believe should receive parallel treatment under the Exchange Act. Currently, all federal savings banks, including those limited to engaging in fiduciary activities, are required to obtain FDIC insurance coverage. However, trust-only federal savings banks typically have a single deposit from an affiliate that under a technical reading of the Federal Deposit Insurance Act could be interpreted as not insured by the FDIC. A small change in the wording of the rule to read - "Any savings association or savings bank which has federal deposit insurance under the Federal Deposit Insurance Act" rather than "that has deposits insured by the FDIC" - would clarify that trust-only federal savings banks are covered by the exemption.

II. Custodian for Retirement Plans

We are concerned that the Commission does not recognize the significant economic impact that its narrow reading of Section 3(a)(4)(B)(viii)(ee) of the Exchange Act will have on various types of pension, retirement, profit sharing, thrift savings, incentive, or other similar benefit plans. In the past, staff of the Commission has recognized that banks play an important role in effecting transactions for such benefit plans. See Universal Pensions, Inc., 1998 SEC No-Act. LEXIS 192 (Jan. 30, 1998). By stating that "custody or related administrative services do not include accepting orders from investors to purchase or sell securities," the Release tremendously complicates the operational realities faced by employers offering various benefitplans. This treatment creates an artificial distinction between types of benefit plans that utilize trustees and those that utilize custodians. Indeed, under Internal Revenue Code Section 401(f), a "custodial account shall be treated as a qualified trust if (1) the custodial account or contract would, except for the fact that it is not a trust, constitute a qualified trust, and (2) in the case of a custodial account the assets thereof are held by a bank." This statute clearly reflects Congress' acknowledgment that, in the context of benefit plans, custodial and trust relationships should be accorded equivalent treatment.

In our experience, institutions often offer their employees multiple benefit plans. Some of these plans are trusteed, while others use a bank as custodian. From the perspectives of plan administrators and employees, these benefit plans appear to operate in an identical manner with regard to the roles played by trustees and custodians. In our experience, many defined contribution benefit plans utilize investment company securities as an investment option for their participants. These securities are distributed by registered broker-dealers and all marketing materials for these securities are prepared by such broker-dealers. The roles played by banks are to (i) maintain omnibus accounts with multiple mutual fund families on behalf of benefit plans, (ii) net and relay orders for shares from plans to the various broker-dealers distributing these funds, and (iii) transfer funds to settle transactions. Restricting banks from netting and relaying orders to broker-dealers only in the case of benefit plans that are structured to utilize a custodian does not appear to offer significant additional protections to investors and would come at significant additional cost to benefit plans.

III. Fiduciary Compensation

We believe it is inappropriate to apply the "chiefly compensated" requirement to each fiduciary account held by a bank rather than to the bank's fiduciary activities as a whole. We believe that the general approach taken in Interim Rule 3a4-2 of looking at a bank's entire fiduciary business is appropriate. We would, however, raise the limit on the ratio of sales compensation to relationship compensation from 10% to 33% (i.e., $6 of relationship compensation allows for $2 of sales compensation). We believe that this higher limit would still satisfy the "chiefly compensated" standard of the GLB Act without unduly constraining how a bank and its customers decide to structure the bank's compensation. Under this higher limit, sales compensation could only make up approximately 25% of total compensation (i.e., in the example above, out of $8 of total compensation $2 would be sales compensation).

IV. Investment Advice for a Fee

We are troubled by two aspects of Interim Rule 3b-17(d): (i) the creation of a requirement of continuous monitoring of client investments and (ii) the potential federalizing of state fiduciary disclosure. The GLB Act did not impose any restrictions on how a client and a bank structure their advisory relationship, it simply allows a bank to effect transactions for its advisory customers. For example, the GLB Act appears to contemplate a bank offering a financial planning product under which, for a fee, the bank will annually prepare a financial planfor the client and then at the client's direction effect transactions to conform the client's portfolio to the results of the financial plan. By its nature, such a service would satisfy the periodic, but not the continuous, requirement of the Interim Rule. We believe that such a product may be appropriate for certain types of long-term investors and that such a product should not be subject to a continuous advice requirement.

Since disclosure of material facts relating to fiduciary conflicts of interest is an area that has historically been subject to extensive regulation by state fiduciary laws, we do not believe it is appropriate for the Commission to add an additional layer of federal scrutiny to the fiduciary disclosures of banks. Furthermore, we believe Interim Rule 3b-17(d)(2) risks creating a federal securities law cause of action for disputes over the extent of appropriate fiduciary disclosure. We do not believe Congress in passing the GLB Act intended to create such a result.

V. Transactions through NSCC

We strongly support Interim Rule 3a4-6. We believe that this Interim Rule recognizes the substantial efficiencies that both banks and investment companies can realize through banks effecting transactions in mutual fund shares through the National Securities Clearing Corporation's mutual fund services.

Conclusion

As discussed above, TIAA-CREF believes that the Interim Rules successfully address many of the issues raised by the GLB Act. As noted above, however, we believe that certain of the Interim Rules should be modified to ensure that the intent and purpose of the GLB Act are more fully reflected.

We would be pleased to discuss our views further with the staff if this would be helpful.

Very truly yours,

Stewart P. Greene