P. O. BOX 10247

Samuel E. Upchurch, Jr.
Executive Vice President,
General Counsel & Secretary

July 17, 2001

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:

Regions Financial Corporation ("Regions"), a financial holding company regulated by the Board of Governors of the Federal Reserve System ("Federal Reserve"), appreciates the opportunity to provide comments to the Securities and Exchange Commission ("Commission" or "SEC") regarding the Interim Final Rules. As an initial matter, we would like to voice our agreement with the points raised in the joint Federal Reserve, FDIC, and Office of the Comptroller of the Currency (collectively, "Banking Agencies") comment letter on the Interim Rules ("Interagency Letter").1

Regions is an Alabama-based financial holding company whose subsidiaries have over 700 offices in eight states. In addition to consumer and commercial banking, employee benefit plan administration and securities custody and trust services provided by Regions' principal subsidiary, Regions Bank, Regions, through its subsidiaries, also offers a broad range of financial services, including mortgage banking; credit life, accident, and health insurance; and securities underwriting and brokerage.

I. Background

The Interim Final Rules interpret Sections 201 and 202 of Title II of the Gramm-Leach-Bliley Act ("GLB Act"). These sections eliminated the blanket exemptions for banks from the definitions of "broker" and "dealer" under the Exchange Act, and replaced those exemptions with more specific activity-focused exemptions applicable to traditional bank securities activities. Congress designed the new exemptions to permit banks to continue providing trust, fiduciary, custodial, employee benefit plan servicing, and other traditional banking services to meet customers' financial needs. As the Senate Banking Committee noted in its Committee Report: "[t]he Committee does not believe that an extensive `push-out' of or restrictions on the conduct of traditional banking services is warranted. . . . Banks are uniquely qualified to provide these services and have done so without any problems for years."2

Regions believes that the Interim Final Rules are, however, in several respects, contrary to the express statutory language of the exemptions and congressional intent. In addition, some aspects of the Interim Final Rules create a burdensome regime of very complex, costly, and difficult to implement requirements that effectively negate for Regions some of statutory exemptions contained in Title II of the GLB Act. Furthermore, Regions believes that some aspects of the Interim Final Rules institute a costly and complex regulatory regime that does not appear to enhance investor protection, promote efficiency, competition or capital formation. Below we discuss some of the more burdensome aspects of the Interim Final Rules.

II. Extension of Compliance Date

Recognizing that Title II of the GLB Act and the Interim Final Rules will dramatically affect the operations of banking institutions, the Commission granted banks two exemptions from the operation of the GLB Act amendments.3 First, the Interim Final Rules extend the time for compliance with any of the GLB Act amendments to the Exchange Act until October 1, 2001. Second, they exempt until January 1, 2002 banks whose compensation arrangements may not meet the conditions of any of the exemptions, provided the banks meet the other conditions of the applicable exemption.

In addition, in response to banks' concerns that inadvertent violations of the new statutory provisions could give customers rescission rights under Section 29 of the Exchange Act (which makes contracts in violation of the Act voidable), the Commission also issued new Rule 15a-8,4 which provides banks with an exemption from private rescission rights arising from a failure to correctly determine broker-dealer status. This exemption is available for contracts entered into before January 1, 2003.

Regions strongly supports the Commission's efforts to provide banks additional time to comply with the exemptions from the definition of broker and dealer in the Exchange Act, and to delay the ability of private parties to sue banks under section 29(b) of the Exchange Act on the basis that the bank is not in compliance with the broker-dealer registration exemptions included in the Exchange Act.

Regions, however, believes that the significant nature of Title II of the GLB Act and the complexity of the Interim Final Rules necessitate a longer deferral of the compliance date for Title II and any interpretative rules that the Commission may ultimately adopt. At a minimum, Title II and the Interim Final Rules will require Regions to, among other things, change its long standing employee and third party compensation structures, dually register certain employees, change the nature of its traditional custodial relationships with its customers, create policies and procedures to ensure compliance with Title II of the GLB Act, and create an elaborate compensation tracking system for the "chiefly compensated" calculation under the trust and fiduciary activities exemption. In addition, if Regions decides to rely on one of the regulatory exemptions for order taking under the custody and safekeeping exemption or from the "chiefly compensated" calculation under the trust and fiduciary activities exemption, it will have to create, test, and implement an entirely new regime of operational, supervisory, legal, and administrative requirements to ensure compliance with the numerous conditions of those exemptions.5 These and other operational changes will most likely take longer than the regulatory extensions of the compliance date to October 1, 2001 (general extension of time) and January 1, 2002 (extension of time for compensation arrangements).

III. Networking Exemption

Exchange Act Section 3(a)(4)(B)(i) provides an exemption from broker-dealer registration for banks that enter into third-party brokerage arrangements ("networking arrangements") with registered broker-dealers who offer brokerage services either on or off the bank's premises if certain conditions are met. These conditions were originally intended to codify the Commission staff's position in a line of no-action letters concerning financial institution networking arrangements.6 In the Final Interim Rule Release, the Commission provides interpretive guidance on some of these conditions, and defines some of the terms in the networking exemption in new Rule 3b-17.7

Our main observation is that the Interim Final Rules are significantly more restrictive and burdensome than what previously was permitted in financial institution networking arrangements, despite the fact that Congress clearly signaled its intent to preserve such networking arrangements.8 We also find troubling the apparent use by the NASD of its rules to indirectly regulate and supervise permitted bank securities activities when a dual employee is involved.

