Comments on Interim Final Rule:
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
The following information was submitted by financial institutions.
Subject: 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 [Release No. 34-44291; File No. S7-12-01]
Comments: We appreciate the opportunity to provide comments on the Interim Final Rules issued by the Securities and Exchange Commission ("SEC") concerning the several provisions of the Gramm-Leach-Bliley Act ("GLBA").
Our industry is proud of our history of providing trust and/or brokerage services to consumers with no problems. We believe Congress recognized we were a highly regulated industry, and thereby intended for Gramm-Leach-Bliley to allow our trust business to continue without disruption. As drafted, the Interim Final Rules do not allow our traditional trust business to continue. Please consider the following concerns.
1. Any Push-Out Creates Catch 22 in Dual Employee Situation;
SEC Should Clarify that NASD Rule 3040 is Inapplicable to Dual Employee Situation
Under many provisions of the Interim Final Rules, certain traditional trust activities would have to be "pushed-out" into a broker-dealer if certain exceptions cannot be met. One of our primary concerns is that even if those activities are pushed-out, we face a tenuous situation with dual employees. Even if we are faced with licensing our employees, we still run into the dual-employee issue. Where bank personnel serve as employees of both the bank and a broker-dealer, it should be made clear that NASD Rule 3040 does not apply. We face an enormous administrative burden and loss of services if Rule 3040 is applied to our institution.
2. Determining Chiefly Compensated on Account-by-Account Basis is Impossible;
SEC Should Utilize Line of Business or Department Standard at a 49.9% Ratio
Our company does not take any 12b-l fees but the Interim Final Rules requiring us to determine if our compensation meets a strict 10% "chiefly compensated" ratio of bad compensation versus good compensation is not realistic. Not only does the SEC definition depart from traditional statutory interpretation of "chiefly" (a 49.9% standard), but it also creates a wholly unworkable calculation formula. The reality is that we do not employ the personnel to perform the complex fee calculations on an account-by-account basis for the purposes of determining whether the institution meets an exemption. Furthermore, our current technology systems utilized by banks and trust companies cannot accommodate this dramatic change.
In addition, the Interim Final Rules exclude non-securities related income, such as real estate and oil and gas fees, from the "good compensation" for purposes of determining whether we meet the exemption test. This is not realistic in an account that holds only such assets with a small amount of cash. This could be a large portion of our business and is one of the services that distinguish us from and RIA. Additionally, the compensation scheme for the retirement system and/or employee benefit line of business offered by banks or trust companies will be adversely affected. In that business, a bank is typically compensated by 12b-1 fees for administration, shareholder servicing, or subtransfer agency type fees. Ultimately, we would be disadvantaged as compared to insurance companies, and brokerage firms, whereas the purpose of GLBA was to level the playing field with these competing industries.
3. Fiduciary Capacity Definition is Too Limited;
SEC Should Use Widely Accepted Definition of Fiduciary in 12 CFR Part 9
The Interim Final Rules do not follow the traditional definition of fiduciary or "trustee". By limiting what entities are acting as a Trustee, the SEC GLBA. The statute defines fiduciary as it is defined in 12 CFR Part 9. Through the Interim Final Rules, the SEC eliminated several normal trustee relationships from the definition.
In addition, the definition of "Investment Advice For a Fee" is incorrect. The standard of "continuous and regular advice" could wholly mismatch the nature of the trust financial services industry. They are looking at us as a RIA not a fiduciary. Again, the SEC should follow the well-established definition of 12 CFR Part 9.
4. Custody and Safekeeping Exception Excludes Customary Banking Activities;
SEC Should Allow Order Taking Through Custody and Safekeeping Exception
The Interim Final Rules excluded a long list of "customary banking activities" from the Custody and Safekeeping Exception. As drafted, we are restricted from taking orders from its custodial IRA customers, 401(k) and retirement benefit customers or as an accommodation to custodial customers. Again, by effectively eliminating our ability to provide these services, the Interim Final Rules disrupt yet another banking service that GLBA specifically protects. The end-result is another lose-lose proposition for the consumer and his/her long-term relationship with the bank. In the traditional trust business, the fees cover personnel costs; are based on settled transactions and no incentive compensation is offered.
