William C. Mutterperl
Executive Vice President,
General Counsel and Secretary
FleetBoston Financial Corporation
100 Federal Street
Boston, MA 02110
July 16, 2001
Jonathan G. Katz
Securities and Exchange Commission
450 5th Street, N.W.
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, Release File No. S7-12-01 ("Interim Final Rules")
Dear Mr. Katz:
I am writing to you on behalf of FleetBoston Financial Corporation ("FleetBoston") to express its serious concerns about the above referenced Interim Final Rules issued by the Securities and Exchange Commission ("Commission") on May 11, 2001.1
In 1999, Congress enacted landmark legislation modernizing the nation's financial services system, the Gramm Leach Bliley Act (GLBA). As part of the modernization effort, Congress acted to preserve the authority of banks to continue to engage in a limited range of securities activities that have been actively and safely conducted in banks for decades with the careful oversight of the bank regulatory agencies.
Specifically, Sections 201 and 202 of Title II of GLBA eliminated the blanket exception for banks from broker-dealer registration and oversight by the Commission provided by the Securities and Exchange Act of 1934 ("Exchange Act"), and replaced it with several carefully defined exceptions. Congress expended a great deal of thought, time and effort into achieving this result, which provides a good balance between consumer protection, functional regulation and the continued ability of banks to compete in this important area of financial services. However, the Interim Final Rules released by the Commission threaten this delicate balance through an overly broad interpretation of the broker and dealer provisions of the GLBA. FleetBoston is very concerned that the requirements and conditions imposed on several of these exceptions go far beyond what Congress authorized in the GLBA and will have an adverse effect on our securities activities and on our relationships with our customers. We wish to point out briefly several aspects of the Interim Final Rules that we believe would have a significant negative impact on the conduct of our business:
Account-by-Account Calculation of "Chiefly Compensated"
The trust and fiduciary exception requires that banks be "chiefly compensated" by an annual or administrative fee, a fee based on a percentage of assets under management, a flat or capped per order processing fee or any combination of these fees. We believe that it was Congress' intent that the "chiefly compensated" calculation be made taking into account the aggregate compensation that a bank receives from all of its fiduciary accounts. The requirement in the Interim Final Rules to comply with the "chiefly compensated" test on an account-by-account basis places a substantial administrative burden on banks, which will increase costs with no commensurate benefit to the customer. Since we do not have systems in place to demonstrate account-by-account compliance, we face the necessity of creating such systems at great expense and in an unreasonably short time period. It is our view that Congress, in enacting the GLBA clearly did not envision such a disruption of traditional bank activities.2
While the 10% "safe harbor" provisions in Interim Final Rule 3a4-2 purport to relieve a bank's burden to make the account by account calculation, the conditions attached to this Rule are such that no relief is actually provided. For example, the Rule requires a bank to maintain procedures designed to demonstrate that at three different times during the life of a fiduciary account, it meets the "chiefly compensated" test. We believe these requirements transform the intended safe harbor into simply another account-by-account requirement.
Moreover, the methods described in the adopting release for distinguishing sales compensation from relationship compensation and other compensation are confusing and do not reflect the nature of typical bank fiduciary relationships. For example, the Interim Final Rules permit compensation to be classified as "relationship compensation" only when paid directly by a customer or beneficiary or from the assets of a fiduciary account. In addition to the fact that this "source of funds" requirement is not supported by the statute, it does not consider the bank practice of structuring fees based on an entire relationship, often with an extended family. Fees compensating the bank for an entire relationship may be payable, for example, from non-fiduciary assets held by the bank or its affiliate or from someone other than the accountholder or beneficiary. It is difficult to understand why these fee payment practices, implemented as an accommodation to a customer, should affect the availability of the fiduciary exemption.
In addition, the adopting release also does not properly characterize the compensation (including Rule 12b-1 fees) received by banks for shareholder servicing on behalf of fiduciary customers whose mutual fund shares are held in omnibus accounts. Such third-party compensation is received for services to fiduciary clients that are an integral part of the banks' relationship with them, and therefore should be characterized as relationship compensation.
Trustee and Fiduciary Capacity
In the release adopting the Interim Final Rules, the Commission states views with regard to the meaning of "trustee capacity" and "fiduciary capacity" which create uncertainty where none should exist- state fiduciary laws and Federal banking laws speak to this issue extensively. In tracking the language of the regulations of the Office of the Comptroller of the Currency ("OCC") at 12 C.F.R. 9, the GLBA is surely intended to make the meaning of these terms consistent with existing law, and they should be interpreted no less broadly.
For example, the definition of the term "investment advice for a fee" required no refinement on the Commission's part. The narrowing of the term to require "continuous and regular" investment advice is to create a requirement that is not only inconsistent with existing state fiduciary and Federal banking law, but is also inconsistent with the Commission's own standard for determining whether a broker or dealer meets the definition of "investment adviser" under Investment Advisers Act Section 202(a)(11)(D).
