|The PNC Financial Services Group, Inc.
249 Fifth Avenue
One PNC Plaza, 21st Floor
Pittsburgh, PA 15222-2707
|412 768-4251 Tel
412 762-5920 Fax
| James S. Keller
Chief Regulatory Counsel
July 17, 2001
By E-mail: firstname.lastname@example.org
Jonathan G. Katz
Securities and Exchange Commission
450 5th Street, NW
Washington, D.C. 20549-0609
Re: Interim Final Rules for Banks, Savings Associations, and Savings Banks Under Sections 3(a)(4) and 3(a)(5) of the Securities Exchange Act of 1934 (the "Exchange Act"), Release File No. S7-12-01 ("Interim Final Rules")
Dear Mr. Katz:
The PNC Financial Services Group, Inc. ("PNC") Pittsburgh, Pennsylvania, appreciates this opportunity to provide comments on the Interim Final Rules issued by the Securities and Exchange Commission ("SEC") (66 Fed. Reg. 27760 (May 18, 2001).
PNC is one of the largest diversified financial services companies in the United States, with $71.0 billion in assets as of March 31, 2001. Its major businesses include community banking, corporate banking, real estate finance, asset-based lending, wealth management, asset management and global fund services. Through PNC's full-service subsidiary banks, PNC Bank, National Association ("PNC Bank NA"), Pittsburgh, Pennsylvania, and PNC Bank, Delaware, Wilmington, Delaware, PNC has full-service banking offices in Delaware, Florida, Indiana, Kentucky, New Jersey, Ohio and Pennsylvania. Through several affiliated companies, PNC engages in retail banking activities nationwide.
PNC engages in a full range of securities brokerage activities through three subsidiary registered broker-dealers, PNC Capital Markets, Inc., PNC Brokerage Corp, and J.J.B. Hilliard, W.L. Lyons, Inc. ("Hilliard Lyons"), and provides investment advisory services through its registered investment advisors, including BlackRock, Inc., Hilliard Lyons, and PNC Brokerage Corp. PNC also offers investment management, custody and fiduciary (including trust) services through departments of PNC Bank, NA and PNC Bank, Delaware, that are regularly examined by bank examiners for compliance with fiduciary principles and standards. As of March 31, 2001, PNC had approximately $247.5 billion in assets under management through subsidiaries, including $64 billion under trust management by the banks.
Also, through its subsidiary PFPC, Inc. ("PFPC"), Wilmington, Delaware, PNC provides a full range of services to mutual funds, partnerships and other pooled investment vehicles, both domestic and offshore, including accounting and administration services, transfer agency and shareholder services, fund custody and securities lending services, global fund services and subaccounting services. PFPC is the largest full-service transfer agent to the mutual fund industry in the United States. PFPC also offers mutual fund distribution services through its five broker-dealer subsidiaries: PFPC Distributors, Inc., Offit Funds Distributor, Inc., BlackRock Distributors, Inc., Northern Funds Distributors, LLC, and ABN Amro Distribution Services (USA), Inc.
In light of the various securities-related activities conducted by PNC, including those conducted through PNC Bank NA and PNC Bank, Delaware, PNC has a significant interest in the Interim Final Rules. PNC was actively engaged, both directly and through trade associations, in the deliberations leading up to the enactment of the Gramm-Leach-Bliley Act ("GLB Act"), including Title II. PNC thought it had a clear idea of the intent of Congress in enacting Title II, and was relatively confident that it was well positioned to comply with those provisions, based on the language of the statute and its understanding of the legislative intent underlying the statute. PNC, like the bank regulatory agencies, the bank trade associations, and numerous other banks, was surprised by, and respectfully disagrees with, the positions taken by SEC staff and the SEC's Interim Final Rules regarding the "push-out" provisions.1
PNC agrees with the views expressed in the Agency and ABASA Letters that the Interim Final Rules are "in a number of critical respects contrary to the express statutory language in the exemptions and congressional intent," and create "an extremely burdensome regime of overly complex, costly and unworkable requirements that effectively negate the statutory exemptions and the congressional intent underlying those exemptions."2 In response to the specific request of the SEC that "all interested parties ...provide specific practical comments on the rules as written," PNC is providing below both general and specific comments on how to address some of the issues in the Interim Final Rules;3 however, even if the specific recommended changes were made, the Interim Final Rules might still be at variance with the statutory language of Title II and the congressional intent underlying these provisions. The recommended changes are ones that PNC believes are needed at a minimum.
