July 17, 2001
Jonathan G. Katz, Secretary
Securities and Exchange Commission
450 5th Street, NW
Washington, DC 20549-0609
Re: File No. 27-12-01, 17 CRF Parts 200 and 240, 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
Dear Mr. Katz:
The Independent Community Bankers of America (ICBA)1 has reviewed the interim final rule issued by the Securities and Exchange Commission (SEC) to implement Title II of the Gramm-Leach-Bliley Act of 1999 (GLBA) and wishes to offer the following comments.
Prior to GLBA, banks enjoyed a blanket exemption from registration as brokers or dealers under the 1934 Securities and Exchange Act. GLBA removed the blanket exemption, but recognizing that banks have long offered customers certain securities services without problem, instituted a series of exceptions for certain traditional banking activities, such as trust and fiduciary activities. Theoretically, the interim final rule is designed to implement those provisions.
However, the ICBA finds that the interim final rule is incompatible with both the plain language of GLBA and Congressional intent. Title II of GLBA was designed to ensure that traditional banking activities involving securities transactions, such as fiduciary activities and custodial functions, not be disturbed and that banks be able to continue to provide services to customers as they have for many years. The interim final rule, though, would make it difficult - if not impossible - for banks to continue those activities undisturbed. In its current state, the interim final rule is extremely burdensome, unnecessarily complicated and restrictive, and will prove so costly for banks to implement that it essentially nullifies the statutory exceptions, defeating the Congressional intent that banks be allowed to continue to function as they have. Without substantial revision, the interim final rules will force many banks - especially smaller banks - to discontinue existing services to the detriment of their customers. Those banks that continue to offer the same services will face substantially increased costs due to compliance with the interim final rule's complexity. Of particular concern for ICBA members are the potential impact the interim final rule will have on trust and fiduciary services, safekeeping and custody arrangements and networking arrangements with third-party broker-dealers.
The statutory exceptions in Title II of GLBA are extremely important for community banks and their customers. Registering as brokers or dealers or establishing a broker-dealer affiliate is simply not an option for small banks. The capital required and the compliance and reporting systems that small banks would have to implement to register as broker-dealers are not commensurate with the potential income streams for these banks. The business case would not justify registration. Furthermore, many community banks operate in rural areas where attracting qualified personnel to staff such an operation is not feasible. Therefore, practical and useful applications of the statutory exceptions are critical to continue to provide these services and to make them available to investors.
The ICBA also questions the manner in which the interim final rule was issued. Because the SEC had not issued any guidance on these exceptions and because the statutory effective date was approaching, the agency was asked to defer the effective date of the requirements while seeking comments on proposed guidance. Instead, without any input from the banking industry or the public, the SEC issued an interim final rule. This interim final rule places banks in an untenable position. While the SEC did establish a deferred date for compliance, the transition period is extremely short given the complexities of the rule. And, before a final rule has been issued, banks will be compelled to revise their systems and procedures based on the interim final rule in order to begin to prepare for compliance by the deadline.2 The ICBA objects to the fundamental unfairness of expecting banks to proceed on the basis of a rule that was issued without following standard administrative procedures and without knowing how the rules will be changed, especially given the serious impact the rule will have on bank services and customer relationships.
Therefore, the ICBA believes that a substantially revised rule should be issued for public comment. The ICBA especially urges the SEC to work with the agencies charged with supervising the entities which this rule impacts.3 To allow adequate time for banks to revise systems and procedures in accordance with a revised rule, compliance should be deferred until at least twelve months after a final rule is published. Finally, to avoid further disruption of customer service by banks, the ICBA also strongly urges the SEC to immediately announce the suspension of the interim final rule's requirements until a final rule can be issued.
Congress adopted the exceptions to broker-dealer registration in GLBA because banks have provided these products and services for years, making banks uniquely qualified to continue to engage in certain securities activities.
The interim final rule would impose unworkable and burdensome requirements that would disrupt trust and fiduciary activities. The rule fails to take into account the extensive fiduciary requirements that other laws impose on bank trust and fiduciary activities and overlooks the existing supervisory framework that the federal banking agencies have established to supervise these activities. Furthermore, the interim final rule would call into question the legitimacy of the trustee function and unnecessarily create uncertainty and ambiguity.
To prevent banks from using trust services to engage in a full-brokerage operation, GLBA requires that banks be "chiefly compensated" for trust and fiduciary activities on the basis of non-brokerage related fees, but the SEC interpretation creates a complex and unworkable definition of compensation. Furthermore, the interim final rule would apply the analysis on an account-by-account basis instead of an aggregate basis, a step that is extremely burdensome and incompatible with Congressional intent.
The interim final rule would also severely disrupt safekeeping and custody arrangements by taking an overly narrow view of what activities are acceptable. The GLBA clearly intended that these activities be allowed to continue, but the interim final rule would make it virtually impossible for banks to continue to serve customers. Perhaps recognizing this, the SEC has adopted two special exemptions to the limitation, but the exemptions are so complex and restrictive as to be of negligible value. If the agency followed the plain language of the statute to exempt custody and safekeeping activities, these two special exemptions would be unnecessary.
Especially important to the ability of community banks to serve their customers are networking arrangements with third-party broker-dealers. Here, the interim final rule would impose new and unrealistic restrictions on referral fees, making it difficult for banks to continue to offer these types of programs.
In addition, a number of other areas in the interim final rule need to be addressed or revised, such as sweep accounts, securitizations, a safe harbor that allows banks to cure inadvertent errors and an extension of time for compliance. Following are ICBA's comments on the specifics of the rule, but we wish to reiterate that we urge the SEC in the strongest possible terms to propose for comment a substantially revised rule that is compatible with Congressional intent and the plain terms of the statute.
Trust and Fiduciary Activities
For many years, banks have offered customers trust and fiduciary services that involve securities transactions. These activities are a mainstay of the business of banking, have been delivered to customers without serious problems, and are subject to state laws on fiduciary activities and supervision by banking agencies. Recognizing this longstanding tradition, Congress included an exception in GLBA that allows banks to continue to provide securities transactions for their trust and fiduciary customers as they have for many years. To prevent banks from conducting a full-scale brokerage operation in the guise of trust department activities, GLBA placed some qualifications on this exception: the statute requires a bank to be "chiefly compensated" for trust and fiduciary services on the basis of non-brokerage related fees and prevents the bank from advertising its securities services, except in connection with general trust services. However, Congress clearly intended that existing services to bank customers through trust and fiduciary activities - including securities services - be allowed to continue.4
In addressing these activities, the interim final rule goes too far and will disrupt long standing fiduciary and trustee activities, contrary to Congressional intent. The ICBA also is concerned that the existing SEC approach to trust and fiduciary activities will increase costs and impose burden and inconvenience on bank customers. If a bank is required to "push-out" the securities activities of an account to a registered broker-dealer, the customer will be forced to have one account with a bank and a separate brokerage account with a broker-dealer to conduct securities transactions. State law governs what entities may serve as trustee. Generally, banks may serve as a corporate trustee while a broker-dealer may not, mandating a dual account situation, a costly enterprise for trust customers.