Accepting Securities Orders for Custody Accounts
The acceptance of securities orders from custodial customers and their transmittal to a broker-dealer for execution is a long-standing and customary service provided by bank custodians. We believe that the Commission's determination that the Custody and Safekeeping Exemption does not include this activity is inconsistent both with the letter and spirit of the GLBA. Moreover, the limited exceptions granted by the Commission to allow this activity are unreasonably restrictive. For example, the restriction on the use of employees whose primary duties for the bank involve effecting securities transactions for customers hampers our ability to entrust this activity to the bank's trading department, i.e., those employees who are best trained and most qualified to perform this function.
The limited exceptions provided by the Commission on traditional custodial account activities will serve, again, to increase customer cost and inconvenience. We accept securities orders from custodial customers occasionally as an accommodation to them. This service allows customers to avoid the expense of establishing a brokerage account to effect these occasional trades. If required to comply with the Commission's restrictions, we may have no choice other than to "push out" the order-taking activities to a broker/dealer, requiring our customers to incur the additional expense and effort of involving another party, yet yielding no additional benefit.
Third Party Brokerage Arrangements
The Networking Exception provides that bank employees may not receive incentive compensation for brokerage transactions, but may receive a nominal payment for customer referrals. The Interim Final Rules define the term "nominal" to mean not more than one hour of the bank employee's gross cash wages. This overly restrictive definition is unnecessary and needlessly difficult to implement.
The language of the statute tracks the long standing policies of the Federal banking regulators, which examine bank networking arrangements to ensure that referral fees are consistent with these requirements. Given these existing restrictions on the payment of referral fees to bank employees, we believe that the additional restrictions added by the Interim Final Rules are unjustified. In addition, requiring banks to implement payroll systems to calculate referral fees for each employee depending on his or her current salary or wages will, again, increase administrative burden to banks and costs to customers with no corresponding customer benefit.
In addition, without explicit statutory authority or support in any attendant GLBA legislative history, the Commission expands the restriction to prohibit year-end bank bonuses awarded to branch, department or line of business employees that take into consideration securities transactions. Such an interpretation goes far beyond the expressed goal of Congress to prevent conflicts of interest and the sale of unsuitable securities products to bank customers. We believe it is appropriate for the Commission to clarify that its concerns are limited to assuring that bonus plans not serve as a back-door means to compensate unlicensed bank employees for securities transactions that are not otherwise excepted. Such a clarification will help avoid unnecessary and burdensome restructuring of compensation systems.
Definition of "No-Load" under the Sweep Exception
The GLBA allows banks to sweep deposit funds into a "no-load" money market mutual fund, that is, a fund that does not impose a sales charge or pay sales compensation to the bank. We disagree with the Commission's adoption of the National Association of Securities Dealers definition of "no-load" in Conduct Rule 2830(d)(4). This definition applies only in the context of mutual fund advertising. It is a refinement of the term ``load" that is not relevant to the use of the term for determining the suitability of a fund under the Sweep Exception.
In summary, we believe that if the Commission's proposal is implemented as released on May 11, the resulting uncertainty in the legal environment would cause serious disruptions in our businesses that are entitled to rely on these exceptions. This creates unnecessary costs and inefficiencies that will reduce competition and have adverse consequences on our customers, which is contrary to the intent of Congress as expressed in the GLBA. We agree with the July 2, 2001 joint letter sent to the Commission by the Federal Reserve Board, the OCC, and Federal Deposit Insurance Corporation which identifies critical flaws in the Interim Final Rules that "...create an extremely burdensome regime of overly complex, costly and unworkable requirements that effectively negate the statutory exemptions and congressional intent underlying those exceptions."
We urge the Commission to formally treat the Interim Final Rules as proposed rules and to address carefully the concerns outlined in this letter and those expressed by the banking agencies and financial services trade groups such as the American Bankers Association and the Financial Services Roundtable. We also urge the Commission to allow banks at least one year from the adoption of final rules to fully comply with those rules that will require significant modifications to the banks' business or additional systems to monitor compliance with the rules.
We appreciate the opportunity to comment on the Interim Final Rules and would be pleased to answer any questions you may have with regard to the issues raised in this letter. We also look forward to continued participation in discussions between the Division of Market Regulation and the financial services trade groups.
William C. Mutterperl
|1||FleetBoston is a diversified financial services holding company with assets exceeding $200 billion. Among the services offered by FleetBoston's subsidiary companies are retail banking; commercial banking, including capital markets/investment banking and commercial finance; trust and fiduciary services; and brokerage services.|
|2||"The conferees provided that banks that effect transactions in a trustee or fiduciary capacity under certain conditions will be exempt from registration under the Federal securities laws if the ban: (1) is chiefly compensated by means of administration and certain other fees, including a combination of such fees, and (2) does not publicly solicit brokerage business. The Conferees expect that the SEC will not disturb traditional bank trust activities under this provision." See, Gramm Leach Bliley Act, 106th Cong. 1st Sess., Rept. 106-434, Title II, Subtitle A at 164.|