Process and Timing
As an initial matter, PNC respectfully suggests that the Interim Final Rules should have been published as, and should be considered, proposed rules. In this regard, in light of the Agency and ABASA Letters and discussions that have been held between banking industry representatives and SEC staff, it appears that there is significant disagreement with the SEC's contention that the Interim Final Rules "do not impose any new obligations beyond those created by the statute."4 In addition, given the numerous issues raised by the Interim Final Rules, PNC would recommend that the SEC provide for an additional comment period after it promulgates rules in response to this round of comments.
Given the complexity and controversial nature of the Interim Final Rules, the timing of the effective date of the Interim Final Rules indeed places banking organizations in an "untenable position."5 Because PNC takes extremely seriously all of its statutory and regulatory obligations, there is currently an intensive effort underway, utilizing significant personnel and computer resources, to ensure that PNC is in compliance with the provisions of the Interim Final Rules by October 1, 2001, or January 1, 2002, as appropriate. This effort continues, notwithstanding the full expectation that there will be a significant number of material changes to the Interim Final Rules and that many of the preparations currently being made will ultimately have to be altered. Accordingly, we recommend that the SEC issue, at the earliest possible time, a formal statement that compliance with the rules implementing Title II will not be required any earlier than one year after the latter of adoption of final rules by the SEC and recordkeeping provisions by the bank regulatory agencies.6
As discussed above, the burden to banking organizations such as PNC created by the effective dates in the Interim Final Rules is considerable; in contrast, there would appear to be little harm if the SEC were to extend the effective dates as recommended. As was discussed in a meeting among SEC staff and representatives and members of the New York Clearing House Association and the Financial Services Roundtable on July 10, 2001, such an extension would not be harmful to (1) bank customers, as there appears to be no basis for concluding that bank customers have been harmed in any way with respect to their securities transactions with banks; (2) competitors, as there have been no complaints of which we are aware from broker-dealers regarding bank securities activities; or (3) functional regulation, which we believe would only be enhanced by promulgating regulations in as careful a manner as possible.
Accordingly, PNC recommends that the SEC, at the earliest opportunity, formally announce that final regulations implementing Title II of the GLB Act will not be effective until after the SEC's rules and the banking agencies' record keeping rules are finalized, with a one-year transition period before banking organizations would be required to bring their operations into compliance with such final rules.
I. Trust and Fiduciary Activities
We respectfully suggest that in a number of ways the Interim Final Rules are contrary to the GLB Act's exception for trust and fiduciary activities. The rules impose requirements not found in the statute that effectively negate the availability of the exception. This result is contrary to congressional intent that traditional bank trust and fiduciary activities not be disturbed by the Commission's rules. 7 Trust and fiduciary products and services have long been offered to bank customers subject to comprehensive legal requirements that offer extensive customer protections. Bank examiners regularly examine these activities for compliance with trust and fiduciary principles, and would be fully able to determine if a bank attempted to conduct a discount brokerage business in the guise of its trust and fiduciary operation. In light of the extensive regulation of bank trust and fiduciary activities, Congress adopted the exception to permit banks to continue providing these traditional customer services.8
The Interim Final Rules also fail to recognize the fundamental reality of the trust business: state laws typically limit which corporations may serve as trustees. Banks and trust companies, but not broker-dealers, generally are authorized to act as trustees subject to a comprehensive regulatory scheme under state and Federal law. If the Interim Final Rules force trust activities out of banks, customers will have fragmented relationships with their chosen trustee and a third-party broker-dealer, and be burdened with additional costs that are unnecessary in light of the strong protections already afforded by the fiduciary requirements imposed on trustees.
A. Chiefly Compensated
Although Congress sought to preserve traditional trust and fiduciary activities of banks, Congress did not want banks to circumvent the securities laws by operating full-scale brokerage businesses through their trust departments. Congress addressed this concern through the exception for trust and fiduciary activities by requiring a bank to be "chiefly compensated" for its trustee or fiduciary related transactions on the basis of non-brokerage related fees and by prohibiting the bank from publicly soliciting brokerage business. Congress also concluded that the trust and fiduciary laws and the oversight by Federal and state banking agencies provide sufficient consumer protection for the customers of banks that operate within the statutory standards.
The GLB Act and its legislative history suggest that the chiefly compensated limit should be applied on an aggregate basis to the bank's trust and fiduciary activities, and not on an account-by-account basis, to achieve its purpose.9 The Interim Final Rules, however, would require PNC to conduct an account-by-account review, and establish for each individual trust or fiduciary account that the bank is "chiefly compensated" by specified fees. Moreover, the rules create a unique definition of compensation for purposes of the "chiefly compensated" computation that excludes legitimate, long-recognized forms of fiduciary compensation. These exclusions are not found in the statute, and would unnecessarily force PNC to restructure existing customer relationships at great costs to both itself and its trust and fiduciary customers.
