77522 Federal Register / Vol. 71, No. 247 / Tuesday, December 26, 2006 / Proposed Rules 

FEDERAL RESERVE SYSTEM 

12 CFR Part 218 

[Regulation R; Docket No. R–1274] 

SECURITIES AND EXCHANGE 

COMMISSION 

17 CFR Parts 240 and 247 

[Release No. 34–54946; File No. S7–22–06] 

RIN 3235–AJ74 

Definitions of Terms and Exemptions 

Relating to the ‘‘Broker’’ Exceptions 

for Banks 

AGENCIES: Board of Governors of the 

Federal Reserve System (‘‘Board’’) and 

Securities and Exchange Commission 

(‘‘SEC’’ or ‘‘Commission’’) (collectively, 

the Agencies). 

ACTION: Proposed rule. 

SUMMARY: The Board and the 

Commission jointly are issuing, and 

requesting comment on, proposed rules 

that would implement certain of the 

exceptions for banks from the definition 

of the term ‘‘broker’’ under Section 

3(a)(4) of the Securities Exchange Act of 

1934 (‘‘Exchange Act’’), as amended by 

the Gramm-Leach-Bliley Act (‘‘GLBA’’). 

The proposed rules would define terms 

used in these statutory exceptions and 

include certain related exemptions. In 

developing this proposal, the Agencies 

have consulted with the Office of the 

Comptroller of the Currency (‘‘OCC’’), 

the Federal Deposit Insurance 

Corporation (‘‘FDIC’’) and the Office of 

Thrift Supervision (‘‘OTS’’). The 

proposal is intended, among other 

things, to facilitate banks’ compliance 

with the GLBA. 

DATES: Comments should be received on 

or before March 26, 2007. 

ADDRESSES: 

Board: You may submit comments, 

identified by Docket No. R–1274, by any 

of the following methods: 

• Board’s Web site: http:// 

www.federalreserve.gov. Follow the 

instructions for submitting comments at 

http://www.federalreserve.gov/ 

generalinfo/foia/ProposedRegs.cfm. 

• Federal eRulemaking Portal: http// 

www.regulations.gov. Follow the 

instructions for submitting comments. 

• E-mail: 

regs.comments@federalreserve.gov. 

Include docket number in the subject 

line of the message. 

• Fax: (202) 452–3819 or (202) 452– 

3102. 

• Mail: Jennifer J. Johnson, Secretary, 

Board of Governors of the Federal 

Reserve System, 20th Street and 

Constitution Avenue, NW., Washington, 

DC 20551. 

All public comments are available 

from the Board’s Web site at http:// 

www.federalreserve.gov/generalinfo/ 

foia/ProposedRegs.cfm as submitted, 

unless modified for technical reasons. 

Accordingly, your comments will not be 

edited to remove any identifying or 

contact information. Public comments 

also may be viewed electronically or in 

paper form in Room MP–500 of the 

Board’s Martin Building (C and 20th 

Streets, NW) between 9 a.m. and 5 p.m. 

on weekdays. 

SEC: Comments may be submitted by 

any of the following methods: 

Electronic Comments 

• Use the Commission’s Internet 

comment form (http://www.sec.gov/ 

rules/proposed.shtml); or 

• Send an e-mail to rulecomments@sec.gov. Please include File 

Number S7–22–06 on the subject line. 

Paper Comments 

• Send paper comments in triplicate 

to Nancy M. Morris, Secretary, 

Securities and Exchange Commission, 

100 F Street, NE., Washington, DC 

20549–1090. 

All submissions should refer to File 

Number S7–22–06. This file number 

should be included on the subject line 

if e-mail is used. To help us process and 

review your comments more efficiently, 

please use only one method. The 

Commission will post all comments on 

the Commission’s Internet Web site 

(http://www.sec.gov/rules/ 

proposed.shtml). Comments are also 

available for public inspection and 

copying in the Commission’s Public 

Reference Room, 100 F Street, NE., 

Washington, DC 20549. All comments 

received will be posted without change; 

we do not edit personal identifying 

information from submissions. You 

should submit only information that 

you wish to make available publicly. 

FOR FURTHER INFORMATION CONTACT: 

Board: Kieran J. Fallon, Assistant 

General Counsel, (202) 452–5270, 

Andrew Miller, Counsel, (202) 452– 

3428, or Andrea Tokheim, Senior 

Attorney, (202) 452–2300, Legal 

Division, Board of Governors of the 

Federal Reserve System, 20th Street and 

Constitution Avenue, NW., Washington, 

DC 20551. Users of Telecommunication 

Device for Deaf (TTD) only, call (202) 

263–4869. 

