July 17, 2001
Jonathan G. Katz
Securities and Exchange Commission
450 5th Street, NW
Washington, D.C. 20549-0609
Re: Definition of Terms in and Specific Exemptions for Banks, Savings Associations, and Savings Banks Under Sections 3(a)(4) and 3(a)(5) of the Securities Exchange Act of 1934, File No. S7-12-01.
The Conference of State Bank Supervisors ("CSBS") appreciates the opportunity to provide comments on interim final rules ("Interim Rules")1 issued by the Securities and Exchange Commission ("SEC") to implement provisions of the Gramm-Leach-Bliley Act ("GLB Act").2 CSBS is the national organization of state officials responsible for chartering, regulating and supervising the nation's 6,868 state-chartered commercial and savings banks and 419 state-licensed branches and agencies of foreign banks.
The GLB Act establishes activity-specific exceptions from broker-dealer licensing requirements for banks that conduct those activities. Prior to the GLB Act, banks were excluded from the definition of "broker" and "dealer" under the Securities Exchange Act of 1934 ("Act").3 This exempted them from the Act's licensing requirements. Recognizing the statutory foundation provided by the Act, we believe that the GLB Act's provisions were not meant to inhibit or prevent previously permissible activities but to allocate future regulatory oversight of those activities to the appropriate state or federal regulatory authority. Unfortunately, it appears that the SEC misinterpreted this mandate because the Interim Rules are plagued with narrowly drawn exceptions combined with onerous and complicated restrictions. As a result, the SEC severely restricts a bank's ability to engage in previously permissible activities without a broker-dealer license. Some institutions, particularly smaller institutions may cease conducting these activities because they only marginally engage in previously exempted activities and do not have the business justification to obtain a broker-dealer license. We request that the SEC reconsider the overall objectives of the Interim Rule, particularly the issues discussed below.
CSBS believes the SEC's Interim Rule implementing the exception for third party brokerage arrangements imposes unnecessary restrictions on bank employee compensation programs. The Interim Rule is derived from the GLB Act's provision that permits third party brokerage arrangements so long as, among other things, bank employees do not receive more than a nominal one-time cash referral fee.4 CSBS believes this language was intended to prevent non-licensed bank employees from receiving brokerage commissions. However, the SEC's Interim Rules restrict far more than securities transactions; they potentially impact all bank incentive programs. For example, the Interim Rule requires banks to perform detailed calculations in order to ensure that the amount of the referral fee is no more than one hour of an employee's gross hourly wages - even if such employees are compensated on an annual basis. At a minimum, this adds regulatory burden to an otherwise burden less compensation program. The Interim Rules further prevent bonuses based on anything other than the overall profitability of the bank, regardless of the contribution of employees receiving the compensation.5 The Interim Rules would not permit focused bonus programs for unregistered employees, such as programs premised on performance goals for the securities transactions for a branch, department or line of business.6 We suggest that the GLB Act's mandates can be met without forcing a bank to completely restructure its bonus program, as may be required by the Interim Rules. While we support the SEC's efforts to promote investor protection, we believe there are less burdensome ways than those in the Interim Rules to ensure that those people who have a "salesman's stake" in securities transactions are subject to the relevant state and federal securities laws.7
We also note that the Interim Rules' Supplementary Information regarding the networking exception includes a discussion of the exception's applicability to service corporations of savings associations and savings banks.8 However, the discussion relates only to "required service corporations," i.e. where a savings association or savings bank was required by law to conduct such activities in a service corporation. Consequently, the Interim Rule is silent with respect to its applicability to other types of subsidiaries, such as those that only engage in activities that a bank is permitted to engage in directly. We believe that for consistency purposes, the SEC should therefore clarify that the Interim Rules' networking exception requirements apply to any bank subsidiary expressly formed for the purpose of engaging in securities transactions.
Trust and Fiduciary Activities Exception
The Interim Rule's implementation of the GLB Act's trust and fiduciary activities exception also suffers from a narrow formulation of statutory intent. For example, the GLB Act provides that in order to qualify for the trust and fiduciary activities exception, a bank must be "chiefly compensated" for such transactions.9 The SEC's interpretation of the term "chiefly compensated" is more elaborate than the statutory language and requires a compensation analysis to be conducted on an account-by-account basis. We believe that imposing the chiefly compensated analysis on every account will interfere with the traditional trust and fiduciary activities of banks. Even though the SEC attempts to provide an "exemption" from the account-by-account analysis, the exemption requires complex monitoring procedures, which results in the exemption becoming a less than attractive option for many institutions. For example, in order to be exempt from the account-by-account analysis, a must ensure that, during any year, the sales compensation received from all of its trust and fiduciary accounts does not exceed 10 percent of the relationship compensation received from such accounts. On the other hand, the "account-by-account" analysis method conceivably permits sales compensation to account for 49 percent of a bank's total compensation from its trust and fiduciary accounts. This unusual result is indicative of how the exemption is more onerous than the general rule.