The SEC has attempted to be responsive to this concern by providing a "safe harbor": a bank may compute compensation on the basis of its total fiduciary activities if "sales compensation" is less than ten percent of "relationship compensation" for fiduciary activities. However, the safe harbor is unduly restrictive, and would require banks to have in place procedures reasonably designed to ensure compliance at certain key times in the life of each account. This requirement for testing procedures at the account level at certain key times in the life of the account at the very least substantially reduces the usefulness of the safe harbor.
We respectfully suggest that the SEC should revisit the "chiefly compensated" issue anew. Like other banks, PNC fully recognize that the "chiefly compensated" language is statutory; however, we believe that does not mean that the only way to measure chiefly compensated is on an account-by-account basis or that there is only one approach to designing a safe harbor. For some smaller banks an account-by-account approach may make sense; for other banks, use of a business unit or department level test would work best. The rule should be flexible enough to accommodate recordkeeping systems that are currently in place. PNC would willingly work with other banking organizations and the SEC staff in devising the details of such an approach.
In this regard, we respectfully recommend the following changes to the "chiefly compensated" aspects of the Interim Final Rules:
Aggregation vs. Account-by Account
Definition of Relationship Compensation
B. Definition of Trustee and Fiduciary Capacity
Rule 3b-17(k) of the Interim Final Rules appears to limit severely the blanket statutory exception for banks acting in a trustee capacity by including in the definition of "trustee capacity" only acting as a trustee for certain tax-deferred accounts and indenture trustees. As noted in the Agency and ABASA letters, the definition of "fiduciary capacity" was drawn from Part 9 of the OCC's regulations governing the fiduciary activities of national banks and was intended to encompass the broad range of services that banks provide as a fiduciary.11
The GLB Act expressly provides that the Trust and Fiduciary Exception is available for transactions that a bank effects in a "trustee capacity," provided the bank complies with the Act's compensation and advertising restrictions. A bank acts in such a capacity when it is named as trustee by written documents that create the trust relationship under applicable law.
While the SEC has stated that there is "uncertainty" concerning whether banks acting as an indenture trustee, or as a trustee for ERISA plans or individual retirement accounts ("IRAs"), are "trustees" for purposes of the Trust and Fiduciary Exception, PNC believes that the plain meaning of the term encompasses all relationships in which a bank acts as a trustee under applicable law, and this plain meaning is consistent with Congress' desire to protect the services that bank trust departments have long-performed as trustee under applicable state or Federal law. There appears to be no indication that Congress intended to grant the SEC broad latitude to review particular types of trustee services provided by banks to determine whether such relationships constitute a "trustee" relationship for purposes of the GLB Act's broker-dealer registration exceptions. The SEC's position could cast a cloud over a wide range of trust relationships that banks have offered their customers, including self-directed personal trusts, charitable foundation trusts, insurance trusts and rabbi and secular trusts.12
Accordingly, PNC respectfully recommends that the SEC clarify that the term "trustee capacity," as used in the Act's Trust and Fiduciary Exception, has its plain and ordinary meaning and includes, without limitation, a bank acting as an indenture trustee, ERISA trustee, IRA trustee and trustee for the other self-directed trusts enumerated above. It is our understanding, based on recent meetings with SEC staff, that the staff concurs in this interpretation of the terms "trustee capacity" and "fiduciary capacity," and intends to recommend to the SEC that the preamble and final rules contain this clarification.
II. Custody and Safekeeping
We believe that the Custody and Safekeeping Exception was intended to permit banks to continue to provide customers the custody and safekeeping services, including incidental and related securities execution services, that they traditionally have provided as part of their customary banking activities. The SEC's interpretation of the Custody and Safekeeping Exception would disrupt the traditional custody and safekeeping activities of banks that Congress intended to protect. Accordingly, we respectfully suggest that the SEC's interpretation of the Custody and Safekeeping Exception in the Final Interim Rules is inconsistent with the statute and Congress' intent because it would not permit banks to continue to provide the custody and safekeeping services, including the securities order-taking services, that they have long-provided as part of their customary banking activities. Customers may forgo establishing custodial relationships with banks or decide to move existing custodial relationships out of the bank. The end result will be the impairment of core banking functions that Congress intended to remain within the bank.