SEC: Catherine McGuire, Chief 

Counsel, Linda Stamp Sundberg, Senior 

Special Counsel, Richard C. Strasser, 

Attorney Fellow, John Fahey, Special 

Counsel, Haimera Workie, Special 

Counsel, at (202) 551–5550, Office of the 

Chief Counsel, Division of Market 

Regulation, Securities and Exchange 

Commission, 100 F Street, NE., 

Washington, DC 20549. 

SUPPLEMENTARY INFORMATION: 

Table of Contents 

I. Introduction and Background 

II. Networking Arrangements 

A. Proposed Definitions Related to the 

Payment of Referral Fees 

1. Proposal Definition of ‘‘Nominal OneTime Cash Fee of a Fixed Dollar 

Amount’’ 

2. Proposed Definition of ‘‘Contingent on 

Whether the Referral Results in a 

Transaction’’ 

3. Proposed Definition of ‘‘Incentive 

Compensation’’ 

B. Proposed Exemption for Payment of 

More Than a Nominal Fee for Referring 

Institutional Customers and High Net 

Worth Customers 

1. Definitions of ‘‘Institutional Customer’’ 

and ‘‘High Net Worth Customer’’ 

2. Conditions Relating to Bank Employees 

3. Other Conditions Relating to the Banks 

4. Provisions of Written Agreement 

a. Customer and Employee Qualifications 

b. Suitability or Sophistication Analysis by 

Broker-Dealer 

c. Notice From Broker-Dealer to Bank 

Regarding Customer Qualification 

5. Referral Fees Permitted under the 

Exemption 

6. Permissible Bonus Compensation Not 

Restricted 

C. Scope of Networking Exception and 

Institutional/High Net Worth Exemption 

III. Trust and Fiduciary Activities Exception 

A. ‘‘Chiefly Compensated’’ Test and BankWide Exemption Based on Two-Year 

Rolling Averages 

B. Proposed Definition of ‘‘Relationship 

Compensation’’ 

C. Advertising Restrictions 

D. Proposed Exemptions for Special 

Accounts, Transferred Accounts, and a 

De Minimis Number of Accounts 

IV. Sweep Accounts and Transactions in 

Money Market Funds 

A. Proposed Sweep Account Definitions 

B. Proposed Exemption Regarding Money 

Market Fund Transactions 

V. Safekeeping and Custody 

A. Overview of Statutory Exception 

B. Proposed Exemption 

1. Employee Benefit Plan Accounts and 

Individual Retirement or Similar 

Accounts 

a. Employee Compensation Restriction 

b. Advertisements and Sales Literature 

c. Other Conditions 

d. Non-Fiduciary and Non-Custodial 

Administrators or Recordkeepers 

2. Accommodation Transactions 

a. Accommodation Basis 

b. Employee Compensation Restriction 

c. Bank Fees 

d. Advertising and Sales Literature 

e. Investment Advice or Recommendations 

f. Other Conditions 

3. Evasion 

VI. Other Proposed Exemptions 


sroberts on PROD1PC70 with PROPOSALS
Federal Register / Vol. 71, No. 247 / Tuesday, December 26, 2006 / Proposed Rules 77523 

1Pub. L. 106–102, 113 Stat. 1338 (1999). 

2Pub. L. 73–66, ch. 89, 48 Stat. 162 (1933) (as 

codified in various Sections of 12 U.S.C.). 

3 15 U.S.C. 78c(a)(4). 

4Exchange Act Section 3(a)(4)(B)(i). This 

exception permits banks to enter into third-party 

brokerage, or ‘‘networking’’ arrangements with 

brokers under specific conditions. 

5Exchange Act Section 3(a)(4)(B)(ii). This 

exception permits banks to effect transactions as 

trustees or fiduciaries for securities customers 

under specific conditions. 

6Exchange Act Section 3(a)(4)(B)(iii). This 

exception permits banks to buy and sell commercial 

paper, bankers’ acceptances, commercial bills, 

exempted securities, certain Canadian government 

obligations, and Brady bonds. 

7Exchange Act Section 3(a)(4)(B)(iv). This 

exception permits banks, as part of their transfer 

agency activities, to effect transactions for certain 

issuer plans. 

8Exchange Act Section 3(a)(4)(B)(v). This 

exception permits banks to sweep funds into noload money market funds. 

9Exchange Act Section 3(a)(4)(B)(vi). This 

exception permits banks to effect transactions for 

affiliates, other than broker-dealers. 