A. Nominal One-Time Cash Fee

One of the conditions of the networking exemption is that bank employees (other than employees who are also registered representatives of the broker-dealer) ("non-dual bank employees") are prohibited from receiving "incentive compensation," except that a non-dual 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."9

In the context of banks paying for customer referrals, the Commission states in the Interim Final Rules that a "nominal one-time cash fee of a fixed dollar amount" is: (1) a payment that does not exceed one hour of the gross cash wages of the unregistered bank employee making the referral; or (2) a payment in the form of 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 awarded for referrals involving securities are not greater than the points awarded for products or services not involving securities.10 New Rule 3b-17(g)(2) specifies that, regardless of the form of payment, the payment may not be related to the size, value or completion of any securities transaction, the amount of securities-related assets gathered, the size or value of any customer's bank or securities account, or the customer's financial status.11

The concept of a "nominal flat fee" has been used by the staff of the Commission in the context of financial institution networking arrangements since at least the early 1980s.12 In none of these precedents, however, has the SEC staff suggested that nominal fees should be limited to one hour of the gross cash wages of an individual.

We understand the Commission's concern in limiting transaction-based compensation paid to unregistered bank employees in order to mitigate any salesman's stake the employee may have in a securities transaction and, therefore, control possible sales practice abuses. However, there always will be a registered broker-dealer between the customer and any brokerage transaction effected. It is the broker-dealer that will be responsible for ensuring that the eventual securities transaction is consistent with the suitability standards and other investor protection requirements of the securities laws. Clearly, there is no regulatory gap here that the Commission must fill. Moreover, the conditions contained in the staff's prior line of financial institution networking no-action letters - which, as indicated above, are the basis for the GLB Act networking exemption - have functioned for almost 20 years to ensure that investors are protected from various types of fraudulent and manipulative conduct. There is no apparent basis to create a more onerous standard at this time.

The definition of one-time nominal cash fee contained in the Interim Final Rules would appear to add no regulatory or consumer protection benefits to long established traditional bank networking arrangements. In addition, the restriction that a referral fee not exceed "one hour of the gross cash wages of the unregistered bank employee making the referral"13 will be very difficult and costly to implement, and is significantly lower than previously was industry standard. It appears to us to be unfair to require banks to pay less to lower-salaried personnel for referrals to a broker-dealer than to higher-salaried employees for the same activity.

As drafted, Regions will be forced to incur additional administrative burden because a separate referral fee calculation will now be required for each employee who makes a referral. Administrative burden is further increased because the referral fee program will have to keep track of each adjustment in an employee's salary or wages.

The Interim Final Rules also require that in a bonus program, including both securities and non-securities related referrals, the "securities-related referral points [must] have a value that is no greater than the points received under the system for any other product or service."14 There, however, is no requirement in the statute that the points awarded for securities referrals must be no more than the award for the referral of any other product. The statutory language merely requires that points awarded for securities referrals be "nominal" - bonus points need not be compared.

B. Definition of "Referral"

New Rule 3b-17(h) defines the term "referral" to mean a bank employee arranging a first securities-related contact between a registered broker-dealer and a bank customer.15 According to the Commission, the term does not include any activity (including any part of the account opening process) related to effecting transactions in securities beyond arranging that first securities-related contact. The SEC makes clear that the nominal fee may only be paid for a referral of a customer; it cannot be based on that customer actually opening an account at the broker-dealer.16 In this regard, the Commission takes the position that a fee paid on an accounts-opened basis would be considered transaction-related compensation and would not be just a referral fee. However, under prior financial institution networking no-action letters, banks were allowed to pay referral fees on an accounts-opened, but not on a securities transaction basis.17

The Commission's position, therefore, appears to be more restrictive than the staff's prior positions established pursuant to its long line of financial institution networking letters. These letters have been the basis for SRO rules (i.e., NASD Rule 2350) and innumerable networking arrangements between financial institutions and broker-dealers. The Commission's more restrictive interpretation of permissible networking arrangements under the GLB Act will, therefore, have far reaching operational, administrative, and compliance implications for any financial institution that has a preexisting networking arrangement with a broker-dealer.

As indicated above, the GLB Act networking exemption is based on the staff's prior financial institution networking no-action letters. In those letters, the staff has not previously limited referral activities so narrowly. Rather, in the financial institution networking letters, the staff has permitted non-dual bank employees to, among other things:

While these no-action letters discussed these activities in connection with the condition that non-dual bank employees perform only "clerical and ministerial" functions, the Commission's interpretation of the meaning of "referral" directly impacts what duties non-dual bank employees may perform in a networking arrangement, as well as the traditional compensation structures used by banks in financial institution networking arrangements.

Because these letters are the body of networking precedents that Congress specifically referenced in enacting the GLB Act networking exemption, it is not clear to us on what statutory basis the networking exemption is being narrowed by the Interim Final Rules.

C. Forwarding Customer Funds and Securities

The GLB Act networking exemption requires, among other things, that non-dual bank employees may only engage in various clerical and ministerial functions in connection with brokerage transactions executed pursuant to a networking arrangement, except that non-dual bank employees may, among other things, "forward customer funds or securities."26

As indicated above, the legislative history of the GLB Act networking exemption indicates that this exemption is in many respects based upon the staff's no-action letter to Chubb Securities Corporation.27 In the Chubb Letter, the staff granted no-action relief from the broker-dealer registration requirements of Section 15 of the Exchange Act to certain financial institutions (and their required service corporations) that entered into networking arrangements with registered broker-dealers.28 The Chubb Letter contained several conditions, including a requirement that non-dual bank employees may not handle customer funds and securities, except that they may, at the customer's request, effect electronic funds transfers to a broker-dealer from a customer's account at the bank.29

The Interim Final Rules do not, however, address the extent to which non-dual bank employees may handle customer funds and securities in connection with a networking arrangement.30 As indicated above, the GLB Act networking exemption appears to broadly permit non-dual bank employees to "forward customer funds and securities," while the Chubb Letter, which the GLB Act networking exemption was largely based upon, more narrowly permits non-dual bank employees to, at the customer's request, "effect electronic funds transfers" to a broker-dealer from the customer's account at the bank.