For example, banks have long-provided securities execution services to self-directed IRA accounts for which the bank acts as custodian.13 Applicable Internal Revenue Service regulations generally require that a bank serve as trustee or custodian for an IRA,14 and thousands of banks offer self-directed custodial IRA services to their customers. Bank-offered custodial IRAs provide consumers throughout the United States a convenient and economical way to invest for retirement on a tax-deferred basis. Bank-offered custodial IRA services are subject to strict regulation under the Internal Revenue Code, are subject to regular supervision by the bank regulatory agencies, and have been offered by banks for years without creating consumer protection concerns.
Because banks generally must serve as the custodian for custodial IRA accounts, providing securities execution services to these accounts allows the public to avoid the unnecessary expenses and administrative complexities associated with establishing a separate account at a broker-dealer. Moreover, where a bank serves as custodian for a self-directed IRA, the bank directs the customer's securities transactions to a registered broker-dealer for execution and would be required to continue doing so under the GLB Act.15
In addition, banks provide custodial and safekeeping services to 401(k) and other retirement and benefit plans where a third party acts as trustee and/or investment adviser to the plan. Frequently, banks offer these services as part of a bundle of recordkeeping, reporting, tax-preparation and administrative services for 401(k) and other plans. As the SEC has itself recognized, banks offering such a bundle of custodial and administrative services may accept and process orders from the plan trustee or investment adviser or the plan's participants for the investment of new contributions or the re-allocation of existing contributions.16 In these circumstances, the custodial bank performs its order-taking and order-execution functions pursuant to the direction and supervision of one or more plan fiduciaries.17 These bank-offered services allow plan administrators to obtain securities execution and other administrative services in a cost-effective manner, thereby reducing plan expenses and benefiting plan beneficiaries.
As the SEC also has recognized, banks as part of their customary banking activities effect securities trades as an accommodation to their custodial customers.18 This customer-driven service allows customers to avoid having to go through the unnecessary expense of establishing a separate account with a broker-dealer to effect occasional trades associated with the customer's custodial assets. Furthermore, because these services are customarily provided only as an accommodation to custodial accounts, banks typically seek to recover only the costs incurred in placing the trade and settling for the customer.
We believe that the Custody and Safekeeping Exception enables banks to continue the custody and safekeeping activities that banks have provided as part of their customary banking activities, including the securities order-taking activities described above. The exception is not "open-ended" and would not allow banks to offer general brokerage services to the public in contravention of the GLB Act.
For the reasons discussed above, PNC respectfully suggests that sections 240.3a4-5(a)(1)-(4) of the Interim Final Rules are unnecessary. If, however, the SEC feels guidance is required on order-taking by bank custodians, we recommend the following revisions:
If the compensation structure is retained as written in the Interim Final Rules, banks will be forced to exit the business or change account fees so that less active traders, or those now using outside brokers, will bear the cost of more active traders contacting the bank directly to take orders.
Thus, we respectfully request that if the SEC considers any guidance on order-taking for custody accounts necessary, it be limited to prohibiting solicitation of trades and the receipt of commissions (other than for the purpose of passing along the commissions to the broker).
B. Carrying Broker
PNC is concerned that the distinction that the SEC makes in the preamble to the Interim Final Rules, at footnote 174, between permissible clearing and settlement functions within the Custody and Safekeeping Exemption and impermissible "carrying broker" activities is not clear. This is especially a concern where multiple customers may have with a bank accounts for which the bank provides investment management and custody services, as well as accounts with the bank's affiliated registered broker-dealer for which the bank is custodian. In such a situation, the bank might inadvertently become a carrying broker merely by having a large number of such accounts, even though the accounts were originated primarily because of the bank's relationship with the customers.
III. Sweep Accounts
The GLB Act allows banks to sweep deposit funds into a "no-load" money market mutual fund (the "Sweeps Exception").21 The Interim Final Rules generally adopt the definition of "no-load" that the NASD has adopted in its Rule 2830(d)(4). That rule prohibits an investment company from being advertised as "no-load" if "the investment company has a front-end or deferred sales charge or [imposes] total charges against net assets to provide for sales related expenses and/or service fees [that] exceed .25 of 1 percent of average net assets per annum."22
PNC believes that the SEC rules should not incorporate the interpretation of "no-load" adopted by the NASD. First, as the SEC itself notes, the interpretation of "no-load" by the NASD in Rule 2830(d)(4) was intended to address the circumstances in which investment companies can be advertised as "no load" in light of the SEC's Rule 12b-1 permitting investment companies to use their assets to finance distribution expenses.23 The use of the term "no-load" in the Sweeps Exception is used in an entirely different context than the NASD Rule.