Acting in a Fiduciary Capacity. GLBA specifies that a bank is acting in a fiduciary capacity, and hence exempt from the definition of broker-dealer, when acting as "trustee, executor, administrator, registrar of stocks and bonds, transfer agent, guardian, assignee, receiver, or custodian under a uniform gift to minors act." In addition, the statute clearly states that a bank is not defined as a broker-dealer if it "effects transactions in a trustee capacity."5
The terms of the statute are unambiguous, but the SEC states that it will assess the activities as well as the label to determine whether a bank is truly acting in a fiduciary capacity. By asserting a necessity to "clarify" what needs no clarification, the interim final rule creates confusion and an invitation to litigation. It also suggests that the SEC has the authority to review and interpret fiduciary law, an authority not conferred by GLBA.
By bringing into question when a trustee is truly a trustee, the SEC is compelled to address three areas: indentured trustees, ERISA and similar trustees and IRA trustees. For these particular relationships, the SEC specifies that a bank acting in these capacities qualifies for the broker registration exception, but only as long as the securities transactions are conducted in the trust department or other area of the bank that is regularly examined for compliance with fiduciary standards.
There is no reason for the creation of this ambiguity or additional restrictions on the scope of trustee or fiduciary capacity. The SEC's calling into question what constitutes a trustee serves neither public policy nor Congressional intent. The ICBA strongly recommends that this interpretation be eliminated from the final rule. This would obviate the need to create special exemptions for indentured trustees or ERISA and IRA trustees. Rather, the SEC should accept the plain meaning of the term without qualification and acknowledge that Congress has excepted a bank acting in a trustee or fiduciary capacity under applicable law from the definition of broker-dealer.
Trustees and Fiduciaries are Subject to Existing Law and Banking Agency Supervision. It is critically important that the SEC recognize that whenever a bank is acting in a fiduciary capacity, it becomes subject to both existing state laws on fiduciary conduct and regular bank supervision.
First, well-established state laws and regulations on fiduciary conduct apply to any transactions that the bank conducts in its trustee or fiduciary capacity. For example, the National Conference of Commissioners on Uniform State Laws has drafted uniform statutes that many states have adopted to govern the activities and responsibilities of banks acting as fiduciary. In addition, the common law in most states further defines these responsibilities - including the responsibilities of a fiduciary when managing and investing trust assets. Many of these laws are codifications of practices that go back centuries. There is no need for the SEC to impose itself in evaluating what constitutes acting as a fiduciary when state law readily establishes this. Rather, if a bank is acting in a manner that is accepted by state law as acting in a fiduciary capacity, that should be sufficient under Title II of GLBA.
Second, examiners from the federal banking agencies regularly review these activities through long-established examination procedures. During these examinations, the examiners consider the procedures that the bank uses to develop investment recommendations and whether investments are consistent with the terms of the governing trust instrument. The examiners also investigate the bank's policies and procedures to ensure the investments are made in accordance with existing laws and regulations, including compliance with applicable securities rules. And, special examiners trained in trust and fiduciary matters conduct these examinations.6
Both the existence of state fiduciary laws and the supervision by bank regulators offer protection for the grantors and beneficiaries of these trusts, including protection regarding any securities transactions that may occur. Congress recognized this in creating the exception under Title II of GLBA. SEC overlay of additional regulatory restrictions is both burdensome and unwarranted.
Chiefly Compensated. As noted above, one of the conditions in GLBA for a bank to qualify for the trust and fiduciary exception is that it must be "chiefly compensated" on the basis of activities unrelated to securities transactions. The purpose is to ensure that banks do not engage in a full-service brokerage operation under the auspices of the trust department.
The SEC interim final rule provides lengthy, complex and burdensome specifications on whether a bank has met the qualification of being "chiefly compensated." The rule requires the bank to make the assessment annually for each individual account. The ICBA disagrees with this interpretation and believes the analysis should be on an aggregate basis. This would be consistent with Congressional intent to ensure that a full-brokerage business is not conducted through the trust department of the bank.
Trust departments often conduct securities transactions in individual trusts for many reasons, but to require analysis on individual accounts could mean that some fail to meet the test merely because they are carrying out normal trust obligations. For example, when an account is first opened in a trust department, investment policy of the bank and the governing trust instrument may require the trust department to engage in a significant number of securities transactions at the outset. Bank trust departments also engage in a high volume of securities transactions near year-end for tax purposes or to comply with the terms of the governing instrument. These transactions are designed for purposes other than conducting a brokerage business, but they could prevent the accounts from qualifying under the SEC proposed interim final rule.
It is not necessary to evaluate the trust department account-by-account to ensure that the bank does not conduct a full-scale brokerage business in the trust department. An aggregate analysis to determine how the department is chiefly compensated is sufficient to provide this information. A costly account-by-account analysis runs contrary to Congressional intent that long-established trust and fiduciary operations not be disrupted by GLBA.
Second, the interim final rule would require trust departments to classify trust department compensation into one of three categories: relationship compensation, sales compensation or unrelated compensation. Trust departments currently do not have systems in place that make these evaluations. To construct such systems will be a time consuming and expensive undertaking with costs likely to be passed on to trust customers. For smaller banks, this accounting exercise alone is likely to substantially erode any trust department income.
The ICBA strongly urges the SEC to revise the interim final rule's approach and allow banks to conduct an analysis of whether or not the bank meets the "chiefly compensated" test on an aggregate departmental basis. The ICBA also urges the SEC to clearly specify in the final rule that "chiefly compensated" is accepted as meaning that relationship compensation only need be a simple majority, i.e., 51 percent, of sales and relationship compensation.
Special Exception. The SEC has provided a safe harbor intended to allow a bank to avoid the account-by-account calculation to determine whether it is "chiefly compensated" on a relationship basis if most of the trust department income is from relationship-based fees. The ICBA appreciates the fact that the SEC recognizes that a safe harbor is needed if the rule requires an account-by-account analysis. However, as designed in the interim final rule, the safe harbor is insufficient and does not reach its intended goal.