Ultimately, the exemptions offered to in the rules are fraught with so many complexities that a bank or trust company would spend endless hours to determine if it could meet the requirements, with no offsetting consumer protections. The framework is simply unworkable and once again puts banks at a competitive disadvantage in the market for many custodial services.
5. NSCC/Fund Serv Registration is too Narrow;
SEC Should Allow Traditional Mutual Fund Trading
The Interim Final Rules attempt to implement overly narrow mutual fund trading provisions. The exemption for trading through a registered broker-dealer for mutual fund trades is too narrow, since many mutual funds do not have an affiliated registered broker-dealer. Many small institutions can not afford to participate in NSCC or FundServ. This would adversely effect their ability to stay competitive in using mutual funds. Presently they establish accounts directly with the mutual fund. In addition, many mutual funds are not NSCC or FundServ eligible. Moreover, the registration process with NSCC/FundServ is a lengthy process to force funds to comply with. Our industry has typically traded through the transfer agent or to the mutual fund direct. Ultimately, banks and trust companies may be forced to stop using those funds that are not NSCC/FundServ eligible putting banks or trust companies and some mutual fund companies at a competitive disadvantage and wholly disrupting their traditional business.
6. Rules Utilize Wrong "No Load" Definition for Sweep Exception;
SEC Should Adopt Appropriate Definition
Under GLBA, our institution is allowed to sweep funds into any no-load, open-end management investment company that is a money market fund registered under the Investment Company Act. By adopting the NASD's highly restrictive definition of "no load," the SEC effectively forces us to abandon a traditional sweep account product. The term "no-load" should be defined as "no sales load" or "deferred sales load only," rather than incorporating the NASD's definition of "no-load." The protections intended by the NASD "no load rule" are primarily aimed at protecting consumers from misleading advertising by an investment company as it relates to the sales of securities. That is not the issue here. Customers taking advantage of a sweep program already receive appropriate disclosures regarding fees.
This change wholly disrupts the traditional trust business. Since we could receive 12b-1 fees in excess of 25 basis points for the use of any sweep product, we face a loss of income. Why can broker-dealers offer a sweep product that pays more than 25 basis points in a 12b-1 fee, with only the restriction that the broker-dealer does not advertise or publicize the fund as "no-load"? Whereas we would not be able to receive more than 25 basis points in a 12b-1 fee for a sweep product unless they are registered. We would not be surprised if a mutual fund relied on the "no load" definition in the Interim Final Rules and refuse to pay more than 25 basis points to Banks. Institutions in our industry face the prospect of renegotiating all revenue sharing contracts.
7. Referral Fee Rules Infringe on Networking Referral Exception;
SEC Should Leave Compensation Decisions to Bank Regulators
The Interim Final Rules unfairly limit the amount of referral fee that can be paid to non-licensed personnel in the bank to the maximum of one hour of compensation for that employee or another method where points are used to obtain prizes or monetary compensation. We are put at a competitive disadvantage significantly limiting the amount that can be paid for referrals. The requirement that it be a nominal or de minimis amount already limits the amounts paid. The SEC should keep the definition consistent and not make a new exception for our industry. In an already heavily regulated environment, we will be charged with calculating and tracking the compensation to ensure it meets the limitations. We face the prospect of wholly restructuring our compensation programs and making a significant transition with employees. We are also concerned about potential privacy issues and possibly discriminating practices.
Again, thank you for the opportunity to comment. We urge the SEC to give great deference to the banking regulators who are so familiar with the banking industry as the rules are being developed. In addition, we trust the views of the American Bankers Association and Texas Bankers Association Trust Division will be taken as representative of the industry - whether it be community bank, trust company or regional financial service provider.
CC: Hon. Phil Gramm
Hon. Kay Bailey Hutchison
Texas Bankers Association