Bank of Montreal	Harris Bank

July 16, 2001

Jonathan G. Katz
Secretary
Securities and Exchange Commission
450 5^th Street, NW
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:

On behalf of Harris Trust and Savings Bank and our 28 community banks (collectively, "Harris"), we appreciate this opportunity to comment on the Interim Final Rules issued by the Securities and Exchange Commission ("Commission") implementing provisions of the Gramm-Leach-BlileyAct of 1999 ("GLB Act").

Harris is part of the Bank of Montreal Group of Companies, a Canadian organization operating in the United States. The Bank of Montreal Group of Companies in the United States is comprised of bank and several non-bank entities, including a securities company and a brokerage, which total approximately $60 billion in assets. The Bank of Montreal Group of Companies offers a wide range of financial services, including trust, private banking, and investment services.

We are concerned that the Interim Final Rules create an extremely burdensome regime of overly complex, extremely costly and unworkable requirements. We think that these requirements will cause Harris to discontinue certain services and products that we have offered to our customers for decades, resulting in loss of revenue and disruption of our customer relationships. Such results neither fairly reflect congressional intent, nor, in some instances, conform to the express statutory language of the GLB Act. For these and for the following reasons, Harris strongly opposes the Interim Final Rules.

1. Trust and Fiduciary Activities Generally

The GLB Act provides a statutory exception for traditional trust and fiduciary activities of banks ("Trust and Fiduciary Exception").¹ The Trust and Fiduciary Exception authorizes a bank to effect securities transactions in a trustee or fiduciary capacity in its trust department or other department that is regularly examined by bank examiners, so long as the bank is "chiefly compensated," consistent with fiduciary principles, on the basis of an annual or administrative fee, a fee based on a percentage of assets under management, a flat or capped per order processing fee equal to not more than the cost incurred by the bank in processing the securities transaction, or any combination of these fees.² The Trust and Fiduciary Exception also prevents the bank from soliciting brokerage business, other than by advertising that it effects securities transactions in conjunction with advertising its other trust activities.³

Under the Interim Final Rules, Harris must implement the "chiefly compensated" component of the Trust and Fiduciary Exception on an account-by-account basis each year.⁴ For Harris, this would require a yearly analysis of fees charged to over 10 thousand accounts. We do not believe that an account-by-account calculation is either workable or consistent with the intent and wording of the Trust and Fiduciary Exception.

The Commission has requested comment regarding whether or not the percentage threshold for the "chiefly compensated" requirement should be higher than 50 percent. Harris believes that the "chiefly compensated" component should not be interpreted to require a higher percentage threshold than the 50 percent threshold currently contained in the Interim Final Rules. As the Commission has noted, the most common definitions of "chiefly" include "most of all," "principally," and "mainly."⁵ Imposing a higher percentage threshold would be arbitrary and contrary to the Commission's own statements.

A. Rule-Based Exemption to Account-by-Account Analysis

The Commission maintains that it has provided a rule-based exemption from performing the "chiefly compensated" test on an account-by-account basis. Under this exemption, Harris would be permitted to perform the "chiefly compensated" analysis on a bank-wide basis if "sales compensation" is less than 10 percent of "relationship compensation".⁶ Harris also must have in place on-going compliance procedures reasonably designed to ensure that, for each trust and fiduciary account, "relationship compensation" exceeds "sales compensation" at three specific times during the life-cycle of the account: (1) when the account is opened, (2) when the compensation arrangements for the account are changed, and (3) when sales compensation received from the account is reviewed by the bank for purposes of determining any bank employee's compensation. ⁷

This exemption is conditioned on having so many procedures in place - procedures that significantly involve the very account-by-account monitoring that the exemption purports to avoid - that Harris believes the exemption is rendered useless. In fact, we believe that the requirements of this "safe harbor" actually may be more arduous to navigate and much stricter than the plain language of the GLB Act itself. We believe that a minimum of one year will be needed to develop, test and install the required operations and compliance systems necessary to comply with this exemption.

B. Directed Trustees

The Commission has defined "trustee" to include an indenture trustee or a trustee for a tax-deferred account described in Sections 401(a), 408, and 408A under subchapter D and in Section 457 under subchapter E of the Internal Revenue Code.⁸ This definition includes trustees for ERISA accounts and IRA trust accounts even where the trustee takes direction from another party or entity, such as an investment adviser or plan participant. The Commission appears to suggest that other accounts for which the bank serves as directed trustee would not be included within the definition of "trustee." These accounts would include personal trusts, charitable foundation trusts, insurance trusts, and rabbi and secular trusts. The Commission would also seem to suggest that conservator, guardian and other fiduciary roles would be suspect if the bank did not exercise investment discretion.