Under the interim final rule, if the bank can demonstrate that sales compensation is less than 10 percent of its income for all fiduciary activities, it may avoid the account-by-account calculation. However, the bank must nonetheless maintain procedures to assess compliance with the "chiefly compensated" provisions on an account-by-account basis when an account is opened, when compensation arrangements change or when sales compensation is reviewed in connection with employee compensation. In making the 10 percent assessment, the bank would not consider any accounts that do not include securities trading activities.
The qualifications that the SEC has imposed on the safe harbor make it virtually meaningless. The procedures that require assessments account-by-account when an account is opened, when compensation arrangements change or when sales compensation is reviewed in connection with employee compensation essentially re-institute the account-by-account analysis that the safe harbor is meant to avoid.
Second, 10 percent is much too low. The statute speaks in terms of "chiefly compensated" by income from securities transactions. Nothing in the statute or legislative history indicates that this should be other than an analysis to determine that over fifty percent of the bank's compensation is from relationship compensation. Accordingly, ten percent is much too low.
However, since the ICBA also firmly believes that it would be more appropriate to use an aggregate analysis when determining whether a bank trust department meets the "chiefly compensated" test, this special safe harbor should be unnecessary.
Relationship Compensation. As defined in the interim final rule, relationship compensation is fees based on the account relationship received directly from the customer or beneficiary, or directly from the assets of the trust or fiduciary account. The ICBA believes that this is too narrow. GLBA does not place restrictions on the source of fees for these services, and the ICBA does not believe there is any justification or need to create such restrictions. Bank trust departments often structure fee arrangements to meet a variety of needs (such s for a series of related trusts) and should be able to continue to do so. The source of the fees is irrelevant to whether the compensation is securities transactions or based on the trust relationship. Therefore, this restriction should be eliminated from the final rule.
The interim final rule provides that one example of a relationship fee would be per order processing fees, provided the fees are limited to the cost assessed by the third party broker-dealer, plus any reasonable overhead incurred by the bank in connection with the transaction that is represented by bank resources devoted solely to securities order processing. The language of GLBA is not so restrictive, and would allow the bank to be compensated for any costs associated with order processing. Banks structure their activities in a variety of ways to make the most efficient use of their resources. Especially in smaller banks, individuals may perform more than one function and not be exclusively devoted to securities transaction processing. Alternatively, the bank may outsource these responsibilities to make more efficient use of existing resources. It does not make sense to deny the bank the ability to recover the costs of those activities merely because the individual involved is not exclusively devoted to securities order processing. Since the GLBA does not place this restriction on the ability of a bank to recover its costs, it is inappropriate for the SEC to add such a qualification. Therefore, the final rule should allow banks to recover any reasonable costs associated with the per order processing and characterize that expense as a relationship fee.
The interim final rule requires that all aspects of securities transactions conducted for trust and fiduciary customers be conducted solely in the trust department or other part of the bank subject to regular fiduciary examinations in order to qualify for the exemption. However, as noted, many banks -particularly smaller banks - may outsource related duties such as order processing, settlement and other back office functions or delegate them to other areas of the bank to make the most efficient use of resources. While these activities may not be subject to trust examinations, that does not mean they are not examined or reviewed by banking supervisors. On the contrary, all activities of the bank are regularly examined for compliance with applicable laws and regulations. The interim final rule would place an artificial constraint on normal business activities and force banks to structure activities in inefficient and costly ways. Therefore, the rule should be revised to allow banks to perform these ancillary activities outside the trust department.
Sales Compensation, as defined by the interim final rule, would include fees that are not capped or based on what the bank was charged for the transaction by a broker-dealer. As noted above, GLBA allows the bank to recover its costs, and therefore any recovery of bank costs should not be defined as sales compensation.
Under the interim final rule, sales compensation would also include "service fees" paid by an investment company for personal service or the maintenance of shareholder accounts, also sometimes referred to as Rule 12b-1 fees. The ICBA disagrees with this interpretation, and urges these fees be designated as relationship compensation when law or the governing agreement requires these fees be used to benefit the account. For example, under ERISA, the bank is required to use these fees either to directly benefit the pension plan or to reduce by an equal amount other compensation it receives. It would be unfair under those circumstances to designate the fees as sales compensation.
Another reason not to define Rule 12b-1 fees as sales compensation is that it will make it extremely difficult - if not impossible - for many banks to serve as trustee for a pension plans for small employers. Many of these plans are compensated using Rule 12b-1 fees to hold down costs. If these fees are defined as sales compensation, many of these pension trusts will fail to qualify as "chiefly compensated" by relationship compensation. In turn, this will cause the costs for administering these plans to increase to the point that many small employers will decide it is uneconomical to continue the pension trust.
Finally, redefining Rule 12b-1 fees as sales compensation goes against existing SEC interpretations. The agency has consistently agreed that such fees are for administration and servicing, i.e., relationship compensation.
Other Trust and Fiduciary Activities
Investment Adviser When the Bank Receives a Fee for Investment Advice. The GLBA specifies that a bank is acting in a fiduciary capacity, and therefore exempt from the definition of a broker, when it acts "as an investment adviser if the bank receives a fee for its investment advice." However, where the statute offers no qualifications to this provision, the interim final rule restricts the ability of a bank to qualify for the exception. The ICBA believes that these qualifications are unnecessary and should be eliminated. If a bank is offering investment advice for a fee, by the very terms of the statute the bank is acting in a fiduciary capacity and therefore qualifies for the exception. If for some reason the SEC believes that the bank is abusing the exception, it has the ability to refer the problem to the appropriate banking supervisor for further investigation.
In addition to believing that no qualifications are necessary, the ICBA finds the two qualifications inappropriate. First, the rule requires the bank to provide "continuous and regular investment advice based on the customer's investment needs." The advice must be ongoing rather than episodic and impersonal advice, such as advice provided through a newsletter designed for general circulation, in response to a market event, or that is not tailored to a specific customer's needs. However, the underlying intent of the interim final rule's requirement seems to be to ensure that the bank has met with and assessed the financial needs of the customer, and the ICBA agrees that is a fair requirement. However, intent to ensure that the investment advice is tailored to a particular customer is not commensurate with requiring that it be ongoing.7 For some customers, a one-time portfolio review may be all the investment advice the customer wants or needs. As long as the advice proffered is specific to a particular customer, that should be sufficient. Furthermore, the interim final rule's requirement does not provide clear guidance for compliance, since it is not readily ascertainable what qualifies as "continuous and regular." Therefore, the ICBA believes the requirement should be eliminated.