Second, early legislative and regulatory versions of the Sweeps Exception included the term "no-load" long before the NASD adopted its interpretation. Senate bill S. 1886 in the 100th Congress used the term in the Sweeps Exception and the SEC also used the term when it adopted a similar sweeps exception in the now-defunct Rule 3b-9.24 Third, neither the Investment Company Act of 1940, the federal statute governing mutual funds, nor the SEC's regulations and forms promulgated thereunder use the NASD's interpretation when referencing sales loads.25 Form N-1A, the general registration form for money market mutual funds and other open-end management investment companies, classifies disclosures regarding sales loads differently from disclosures regarding 12b-1/shareholder servicing fees.26 Specifically, sales loads are classified as "shareholder fees (fees paid directly from investment)" while 12b-1/shareholder servicing fees are classified as "annual fund operating expenses (expenses that are deducted from Fund assets)."
We believe that it is not necessary to interpret "no-load" to include funds that impose asset-based sales and other charges in excess of 25 basis points, and that the SEC's current position will impose a significant burden on the administration of bank sweeps programs without providing a commensurate level of protection to sweeps customers. Bank customers already receive appropriate disclosures concerning any fees charged in connection with a sweep account-including any Rule 12b-1 and other fees charged by the relevant money market mutual fund-from the bank.
The SEC's "no-load" interpretation would prevent PNC Bank NA from operating some of its sweeps programs in the manner in which they have been conducted for years. As a result, PNC Bank NA would have to incur significant administrative expense in revising some of its programs to meet the SEC definition of "no-load," while providing no additional benefit to, and in fact inconveniencing, its customers. PNC Bank NA, like other banks that would have to revise their sweeps programs to accommodate this definition of "no load," would increase the deposit account or other fees it charges sweeps customers to make up for the loss of fees paid by the money market mutual fund that it could no longer accept. This would limit the flexibility of the pricing of the sweeps service, and would replace a highly negotiated fee, which customers appreciate, with inflexible, non-negotiable monthly service fees. At the end of the day, banks would receive the same amount of income for their sweeps services, customers would be limited in how these fees could be structured, and the increased costs of amending fee schedules would be paid by banks and customers alike. Accordingly, we respectfully recommend that the SEC amend section 240.3b-17(f)(1) to read as follows:
"(f)(1) The term no-load in the context of an investment company registered under the Investment Company Act of 1940 (15 U.S.C. 80a-1 et seq.) means:
(i)Purchases of the investment company's securities are not subject to a sales load, as that term is defined in Section 2(a)(35) of the Investment Company Act of 1940 (15 U.S.C. 80a-2(a)(35)), or a deferred sales load, as that term is defined in § 270.6c-10 of this chapter ; and (ii) The investment company's total charges against net assets for sales or sales promotion expenses and personal service or the maintenance of shareholder accounts do not exceed 0.25 of 1% of average net assets annually and are disclosed in the moneymarket fund's prospectus."
IV. Mutual Fund Transactions: Rule 3a4-6
Section 3(a)(4)(C)(i) of the Securities Exchange Act of 1934, as amended by the GLB Act, requires, among other things, that a bank directs its trades in publicly traded securities in the United States to a registered broker dealer in order not to be a "broker." Under section 3a4-6 of the Interim Final Rules, a bank that meets all of the conditions for the broker exemption will be exempt from the condition cited above for transactions in investment company securities effected through the National Securities Clearing Corporation's ("NSCC") Mutual Fund Services ("Fund/SERV").
While PNC participates in the NSCC's Fund/SERV, and a rule permitting the use of Fund/SERV is important to PNC, this limited exemption does not take into account the fact that banks commonly effect trades in open-end investment company securities directly with a fund through its transfer agent, and there is no apparent regulatory reason to disrupt this relationship. Based on discussions with SEC staff, it appears that the staff may have been unaware that such trades are commonly sent directly to transfer agents, without the interposition of a fund's distributor. In all sales of investment company securities, the shares are sold either by a registered broker-dealer as the fund's distributor or, in limited circumstances, by the fund as the issuer. Orders for the sale of shares are typically transmitted directly to the fund's transfer agent, acting on behalf of the fund, rather than being transmitted first to the fund's distributor. It is a standard function of a fund's transfer agent to accept orders directly for the purchase, exchange or redemption of shares on behalf of the fund.
The importance to PNC of being able to purchase and redeem shares of open-end investment companies through the transfer agent for the funds in certain circumstances can be illustrated as follows:
Both in the case of proprietary and non-proprietary funds, the fund distributor typically does not handle trade processing. PNC Bank NA would not be able to service its customer needs if it is not able to deal directly with the transfer agent since it would not be able to guarantee timely order placement. Additionally, unlicensed bank personnel who participate in communication with the fund transfer agents do not talk to the customers, and would not be in any position to influence the investment decisions.