The broader language of the GLB Act recognizes that banks traditionally have handled both customer funds and customer securities on a regular basis, and that they are very effective at that function. See, e.g., 17 C.F.R. §§ 240.15c3-2, 15c3-3(c)(5) (indicating that banks are good control locations for brokerage customer funds and securities). To restrict banks' services in this regard in the networking context does not protect investors or the public interest.

We request that the Commission recognize that non-dual bank employees may handle customer funds and securities. The language of the GLB Act networking exemption appears to be broad enough to permit a non-dual bank employee to directly accept a check, cash, or physical securities from a brokerage customer. In the alternative, the "forward customer funds and securities" language of the GLB Act networking exemption may be interpreted to permit non-dual bank employees to effect various transfers from a brokerage customer's account at the bank or other institution (e.g., investment adviser or custodian) to the customer's account at the broker-dealer.

D. NASD Regulation of Permitted Bank Securities Activities Under Conduct Rule 3040

We strongly support the Banking Agencies' request to the Commission to address the applicability of NASD Rule 3040 to dual employee arrangements in which bank personnel serve as employees of both a bank and a broker-dealer. Regions, like many banking institutions, has in the past used dual employees in its trust and other departments and expects to use dual employees in the future, as contemplated by Congress in the GLB Act. Regions requests that the Commission issue guidance that clarifies that NASD Rule 3040 does not apply to dual employees operating in their capacity as bank employees when involved in permitted bank securities transactions pursuant to an exemption.

Applying NASD Rule 3040 to permitted bank securities activities would for all practical purposes eviscerate the exemptions because, under the Rule, NASD member firms would be required to supervise and maintain books and records regarding all the securities activities of a dual bank employee, and the SEC and NASD would then supervise the bank's securities activities if dual employees are involved. Congress clearly did not intend for the SEC and NASD to supervise the bank permissible securities activities of dual bank employees through a NASD Rule. Congress' intent to not permit SRO rules to trump the push-out provisions of Title II of the GLB Act is clearly illustrated by the Conference Committee Report, which states:

The Conferees provided for an exception for networking arrangements between banks and brokers. Revisions to Rule 1060 recently approved by the National Association of Securities Dealers (`NASD') are in conflict with this provision. As a consequence, revisions to the rule should be made to exempt banks and their employees from the provisions' coverage.31

We believe that Congress did not intend to require or permit broker-dealer affiliates of banks or the Commission and the NASD indirectly to control, supervise, examine and regulate permissible bank securities activities through SRO rules. This position would be contrary to the concept of functional regulation, which is a basic tenet of the GLB Act.

One of the purposes of Rule 3040 is to ensure that associated persons of broker-dealers do not sell securities to the investing public without the benefit of supervision and oversight.32 The dangers of unsuitable investment recommendations and misleading or fraudulent conduct is most prevalent when an associated person establishes his own business operation - for example, an independent financial planning firm or a hedge fund. In these situations, there may be a regulatory gap that the Commission and the NASD need to fill in order to protect investors. This, however, is not the case when associated persons of a broker-dealer function as dual employees of a bank and the broker-dealer. In this situation, there is no regulatory gap for the Commission and the NASD to fill because the bank and its employees are already regulated and closely examined under state and federal banking law and, if the associated person's activities occur in the trust department of the bank, traditional trust and fiduciary law. NASDR staff has determined that, at least in one case, Rule 3040 does not apply to dual bank/broker-dealer employees who, among other things, provide investment advice to the bank's trust customers and refer trust customers to the broker-dealer. 33

Applying Rule 3040 to dual bank/broker-dealer employees would place an unnecessary burden on both the bank and the broker-dealer, and add unneeded paperwork and cost to dual employee arrangements. Moreover, no investor protection or public purpose is served by injecting the broker-dealer, the Commission, and the NASD into supervising the details of the dual employee's activities at the bank because, as indicated above, the dual employee's permissible bank securities activities are already highly regulated by other regulatory authorities.

Equally as important, we request that the Commission clarify that Rule 3040 does not give NASD examiners the authority to examine or otherwise scrutinize dual employees acting in their capacities as bank employees in compliance with an exemption of the GLB Act. Granting NASD examiners the authority to examine permitted bank securities activities would be counter to the division of jurisdiction embodied in the GLB Act, and would most likely increase the administrative, operational, and compliance costs associated with Regions using dual employees.

IV. Trust and Fiduciary Activities Exemption

The trust and fiduciary activities exemption authorizes a bank, without registering as a broker-dealer, to effect securities transactions in a trustee capacity, or in a fiduciary capacity in its trust department or other department that is regularly examined by bank examiners for compliance with fiduciary principles and standards, so long as-

A. Chiefly Compensated

The Interim Final Rules provide a complex matrix for defining "chiefly compensated." In particular, the Interim Final Rules provide that a bank meets the statute's "chiefly compensated" requirement only if, on an annual basis, the amount of "relationship compensation" received by the bank from each trust and fiduciary account exceeds the "sales compensation" received by the bank from that account. In other words, the Interim Final Rules apply the GLB Act's "chiefly compensated" requirement to each trust and fiduciary account held by the bank, rather than to the bank's trust and fiduciary activities as a whole, and provide that a bank meets the Act's "chiefly compensated" requirement only if the "relationship compensation" received from each trust and fiduciary account during a year exceeds 50 percent of the aggregate relationship and sales compensation received from the account during the year.34

The Interim Final Rules also provide detailed definitions of "sales compensation," "relationship compensation," and "unrelated compensation" and require a netting of these categories of payments on an account-by-account basis to determine compliance with the exemptions. In the Interim Final Rules, the Commission states that fees paid to the bank by third parties - i.e., persons other than the bank's customer or the beneficiary of the trust - are not included in the definition of "relationship compensation." In addition, the Interim Final Rules provide that "sales compensation" includes, among other things, any fees paid under a 12b-1 plan.