Second, the rule requires the bank to be under an obligation, through law or contract, "to make full and fair disclosure to the customer of all material facts relating to conflicts." The ICBA believes that this requirement is unnecessary and redundant, given existing standards that govern bank fiduciary duties in their customer relationships.
Since Congress did not impose qualifications, and since the interim final rule's qualifications are unworkable and unnecessary, the ICBA recommends they be deleted.
Transfer Agent. According to the SEC, the fiduciary relationship of a bank acting as a transfer agent is between the bank and the issuer, not the purchaser of the security. Therefore, the exception is limited to transactions conducted on behalf of the issuer. The bank must rely on another exception for securities transactions conducted on behalf of shareholders in order to be exempt from registration for those activities.
The ICBA does not believe that this is logical. By defining the fiduciary relationship as only between the bank and the issuer, the SEC eliminates a great portion of the transfer agency function. The more appropriate view would to see the transfer agency as an intermediary that owes a fiduciary duty to both the issuer and the purchaser. If a bank transfer agent cannot conduct transactions in an issuer's stock on behalf of purchasers or holders of that stock, the bank cannot function effectively as a transfer agent. Because of this extreme limitation, no issuer would want to engage the services of a bank as transfer agent, and no bank will be able to function as transfer agent without registering as a broker-dealer. Banks have engaged in transfer agency activities for many years without problem and Congress recognized this is granting this exception in GLBA. The SEC's interpretation in the interim final rule flies in the face of this longstanding tradition and experience - and denies effect to Congressional intent.
Safekeeping and Custody Activities
Another significant exception from the definition of broker under GLBA allows a bank to serve in the capacity of safekeeping or custodian for a customer's securities. Under this provision, the bank can hold customer securities, exercise warrants, facilitate the transfer of funds in connection with clearance and settlement of securities transactions, and effect securities lending and borrowing on behalf of a customer. However, the bank cannot act as a carrying broker.
Safekeeping and custody activities, like trust and fiduciary activities, have long been a part of the business of banking. This exception provides a means for banks to continue offering without disruption these products and services that they have offered for many years.
Generally, the SEC defines this exception as one where the bank functions in a "clerical or ministerial" role and does not engage in "broader securities activities." For example, according to the SEC, safekeeping and custody does not allow a bank to accept orders to purchase and sell securities. The agency believes that this kind of communication with customers "implicates concerns traditionally covered by the federal securities laws."
The ICBA believes that the SEC has taken an unduly narrow interpretation of what is permissible under GLBA for safekeeping and custody activities. The interim final rule would not allow a bank to accept orders to purchase and sell securities when serving as a custodian. However, such an interpretation makes little sense and defeats the purpose of the statutory exception. If a bank cannot accept orders from a customer on the disposition of securities the bank holds as custodian, including orders to purchase and sell, then there is little reason for a bank to serve as a custodian. The SEC interpretation makes the bank custodial role little more than one of corporate safety deposit box.
GLBA gives banks the ability to "facilitate the transfer of funds or securities, as a custodian or a clearing agency, in connection with the clearance and settlement of its customers' transactions in securities."8 Congress qualified this exception from the definition of broker by requiring that banks execute such transactions through a registered broker-dealer. The SEC interpretation fails to give full effect to the logical statutory interpretation that banks be allowed to accept orders for securities sales and purchases from customers as part of their custodial function. The bank is merely facilitating the investment decision made by the customer, and as long as the transaction is executed by a registered broker-dealer, that should be sufficient.
The SEC interpretation of the safekeeping and custody exception will force banks to restructure and realign many business arrangements. The SEC has gone so far as to interpret this restriction to apply to custodial IRA accounts and other retirement plans, leading it to institute two special exemptions. The exemptions, though, are so overly complex, burdensome and restrictive as to be unworkable and meaningless. However, the ICBA believes that these exemptions would be unnecessary under a proper interpretation of the safekeeping and custody exception that gives full effect to Congressional intent and allows banks to conduct securities transactions on behalf of their safekeeping and custody customers.
Small Bank Exemption. This SEC-created exemption is primarily designed to allow small banks to continue to conduct securities transactions for a customer's IRA, and solely as an accommodation to customers. However, the qualifications and long list of conditions that the SEC imposes under the interim final rule render this first special exemption essentially useless.
To qualify for the small bank exemption under the interim final rule, a bank must have had less than $100 million in assets as of December 31 of the two previous years and may not be affiliated with a holding company with over $1 billion in consolidated assets in the two prior years. The ICBA believes that this figure is much too low. For example, for purposes of the Community Reinvestment Act (CRA), the federal banking agencies define a small bank as one with less than $250 million in assets. The ICBA strongly recommends that the SEC revise the definition of small bank at least to one with $250 million in assets, to be in keeping with existing banking industry guidelines.
Once a bank satisfies the size threshold, the interim final rule would permit the bank to conduct transactions, subject to a litany of unnecessary qualifications that severely limits its usefulness. Transactions would be permitted, but only for custodial IRA accounts and other specified tax-deferred accounts (not 401(k) accounts) and only for the purchase of SEC-registered mutual funds. Bank compensation related to effecting transactions under this exemption would be limited by the interim final rule to less than 3 percent of annual revenue. The bank must not have a broker-dealer affiliate or a networking arrangement with a third party broker-dealer to effect securities transactions for the bank's customers. Any bank employee involved must primarily have duties other than conducting securities transactions and must not receive incentive compensation for the transactions.
The artificial constraints required under the small bank exemption would disrupt the traditional banking services that Congress intended to protect by creating the safekeeping and custody exception. These restrictions would place banks at a competitive disadvantage to other financial service providers that offer custodial IRA accounts. Specifically, denying banks the ability to have arrangements with third-party broker-dealers in order to qualify for the small bank exemption makes no sense, since it would allow the bank to offer a service to its customers (the networking arrangement) while still allowing the bank to conduct some transactions in-house. This restriction would merely penalize small banks without any commensurate benefit.
Similarly, the restrictions on bank compensation, more fully discussed below, are inappropriate and contrary to the intent of GLBA. These provisions would institute restrictions that are not contemplated in GLBA, and again serve merely to penalize banks that wish to take advantage of the small bank exemption.
Overall, the ICBA believes that substantial revisions to the interim final rule's general interpretations regarding the safekeeping and custody exception are necessary. However, absent those changes, a small bank exemption would still be vitally important. The ICBA recommends, though, that the qualifications that the SEC has added to the statutory language be deleted, and that banks be allowed to conduct securities transactions through any registered broker-dealer on behalf of their safekeeping and custodial account customers without other constraint, as intended by Congress.