If PNC Bank NA were required to process these orders through Fund/SERV, its customers' funds might remain uninvested for one day since orders through Fund/SERV are settled on the day after the trade is placed. This would be contrary to the current practice in which all orders are processed and settled the same day.
In processing mutual fund orders, PNC Bank NA takes every opportunity to use Fund/SERV to process its daily trading activity. However, as noted above, there are situations where it is more efficient to process certain types of orders directly with the fund through its transfer agent, and other situations where Fund/SERV is not available for the fund and the fund's distributor does not accept the purchase and redemption orders. PNC believes not allowing the use of a transfer agent to process these trades would not add any value or provide a greater degree of protection to its customers. Rather, this restriction in the Interim Final Rules would result in a reduced level of service and increased costs to PNC's customers and PNC Bank NA. Accordingly, PNC strongly recommends that Rule 3a4-6 be amended as follows:
"§ 240.3a4-6 Exemption from the definition of "broker" for banks that execute transactions in investment company securities through NSCC Mutual Fund Services or directly through a fund's transfer agent.
A bank that meets the conditions for an exception or exemption from the definition of the term "broker," except for the condition in Section 3(a)(4)(C)(i) of the GLB Act (15 U.S.C. 78c(a)(4)(C)(i)), is exempt from such condition solely for transactions in investment company securities effected through the National Securities Clearing Corporation's Mutual Fund Services or directly with a fund through its transfer agent."
V. Employee Compensation
A. Referral Fees
The GLB Act permits banks to enter into arrangements with registered broker-dealers to offer brokerage services to bank customers provided the "networking" arrangement meets certain requirements specified in the Act.27 One of the requirements is that bank employees (other than employees also employed by the broker-dealer who are registered with the NASD or another self-regulatory organization (i.e., "dual employees")) are prohibited from receiving "incentive compensation," except that a bank employee may receive compensation for the referral of any customer "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."28
The SEC has interpreted the term "nominal one-time cash fee of a fixed dollar amount" to be limited to only-
(1) payments that do not exceed one hour of the gross cash wages of the bank employee making the referral; or
(2) 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 (and their value) awarded for referrals involving securities are not greater than the points (and their value) awarded for activities not involving securities.29
PNC believes that the SEC's interpretation of the term "nominal one-time cash fee of a fixed dollar amount" imposes unnecessary limitations on the securities referral programs of banks that are not required by statute, create burdensome practical difficulties for banks, are inconsistent with the SEC's own practice, and raise employee privacy concerns. These limits are not found in the words of the statute and the legislative history does not suggest that such severe restrictions were intended by Congress.
The SEC staff has long taken the position in no-action letters involving networking arrangements with banks, thrifts and others that the registration requirements of the Securities Exchange Act of 1934 are not triggered by networking arrangements in which a bank employee receives a "nominal fee" for referrals to the registered broker-dealer.30 As the SEC has acknowledged, the GLB Act's networking exception is based on these letters and was intended to codify the existing framework that has long-governed these arrangements.31 In none of these precedents, however, has the SEC staff provided additional guidance on the form of payments these nominal fees may represent or imposed limits on referral fees or bonus programs similar to those provided in the Interim Final Rules. The Chubb Letter specifically states: "Unregistered employees [of the Financial Institutions] may, however, be paid a nominal fee for referring Financial Institution customers to CSC. The amount of any such fees, which will be unrelated to the volume of securities traded by the customer, will be determined and paid by the Financial Institution (or required service corporation)."32
Not only is the restriction that a payment not exceed "one hour of the gross cash wages of the unregistered bank employee making the referral" not required by the GLB Act or the SEC's own precedents, we believe that it also would be unworkable. PNC Bank NA offers all of its employees, regardless of the level of their compensation, the same nominal award value for referring securities customers. Under the Interim Final Rules, PNC Bank NA would be required to incur additional administrative burden in calculating a separate referral fee for each unregistered employee who makes a referral.
The administrative burden would be further increased because the referral fee program would have to keep track of each adjustment in an employee's salary or wages. In addition, the interpretation raises concerns that a referral fee program based on the salary or wages of an employee would not properly protect the privacy of a bank's employees because the employees administering networking arrangements, who now typically do not have access to wage and salary information of employees, would need to have that information.
