Trust Financial Services Division
Texas Bankers Association
203 W. Tenth Street
Austin, Texas 78701
(512) 472-0130 Fax
July 17, 2001
Via E-mail address: firstname.lastname@example.org
Mr. Jonathan G. Katz
Securities and Exchange Commission
450 5th Street, NW
Washington, DC 20549-0609
Re: Release File No. S7-12-01
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
Dear Mr. Katz:
The Trust Financial Services Division of the Texas Bankers Association ("TBA") appreciates the opportunity to provide comments on the Interim Final Rules issued by the Securities and Exchange Commission ("SEC") concerning the "push-out" provisions of the Gramm-Leach-Bliley Act ("GLBA"). The TBA is a nonprofit trade association and represents nearly 600 banks, savings associations and savings banks doing business in Texas, as well as nationally and state-chartered trust companies (collectively "banks"). The TBA specifically represents over 160 corporate fiduciary offices of members providing trust services in Texas. While the vast majority of TBA's members are community banks, all TBA members face significant disruption of their trust activities if the Interim Final Rules are adopted in current form
The TBA's overriding concern is that the Interim Final Rules are directed at a banking industry that is already highly regulated and has a consistent track record of providing trust and/or brokerage services to consumers with no problems. The tenor of the Interim Final Rules would suggest that Congress dictated a drastic change was in order and that many wrongs must be righted in implementing the push-out provisions of GLBA. Nothing could be further from the truth. In large part, the Interim Final Rules are contrary to both the statutory language of GLBA and the legislative history. Moreover, the Interim Final Rules are premised on misunderstandings of the how trust activities are conducted by banks.
To say the Interim Final Rules are unworkable is an understatement. The complexity of the Interim Final Rules is so significant that many banks find it difficult to understand the full extent of the changes that would result! In fact, many corporate fiduciaries in Texas and around the nation are unaware of the potential impact of the Interim Final Rules and, in some cases, are unaware the Interim Final Rules exist. As a heavily regulated industry, banks are accustomed to changes in regulations. However, banks are not accustomed to digesting 170 pages of regulations issued by the SEC that effectively disrupt every traditional line of trust business existing in the bank. Banks have been advocating the reform of Glass-Steagall since the day after it was enacted. But not in their wildest imagination did banks anticipate they would be forced to abandon many of their traditional trust activities to comply with the rules implementing this long sought-after reform.
As the SEC reviews the comments received by the public, TBA hearkens the SEC to recognize that despite the number of banks who may comment, it is in no way indicative of the tremendous impact these rules will make. The Texas Bankers Association is one of only a handful of state bankers associations organized to work with corporate fiduciaries. TBA is limited in its reaction until a Rule is published and the impact can be measured in the industry. To complicate matters, banks simply do not fit into a "one-size fits all" box. There is significant variety in how banks serve their communities with trust activities.
To that end, please acknowledge the alarm sounded by the TBA, the federal banking agencies and the public as the voice of alarm for the entire industry. The comments from the banking industry do not represent a case of crying "Uncle!" over the thought of having to add a new disclosure or adjust a mere practice. Rather, the industry seeks to demonstrate that the Interim Final Rules place banks at a competitive disadvantage and incorporate an unduly regulatory burden.
That being said, the TBA is wholly committed to discussing all issues with the SEC in an effort to revise the Interim Final Rules to meet the clear meaning of GLBA and fulfill legislative intent. In the immediate future, the TBA requests that the SEC reach two significant conclusions:
1. Treat the Interim Final Rules as Proposed Rules and Provide A Minimum One-Year Transition for Any Final Rules.
The TBA urges the SEC to treat the Interim Final Rules as proposed rules and address the concerns raised by TBA in this comment letter, as well as those raised in the comment letter submitted by the federal banking agencies dated June 29, 2001 and other comments submitted by the public. To that end, the SEC should immediately extend the effective date of the Gramm-Leach-Bliley Act's push-out provisions until after the proposed rules are issued as final rules. Banks will then need at least a one-year transition period after the revised rules become final to bring their operations into compliance with the new rules.
2. Accord the Rules with GLBA and Existing Practices of Bank Trust Activities.
The TBA believes the Interim Final Rules are contrary in many respects to the express statutory language contained in the GLBA, as well as Congressional intent. Moreover, the rules ignore the fundamental basis of how certain trust and broker-dealer activities are or are not conducted by banks. The discord between the Interim Final Rules and the activities conducted by banks is of critical importance to the livelihood of trust activities.