Self-directed IRAs and Other Tax-Deferred Accounts. The second special exemption that the SEC creates is the "accommodation exemption" that allows banks to engage in certain securities transactions on behalf of a restricted category of safekeeping and custody customers, such as self-directed IRAs and other tax-deferred accounts.
Banks often serve as custodians to self-directed IRAs.9 While the Internal Revenue Code allows other entities to act as custodians, they must be qualified to do so by the Internal Revenue Service.10 Many banks offer their customers this service and have done so successfully for years without problem. These services are subject to the requirements of the Internal Revenue Code and the supervision of bank examiners as well as being subject to state fiduciary laws.
Currently, banks can offer a full range of investment products, from certificates of deposit to stocks and bonds, to their self-directed IRA customers. Since a bank must serve as trustee or custodian, allowing banks to continue to offer securities transactions to these customers means that individual investors do not have to establish separate accounts with a broker-dealer to execute securities transactions. Instead, banks can and do conduct these transactions on behalf of customers through a broker-dealer. The interim final rule creates a second special exemption for tax-deferred accounts to permit these activities to continue.
However, under the interim final rule, the bank is limited to offering investments strictly in SEC-registered mutual funds. This restriction on the investment options that banks may offer their custodial customers puts them at an unfair competitive advantage in relation to other financial service providers. Since it is not mandated by GLBA, this restriction should be eliminated.
The interim final rule also severely restricts the income a bank may receive from these activities by limiting fees to charges to those directly assessed by the broker-dealer, plus direct overhead. In order to recover any costs for employee activities, the employee must be engaged in securities activities full-time. For many smaller banks with fewer employees, this is completely unrealistic as each member of the staff is likely to serve more than one role. As a result, the bank will be unable to recoup its costs for employee services associated with these activities. The restrictions also will make it difficult for banks to recover any other overhead associated with these services. Therefore, the impact of the SEC interim final rule would be to allow the bank only to pass along direct charges from the broker-dealer. Any other expenses will have to be absorbed by the bank. This essentially means that the bank would be offering these services at a loss. No useful public policy is served by not allowing banks to charge for their services. As a result, the interim final rule would cause banks to discontinue offering these services, contrary to Congressional intent. This restriction should be eliminated.
Overall, the ICBA believes that the restrictions imposed by the interim final rule on safekeeping and custody activities would disrupt existing bank services. Bank supervision and other laws and regulations offer protections for any securities transactions conducted in this area, and the ICBA recommends that the interim final rule's restrictions be eliminated. At a minimum, banks must be allowed to continue to accept purchase and sell orders for securities transactions for their customers' safekeeping and custodial accounts.
Third Party Brokerage Arrangements
One of the most important exceptions from the definition of broker under GLBA for ICBA members is the third party brokerage arrangements exception (referred to by the SEC as the networking exception). If the bank contracts with a third-party to offer brokerage services to the bank's customers, the bank will not be considered a broker subject to SEC broker registration requirements and regulation.
Under the networking exception of GLBA, bank employees may not receive incentive compensation for any brokerage transaction, although they may receive referral fees that are a nominal one-time cash payment of a fixed dollar amount that is not contingent on whether the referral results in a sale.
Referral Fees. The SEC interim final rule places a number of restrictions on referral fees. According to the rule, the referral fee may be made only for the first introduction between a customer and the broker. Second, the rule establishes two alternative definitions for what constitutes one-time nominal cash payments. Under the first alternative, the amount cannot exceed one hour of the gross cash wages of the employee making the referral. Ostensibly, the use of the hourly wage is to adjust for regional variations in compensation packages, but it demonstrates the SEC's lack of understanding of the banking industry and how bank employees are compensated.
In many instances, these referral fees are paid to tellers or customer service representatives for referring customers. In a recent study of bank compensation,11 the ICBA found that the median salary for customer service representatives ranged between a low of $19,469 in Minneapolis and a high of $27,660 in San Francisco, with the mid range around $22,500. For customer service representatives, therefore, the gross hourly wage cap for referral fees would range between just over $9 and slightly more than $13 (based on a 40-hour week). For tellers, salary ranged between a mean of $15,387 and $20,499, placing a cap on referral fees under the SEC rule between just over $7 and just under $10. Basing referral fees on these salary levels greatly diminishes their utility and is not necessary under the statute.
Even if one accepts it is appropriate for the SEC to develop regulations affecting bank employee compensation, an area over which it has no jurisdiction, the gross hourly wage cap that the interim final rule imposes is unrealistic. Different employees in the same bank would eligible for different levels of referral fees, a result not conducive to the teamwork among employees that banks strive to achieve. Furthermore, requiring banks to regularly adjust payment of referral fees based on salary levels is an unnecessary administrative burden. The bank could set the cap using the lowest common denominator, but that would diminish the value of referral fees for many bank employees, essentially obviating the bank's ability to use a form of compensation specifically sanctioned by GLBA.
Use of an employee's hourly wage also raises issues of employee privacy. The member of the bank staff that administers any referral fee plans may not be the same person that administers payroll records. By using the hourly wage cap, though, the referral fee administrator will have to be privy to employee payroll records, an invasion of employee privacy. Others, such as auditors and compliance officers will also have to confirm this information, further invading the privacy of employees eligible for referral fees.
Because of the impracticalities and burdens of using an hourly wage level as a cap for the referral fee, the ICBA strongly opposes its use.
As an alternative, the interim final rule would allow referral fees as part of a points system that covers a range of products or services. However, the points awarded for securities referrals may not be greater than points awarded for other products. The ICBA believes that this approach is equally impractical. First, it discourages securities referrals, since all other products must be given equal or higher priority in order to ensure the SEC restrictions are satisfied. Second, bonuses based in whole or in part on referrals would be prohibited, even if the bonus were based on the securities activity of a department or branch, a requirement that would make it impossible for a bank to award a bonus to a department or branch manager based on the performance of the department as a whole.
The ICBA disagrees with the SEC alternative approach. Nothing in the statute requires these restrictions, but they would disrupt existing bank compensation programs. Therefore, the ICBA opposes the use of the alternative.
Finally, the SEC asks whether it should impose an aggregate cap on such referral fees. The ICBA believes that this would be particularly inappropriate. If each fee is "nominal," there is no reason to place any further constraints, and an aggregate cap would be totally inappropriate.
The interim final rule would also specify that referral fees may not be based on the size, value or completion of the 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. The ICBA does not believe that these additional restrictions are necessary, and therefore they should be eliminated from the rule.
