July 17, 2001
VIA E-MAIL firstname.lastname@example.org.
Jonathan G. Katz
Securities and Exchange Commission
450 5th Street, NW
Washington, DC 20549-0609
Re: Interim Final Rule for Banks, Savings Associations and Savings Banks under Section 3(a)(4) and 3(a)(5) of the Securities Exchange Act of 1934 (the "Exchange Act"), Release File No. 57-12-01 (the "Interim Final Rule" or "Rule")
Dear Mr. Katz:
The Connecticut Bankers Association (the "CBA") appreciates the opportunity to comment on the Interim Final Rule issued by the Securities and Exchange Commission ("SEC") pursuant to the Gramm-Leach-Bliley Act ("GLBA").
By way of background, the CBA is an industry association representing over eighty banks and thrifts conducting banking operations in the State of Connecticut. Many of our member institutions are actively engaged in trust, fiduciary, custodial, networking and other traditional banking services, which Congress, through the GLBA, exempted from the broker-dealer registration requirements under the Exchange Act. Although we appreciate the hard work of the SEC staff on this historic new rule (as is evident from the Interim Final Rule), we do have a number of serious concerns.
Briefly summarized, we have concerns that, in some instances, the SEC has misinterpreted the provisions of the GLBA in a manner that will force banks to undertake significant and unnecessary compliance burdens and curtail traditional activities which Congress clearly intended to exempt. We also have concerns regarding the compliance deadlines and the process by which the SEC elected to issue the Interim Final Rule. Please allow us to elaborate.
A. Referral Fees in the Context of Networking Arrangements.
As you know, the GLBA allows banks to maintain contractual networking arrangements, whereby registered broker-dealers offer brokerage services to bank customers (without requiring the bank to register as a broker-dealer) as long as the arrangement satisfies certain statutory requirements. One of the statutory requirements relates to the type of compensation that may be received by bank employees in connection with the referral of a customer to the broker-dealer in the networking program. More specifically, under the GLBA, the bank employee may only receive compensation for the referral "if the compensation is a nominal one-time cash fee of a fixed dollar amount and the payment of the fee is not contingent on whether the referral results in a transaction."1 In the Interim Final Rule, the SEC has construed the phrase "nominal one-time cash fee of a fixed dollar amount" as being confined to the following two scenarios.
(1) Payments that do not exceed one hour of the gross cash wages of the bank employee making the referral; and
(2) Points in a system or program that covers a range of bank products and non-securities related services where the points count towards a bonus that is cash or non-cash if the points (and their value) awarded for referrals involving securities are not greater than the points (and their value) awarded for activities not involving securities.
We have the following concerns and observations with respect to the SEC's interpretation.
B. Custody and Safekeeping Activities.
We note that the Interim Final Rules do not include customary custodial order-taking services within the exemption for custody and safekeeping activities. Many of our member institutions maintain custodial IRA relationships with customers (pursuant to which, for a fee, a bank may accept and transfer orders for securities to a registered broker-dealer). Congress clearly intended for these types of traditional activities to be included within the exemptions.2 We urge the SEC to amend the Rule to accommodate such activities as exempt transactions.
C. "Chiefly Compensated" in the Context of Trust and Fiduciary Activities.
As you know, the GLBA provides an exemption for trust and fiduciary activities of banks. This exemption reflects Congressional intent to protect and preserve the securities services that banks have traditionally provided to their trust and fiduciary customers.3 We are concerned, however, that some of the positions taken by the SEC in the Interim Final Rule are at odds with Congressional intent and would disrupt traditional trust and fiduciary activities of banks.
One area of significant concern involves the SEC's interpretation of the phrase "chiefly compensated" as used in the GLBA. As you know, the GLBA provides that, in order to qualify for the exemption, a bank must be "chiefly compensated" for the securities transaction that it effects (i.e., for its trust and fiduciary customers) on the basis of certain enumerated fees. In the Interim Final Rule, the SEC states that the "chiefly compensated" test is met only if, on an annual basis, the amount of "relationship compensation" received from each account exceeds the "sales compensation" received by the bank from that account. This interpretation would require an account by account calculation, rather than an "aggregate" calculation based on compensation from all trust and fiduciary activities as a whole. We believe that such an interpretation is inappropriate.
For all of the foregoing reasons, we strongly oppose the SEC's interpretation of the phrase "chiefly compensated". Instead, we urge the SEC to adopt a test based on an "aggregate" analysis.
D. Extension of Compliance Deadlines.
As drafted, the Interim Final Rule has the potential to disrupt many traditional banking operations and impose significant compliance burdens on the banking industry. These are results which were clearly not intended by Congress when it enacted GLBA. We respectfully submit that given the problems raised in this letter, as well as the concerns raised by the American Bankers Association, the federal banking agencies and other interested parties, the SEC must make significant revisions to the rules interpreting the GLBA exemptions. Moreover, the SEC needs to provide the banking industry with adequate time to digest the new rules and to adjust operations to avoid the potentially severe consequences associated with unregistered securities activities. As a result, we strongly urge the SEC to: (i) act immediately to announce the further extension of the effective date of the GLBA exemption provisions (to reduce unnecessary compliance burdens and expenses for banks that are working now to come into compliance with rules that will likely be changed); (ii) change the Interim Final Rule to a proposed rule and invite further dialogue with the banking industry and banking regulators on these important topics; and (iii) when final rules are published, adopt a one-year transition period to allow the banking industry to come into compliance (please do not rush the compliance deadline when the issues are this complex and the potential consequences for noncompliance are this severe).
Again, we thank you for the opportunity to comment upon the Interim Final Rule. If you should have any questions concerning the forgoing, please do not hesitate to contract me ((860) 677-5060) or our legal counsel on this matter, David J. Wiese of Tyler Cooper & Alcorn, LLP ((860) 725-6213).
Gerald M. Noonan
|1||15 U.S.C. § 78(c)(a)(4)(B)(i)(VI).|
|2||The Senate Report states that "The Committee believes that bank custodial, safekeeping, and clearing activities with respect to IRAs do not need to be pushed-out into a Commission registered broker-dealer." S. Rep. No. 106-44, at 10 (1999).|
|3||The Senate Banking Committee Report provides: "The Committee does not believe that an extensive "push-out" of or restrictions on the conduct of traditional banking services is warranted. Banks have historically provided securities services largely through their trust departments, or as an accommodation to certain customers. Banks are uniquely qualified to provide these services and have done so without any problems for years. Banks provided trust services under the strict mandates of State and fiduciary law without problems long before Glass-Steagall was enacted; there is no compelling policy reason for changing Federal regulation of bank trust departments, solely because Glass-Steagall is being modified." S. Rep. No. 106-44 at 10 (1999).|