10Exchange Act Section 3(a)(4)(B)(vii). This 

exception permits certain banks to effect 

transactions in certain privately placed securities, 

under certain conditions. 

11Exchange Act Section 3(a)(4)(B)(viii). This 

exception permits banks to engage in certain 

enumerated safekeeping or custody activities, 

including stock lending as custodian. 

12Exchange Act Section 3(a)(4)(B)(ix). This 

exception permits banks to buy and sell certain 

‘‘identified banking products,’’ as defined in 

Section 206 of the GLBA. 

13Exchange Act Section 3(a)(4)(B)(x). This 

exception permits banks to effect transactions in 

municipal securities. 

14Exchange Act Section 3(a)(4)(B)(xi). This 

exception permits banks to effect up to 500 

transactions in securities in any calendar year in 

addition to transactions referred to in the other 

exceptions. 

15Pub. L. 109–351, 120 Stat. 1966 (2006). 

16See Exchange Act Section 3(a)(4)(F), as added 

by Section 101 of the Regulatory Relief Act. The 

Regulatory Relief Act also requires that the Board 

and SEC consult with, and seek the concurrence of, 

the OCC, FDIC and OTS prior to jointly adopting 

final rules. As noted above, the Board and the SEC 

also have consulted extensively with the OCC, FDIC 

and OTS in developing these joint proposed rules. 

17See 15 U.S.C. 78c(a)(4)(B)(i), (ii), (v) and (viii). 

18Employees of a bank that operates in 

accordance with the exceptions in Section 3(a)(4)(B) 

of the Exchange Act and, where applicable, the 

proposed rules also shall not be required to register 

as a ‘‘broker’’ to the extent that the employees’’

activities are covered by the relevant exception or 

rule. 

A. Proposed Exemption for Regulation S 

Transactions With Non-U.S. Persons 

B. Proposed Securities Lending Exemption 

C. Proposed Exemption for the Way in 

Which Banks Effect Transactions in 

Investment Company Securities 

D. Proposed Temporary and Permanent 

Exemption for Contracts Entered Into by 

Banks From Being Considered Void or 

Voidable 

E. Extension of Time and Transition Period 

VII. Withdrawal of Proposed Regulation B 

and Removal of Exchange Act Rules 3a4–

2 — 3a4–6, and 3b–17 

VIII. Administrative Law Matters 

A. Paperwork Reduction Act Analysis 

B. Consideration of Benefits and Costs 

C. Consideration of Burden on 

Competition, and on Promotion of 

Efficiency, Competition, and Capital 

Formation 

D. Consideration of Impact on the 

Economy 

E. Initial Regulatory Flexibility Analysis 

F. Plain Language 

IX. Statutory Authority 

X. Text of Proposed Rules and Rule 

Amendments 

I. Introduction and Background 

The GLBA amended several federal 

statutes governing the activities and 

supervision of banks, bank holding 

companies, and their affiliates.1 Among 

other things, it lowered barriers between 

the banking and securities industries 

erected by the Banking Act of 1933 

(‘‘Glass-Steagall Act’’).2 It also altered 

the way in which the supervisory 

responsibilities over the banking, 

securities, and insurance industries are 

allocated among financial regulators. 

Among other things, the GLBA repealed 

most of the separation of investment 

and commercial banking imposed by the 

Glass-Steagall Act. The GLBA also 

revised the provisions of the Exchange 

Act that had completely excluded banks 

from broker-dealer registration 

requirements. 

In enacting the GLBA, Congress 

adopted functional regulation for bank 

securities activities, with certain 

exceptions from Commission oversight 

for specified securities activities. With 

respect to the definition of ‘‘broker,’’ the 

Exchange Act, as amended by the 

GLBA, provides eleven specific 

exceptions for banks.3 Each of these 

exceptions permits a bank to act as an 

agent with respect to specified securities 

products or in transactions that meet 

specific statutory conditions. 

In particular, Section 3(a)(4)(B) of the 

Exchange Act provides conditional 

exceptions from the definition of broker 

for banks that engage in certain 

securities activities in connection with 

third-party brokerage arrangements; 4

trust and fiduciary activities; 5

permissible securities transactions; 6

certain stock purchase plans; 7 sweep 

accounts; 8 affiliate transactions; 9

private securities offerings; 10

safekeeping and custody activities; 11

identified banking products; 12

municipal securities; 13 and a de 

minimis number of other securities 

transactions.14

On October 13, 2006, President Bush 

signed into law the ‘‘Financial Services 

Regulatory Relief Act of 2006 

(‘‘Regulatory Relief Act’’).’’ 15 Among 

other things, the Regulatory Relief Act 

requires that the SEC and the Board 

jointly adopt a single set of rules to 

implement the bank broker exceptions 

in Section 3(a)(4) of the Exchange Act.16

It also requires that not later than 180 

days after the date of enactment of the 

Regulatory Relief Act, the SEC and the 

Board jointly issue a single set of 

proposed rules to implement these 

exceptions. 

