July 17, 2001
Jonathan G. Katz
Securities and Exchange Commission
450 5th Street, NW
Washington, D.C. 20549-0609
Re: Bank Broker-Dealer Interim Final Rules; Release No. 34-44291; File No. S7-12-01
66 Federal Register 27760 (May 18, 2001).
Dear Mr. Katz:
In response to the Securities and Exchange Commission's (SEC) interim final rules issued on May 11, 2001,1 Union Bank of California, N.A. ("UBOC") respectfully submits the following comments in opposition to certain provisions of these rules, which address the broker-dealer exemptions of the Gramm-Leach-Bliley Act. We felt compelled to write in order to help you recognize the significant adverse impact these rules will have on our institution and express our dissatisfaction and frustration with the practical application it would have on our trust and banking operations.
UBOC is the second largest commercial bank headquartered in California with $34.4 billion in assets and is among the 35 largest banks in the United States. The Bank has more than 240 branches in California, Washington and Oregon, and offices in New York and Texas, as well as, 18 international offices. Our holding company is UnionBanCal Corporation. We are a full service commercial bank, providing a broad mix of financial services, including: consumer and small business banking, middle market banking, real estate finance, corporate banking, correspondent banking and trade finance, personal and business trust services, and domestic and global custody. UBOC administers more than $130 billion in trust assets, over $20 billion of which is managed by Highmark Capital Management, a registered investment advisor wholly-owned by UnionBanCal Corporation. Broker-dealer activities are conducted through UBOC Investment Services, Inc., a wholly-owned subsidiary of the bank and registered broker-dealer, which administers $8 billion in assets.
While we recognize that the SEC's primary mission is to protect investors and maintain integrity in the securities markets, UBOC considers your rules in their current state to be outside the scope and intent of GLBA, with certain provisions being too complicated, onerous, or ambiguous. Specifically, we contend that traditional trust, fiduciary, custodial, and other banking activities are exempt from broker-dealer registration, as intended with the enactment of GLBA. Most importantly, we have read the comment letters submitted by the American Bankers Association (ABA), ABA Securities Association (ABASA), and the federal banking agencies (FRB, FDIC, and OCC) and we, wholeheartedly, concur with the concerns stated therein.
Thus, in support of our comment letter, and those submitted by the ABA, ABASA, and federal banking agencies, we request that the interim final rules be reviewed and revised, and the deadline for implementation extended well beyond the October 1, 2001 compliance date.
The rule exceeds the scope of the enacting legislation.
While UBOC admits that certain provisions in Title II of GLBA were in need of clarification and interpretation, the interim final rules promulgated by the SEC were drafted too narrowly and exceed the scope and intent of GLBA. We were expecting rules that defined a clear test of requirements for broker-dealer registration and exemption. Instead, we received interim final rules, which significantly interfere with legitimate banking functions and add significant costs to current operations.
In recognition of the SEC's interest in supervising securities-related activities and providing meaningful guidance interpreting unclear provisions of Title II of GLBA, UBOC asks that the SEC consider taking a more moderate approach when crafting the revised final rule.
Adequate controls already exist to meet SEC's objectives of protecting investors and maintaining integrity in securities markets.
Under the supervision of the OCC, UBOC already maintains adequate controls over trust and banking activities. No historical abuse has ever been documented to support the necessity of narrowly drawn rules restricting a bank's ability to place trades for trust accounts or receive reasonable compensation for trust, fiduciary, and custodial services.
With investor suitability considered a prime objective of SEC supervision, fiduciary responsibility is the mandate for trustees, which dictates that a trustee must administer the trust solely in the interest of trust beneficiaries. The OCC's Regulation 9 governs fiduciary activities of national banks and establishes the standards that banks must adhere to when acting in its fiduciary capacity.2 We argue that fiduciary responsibility is a higher standard than investor suitability. A trustee is not permitted to place himself in the position where it would be in his own interest to violate his duty to trust beneficiaries.
The rule pertaining to the trust and fiduciary exemption is complicated, burdensome, and requires significant changes in processes, which crosses many business units.
To qualify for the trust and fiduciary exemption, the bank's compensation for effecting securities transactions must consist "chiefly" of an administration fee or annual fee, a percentage of assets under management, a flat or capped per order processing fee that does not exceed the cost of executing the securities transaction for trust or fiduciary customers, or a combination of such fees.
Again, UBOC concedes that the term "chiefly" as stated in GLBA was ambiguous. However, the interim final rules caused more confusion by designing a complicated scheme for calculating relationship compensation (good compensation) vs. sales compensation (bad compensation), where relationship compensation must be greater than sales compensation. Some of our compensation programs for trust and fiduciary accounts have fee structures where we can't determine whether the fees received are considered "good" or "bad" compensation or the type of compensation that is excluded altogether from the calculation. For example, how would we characterize a practice where part of the compensation received for trust accounts comes from account analysis (a unique fee structure based on multitiered relationship/affiliation management and bundling products and services) and reduced trust fees, because the bank passes compensation to the trust department based upon the customer's overall relationship with the bank?
For our employee benefit plans, the fee schedule discloses the specific charge for each service and UBOC does not charge more than what is disclosed. This fee schedule is based on what is reasonable in the market, governed by ERISA, and relies significantly on shareholder servicing and 12b-1 fees to compensate the trustee for services rendered. However, according the interim final rules, 12b-1 fees and other service fees, although acceptable under ERISA, would be characterized as sales compensation (bad compensation). Thus, many of the compensation programs for UBOC's bundled 401(k) and other employee benefit plan products would fail under the trust and fiduciary exemption. UBOC is a major provider of such bundled employee benefit plan services, which due to their highly automated systems would be disrupted if thousands of daily transactions had to be conducted through brokers.