PNC Bank NA and PNC Bank, Delaware, have conducted their referral fee programs in a manner that is consistent with the Chubb Letter and the Interagency Statement on Retail Sales of Nondeposit Investment Products (February 15, 1994), both of which allow depository institution employees to receive a one-time nominal fee of a fixed dollar amount for each customer referral for nondeposit investment products. These referrals are critical to the growth of the businesses of PNC's broker-dealer subsidiaries, and restrictions on such referrals similar to those in the Interim Final Rules could have a material impact on the growth and profitability of these businesses. PNC is unaware of any issues that have been raised by the networking arrangements that are currently in place, and it would appear that Congress was similarly comfortable with the regime implemented by the bank regulatory agencies and the SEC, as is reflected in the statutory language of the Networking Exception in Title II.
For the reasons discussed above, we strongly recommend that the SEC allow banks, consistent with its current practice, to interpret the term "nominal one-time cash fee of a fixed dollar amount" in a manner that best fits their networking arrangements, and that section 240.3b-17(g) of the Interim Final Rules (definition of "nominal one-time cash fee of a fixed dollar amount") be eliminated.
B. Gross Limits on Compensation
The SEC has also solicited comments on whether gross limits on the amount of referral fees an employee may receive should be adopted. The SEC expresses concern that if aggregate limits are not adopted, a bank might pay referral fees that constitute a substantial portion of an employee's total compensation. The GLB Act, however, does not provide a basis for the adoption of an aggregate limit on referral fees; instead, the law specifically allows payment of a "nominal one-time cash fee." As long as each "one-time" referral fee is nominal, it would meet the specific terms of the statute without regard to any other limit.
C. Bonus Plans
The SEC also states that referral fees may not be paid in the form of bonuses. Rule 3b-17(g)(1)(ii) and the discussion that accompanies it would place restrictions on bank and bank holding company employee bonus plans. PNC believes that these plans are properly subject to the supervision of the appropriate bank regulatory agency and the Board, respectively. Accordingly, unless there were evidence that a bonus plan was being used for the payment of specific transaction-related referral fees, we believe that supervisory and regulatory oversight of bonus plans should be carried out by the bank regulatory agencies.33
VI. Recordkeeping Requirements
The SEC has requested comment on whether it should adopt recordkeeping requirements for banks that seek to rely on the broker-dealer exceptions included in the GLB Act.34 The adoption of such recordkeeping requirements by the SEC would appear to be contrary to the Congress's express directive on this issue in the GLB Act.
Section 204 of the GLB Act added a new section 18(t) to the Federal Deposit Insurance Act (12 U.S.C. § 1828(t)). This section directs each appropriate bank regulatory agency, after consultation with and consideration of the views of the SEC, to adopt recordkeeping requirements for banks that rely on the broker-dealer exceptions established by the GLB Act. Section 204 also requires the bank regulatory agencies to provide the SEC, at its request, any records maintained by a bank pursuant to the bank regulatory agencies' recordkeeping regulations.
Accordingly, consistent with functional regulation, the bank regulatory agencies serve as the appropriate functional regulator of banks and the SEC would not appear to have the authority to establish recordkeeping requirements for banks that are not registered with the SEC.
As discussed above, PNC recommends that the rules ultimately adopted by the SEC not become effective for at least one year after recordkeeping rules are adopted by the bank regulatory agencies. These rules will undoubtedly also have to be published for comment.
PNC appreciates this opportunity to submit its views on the SEC's Interim Final Rules, as well as the willingness of SEC commissioners and staff members to meet with banking industry representatives to discuss the issues raised by the GLB Act and the Interim Final Rules. We are sure that the comments received will generate additional questions and the need for further meetings. In that regard, we look forward to continuing to work closely with the SEC in arriving at final rules that address the concerns of the SEC while at the same time allowing banks to be able to continue to engage in permissible securities-related activities without being subjected to unnecessary regulatory burdens. Finally, we urge the SEC to address as quickly as possible the issue discussed in this letter regarding the timing and effective date of final regulations.
Please feel free to contact the undersigned if you wish to discuss matters raised by this letter.