1. Practical Implications of the Commission's Definition

The Commission's definition of chiefly compensated will place a severe burden on banks.35 Prior to January 1, 2002 - the date on which banks' compensation arrangements must be in compliance with Title II - Regions will have to analyze well over 17,000 trust accounts worth over $20 billion to determine whether Regions performs any securities services for such accounts. For the trust accounts that Regions performs securities services, Regions will have to - prior to January 1, 2002 - create a mechanism to evaluate each account to determine whether the compensation received from that account is "relationship compensation," "sales compensation," or "unrelated compensation" - wholly new terms created by the Commission in the Interim Final Rules. In the best of circumstances, this undertaking will be a monumental task that Regions will have to perform on an annual basis. The administrative, operational, compliance, and legal costs associated with this undertaking will be significant.

2. Account-by-Account Calculation

As stated above, the Interim Final Rules require banks to perform the "chiefly compensated" calculation on an account-by-account basis. We believe the language of the GLB Act requires only that the bank be chiefly compensated for the securities transactions that it effects for all of its trust and fiduciary customers from the fees enumerated in the statute.36 The House Commerce Committee Report suggests that the Act's compensation limits were intended to apply to the bank's total trust and fiduciary activities, and not on an account-by-account basis.37

Practically, it would be exceedingly difficult to perform the "chiefly compensated" calculation on an account-by-account basis because the calculation itself is very complex, and many of the "relationship compensation" and "sales compensation" items are calculated or paid on an aggregate basis, not on an account-by-account basis. Thus, including or deducting those compensation items cannot be done on an account-by-account basis. Banks simply do not maintain the types of records that would be needed to perform the "chiefly compensated" calculation on an account-by-account basis. Requiring an account-by-account calculation will be administratively and operationally difficult or impossible to accomplish.

In the Interim Final Rules, the Commission, however, states that its interpretation of the statute's chiefly compensated requirements may be onerous to many banks.38 In light of these burdens, the Commission adopted an exemption that permits banks to avoid performing the chiefly compensated calculation on an account-by-account basis if they comply with certain conditions. A bank may take advantage of this exemption only if-

As indicated above, Regions agrees with the Commission's determination that the account-by-account calculation will be very burdensome to banks. The calculations required to meet the exemption from the account-by-account calculation, however, require a bank to perform an initial account-by-account "chiefly compensated" calculation and an evaluation of the compensation structure of each account at the time the account is created, each time the compensation structure of the account is changed, and each time an employee is compensated based on services provided to that account. The exemption itself requires an extremely complex account-by-account calculation, which largely defeats the purpose of the exemption.

3. Definition of "Sales Compensation" and "Relationship Compensation"

The Interim Final Rules define sales compensation to include, among other things, (i) fees received from an investment company under a plan adopted pursuant to Rule 12b-1 under the Investment Company Act of 1940 ("Rule 12b-1 fees"), (ii) "service fees" that a bank receives from an investment company (other than under a Rule 12b-1 plan) for providing personal service or the maintenance of shareholder accounts, and (iii) finders fees, other than referral fees paid pursuant to the statutory networking exception.

Fees of fiduciaries are elaborately regulated under state and federal fiduciary laws. These include ERISA and the Internal Revenue Code (in the case of employee benefit plans and individual retirement accounts ("IRA")), as applied by the Department of Labor ("DOL"), Internal Revenue Service ("IRS") and federal banking regulators, Section 23B of the Federal Reserve Act, and state trust, fiduciary and banking laws as applied by state courts and state and federal banking regulators, all of which are derived from principles of the courts of equity dating back hundreds of years. These laws and principles impose limits based upon the reasonableness of fees, and in some cases require trust departments to credit back or offset, to the account level, fiduciary fees and/or those third party fees that were received by the trust department in respect of investments made by the fiduciary account.39 In other cases, the third party fees are received in lieu of fees from the account as the fiduciary's compensation for servicing the account. Driven by, and in reliance upon the elaborate requirements of these laws, as well as the forces of competition for fiduciary clients, bank trust departments have carefully structured their fee arrangements with thousands upon thousands of fiduciary clients over the course of many years.

For example, trust departments, including that of Regions Bank, provide employee benefit plan fiduciary and administrative services to 401(k) and similar plans whereby the plan itself and the plan sponsors pay little or none of the plan servicing fees received by Regions Bank. Instead, the mutual funds in which the plans invest pay fees to Regions Bank based upon the amount of the investment by the plan in the funds. These mutual fund fees, in turn, are ultimately borne by plan participants in the form of lower net returns. These mutual fund fees are paid in lieu of or offset against fees that would otherwise be charged to the plan (and thus would be borne indirectly either by the plan and its participants or by the plan sponsor). It is administratively simpler, consistent with what plans want, and in conformity with fiduciary laws, for Regions Bank to receive its fees in this fashion, rather than to seek to charge each participant directly for their respective share of the cost of administering the plan.