Harris believes that the Commission's limited reading of the term "trustee" is an incorrect construction of the GLB Act. Under the GLB Act, the simple status of "trustee" is alone sufficient to trigger the Trust and Fiduciary Exception, assuming all other requirements of the exception have been met.⁹ The exercise of investment discretion over an account is just one aspect of a fiduciary's role. Trustees such as Harris continue to exercise extensive fiduciary duties and authorities required under state law (e.g., the duty to account to beneficiaries, the duties of loyalty and impartiality, the authority to make discretionary income and principal distributions) even in cases where the grantor or third-party may exercise investment discretion. Therefore, we believe that the Trust and Fiduciary Exception was intended to apply to any account under which Harris is named as a trustee.

C. Investment Advice for a Fee

The GLB Act provides that a bank will fall within the protection of the Trust and Fiduciary Exception if it provides investment advice for a fee.¹⁰ However, the Interim Final Rules restrict the availability of this exception by injecting additional and we think, in some cases, inappropriate requirements. Specifically under the Interim Final Rules, the Trust and Fiduciary Exception will be available to a bank acting in an investment advisory capacity only if, (1) in return for the fee, the bank provides "continuous and regular" investment advice to the customer's account that is based upon the individual needs of the customer; and (2) the bank owes a duty of loyalty to the customer under state law, federal law, contract, or customer agreement, including an affirmative duty to make full and fair disclosure to the customer of all materials facts relating to conflicts. Harris believes that these additional requirements have no basis in the language of the GLB Act.

The Interim Final Rules describe "continuous and regular" as "ongoing (as opposed to episodic or periodic) responsibility to select or make recommendations, based upon the needs of the client, as to specific securities or other investments the customer may purchase or sell."¹¹ This definition is derived from Section 203(A)(a)(2) of the Investment Advisers Act, which has a completely different purpose than the GLB Act.¹² That Section describes investment advisers which have $25 million or more of "assets under management" and thus are required to register with the Commission as opposed to registration with state securities regulators. We believe that this definition, not found within the language of the GLB Act itself, is overly broad and unnecessary. It would not, for example, permit Harris to rely on the Trust and Fiduciary Exception for accounts in which the customer initially asks the bank for asset allocation advice and then determines herself, based on that advice, which securities should be purchased or sold. We believe that this type of investment advice arrangement was intended by Congress to fall within the Trust and Fiduciary Exception because detailed investment advice is being provided to the customer for a fee, although not necessarily on a continuous or regular basis.

D. Regularly Examined by Bank Examiners for Compliance with Fiduciary Principles

The GLB Act requires that all securities transactions effected by a bank under the Trust and Fiduciary Exception be effected in the bank's trust department or in another department of the bank that is regularly examined by bank examiners for compliance with fiduciary principles and standards.¹³ However, the Interim Final Rules require that "all aspects" of the securities transactions conducted by a bank for its trust and fiduciary customers must be conducted in a part of the bank that is regularly examined by bank examiners for compliance with fiduciary principles and standards.¹⁴ The Commission suggests that the areas subject to examination must include any area that identifies potential purchasers of securities, screens potential participants in a transaction for creditworthiness, solicits securities transactions, routes or matches orders or facilitates the execution of securities transactions, handles customer funds and securities, or prepares and sends transactions confirmations (other than on behalf of a broker-dealer that executes the trades).¹⁵

Some of the foregoing activities are not housed within Harris's trust department or within a part of the bank that, while not typically examined for compliance with fiduciary standards and principles, is nonetheless examined on a regular basis by bank regulators. We believe that the Commission's narrow interpretation of the Trust and Fiduciary Exception in this regard will constrain Harris's normal business activities and may prevent Harris from taking advantage of the exception altogether.

2. Safekeeping and Custody Exception

At Harris, we have been providing our customers with custody and safekeeping services for decades. These services include order taking from customers of self-directed custodial individual retirement accounts ("Self-Directed IRAs"). Order taking is a customary and necessary part of Harris's custodial and safekeeping services. Under the GLB Act, Congress has expressly permitted banks to continue to engage in a variety of their customary custodial and safekeeping activities without being considered a broker ("Custody Exception"). Indeed, the GLB Act contemplates that, in connection with providing these customary services, banks will continue to be involved in order taking, which is why the GLB Act requires banks that wish to take advantage of the Custody Exception to direct orders to a broker for execution.¹⁶ If Congress had intended for banks merely to deliver securities or cash, then there would be no need for the statute's broker execution requirement. Congress even specified that custodians to "any individual retirement account" are excepted from broker registration requirements.¹⁷ Self-Directed IRAs, by definition, require custodians to take orders from customers.