James S. Keller
|1||See, for example, letter dated June 29, 2001, from the Board of Governors of the Federal Reserve System ("Board"), the Federal Deposit Insurance Corporation and the Office of the Comptroller of the Currency to Jonathan G. Katz ("Agency Letter") and its Appendix ("Agency Appendix"), and letter dated June 4, 2001, from the ABA Securities Association to Annette L. Nazareth ("ABASA Letter").|
|2||Agency Letter at 1.|
|3||American Banker (July 3, 2001).|
|4||66 Fed. Reg. at 27789.|
|5||Agency Letter at 2.|
|6||The letter dated June 28, 2001, from Annette L. Nazareth to the ABA Securities Association does not appear to relieve banks from being in full compliance by the respective October 1, 2001 or January 1, 2002 deadlines. (That letter states, in relevant part, "[y]ou indicated that more time may be needed to build systems to comply with the Commission's rules. I think that message is a useful one and extending the temporary exemptions to provide additional time to come into compliance with the rules may be appropriate and will be carefully considered. If the Commission makes significant changes to the rules in response to comments received, we understand that additional time would be needed to adjust to those changes.") In fact, it is possible that banks may need more time to comply if the SEC does not make significant changes to the Interim Final Rules.|
|7||See S. Rep. No. 106-44 at 10 (1999).|
|8||The Senate Report states "Banks have historically provided securities services largely through their trust departments, or as an accommodation to certain customers. Banks are uniquely qualified to provide these services and have done so without any problems for years. Banks provided trust services under the strict mandates of State trust and fiduciary law without problems long before Glass-Steagall was enacted; there is no compelling policy reason for changing Federal regulation of bank trust departments, solely because Glass-Steagall is being modified." S. Rep. No. 106-44 at 10 (1999).|
|9||See H.R. Rep. No. 106-74, pt. 3, at 164 (1999). (A "bank must be chiefly compensated for its trust and fiduciary activities" on the basis of the fees specified by the Act.) (Emphasis added).|
|10||See 66 Fed. Reg. at 27776.|
|11||See 12 C.F.R. § 9.2(e).|
|12||Rabbi trusts do not qualify as "a tax deferred account described in Sections 401(a), 408, and 408A under subchapter D and in Section 457 under subchapter E of the Internal Revenue Code of 1986." Yet, the Internal Revenue Service will not favorably rule on the tax status of a rabbi trust unless the trustee is "an independent third party that may be granted corporate trustee powers under state law, such as a bank or trust department or similar party." Rev. Proc. 92-64 (IRS Model Rabbi Trust), Section 4.03.|
|13||If a bank serves as a trustee to an IRA, has investment discretion over an IRA account, or provides investment advice to the accountholder for a fee, the bank may effect securities transactions for the IRA under the statute's Trust and Fiduciary Exception. Accordingly, this discussion focuses on accounts for which transactions could only be conducted under the Custody and Safekeeping Exception, i.e. self-directed custodial IRAs where the bank does not provide investment advice to customers.|
|14||See 26 C.F.R. § 1.408-2(b)(2)(i) and (d). Other types of entities or persons may act as a trustee or custodian for an IRA but only if the Commissioner of the Internal Revenue Service determines that the person or entity will administer the IRA in the manner required by law.|
|15||See 15 U.S.C. § 78c(a)(4)(C).|
|16||See Universal Pensions, Inc., 1998 SEC No-Act. LEXIS 192 (Jan. 30, 1998).|
|17||Under Department of Labor regulations, a bank may provide securities execution services to an ERISA plan without becoming a "fiduciary" to the plan so long as the transactions are conducted pursuant to instructions received from a plan fiduciary that is not an affiliate of the bank. See 29 C.F.R. § 2510.3-21(d).|
|18||See Provident National Bank, 1986 SEC No-Act. LEXIS 2782 (Oct. 6, 1982) (noting that the bank, as part of its custody services, offered a broad range of clerical and administrative services including access to the bank's trading department for the purchase and sale of securities at the customer's instructions).|
|19||66 Fed. Reg. at 27764.|
|20||15 U.S.C. § 78c(a)(4)(B)(viii)(bb).|
|21||15 U.S.C. § 78c(a)(4)(B)(v).|
|22||NASD Rule 2830(d)(4).|
|23||66 Fed. Reg. at 27779.|
|24||See Proxmire Financial Modernization Act of 1988, S. 1886, 100th Cong. § 301 (1988); 12 C.F.R § 240.3b-9(b)(4).|
|25||Section 2(a)(35), 15 U.S.C. 80a-2(a)(35); Rule 6c-10, 17 CFR 270.6c-10; and Form N-1A, 17 CFR 274.11A.|
|26||See Item 3 and Instructions 2 and 3, and Item 8 to Form N-1A.|
|27||15 U.S.C. § 78c(a)(4)(B)(i).|
|28||Id. at § 78c(a)(4)(B)(i)(VI).|
|29||Interim Final Rules § 240.3b-17(g)(1).|
|30||See, e.g., Chubb Securities Corp., 1993 SEC No-Act. LEXIS 1204 (Nov. 24, 1993) ("Chubb Letter"); Independence One Bank of California and BHS Service Corp., 1993 SEC No-Act. LEXIS 620 (Apr. 6, 1993).|
|31||See 66 Fed. Reg. at 27765, n.38.|
|32||Chubb Letter at 7. (Emphasis added).|
|33||See Agency Appendix at 36.|
|34||66 Fed.Reg. at 27763.|