The Commission's Interim Final Rules will upset this delicate balance by overlaying an elaborate account-by-account calculation of which account-related fees are received from the account and which are received from third parties in respect of the account, and imposing a netting requirement on some of these fees, in determining whether a trust department can continue to receive fees in the fashion heretofore permitted under applicable fiduciary law. Not only is this an extremely complex and burdensome task, but in addition the net result may be to force the trust department to choose between (a) completely reconfiguring its compensation arrangements with thousands of fiduciary accounts (which may be difficult since the settlor may be dead, incapacitated or otherwise require court approval for an amendment, may force the trust department to seek to implement fee schedules that are unacceptable to clients, particularly employee benefit plans, or may simply conflict with and not be permitted under applicable fiduciary laws governing fee arrangements), or (b) pushing this function out into a registered broker-dealer (which may be impermissible under applicable fiduciary laws because in most states only natural persons, banks and trust companies can serve as trustees).

We respectfully suggest that it was not the intent of Congress to place the Commission in the position of regulating fiduciary compensation arrangements in connection with defining the trust, fiduciary and custody exemptions. If the Commission believes that it is charged with regulating fiduciary fees, we respectfully request that the Commission make a more careful study of the legal, policy and economic issues involved in fiduciary compensation, as well as issues of federalism (under which most fiduciary compensation issues, other than in relation to employee benefit plans, have been carefully left to the states by Congress, the federal courts and federal regulators)40 and provide several years of advance notice to allow for complete restructuring of fee arrangements, before adopting such a requirement.

The Commission's interpretation of chiefly compensated, unfortunately, may place banks in the position of having to choose between "pushing-out" many traditional trust and fiduciary activities into a broker-dealer or completely restructuring compensation arrangements in a way that is very different from current industry-standard arrangements. We believe Congress did not intend such a result.41

Moreover, requiring banks to identify, categorize, and track the various elements of "relationship compensation" and "sales compensation" will be an incredibly difficult and costly undertaking. As stated above, many of the "relationship compensation" and "sales compensation" items are calculated or paid on an aggregate basis, not on an account-by-account basis. Thus, including or deducting those compensation items cannot be done on an account-by-account basis. Banks simply do not maintain the types of records that would be needed to perform the "chiefly compensated" calculation on an account-by-account basis. Requiring an account-by-account calculation will be administratively and operationally difficult or impossible to accomplish.

The Commission also indicates in the Interim Final Rules Release that referral fees paid to non-dual bank employees under the networking exemption may be excluded from the category of sales compensation. However, as indicated in the Banking Agencies Comment Letter, this position implies that other referral fees paid by the bank to bank employees outside of a networking arrangement (for referral of trust or other permissible bank securities activities) will be viewed as sales compensation. Congress provided that a bank may take advantage of the trust and fiduciary exemption so long as the bank is chiefly compensated by the fees set forth in the statute. Congress did not place any limit on how a bank may compensate its employees that provide trust and fiduciary services, since such compensation must be in accordance with applicable fiduciary principles.

4. "Unrelated Compensation"

The Interim Final Rules indicate that compensation that is neither "relationship compensation" nor "sales compensation" is considered "unrelated compensation" and cannot be used to calculate whether a bank is "chiefly compensated" within the terms of the trust and fiduciary activities exception. These fees would include fees for taking deposits, lending funds, margin lending, managing non-securities assets, and fees received pursuant to another GLB Act exception (such as fees, excepting referral fees, under the networking exception).

As indicated above, the trust and fiduciary activities exemption is intended to encompass traditional bank trust/fiduciary operations.42 Bank trust departments have traditionally offered a broad range of services - both securities and non-securities related. We believe that Congress intended the exemption to apply to the entire trust department and, therefore, all trust compensation, whether related to securities transactions or not, should be included in the chiefly compensated calculation. The House Commerce Committee appears to have taken a similar reading of this exemption:43

Dividing bank trust compensation into so many different categories has the affect of limiting the range of traditional trust and fiduciary services that Congress intended to preserve within banks' trust departments, or forcing the "bundling" of fees to trust, fiduciary and custody customers in a way that does not foster customer interests in full competition.

5. Definition of "Fiduciary Capacity"

Perhaps most significantly, the narrow and restrictive way in which the trust and fiduciary exemption has been applied to employee benefit and IRA programs is contrary to Congress' intent, is potentially disruptive to plans, and a serious burden on the banking industry.44 As discussed below, banks have historically functioned as fiduciaries and trustees in offering a full range of services to employee benefit and IRA programs - including, among other things, opening and maintaining individual participant accounts, maintaining custody of plan assets, and conducting plan enrollment meetings. Under ERISA, DOL Opinions, and established banking law, banks that function as the administrator of employee benefit and IRA plans are fiduciaries.45

For example, even when a bank does not exercise discretionary authority or control over the investments by a 401(k) plan account, or render investment advice for a fee, the DOL takes the position that a bank administering an employee benefit plan is deemed to be a plan fiduciary under ERISA "by the very nature of his position."46 The DOL has held that an administrator of an employee benefit plan "necessarily . . . perform[s] fiduciary functions."47

As such, a bank is subject to a full range of fiduciary duties under ERISA.48 In addition, under ERISA, banks administering employee benefit plans are subject to detailed rules addressing self-dealing and conflicts or interest, and prohibiting them from entering into certain types of transactions with the plan or plan beneficiaries - even if the transactions otherwise would be prudent or satisfy ERISA's fiduciary standards.49

With respect to IRAs, Section 408 of the Internal Revenue Code ("IRC") provides that an administrator of an IRA is a trustee and is subject to fiduciary standards.50 The IRS has held that an administrator of an IRA - such as a bank - is a fiduciary for purposes of various sections of the IRC.51 As such, banks that administer IRAs are subject to a broad range of fiduciary duties, including, among other things, liability for engaging in certain prohibited transactions.52 Moreover, courts have also held that IRA administrators act in a fiduciary capacity.53

As can be seen from the above discussion, the Commission's interpretation of "fiduciary capacity" as not including banks that administer employee benefit and other similar plans has implications beyond the federal securities laws - it impacts the definition of fiduciary and the historical treatment of employee benefit plan and IRA administrators under ERISA, the IRC, and DOL and IRS opinions. These areas are uniquely within the purview of the DOL and the IRS.