The Commission has determined that the Custody Exception does not allow banks to accept customer orders from Self-Directed IRAs or any other custodial accounts. The Commission has chosen to "exempt" these transactions by regulation. One regulatory exemption would permit Harris, as a custodian, to engage in order taking so long as the bank does not directly or indirectly receive any compensation for effecting securities transactions.¹⁸ Qualifying under this regulatory exemption will have serious consequences for our custodial and safekeeping business. It will disrupt this traditional service offered by the bank - a service that Congress intended to protect.

Complying with the Interim Final Rules will mean that Harris will not be able to establish a fee schedule that charges active-trading customers for their increased use of the bank's services. Harris will be prevented from distinguishing on a fee basis between active-trading customers and those that trade hardly at all. In addition, Harris will be prevented from charging for investment orders placed by 401(k) plan participants.

According to the Interim Final Rules, employees involved in effecting securities transactions in custodial accounts cannot also be dual employees with a broker-dealer. This additional requirement will significantly affect Harris's retirement services. Employees in Harris's Retirement Plan Services area are also licensed as dual employees with Harris's registered broker affiliate. The Commission's added requirements would prevent Harris from offering retirement products and services in a seamless fashion.

The Interim Final Rules mandate that bank employees in the custodial area must not receive incentive compensation, including referral fees.¹⁹ Harris strongly opposes this requirement and believes that its employees should be compensated for bringing business to the bank. When a customer is directing securities transactions and Harris, as order taker, is receiving those instructions, it is hard to understand how the bank employee would have any "salesman's stake" in particular investments being sold.

Harris also will be required under the Interim Final Rules to make available to its custodial customers unaffiliated mutual funds that are similar to the bank's proprietary mutual funds.²⁰ We believe that Harris should not be required to search out its competitor's mutual funds to offer to those of its customers who direct their own investments. Moreover, it is unclear how many unaffiliated fund options will be sufficient to satisfy the Commission under this requirement.

3. Networking Exception

The GLB Act permits banks to enter into arrangements with broker-dealers to offer brokerage services to bank customers provided the arrangement meets certain requirements specified in the GLB Act ("Networking Exception").²¹

Harris agrees with the Commission that the Networking Exception does not prevent a broker-dealer, including an affiliate broker-dealer, in a third-party brokerage arrangement from making transaction-related payments to the bank for brokerage transactions conducted by the broker-dealer with the bank's customers.²² However, Harris disagrees with the Commission's attempt to regulate the bank's bonus programs.

The GLB Act provides that bank employees may not receive "incentive compensation" for brokerage transactions; however, bank employees may receive compensation for the referral of customers to the broker-dealer if the compensation is a nominal one-time cash fee of a fixed dollar amount and payment is not contingent on whether the referral results in a transaction taking place.²³ We believe that Congress meant to prohibit bank employees from receiving brokerage commissions for effecting securities transactions. We do not believe that Congress ever contemplated that the Commission would interpret the GLB Act in such a way that it would be used to regulate bank bonus programs.

The Commission has stated that the only permissible bonus programs are those that are based upon the profitability of the bank, not the individual performance of the employee or the line of business.²⁴ Harris disagrees. Even if the Commission has the authority to regulate bank bonus programs (itself a questionable proposition), bonuses should, at the very least, be based on the profitability of the total Harris corporate family, including any brokerage units, and not just the profitability of the bank.

The Interim Final Rules create such a burdensome set of requirements governing brokerage referrals that Harris believes they are completely unworkable and will hold no value or incentive for our employees. Under the Interim Final Rules, cash referral fees must be measured against the hourly wage of the employee making the referral.²⁵ If Harris desires to adopt a referral program under which all bank employees receive the same referral fee, the bank will be forced to use the lowest hourly rate as the benchmark for all bank employee referral fees. Alternatively, Harris could pay each employee a different referral fee based on her or his hourly wage. This will result in smaller referral fees being paid to lower-wage employees who are performing the same function as higher-wage employees. Such inequities will harm Harris's ability to instill a team approach to serving our customers.