It is important for the SEC to recognize that the fee is based on customer referral, not completion of any transactions. Especially disappointing is the failure of the SEC to recognize the success of the current system. Over the past decade, the banking and securities regulators have, through extensive review and debate, settled upon a referral payment methodology that works well and has not evidenced any conflict of interest or steering.12 Therefore, the ICBA urges the agency to eliminate the restrictions on referral fees that are placed in the interim final rule. Since bank compensation programs are reviewed by bank examiners, the banking agencies are capable of ensuring that any compensation - including referral fees - are appropriate and comply with laws and regulations, including the GLBA restrictions.
De Minimis Exception
GLBA provides an exception from registration for a bank that conducts no more than 500 securities transactions in a calendar year. Under the statute, transactions excepted under one of the other provisions of GLBA (e.g., trust and fiduciary activities, safekeeping and custody transactions, etc.) are not included when calculating the 500 limit.
This de minimis exception is an extremely important exception for smaller banks. The statutory exception is straightforward, and the ICBA encourages the SEC not to establish qualifications that confuse Congress' plain meaning. For example, the SEC interim final rule would count certain transactions twice: once as a sale and once as a purchase. This double counting is illogical and incompatible with plain English. Rather, a transaction should be defined solely as the transfer of a security from one owner to a new owner and only counted once.
GLBA also creates an exception from the definition of broker if a bank "effects transactions as part of a program for the investment or reinvestment of deposit funds into any no-load, open-end management investment company registered under the Investment Company Act of 1940 that holds itself out as a money market fund."
Historically, a no-load fund is a fund where neither investors nor the fund bears any costs for distribution of fund shares. In 1980, the SEC adopted Rule 12b-1 under the Investment Company Act that allows fund assets to be used to pay distribution costs.
The National Association of Securities Dealers (NASD) has also adopted a rule defining a no-load fund as one that does not have a front-end or deferred sales charge. In addition, to qualify as a no-load fund, the NASD rule restricts sales related expenses to no more than 0.25 percent of the fund's average net assets per year. The SEC intends to use the NASD rule to define a no-load fund, but the ICBA believes this additional restriction is inappropriate.
The ICBA believes that the SEC has misplaced reliance on the NASD rule. The NASD rule was developed in connection with advertising and disclosure to be sure that customers are informed about the fees and charges levied by a fund. Converting an advertising rule to a registration exemption completely ignores the economic reality of providing the service. The concerns that militate disclosure are very different from those that trigger whether or not a fund qualifies for investments under the Congressional exception that allows banks to make these investments on behalf of customers.
For smaller banks, use of the NASD limitation on what constitutes a no-load fund will cause many to discontinue current business arrangements and services they offer customers. Even at 60 to 75 basis points, these banks barely generate enough volume to make their sweep programs profitable. Administrative costs of implementation and servicing of sweep accounts is significant, especially for small banks that have lower aggregate account balances and fewer customers involved in the sweep function. A 25 basis point cap is not an exemption for small banks - it is an economic prohibition.
Implementation of the highly restrictive NASD definition will defeat these programs and violate the Congressional prescription against disrupting banking services.
Furthermore, the ICBA believes that the restrictions imposed by the SEC on the types of investment that can be made using sweep accounts unfairly restricts the types of investments that banks can offer customers. The ICBA urges the final rule to eliminate the qualifications of the NASD rule. Rather, a no load fund should be defined without the restrictions of the NASD rule. Otherwise, banks will be unable to continue to offer the kinds of sweep accounts that they have offered for years and the GLBA intended to allow them to continue to offer.
The GLBA also grants an exception for affiliate transactions that allows a bank to effect securities transactions for an affiliate, provided the affiliate is not a broker-dealer nor engaged in merchant banking. The SEC has determined that this does not extend to a trade with a non-affiliated customer, even if that transaction is part of a trade involving an affiliate.
The ICBA believes that the restriction that limits these transactions to only those involving two bank affiliates defeats the purpose of the Congressional exception. There are likely to be very few instances when a transaction does not involve at least one non-affiliate of the bank. The focus should be on the entire transaction, not splitting a transaction into separate components of purchase and sale. As long as one of the parties involved in the transaction is an affiliate of the bank, that should be sufficient to meet the requirements of GLBA. Otherwise, the exception becomes useless and the provision in the statute meaningless, contrary to normal tenets of statutory construction, which is to interpret statutory language so that it has meaning.
GLBA creates four exceptions from the definition of dealer for banks, but the only provision that the SEC addresses in the interim final rule is asset securitization activities. Under this exception, banks can underwrite and sell asset-backed securities if the underlying obligations were primarily originated by the bank, an affiliate or through a syndicate of which the bank is a member.
According to the SEC, Congressional intent to create a narrow exception is clear. Therefore, while the interim final rule allows a bank to use the exception to originate and distribute asset-backed securities, it does not allow a bank to repurchase and re-sell such securities (although a bank is allowed to repurchase the securities for its own investment portfolio).
The SEC rule also defines several terms. For a bank to use the exception, it must "predominantly" originate the obligations underlying the security. According to the interim final rule, this means that at least 85 percent of the value of the obligations in the pool must have been originated by the bank, one of its non-broker dealer affiliates, or a syndicate of which the bank is more than an insignificant member. The interim final rule also states that to be considered as having originated the underlying obligations, the bank must have initially made and funded the obligation. The interim final rule also restricts the purchase of such obligations to "qualified investors" as that term is defined elsewhere in the rules under the Securities and Exchange Act of 1934, but essentially, sales are restricted to "a more sophisticated group."
The ICBA is very concerned that the level that the SEC sets for the exception - 85 percent - is too high. While smaller community banks are unlikely to take the lead in putting together the pool of assets that are securitized, for many small banks, the ability to sell loans into the market is critical for liquidity and to be able to meet credit needs by funding new loans. Sales of loans to institutions that securitize them is one way that smaller banks obtain new funding. However, by making it difficult for larger banks to incorporate loans that they themselves do not originate, the SEC erects a barrier to small banks selling these loans into the market. Not all small banks are able, for a variety of reasons, to use government sponsored enterprises such as Fannie Mae and Freddie Mac for this purpose, and so the SEC interim final rule will cut many of them off from the secondary market. Therefore, the ICBA strongly urges the SEC to drop this high percentage. In fact, we believe that a simple majority - 51 percent - would be sufficient to carry out Congress' intent.
In addition, the definition of a syndicate that qualifies for meeting the origination test is unduly restrictive. Banks have formed many types of coalitions with other banks to make loans, especially to low- and moderate-income borrowers. In some instances, the coalition will refer a given borrower to one of the banks to originate and underwrite the loan. However, these types of arrangements would be ineligible under the SEC interim final rule. The ICBA believes that the definition of "syndicate" needs to be revised and expanded to better reflect existing banking practices and to take into account many of the existing arrangements that banks use to meet the needs of low- and moderate-income borrowers.