Section 401 of the Regulatory Relief 

Act also amended the definition of 

‘‘bank’’ in Section 3(a)(6) of the 

Exchange Act to include any Federal 

savings association or other savings 

association the deposits of which are 

insured by the FDIC. Accordingly, as 

used in this proposal, the term ‘‘bank’’

includes any savings association that 

qualifies as a ‘‘bank’’ under Section 

3(a)(6) of the Exchange Act, as amended. 

In accordance with these statutory 

provisions, the SEC and Board are 

jointly requesting comment on proposed 

rules to implement the broker 

exceptions for banks relating to thirdparty networking arrangements, trust 

and fiduciary activities, sweep 

activities, and safekeeping and custody 

activities.17 The proposed rules include 

certain exemptions related to these 

activities, as well as exemptions related 

to foreign securities transactions, 

securities lending transactions 

conducted in an agency capacity, the 

execution of transactions involving 

mutual fund shares, the potential 

liability of banks under Section 29 of 

the Exchange Act, and the date on 

which the GLB Act’s ‘‘broker’’

exceptions for banks will go into 

effect.18 The proposed rules are 

designed to accommodate the business 

practices of banks and protect investors. 

Any additions or changes to these 

rules that may be appropriate to 

implement Section 3(a)(4)(B) of the 

Exchange Act will be adopted jointly by 

the SEC and Board in accordance with 

the consultation provisions in Section 

101(b) of the Regulatory Relief Act. 

Identical sets of the final rules will be 

published by the SEC in Title 17 of the 

Code of Federal Regulations and by the 

Board in Title 12 of the Code of Federal 

Regulations. 

In developing this proposal, the 

Agencies considered, among other 

things, the language and legislative 

history of the ‘‘broker’’ exceptions for 

banks adopted in the GLBA, the rules 

previously issued or proposed by the 

Commission relating to these exceptions 

and the comments received in 

connection with those prior 

rulemakings. The Agencies request 

comment on all aspects of these 

proposals as well as on the specific 

provisions and issues identified below. 


sroberts on PROD1PC70 with PROPOSALS
77524 Federal Register / Vol. 71, No. 247 / Tuesday, December 26, 2006 / Proposed Rules 

19See 12 U.S.C. 1828(t)(1). 

20 15 U.S.C. 78c(a)(4)(B)(i). 

21An unregistered bank employee is an employee 

that is not an associated person of a broker or dealer 

and is not qualified pursuant to the rules of a selfregulatory organization. 

22 15 U.S.C. 78c(a)(4)(B)(i)(VI). 

23See H.R. Rep. No. 106–74, pt. 3, at 163 (1999) 

(‘‘[T]he conditions contained in the networking 

exception * * * restrict the securities activities of 

unregistered bank personnel to reduce sales 

practice concerns.’’). 

24Proposed Exchange Act Rule 700(c). 

25Proposed Exchange Act Rule 700(c)(1). 

26Proposed Exchange Act Rule 700(d). 

27Proposed Exchange Act Rule 700(c)(2). 

28Proposed Exchange Act Rule 700(c)(3). 

29Each adjustment would be rounded to the 

nearest multiple of $1. Proposed Exchange Act Rule 

700(f). 

30See Exchange Act Section 3(a)(4)(B)(i)(VI), 

permitting payment of a ‘‘nominal one-time cash 

fee.’’

In addition, the Agencies request 

comment on whether it would be useful 

or appropriate for the Agencies to adopt 

rules implementing the other bank 

‘‘broker’’ exceptions in Section 

3(a)(4)(B) of the Exchange Act that are 

not addressed in this proposal. If any 

rules (including exemptions) related to 

these other exceptions are adopted in 

the future, they would be adopted 

jointly by the SEC and Board. 

As required by the GLBA, the Board, 

OCC, FDIC, and OTS (collectively, the 

Banking Agencies) will develop, and 

request public comment on, 

recordkeeping rules for banks that 

operate under the ‘‘broker’’ exceptions 

in Section 3(a)(4) of the Exchange Act.19

These rules, which will be developed in 

consultation with the SEC, will 

establish recordkeeping requirements to 

enable banks to demonstrate compliance 

with the terms of the statutory 

exceptions and the final rules ultimately 

jointly adopted and that are designed to 

facilitate compliance with the statutory 

exceptions and those rules. 