Banks receive compensation for trust and fiduciary accounts largely through asset-based sales charges, which we consider to be within our jurisdiction and determination. The calculation scheme required by the interim final rules results in arbitrary decisions, which don't appear to achieve the SEC's desired intent of preventing unregistered bank employees from receiving incentive compensation for accommodating securities trades deemed unsuitable for trust customers.
If UBOC were to attempt to comply with the SEC's interpretation of requirements for exempting certain managed securities-related activities from broker-dealer registration, such as placing trades for trust account customers, this process would prove to be extremely costly and burdensome.
Cost factors for compliance with the recordkeeping responsibilities of calculating and documenting the "chiefly compensated" calculation for the fiduciary exception dictated by the SEC Rules are prohibitive.
While you didn't specifically request a cost analysis for implementing the final rules, we have projected that our estimated cost for complying with the "chiefly compensated" calculations for incentive compensation programs, in order to qualify for the Fiduciary exemption, would be over $10 million. Since we determined that the calculation process couldn't possibly be performed manually due to the number of accounts and frequency, this estimate is based upon the following:
It is the account-by-account analysis that is daunting and intimidating. Moreover, the 10 percent alternative calculation method allowed for computing aggregate sales compensation of all trust and fiduciary accounts to ensure that it does not exceed 10 percent of relationship compensation, doesn't provide much relief. We would still have to monitor on an account-by-account basis to ensure ongoing compliance.
Given that we are unclear as to how the SEC will examine compliance with the rules, detailed documentation and certifications will be necessary to reference our interpretations and attempt to fully comply.
This cost does not include the costs associated with redesigning a compensation program to meet the "chiefly compensated" standard dictated by the SEC rule, preparing trust employees (as dual employees) to pass the licensing examination for becoming a registered representative, or "pushing out" all or a portion of the securities-related services to our broker-dealer affiliate.
Unfortunately, if we must take the necessary steps to perform this calculation in order to utilize the trust and fiduciary exception, most of the cost will be passed on to our clients.
The SEC's interpretation of the safekeeping and custody exemption is infeasible, since it prohibits banks from effecting securities trades for self-directed IRA and other employee benefit accounts where the bank acts as custodian.
According to the interim final rules, customary custodial order-taking services do not qualify for exemption from broker-dealer registration. Banks have a long-standing tradition of allowing clients to effect securities trades on an accommodation basis. By allowing this, our customers avoid needless expenses and the nuisance of having to open a separate account with a broker-dealer. When banks place trades for our clients through a registered broker-dealer, we are able to combine custodial and administrative services, which reduce overall plan expenses and benefit plan beneficiaries.
The definition interpreted by the SEC for referral compensation under the networking exemption is too narrow and restrictive.
The interim final rules state that bank employees may not receive incentive compensation for any brokerage transaction, but may receive compensation for the referral of customers if the compensation is a nominal one-time cash fee of a fixed dollar amount and the payment is not contingent on whether the referral results in a transaction.
The nominal one-time cash fee of a fixed dollar amount is interpreted in the interim final rules as an amount not to exceed one hour of an employee's gross hourly wage. Taken literally, this amount could be as low as $7.15 for UBOC employees. We contend that a definition of a nominal one-time cash fee is not necessary. If the SEC is so inclined to define one, then the guidance should be closer to industry standards, which range from $10 to $100, not an amount so low it provides little to no incentive for low-level employees and totally defeats the purpose of the program. Essentially, this restriction will prohibit banks from constructing referral programs under the networking exemption. Most of our referral programs are already in place for calendar years 2001 and 2002. More time would be needed to modify such programs.
The SEC should reconsider the timing of implementing their final rules and Title II of GLBA.
Given the current timeframe for mandatory compliance, completion of the process for implementation is impossible. While the stated effective date is October 1, 2001, you have agreed to accept comments on the final rule until July 17, 2001. Assuming that you will carefully review each comment letter received, any revisions to the interim final rules could not be published before late August or early September. We strongly urge that the SEC allow banks a reasonable timeframe to design systems and processes for compliance with any revised rules.
UBOC urges the SEC to reconsider its interim final rules in order to incorporate changes and clarifications from the comments received and, upon issuance of revised final rules, allow adequate time for implementation. The concerns outlined in the banking agencies' comment letter are very articulate and accurately reflect the specific concerns affecting UBOC.
UBOC thanks the Securities and Exchange Commission for its consideration of our views. We understand that the SEC has an obligation to enforce Title II of GLBA. Yet, we hope that any rules promulgated by you would take into account the historical operations of trust and banking industries and allow sufficient time for compliance with rules that are complicated and require significant changes to current banking operations. Should there be any questions, or if further information is needed, please feel free to contact our Chief Compliance Officer, Stuart Lehr, at (415) 291-4780.
President and CEO
cc: hartnack, stolte, westerbeek, sekiguchi, lehr, andrews, moynihan, king, leahy, richey, wilson, wright, konkol
|1||Release No. 34-44291, 66 Federal Register 27760 (May 18, 2001).|
|2||12 CFR 9 - Fiduciary Activities of National Banks|