Where Activities Are Conducted
To qualify for the trust and fiduciary exception, the interim final rule requires that the activities be conducted in the bank's trust department and be subject to examinations for "compliance with fiduciary principles and standards." While GLBA requires that activities conducted in a fiduciary capacity be conducted in the trust department and subject to such examinations,13 the statute does not place the same restrictions on activities conducted as a trustee.
It is important that the SEC recognize that banks, especially smaller banks, may conduct certain activities that would otherwise qualify for an exception outside of the trust department. For example, a bank may offer self-directed IRAs through its normal retail branch activities. These activities are still subject to regular review by bank examiners. However, the interim final rule must take into account that it is the activity that Congress intended to allow to continue, without creating new constraints on where that activity takes place. To require activities to be conducted only in a trust department will create an unnecessary restriction that will force banks to realign products and programs in possibly inefficient ways at unnecessary cost to both the bank and its customers. For smaller banks that do not have trust departments, this will serve as a ban on these activities.
Since GLBA provides the exception for activities as a trustee without the qualifications that the activities be conducted in the trust department, the ICBA opposes the creation of a qualification that is not in the statute. Furthermore, we urge the SEC to clarify that it is the activity that will qualify for the exception - not where the activity is conducted.
Execution of Transactions
Many of the exceptions in the interim final rule seem to require that even though the bank qualifies for the exception, the actual transaction must be conducted through a registered-broker dealer. The ICBA finds this much too restrictive. In some instances, smaller banks execute transactions on behalf of their customers directly with a mutual fund company. Requiring the bank to divert the trade through a broker-dealer will merely add expense and burden for the bank and its customers. Unless GLBA specifically requires securities transactions to be conducted through a registered broker-dealer, the ICBA urges the SEC to allow banks that qualify for an exception to trade directly with investment companies. This clarification is especially important for self-directed IRAs.
Need for A Cure Mechanism
The interim final rule does not allow a bank to meet these standards in good faith, but instead would impose a rigid all or nothing scheme. The absence of a cure mechanism exposes banks to considerable risks - possibly even to the safety and soundness of the institution - in the event of a single error. The imposition of an all or nothing approach to the rules imposes for small financial institutions a significant capital risk resulting from inadvertent and unintended securities law violations.
Many banks, in the process of serving their customers, execute transactions in trust accounts during the closing days of the year, usually to address federal tax concerns. As a result, while the bank might be making every effort to meet the requirements of the SEC's interim final rule, it might find that it inadvertently dropped out of compliance. For example, as the interim final rule is currently structured, a trust department might find that some of its accounts had over 50 percent of compensation from securities transactions due to year-end transactions, despite the fact that the department had made every effort to meet SEC constraints. This would require the bank to completely restructure its programs and register as a broker-dealer in only twenty-four hours.
The ramifications for not doing so would be draconian. For example, if the bank were found to be an unregistered broker-dealer, the customer could later void the transaction at any time (once the interim final rule takes full effect). Customers would be able to take advantage of this situation in a falling market and choose to void a transaction at the expense of the bank, regardless of its propriety when entered. This danger alone might be sufficient to steer many banks away from activities that Congress deemed appropriate.
Therefore, the ICBA believes that it is appropriate and necessary to incorporate a provision that allows a bank operating in good faith to comply with the rules to "cure" any inadvertent errors within a reasonable period of time.
Extension of Time for Compliance
Many banks had expressed concern about the ability to meet the statutory deadline for compliance (May 12, 2001). In fact, the original requests to the SEC were primarily to extend the deadline, leading the SEC to conclude that an interim final rule was appropriate.
The interim final rule institutes two additional exemptions for banks that allow additional time for compliance. First, banks are given until October 1, 2001 to adapt their securities activities to the new requirements, either by structuring them to meet one of the exceptions, by moving them to a registered broker-dealer, or by registering as a broker-dealer. Second, banks have until January 1, 2002 to conform any compensation arrangements to meet the conditions outlined in the interim final rule.
Under existing SEC rules, if an entity sells a security when it should have been registered but was not, that sale can be voided. Accordingly, if a bank did not meet the conditions of one of the exceptions in the interim final rule and had not registered as a broker-dealer by the deadline, a customer could void that sale at any time. In a declining market, a customer would merely have to make such a claim and the bank would bear the loss. Therefore, the interim final rule has an additional provision that precludes contracts executed before January 1, 2003 from being voidable.
The ICBA applauds the SEC for recognizing the need to allow banks additional time to comply with the new rules. Clearly, the SEC recognizes the difficulties inherent in applying some of these provisions, based on the length and depth the agency goes to in explaining its rationale for some aspects of the interim final rule. However, this same complexity also mandates a longer transition period before the rule takes effect. The interim final rule allows just over four months to comply with a rule that has yet to be finalized, meaning that banks must begin to comply with the interim final rule without knowing what changes may be made when it is finalized. Furthermore, software programs have not yet been developed to take into account the analysis needed for assessing whether the bank meets the "chiefly compensated" test for trust and fiduciary activities, and it will take much longer than the next six months to develop, test and install such programs. For smaller institutions that lack the resources and personnel and must rely on vendors to develop these programs, six months is clearly an insufficient amount of time. Therefore, the ICBA strongly recommends that the SEC further extend the dates for mandatory compliance by an additional twelve months at the very least. In all fairness, the date for final compliance should not be established until a final rule is issued, with the compliance date twelve months after that rule is issued.
The interim final rule does not impose recordkeeping requirements to verify compliance with any of the conditions specified, based on the presumption that banks will maintain such records in the ordinary course of business. While it is likely that the federal banking agencies will adopt such requirements, as required by GLBA, the SEC also asks whether it should institute parallel recordkeeping requirements to ensure compliance.
The ICBA believes it would be inappropriate for the SEC to impose recordkeeping requirements on banks. The recordkeeping requirements of banks is an area uniquely suited to the federal banking agencies. Congress recognized this in section 204 of GLBA, which confers this authority on the banking agencies. The statute does not grant the SEC similar authority. Therefore, the ICBA does not believe the SEC should institute such requirements. If the SEC has concerns about the types of records that banks should maintain, it should express those views to the banking agencies which can, as Congress specified in section 204, take the SEC's concerns into consideration in developing such requirements.