Moreover, banks have traditionally served as financial intermediaries between various parties.54 In this role banks have handled funds and securities in a broad range of financial transactions, including functioning as the administrator of employee benefit and IRA plans. It is uniquely a banking function to facilitate the transfer of financial instruments between contracting parties.55 Congress recognized that banks have provided these products and services effectively, under applicable regulatory requirements, for many years. As noted in the Conference Report, the GLB Act provides specific exemptions for banking activities from broker-dealer requirements to "facilitate certain activities in which banks have traditionally engaged" - e.g., administering employee benefit and IRA accounts.56 Congress also expressed its expectation, "that the Commission will not disturb traditional bank trust activities." We believe the Commission's interpretation of the trust and fiduciary activities exemption will severely disrupt the trust and fiduciary services that Regions has provided to the public for many years.

6. Definition of Investment Advice for a Fee

The Interim Final Rules provide that a bank will be deemed to be acting in an investment advisory capacity for purposes of the trust and fiduciary exemption if the bank: (1) provides continuous and regular investment advice to the customer's account that is based upon the individual needs of the customer; and (2) owes a duty of loyalty to the customer (arising out of state or federal law, contract, or customer agreement).

The "continuous and regular" requirement in the Interim Final Rules may prevent a trust department from relying on the trust and fiduciary exemption in circumstances where an account obtains investment advice on a less-than-continuous basis. This interpretation is not based upon the statute, and creates an unfair competitive advantage for registered investment advisers who are permitted to offer these products and services because the Investment Advisers Act does not contain a "continuous and regular" requirement.

The definition of "fiduciary capacity" in the GLB Act is similar to the definition of "fiduciary capacity" in Part 9 of the OCC's fiduciary regulations.57 Therefore, a reference to Part 9 is helpful in interpreting the meaning of acting "as an investment adviser if the bank receives a fee for its investment advice" in the GLB Act. Part 9 does not require that a bank provide "continuous and regular investment advice." Similarly, the definition of "investment adviser" in the Investment Advisers Act is not based upon providing continuous and regular advice.58 Instead, that requirement in the Interim Final Rules appears to find its origin in the National Securities Markets Improvement Act of 1996 ("NSMIA"), which assigned jurisdiction to the states and the Commission over small and large investment advisers, respectively, based upon the dollar value of their "assets under management."59 The definition of fiduciary capacity under Title II of the GLB Act, however, arises in a different context from NSMIA - the GLB Act addresses when a bank is acting as an investment adviser and is not attempting to measure the dollar value of the assets under management.

7. Litigation and Enforcement Risk

As indicated above, the Interim Final Rules require banks to - subject to the 10% exemption - perform the chiefly compensated calculation annually on an account-by-account basis.60 The calculation is based on the compensation a bank receives for its trust and fiduciary services during the immediately preceding year. If, at the end of the year, a bank assesses its transactions and only then learns it has failed to comply with the chiefly compensated test, that means the bank has violated the law by operating as an unregistered broker-dealer. This creates potential regulatory and private party liability for a bank. Such liability may force a bank to push-out all of its securities activities, regardless of whether such activities come within the parameters of the trust and fiduciary activities exemption.

V. Safekeeping and Custody Exemption

The GLB Act's custody and safekeeping exemption permits a bank, without being considered a broker, to engage in a variety of custodial and safekeeping-related activities "as part of its customary banking activities." The activities expressly permitted by the statute include, among other things, serving as a custodian or provider of other related administrative services to any IRA, pension, retirement, profit sharing, bonus, thrift savings, incentive, or other similar benefit plan. The exemption also allows banks to engage in other activities as part of their customary safekeeping and custody operations, such as facilitating the transfer of funds or securities as a custodian or clearing agency, effecting securities lending and borrowing transactions for customers, and holding securities pledged by a customer.

In the Interim Final Rules Release, the Commission states that this exemption does not permit banks to accept 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. Regions believes this interpretation is not consistent with the GLB Act or its legislative history, and will limit employee benefit plan and IRA servicing arrangements and consumer choice of providers and servicing arrangements. For example, if participant orders for their 401(k) or IRA accounts must be placed through a broker-dealer, coordination of the settlement of those transactions may present significant operational challenges, since the broker-dealer and the bank's trust and customer operations typically settle and clear securities positions independently. Forcing order-placing functions to be housed at a separate entity (the broker-dealer) makes it difficult to settle transactions efficiently when the account assets are in custody at the bank.

Custody and safekeeping activities-like trust and fiduciary activities-are a core part of the business of banking. Regions has for years provided custodial and safekeeping services to 401(k) and other retirement and benefit plans. In many cases, Regions offers these services as part of a bundle of recordkeeping, reporting, tax preparation and administrative services for 401(k) and other plans. In addition, Regions has provided order-taking services to its custody and safekeeping customers. Such services have been a traditional part of Regions' banking business.

As the SEC has itself recognized, banks offering such a bundle of custodial and administrative services may accept and process orders from the plan or the plan's participants for the investment of new contributions or the re-allocation of existing contributions.61 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.62 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.

In the Interim Final Rules, the Commission provides two exemptions for banks to accept securities buy and sell orders from its custody clients. Regions, however, believes that the conditions attached to the exemptions makes them less useful because of the administrative, operational, and economic costs associated with complying with those conditions.