We urge the Commission to provide more flexibility in the determination of what is a "nominal" one-time cash fee. Similarly, we urge the Commission to reconsider its requirement that referral points have a value that is no greater than the points received for any bank product or service. As with the cash referral fees discussed above, points for brokerage referrals will be reduced to the lowest common denominator. The Commission should recognize that not all products that banks offer are alike. For example, renting a safety deposit box should not warrant the same kind of employee referral award as bringing $100,000 of investment assets to the bank.

4. Sweep Exception

The GLB Act allows banks to sweep deposit funds into a "no-load" money market mutual fund ("Sweep Exception").²⁶ The Interim Final Rules adopt the definition of "no-load" that the NASD has adopted in its Rule 2830(d)(4). That rule prohibits an investment company from advertising as "no-load" if the "investment company has a front-end or deferred sales charge or [imposes] total charges against net assets to provide for sales related expenses and/or service fees [that] exceed .25 of 1 percent of average net assets per annum."²⁷

Harris believes that the position taken by the Commission in the Interim Final Rules imposes significant burdens on the administration of Harris's current sweep programs without providing a commensurate level of protection for our sweep customers. Our sweep customers currently receive from the bank appropriate disclosures concerning any fees charged in connection with the customer's sweep account, including any Rule 12b-1 and other fees charged by the relevant money market mutual fund. The Commission's interpretation of "no-load" will require Harris to change the way it has been operating for years. Harris also will incur significant expense in revising its sweep program to meet the Commission's interpretation and may be required to discontinue certain of our sweep offerings, with little benefit in terms of incremental protection to the customer.

5. Effective Dates and Cure Period

Harris finds the current October 1, 2001, implementation date provides insufficient time and essentially requires the bank immediately to restructure operations, products and services to ensure compliance with the GLB Act and the Interim Final Rules. We think it inappropriate and unfair to require banks to incur expenses and establish procedures to comply with the Interim Final Rules before the Commission has reviewed public comments. Harris estimates that it will take at least one year to establish procedures and restructure its products and services to comply with the Interim Final Rules. Therefore, we think that the Commission should further extend the effective date of the GLB Act's push-out provisions until at least one year after rulemaking is completed.

The Commission has failed to provide any guidance regarding a cure period for securities transactions that do not meet any exception under the GLB Act or the Interim Final Rules due to inadvertent error or unforeseen circumstances. Harris believes that it is critical that the Commission accommodate good-faith attempts to conduct securities transactions in accordance with the GLB Act's exceptions. Without this relief, Harris may be forced to discontinue some of its traditional services because of the harsh consequences of being deemed to be a broker-dealer as the result of an inadvertent error. A reasonable cure period is necessary to permit banks to recognize and correct inadvertent or unforeseen violations.

6. Applicability of NASD Rule 3040

The Commission has failed to address the applicability of NASD Rule 3040 to dual employee arrangements in which bank employees also are employees of a broker-dealer. Harris is planning on relying on dual employee relationships to comply with many of the exceptions under the GLB Act. Application of Rule 3040 to our bank employees who also are employees of our affiliate broker-dealer would require security transactions made by the employee in her capacity as bank employee to be (1) approved by the broker-dealer and (2) recorded on the broker-dealer's books and records.²⁸ This means that each separate transaction be approved and monitored by the broker-dealer and that the funds for the transaction be transferred to the books and records of the broker-dealer. As a result, Harris may have no choice but to "push-out" all securities transactions to the broker-dealer. This would effectively deny Harris the benefits of the exceptions provided by the GLB Act, and would most definitely be contrary to congressional intent.

Harris strongly urges the Commission to provide clarity in this area by specifically stating that NASD Rule 3040 does not apply to dual employees operating in their capacities as bank employees.

Conclusion

Harris think that the Commission's Interim Final Rules impose unnecessarily burdensome and costly requirements that will disrupt the bank's existing customer relationships and could force the bank to discontinue offering traditional products and services, a result that Congress specifically sought to avoid. Given the magnitude of the impact that these rules will have on the core of Harris's banking business, we strongly urge the Commission to withdraw the Interim Final Rules and revise them in proposal format. Otherwise we respectfully request that the Commission revise its rules considering the foregoing comments and allow banks at least a one-year transition period after the revised rules become final to bring their operations, products and services into compliance.

Sincerely,

/s/
_________________________
Paul V. Reagan
Senior Vice President and U.S. General Counsel