Prior to GLBA, only banks and not savings associations were exempt from broker-dealer registration requirements. The interim final rule extends the new exceptions from registration to savings associations as well, placing them on the same footing as banks. The ICBA believes that this is an appropriate step and supports this aspect of the rule.
Section 722 of GLBA mandates that federal banking agencies use plain language in all rulemakings. Although this same requirement was not applied to the SEC, the ICBA believes that the agency should make every effort to comply with the spirit of the law in requiring bank regulations to be written in understandable language. The cross-referencing and structure of the interim final rule is very complicated and likely to require legal expertise to interpret. For smaller banks, this alone present an additional barrier to reliance on the exceptions, since few have in-house counsel to interpret these rules, and many in rural areas do not have ready access to attorneys expert in the finer aspects of securities law and regulation. To make these exceptions useful for small community banks with limited resources, the ICBA strongly urges the SEC to issue a final rule that is in plain language and readily comprehensible.
Statutory Exceptions Not Addressed in the Interim Final Rule
There are a number of additional exceptions in the statute, such as engaging in permissible securities activities or private securities offerings, that are not addressed in the interim final rule. These are statutory exceptions adopted by Congress to allow banks to continue to engage in certain bank permissible securities transactions without being required to register as brokers or dealers. However, based on the restrictive nature of the SEC interpretation of the exceptions that are covered in the interim final rule, the ICBA is extremely concerned about the restrictions that the agency might place on these exceptions as well. The ICBA firmly believes that before the SEC takes any action on any of these exceptions, either through no-action letter or otherwise, it should take the appropriate rulemaking steps mandated by the Administrative Procedures Act and issue a proposed rule with an opportunity for public comment. This is critically important to provide the SEC with the information that it needs to understand the functioning of the banking industry, existing protections under current laws and banking agency supervision, and the ramifications of any decision the SEC might make.
In the ICBA's view, the SEC's interpretations in the interim final rule of the GLBA exceptions from the definition of broker and dealer are unduly and unnecessarily narrow, complicated and qualified. The net effect of the restrictions and conditions contained in the interim final rule is to nullify the statutory exceptions. This is neither in keeping with the spirit nor the express language of GLBA.
The vast majority of the thousands of community based financial institutions must place complete reliance on the exemptions from registration to continue to offer the services they provide their customers today. To these small financial institutions, registration is neither a practical or economic alternative. These small banks and thrifts do not have the capital to build and staff a broker-dealer operation that can effectively meet the highly complex record keeping and supervisory requirements of the SEC. Even if they could afford to do so, community banks located in rural areas would find it very difficult to recruit and retain experienced personnel to staff such an operation. While the SEC maintains that its primary goal is protection of investors, the ICBA is seriously concerned that for many customers of smaller banks in rural markets, building a regulatory structure that is impractical denies thousands of small rural financial institutions the preexisting authority to offer these services for their customers, resulting in "investor exclusion" instead of "investor protection."
The SEC summarizes the 'more than thirty years of Congressional efforts' that culminated in GLBA. After such extensive discussion, it is inconceivable that Congress intended a redefinition of standard terms such as trustee and fiduciary - terms that have been widely used and accepted for many years - but then did not grant specific authority to do so. On the contrary, the express intent of Congress, after three decades of discussion and debate, was to exempt certain well-known and understood traditional banking activities that involve related securities transactions. There was no intent to allow a new regulatory scheme to redefine banking.
It is inappropriate to qualify the ability of banks to offer trust and fiduciary services. The SEC interpretations and qualifications of what constitutes "chiefly compensated" are overly burdensome, complex and unnecessarily confusing for banks. The qualifications the interim final rule would place on safekeeping and custody arrangements would force banks to greatly curtail existing activities, contrary to Congressional intent. And, the restrictions on referral fees for networking arrangements are unduly restrictive as are the restrictions on the types of investments permissible through sweep arrangements.
Congress clearly intended that banks continue to be able to provide the services that they have offered successfully for many years. Banks have offered these services, including securities transactions, as part of their traditional banking activities without problem. These activities are subject to strict fiduciary standards and closely supervised by the various banking agencies. Congress recognized all of this when it established the exceptions under Title II of GLBA. Banks should be allowed to continue providing traditional services to their customers without sustaining prohibitive costs to comply.
Therefore, the ICBA urges the SEC to substantially revise and reissue for public comment a proposed rule that gives effect to Congress' intent.
Thank you for the opportunity to comment. Should you have any questions or need additional information, please contact ICBA's regulatory counsel, Robert Rowe, at 202-659-8111 or email@example.com.
Robert I. Gulledge
|1||ICBA is the primary voice for the nation's community banks, representing 5,000 institutions at nearly 17,000 locations nationwide. Community banks are independently owned and operated and are characterized by attention to customer service, lower fees and small business, agricultural and consumer lending. ICBA's members hold more than $486 billion in insured deposits, $592 billion in assets and more than $355 billion in loans for consumers, small businesses and farms.|
|2||While the statute has existed since November 1999, the length and extent to which the SEC goes to explain its rationale on portions of the interim final rule demonstrates the complexities of these issues and the difficulty the industry would have in complying without regulatory guidance.|
|3||The ICBA fully supports the comments on the interim final rule filed June 29, 2001 by the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation and the Office of the Comptroller of the Currency.|
|4||See, e.g., H.R. Rep. No. 106-74, pt.3, 164: GLBA "provides an exception for bank trust activities, recognizing the traditional role banks have played in executing securities transactions in connection with their trust accounts."|
|5||GLBA, Section 201, amending section 3(a)(4)(B)(ii) of the Securities Exchange Act of 1934.|
|6||The Federal Financial Institutions Examination Council (FFIEC) has developed the Uniform Interagency Trust Rating System (UITRS) that is designed specifically to evaluate and rate the trust and fiduciary activities of banks.|
|7||The ICBA questions whether many broker-dealers meet the qualifications that the SEC is seeking to impose on banks.|
|8||Section 3(a)(4)(B)(viii)(I)(bb) of the Securities Exchange Act of 1934 as amended by GLBA.|
|9||This discussion focuses on those situations where the bank does not offer investment advice or make investment decisions for the accountholder.|
|10||26 CFR 1.408-2(b)(i) and (d).|
|11||Community Bank Compensation & Benefits Survey Report 2001, conducted for ICBA by Association Research, Inc. The survey was conducted in the fall of 2000.|
|12||See, e.g., Interagency Statement on Retail Sales of Nondeposit Investment Products, issued by the four federal banking regulators in February 1994.|
|13||Securities and Exchange Act of 1934, section 3(a)(4)(b)(ii) as amended by GLBA Section 201.|