VI. Sweep Accounts Exemption

The GLB Act allows banks to sweep deposit funds into a "no-load" money market mutual fund (the "Sweep Exemption"). The Interim Final Rules 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."63

As stated in the Banking Agencies' Comment Letter, 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. The use of the term "no-load" in the Sweep Exemption is used in an entirely different context than the NASD Rule.

Banks have been offering sweep programs into "no-load" money market mutual funds for many years. Not all of the money market mutual funds that are available for sweep programs come within the definition of "no-load" contained in NASD Rule 2830(d)(4). The Commission's interpretation may require Regions to incur significant administrative expense in revising its programs to meet the Commission's interpretation of "no-load." The Commission's interpretation, moreover, likely will not provide significant benefit to sweep customers. Moreover, because bank sweep programs are already highly regulated by state and federal banking agencies, we are unable to discern any customer benefits from the Commission's interpretation - particularly considering the increased costs associated with complying with the Commission's interpretation.

VII. Conclusion

Regions believes the Interim Final Rules are in many respects contrary to the plain language of the GLB Act and its legislative history, and contain unnecessarily burdensome, costly and unworkable requirements. In addition, the Interim Final Rules will severely disrupt Regions' existing customer relationships and may force Regions to unnecessarily "push-out" some of its traditional banking activities. In the final analysis, the Commission's Interim Final Rules impose extremely costly regulatory requirements on traditional bank securities activities that may result in increased consumer costs, less cost effective means for the public to participate in the capital markets, and less competition, without any increased consumer protections.

* * *

We appreciate the opportunity to comment on the Commission's Interim Final Rules. If you would like to further discuss the issues raised in this comment letter, please feel free to contact me at the above telephone number.


//Samuel E. Upchurch, Jr.
Samuel E. Upchurch, Jr.


cc: David F. Freeman, Jr.
Arnold & Porter

1 Comment Letter on Interim Final Rules from Federal Reserve, OCC & FDIC (June 29, 2001).
2 Senate Committee on Banking, Housing, and Urban Affairs Report on S. 900, Financial Services Modernization Act of 1999 (Rpt. No. 106-44).
3 See "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," Exchange Act Release No. 44291 (May 11, 2001) [66 Fed. Reg. 27760, 27786 through 27788 (May 18, 2001)] ("Interim Final Rules Release").
4 17 C.F.R. § 240.15a-8.
5 New Rule 3a4-2 exempts a bank from the definition of broker if it complies with the trust and fiduciary activities exemption, except for the "chiefly compensated" condition, provided that the bank's sales compensation is less than 10% of its relationship compensation for all activities for which it relies on the trust and fiduciary activities exemption during the preceding year. 17 C.F.R. § 240.3a4-2. In order to use this exemption, the bank must first determine whether a trust or fiduciary account involves activities for which the bank relies on the trust exemption. Compensation from accounts that do not hold securities would not be included in the 10% calculation, and neither would compensation from activities covered by one of the other GLB Act exemptions (e.g., fees for investing in no-load money market funds permitted under the sweep exemption). With respect to the remaining accounts holding securities, the bank uses its total compensation received from all these accounts for the 10% calculation.

In addition, under Rule 3a4-2, the bank must maintain procedures reasonably designed to ensure compliance with the "chiefly compensated" condition with respect to a trust or fiduciary account (1) when the account is opened; (2) when the compensation arrangement for the account is changed; and (3) when sales compensation received from the account is reviewed by the bank for purposes of determining an employee's compensation.

The exemptions for order taking under the safekeeping and custody exemption are equally as complex and detailed. See Interim Final Rules Release at 84 through 91 [66 Fed. Reg. at 27781 through 27783]. See also Interagency Letter at 29 through 33.

