CHITTENDEN SECURITIES, INC.
TWO BURLINGTON SQUARE
BURLINGTON, VT 05401
September 4, 2001
Via Electronic Mail
Jonathan G. Katz
Securities and Exchange Commission
450 Fifth Street, NW
Washington, DC 20549
RE: Interim Final Rules for Banks Under Sections 3(a)(4) and 3(1)(5) of the Securities and Exchange Act of 1934, Release No. 34-44291, File No. S7-12-01
Dear Mr. Katz:
Chittenden Securities, Inc. ("CSI") appreciates the opportunity to comment on the interim final rules on the broker-dealer exceptions for banks, which implement Title II of the Gramm-Leach-Bliley Act ("GLB"), Pub.L.No.106-102.
Our comments are focused principally on the limitations and restrictions the interim final rules place on referral fees under the GLB's third party brokerage exception. While there are issues raised by the interim rules that we wish to address, CSI appreciates the efforts that the commission has taken with these rules.
Title II of GLB is of utmost importance to CSI and our bank affiliates because it provides, by amending the Securities and Exchange Act of 1934 (the "Exchange Act"), what securities activities banks may continue to conduct as an exception to the broker-dealer of the Exchange Act. Although the interim rules have raised serious issues for many of our bank affiliates and the banking industry in general, our concerns are much more limited because the rules primarily impact our firm through the third party brokerage exception.
CSI has conducted business with our affiliate banks pursuant to the SEC's no-action letter in Chubb Securities Corp., 1993 SEC No-Act. WL 5565540 (Nov. 24, 1993), Rule 2350 of the National Association of Securities Dealers and the Interagency Statement on Retail Sales of Nondeposit Investment Products, issued by the Board of Governors of the Federal Reserve, the Federal Deposit Insurance Corporation, the Office of the Comptroller of the Currency, and the Office of Thrift Supervision. This arrangement has permitted our customers to have access to a wide range of financial products and services all in one place. The payment of referral fees to bank personnel who refer customers to the registered representatives of CSI has been a fundamental part of this arrangement.
In the interim rules, the Commission has now defined "nominal one-time cash fee" to include restrictions that are beyond the language and intent of GLB, and inconsistent with industry practice. The interim rules provide that the term "nominal one-time cash fee of a fixed dollar amount" is to be limited to only: (1) "[a] payment that does not exceed one hour of the gross cash wages of the unregistered bank employee making a referral;" or (2) "[P] 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."1
Based upon the language of GLB and the industry's long experience with networking arrangements, we do not see the justification for additional limitations on the form of payment "nominal fees" may take. The "nominal fee" standard for referral fees is contained in NASD Rule 2350 and the Interagency Statement, and the industry's practice of payment of nominal fees has been subject to NASD and bank regulation.
For CSI and our bank affiliates, referral fees based on an hourly wage will create an administrative nightmare because a separate referral fee calculation would now be required for each employee who makes a referral. Referral fee programs would have to be adjusted each time an employee's salary changes - which typically happens annually, but often more frequently because of employee position changes and promotions. Using the hourly wage also raises privacy concerns in that employees' hourly wage and thus compensation would be made known to many throughout the bank and CSI (who otherwise would not be privy to such information) in order to implement the incentive program.
The interim rules' provision concerning points is problematic as well. The interim rules require that the points for securities referrals be "not greater than the points awarded for activities not involving securities."2 The point system for referral payments required by the rules means that points for a securities related referral can be no greater than the points for the referral for any other product or service - irrespective of the nature or value of the other product or service. Thus, the points awarded from a securities referral are reduced to the lowest amount given for any other product. For example, a securities referral would be treated the same as a safe-deposit box opening or other basic item.
We see no requirement in GLB that the points awarded for securities referrals be no more than the award for the referral of any other product. Moreover, the inherent problem with the interim rules is that in order for referral systems to be effective they must recognize that not all products are alike and that some activities are more valuable than others. The referral for opening a safe deposit box should not justify the same award as the referral of a customer who opens an account with $50,000 in investment assets.
The rules also provide that securities referral fees (whether points or cash) may not be related to: (1) size or value of any securities transaction; (2) amount of securities- related assets gathered; (3) size or value of a customer's bank or securities account: or (4) financial status of a customer.3 We think these are unnecessary limitations that do not serve the best interest of the investor. GLB's safeguard (the prohibition of the payment of a referral fee that is contingent on whether the referral results in a transaction) is sufficient to protect investors.
It is CSI's opinion that GLB's mandate is satisfied if the "nominal fee" standard for referral fees is maintained. No further limitations on either monetary payments or award points are necessary. Indeed, Congress adopted "nominal fee" in GLB because it was recognized and used by the bank regulatory agencies, the NASD and SEC. The Commission should allow, as under current practice, broker-dealers and bank affiliates to interpret the term in a manner that best fits their networking arrangements. The standard gives flexibility to firms and can be monitored through the regulatory process.
CSI is concerned that the interim rule's referral fee provisions defeat the balances carefully struck by GLB, and establishes a system that is not in the best interest of satisfying the securities needs of bank customers.
Lastly, in recognition of the historic changes brought about by GLB, we request that the SEC delay mandatory compliance with Title II until a sufficient time after the rules are in final form to allow the industry to make the necessary changes to their systems. In particular, our firm will require additional time because we will only be able to finalize our systems based on the activities of our bank affiliates relative to the final rules.
If our firm can provide additional information, please do not hesitate to contact me at (802) 660-1597.
Patricia P. Wood
|1||Interim Rule 240.3b-17(g)(1).|
|2||Interim Rule 240.3b-17(g)(1)(ii).|
|3||Interim Rule 240.3b-17(g)(2)|