CSBS notes that banks have historically provided securities services through their trust departments as an accommodation to certain customers. Banks provide such trust services under the strict mandates of state trust and fiduciary law. Requiring banks to track the compensation received from all trust and fiduciary customers on an account-by-account basis also may impose significant and unnecessary burdens on banks. Banks that do not currently have the systems in place to track the compensation received from their trust and fiduciary activities on an account-by-account basis would incur significant expenses to comply with the SEC's complex regulatory requirements. Or, they may cease to perform such activities. Either outcome will negatively impact customers who will either have to switch trust and fiduciary providers, or incur additional costs.
Trustee and Fiduciary Definition
The GLB Act provides an exception for securities transactions that a bank conducts pursuant to its trustee or fiduciary capacity.10 While the term "fiduciary capacity" is specifically defined in the GLB Act, the term "trustee capacity" is not. The SEC asserts that because the term "trustee capacity" is undefined in the GLB Act, ambiguities arise concerning whether banks acting as an indenture trustee, or as a trustee for ERISA plans or individual retirement accounts ("IRAs"), qualify for the trust and fiduciary exception. The SEC resolves the ambiguity it created by granting an "exemption" for banks acting in these capacities to resolve this ambiguity.
CSBS disagrees that there is ambiguity concerning the scope of the term "trustee capacity" used in the trust and fiduciary exception. The plain meaning of the term encompasses all relationships in which a bank acts as a trustee under applicable state or federal law. Moreover, CSBS is concerned that in its attempt to resolve an unambiguous term, the SEC creates uncertainty regarding whether other accounts for which the bank serves as directed trustee are included within the definition of trustee capacity. These accounts would include personal trust, charitable foundation trusts, insurance trusts, and rabbi and secular trusts.
Therefore, we believe the SEC should clarify that the term "trustee capacity," as used in the GLB Act's trust and fiduciary exception, has its plain and ordinary meaning and includes all relationships in which a bank acts as a trustee under applicable state or federal law. CSBS suggests that for regulatory consistency, the definition of fiduciary capacity should also include all relationships in which a bank acts as a fiduciary under applicable state or federal law.
Safekeeping and Custody Exception
The GLB Act provides that, as part of its customary banking activities, a bank is permitted to conduct a range of custodial- and safekeeping-related activities without being considered a broker.11 Custody and safekeeping activities are a fundamental component of the business of banking. Such activities often include incidental and related brokerage services. However, the Interim Rules generally prohibit banks from accepting securities orders for their custodial IRA customers, for 401(k) and benefit plans that receive custodial and administrative services from the bank, or as an accommodation to custodial customers. Although the Interim Rules also include two SEC-granted exemptions for custodial-related transactions, the exemptions' requirements are so narrowly crafted that it is difficult for banks to qualify for them.
CSBS believes 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 services, that they traditionally have provided as part of their customary banking activities. We believe that the Interim Rules may impose additional and unnecessary costs on customers associated with effecting occasional trades related to their custodial assets. This result is contrary to congressional intent.
We believe that the GLB Act's functional regulation provisions were not meant to inhibit previously permissible activities, but rather to allocate future regulatory oversight of banking activities to the appropriate state or federal regulatory authority. However, it appears that the Interim Rules impose unnecessary and burdensome restrictions on the very activities that the GLB Act was designed to protect. We therefore request that the SEC reconsider whether the broker-dealer licensing exemptions for bank activities can be reformulated in a manner that more closely embodies statutory intent.
Thank you for this opportunity to comment. Please call on us if you have any questions or if we can provide additional assistance.
Best Personal Regards,
President and CEO
|1||66 Fed. Reg. 27760, (May 18, 2001).|
|2||Pub. L. 106-102, sec. 305, 113 Stat. 1338, (Nov. 12, 1999).|
|3||15 U.S.C. 78a et seq.|
|4||Pub. L. 106-102, sec. 305, 113 Stat. 1338, 1385 (Nov. 12, 1999).|
|5||66 Fed. Reg. 27766, (May 18, 2001).|
|7||Id. at 27765.|
|9||Pub. L. 106-102, sec. 305, 113 Stat. 1338, 1386 (Nov. 12, 1999).|
|10||Id. at 1389.|
|11||Pub. L. 106-102, sec. 305, 113 Stat. 1338, 1388 (Nov. 12, 1999).|