The TBA wholeheartedly supports each of the issues raised by the federal banking agencies in their June 29, 2001 comment letter. To emphasize the points raised by the Fed, OCC, and FDIC, the TBA requests the SEC to specifically focus on the following areas in which the Interim Final Rules impact banks:
I. Rules Mischaracterize Trust Activity Exemption
The point of the trust activity exemption in GLBA was to allow traditional bank trust activities to continue undisturbed, while not allowing a bank trust department to operate a broker-dealer business. In the Interim Final Rules, the SEC effectively eliminated an exemption for many banks. Further, the SEC overreached in excluding investment advisor from the fiduciary activity exemption and otherwise creating new definitions not found in GLBA. At no time did Congress indicate a major policy shift was in order through GLBA to restrict a bank's right to offer trust services. Banks have been offering these services for years under a highly regulated environment and consumers have been protected at every step of the way. By this rule, the SEC effectively places banks at risk for being able to continue to serve as a corporate fiduciary.
Chiefly Compensated Limit and Scope is Inappropriate.
The SEC also significantly departed from the GLBA by its interpretation of "chiefly compensated" to mean 10% of bad compensation versus good compensation. Not only does the SEC definition depart from traditional statutory interpretation of "chiefly" (a 49% standard), but it also creates a wholly unworkable calculation formula. The SEC approach unduly burdens banks with no offsetting consumer protections; it is a lose-lose proposition. The following bullet points illustrate the scope of the inappropriateness of the "chiefly compensated" rule.
II. Rules Utilize Wrong "No Load" Definition for Sweep Exception
Under GLBA, banks are allowed to sweep funds into any no-load, open-end management investment company that is a money market fund registered under the Investment Company Act. By adopting the NASD's highly restrictive definition of "no load," the SEC effectively forces a bank to abandon its traditional sweep account product. The term "no-load" should be defined as "no sales load" or "deferred sales load only," rather than incorporating the NASD's definition of "no-load." The protections intended by the NASD "no load rule" are primarily aimed at protecting consumers from misleading advertising by an investment company as it relates to the sales of securities. That is not the issue here. Bank customers taking advantage of a bank's sweep program already receive appropriate disclosures regarding fees. The reality is that the rule as drafted, creates the following issues:
III. Rules Unfairly Limit Employee Compensation for Networking Exemption.
The Interim Final Rules unfairly limit the amount of referral fee that can be paid to non-licensed personnel in the bank to the maximum of one hour of compensation for that employee or another method where points are used to obtain prizes or monetary compensation. The SEC also limits the banks ability to pay compensation such as year-end bonuses if the compensation takes into consideration the securities transactions of a branch, department, or line of business. The impact on banks is significant in these ways:
IV. Rules Erroneously Exclude Order Taking from Custody and Safekeeping Exception
There is a long list of "customary banking activities" that should be included in the Interim Final Rules implementing the Custody and Safekeeping Exception. However, the SEC has defined the Custody and Safekeeping Exception in such a way as to restrict a bank from taking orders from its custodial IRA customers, 401(k) and retirement benefit customers or as an accommodation to custodial customers. Again, by effectively eliminating a bank's ability to provide these services, the Interim Final Rules disrupt yet another banking service that GLBA specifically protects. The end-result is another lose-lose proposition for the consumer and his/her long-term relationship with the bank.
The exemptions offered to "small banks" are fraught with so many complexities that a bank would spend endless hours to determine if it could meet the requirements, with no offsetting consumer protections. The framework is simply unworkable and once again puts banks at a competitive disadvantage in the market for many custodial services.
V. Rules Implement Overly Narrow Mutual Fund Trading Provisions
The SEC granted an exemption for trading through a registered broker-dealer for mutual fund trades for which NSCC/FundServ is used, but many mutual funds are not NSCC or FundServ eligible. Banks have typically traded through the transfer agent or to the mutual fund direct. The registration process with NSCC/FundServ is a lengthy process to force funds to comply with. With all the additional registration traffic, NSCC faces a huge feat. Ultimately, banks may be forced to stop using those funds that are not NSCC/FundServ eligible putting banks at a competitive disadvantage.
VI. Rules Don't Address Dual Employee Arrangements
Believe it or not, the TBA urges the SEC to address an additional issue in an appropriate manner. Banks must have guidance on the dual employee situation existing where bank personnel serve as employees of both the bank and a broker-dealer. Without clarification that NASD Rule 3040 does not apply to dual employees, banks face yet another administrative burden and loss of services.
In conclusion, this comment letter does not seek to address each and every nuance of concern to TBA. The comment letter of the federal banking agencies does an excellent job of covering the issues. TBA wants to emphasize that the cumulative impact of the Interim Final Rules, and the multiple issues contained in each and every part, will be devastating to banks providing trust services. Congress intended no such result. TBA strongly encourages the SEC to take immediate steps to transform the Interim Rules to Proposed Rules and thereby gather more information in order to implement GLBA appropriately. Thank you.
Very truly yours,
A. Michelle Roberts
CC: Hon. Phil Gramm
Hon. Kay Bailey Hutchison
Texas Congressional Delegation