6 See House Commerce Committee Report on H.R. 10, The Financial Modernization Act of 1999 (Rpt. No. 106-74) (stating "Section 201 provides an exception for so-called `networking' arrangements between a bank and a registered broker-dealer. This exception follows a long line of Commission no-action letters. See e.g., Chubb Securities Corp. . . .").
7 17 C.F.R. § 240.3b-17.
8 House Commerce Committee Report on H.R. 10, The Financial Modernization Act of 1999 (Rpt. No. 106-74).
9 Exchange Act Section 3(a)(4)(B)(i)(VI).
10 Interim Final Rules Release at 21 through 28 [66 Fed. Reg. at 27765 through 27766].
11 Id.
12 See e.g., SEC No-Action Letter re: S.A.M. Securities (Sept. 9, 1983).
13 See Interim Final Rules Release at 21 [66 Fed. Reg. at 27765].
14 Id.
15 Id.
16 A fee based on the opening of a brokerage account is not securities transaction-related; rather, opening an account at a broker-dealer is merely a necessary pre-condition of effecting a securities transaction.
17 See, e.g., SEC No-Action Letters re: UVEST Financial Services Group, Inc. (Nov. 24, 1992) (stating "[t]he referral fee will be nominal, one-time per referral, flat dollar amount paid solely for the referral, but may be contingent on the referred person actually making an appointment with the Registered Representative or opening an account.") (emphasis added) and Capital Securities Investment Corporation (Feb. 3, 1993) (stating "[u]nder the Referral Program, a referral fee would be paid to a non-registered employee of the Financial Institution or the Service Corporation whenever a customer who is referred by such employee speaks with a representative and opens an account with the representative.") (emphasis added).
18 SEC No-Action Letter re: Walnut Street Securities (Jan. 16, 1992).
19 SEC No-Action Letters re: S.A.M. Securities (Sept. 9, 1983) and Federated Securities Corp. (Feb. 7, 1986).
20 SEC No-Action Letters re: Security Pacific Brokers (Oct. 20, 1983 and May 27, 1983).
21 SEC No-Action Letter re: Federated Securities Corp. (Feb. 7, 1986).
22 SEC No-Action Letter re: Security Pacific Brokers (Oct. 20, 1983).
23 SEC No-Action Letter re: S.A.M. Securities (Sept 9, 1983).
24 Id.
25 SEC No-Action Letter re: TFS, Inc. (Feb. 2, 1984).
26 See Exchange Act Section 3(a)(4)(B)(i).
27 H.R. Rep. No. 106-74, pt. 3, at 163 (1999).
28 SEC No-Action Letter re: Chubb Securities Corp. (Nov. 24, 1993).
29 Id.
30 Id.
31 House Rpt No. 106-434.
32 See generally NASD Notices to Members 85-54 (Aug. 16, 1985) and 85-84 (Dec. 23, 1985).
33 See NASD Interpretive Letter of Dec. 16, 1996. Available on the NASDR's Web site at
34 Interim Final Rules Release at 51 through 73 [66 Fed. Reg. 27773 through 27778].
35 Interagency Letter at 2 through 11.
36 See 15 U.S.C. § 78c(a)(4)(B)(ii). Specifically, the "such transactions" referred to in subclause (I) of the exception clearly refers to all of the transactions effected by the bank in a trustee or fiduciary capacity pursuant to the exception. There simply is no reference to individual accounts anywhere in the exception.
37 See H.R. Rep. 106-74, pt. 3, at 164.
38 See Interim Final Rules Release at 66 [66 Fed. Reg. at 27776].
39 See, e.g., DOL Opinion No. 97-15A (1997); PTCE 77-3, 42 Fed. Reg. 18,734 (1977), 77-4, 42 Fed. Reg. 18,732 (1977); 17B N.Y. E.P.T.L. 11-2.2; Okla Stat. Ann. tit. 60 § 175.55. Accord Fogel v. Chestnutt, 668 F.2nd 100, 114-15 (2nd Cir. 1981), cert denied 459 U.S. 828 (1982), Papilsky v. Berndt, [1976-77 Trans. Binder] CCH Fed. Sec. L. Rep. ¶ 95,627 (finding breach of fiduciary duty by investment adviser to mutual fund that failed to have a broker-dealer that would join an underwriting syndicate in order to obtain discounts for an investment company on purchases of securities underwritten by the syndicate).
40 See, e.g., 12 C.F.R. § 9.15 (deferring to applicable state law on fiduciary fee matters); Trimble v. Gordon, 430 U.S. 762, 771 (1977); Blair v. Comm'r of Internal Revenue, 300 U.S. 5, 10 (1937); Waterman v. Canal-Louisiana Bank & Trust Co., 215 U.S. 33, 45 (1909); Rice v. Rice Foundation, 610 F.2d 47, 474-75 (7th Cir. 1979); Blackhurst v. Johnson, 72 F.2d 644, 646 (8th Cir. 1934); Dudley v. Board of City Trusts, 361 F. Supp. 714 717-18 (E.D. Pa. 1973); Wachovia Bank & Trust v. Green, 236 N.C. 654, 659, 73 S.E.2nd 879, 883 (1953); In re Worchester County Nat'l Bank, 263 Mass. 444, 458-62, 162 N.E. 217, 224 (1928), aff'd 279 U.S. 347 (1929) (all recognizing primacy of state law and state courts in matters of trust, probate and fiduciary law).
41 H.R. Conf. Rep. No. 106-434 at 163, 164 (1999); S. Rep. No. 106-44 at 10 (1999) (stating Congress expected the Commission to not disturb traditional bank trust operations).
42 See Senate Rpt. No. 106-44
43 See H.R. Rep. 106-74, pt. 3, at 164 (A "bank must be chiefly compensated for its trust and fiduciary activities" on the basis of the fees specified by the Act.).
44 Id. (stating "[b]anks 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").
45 See, e.g., 29 U.S.C. § 1104 and DOL Opinion No. 97-15A (May 22, 1997) (Frost National Bank).
46 See 29 C.F.R. § 2509.75-8, D-3.
47 DOL Opinion No. 97-15A (May 22, 1997).
48 See 29 U.S.C. § 1104(a).
49 See 29 U.S.C. § 1106.
50 26 U.S.C. § 408.
51 29 C.F.R. § 2509.75-8, D-3; 26 U.S.C. § 4975(e)(3) (prohibited transactions provisions).
52 26 U.S.C. § 4975(d)(4).
53 See, e.g., In re Sopkin, 57 B.R. 43 (Bkrtcy. D.S.C. 1985).
54 See 65 Fed. Reg. 80735 (Dec. 22, 2000) (adoping release) and 65 Fed. Reg. 47696 (Aug. 3, 2000) (proposing release).
55 Id.
56 See H.R. Conf. Rep. No. 106-434 at 163 through 164 (1999); Senate Rpt. No. 106-44 at 10 (1999).
57 12 C.F.R. § 9.2(e).
58 Investment Advisers Act § 202(a)(11).
59 National Securities Markets Improvement Act of 1996, Pub. L. No. 104-290, 110 Stat. 3416 (1996), codified at Investment Advisers Act § 203A(a)(2) [15 U.S.C. 80b-3a(a)(2).].
60 See 17 C.F.R. § 240.3b-17(a).
61 See, e.g., SEC No-Action Letter re: Universal Pensions, Inc. (Jan. 30, 1998).
62 Commission staff has permitted non-bank transfer agents, among other things, to accept sales orders (but not purchase orders) in connection with post-demutualization purchase and sale programs. See, e.g., SEC No-Action Letter re: Metropolitan Life Insurance Co. (Nov. 23, 1999).
63 NASD Conduct Rule 2830(d)(4).