II. Networking Arrangements 

The third-party brokerage 

(‘‘networking’’) exception in Exchange 

Act Section 3(a)(4)(B)(i) permits a bank 

to avoid being considered a broker if, 

under certain conditions, it enters into 

a contractual or other written 

arrangement with a registered brokerdealer under which the broker-dealer 

offers brokerage services to bank 

customers (‘‘networking 

arrangement’’).20 The networking 

exception does not address the type or 

amount of compensation that a bank 

may receive from its broker-dealer 

partner under a networking 

arrangement. However, the networking 

exception generally provides that a bank 

may not pay its unregistered 

employees 21 incentive compensation 

for referring a customer to the brokerdealer or for any securities transaction 

conducted by the customer at the 

broker-dealer. Nevertheless, the 

statutory exception does permit a bank 

employee to receive a ‘‘nominal onetime cash fee of a fixed dollar amount’’

for referring bank customers to the 

broker-dealer if payment of the referral 

fee is not ‘‘contingent on whether the 

referral results in a transaction.’’ 22

Congress included the limitation on 

incentive compensation to reduce 

securities sales practice concerns 

regarding unregistered bank 

employees.23

A. Proposed Definitions Related to the 

Payment of Referral Fees 

The proposed rules define certain 

terms used in the networking exception 

in the Exchange Act related to referral 

fees and terms used in these proposed 

definitions. The proposed rules also 

provide an exemption from certain of 

the requirements in the networking 

exception with respect to payment for 

referrals of certain institutional 

customers and high net worth 

customers. 

1. Proposed Definition of ‘‘Nominal 

One-Time Cash Fee of a Fixed Dollar 

Amount’’

Under the proposal, the term 

‘‘nominal one-time cash fee of a fixed 

dollar amount’’ would be defined as a 

cash payment for a referral in an amount 

that meets any one of three alternative 

standards.24 The Agencies believe that 

these alternatives provide useful and 

appropriate flexibility to banks of all 

sizes and locations to use different 

business models and to take into 

account economic differences around 

the country in assessing whether a cash 

referral fee paid in a particular instance 

is a ‘‘nominal’’ amount for purposes of 

the networking exception. The three 

alternatives are consistent with the 

statutory ‘‘nominal’’ fee requirement 

because the amount of compensation 

permitted under each of the three 

formulations would be small in relation 

to the employee’s overall compensation 

and therefore unlikely to create undue 

incentives for bank employees to presell securities to bank customers. 

Under the first alternative, a referral 

fee would be considered nominal if it 

did not exceed either twice the average 

of the minimum and maximum hourly 

wage established by the bank for the 

current or prior year for the job family 

that includes the relevant employee, or 

1/1000th of the average of the minimum 

and maximum annual base salary 

established by the bank for the current 

or prior year for the job family that 

includes the relevant employee.25 The 

proposed rules define a ‘‘job family’’ for 

these purposes as a group of jobs or 

positions involving similar 

responsibilities, or requiring similar 

skills, education or training, that a bank, 

or a separate unit, branch or department 

of a bank, has established and uses in 

the ordinary course of its business to 

distinguish among its employees for 

purposes of hiring, promotion, and 

compensation.26 Depending on a bank’s 

internal employee classification system, 

examples of a job family may include 

tellers, loan officers, or branch 

managers. A bank should not deviate 

from its ordinary classification of jobs 

for purposes of determining whether a 

referral fee would be considered 

nominal under this standard. 

Under the second alternative, a 

referral fee would be considered 

‘‘nominal’’ if it did not exceed twice the 

employee’s actual base hourly wage.27

Thus, unlike the first option, this 

alternative is based on the actual hourly 

base wage of the employee receiving the 

referral fee. 

Under the third alternative, a referral 

fee would be considered ‘‘nominal’’ for 

purposes of the networking exception if 

the payment did not exceed twenty-five 

dollars ($25).28 This dollar amount 

would be adjusted for inflation on April 

1, 2012, and every five years thereafter, 

to reflect any changes in the value of the 

Employment Cost Index For Wages and 

Salaries, Private Industry Workers (or 

any successor index thereto), as 

published by the Bureau of Labor 

Statistics, from December 31, 2006.29

The Agencies selected this index 

because it is a widely used and broad 

indicator of increases in the wages of 

private industry workers, which 

includes bank employees. 

A bank employee may receive a 

referral fee under the networking 

exception and Proposed Exchange Act 

Rule 700 for each referral made to a 

broker-dealer, including separate 

referrals of the same individual or 

entity. Referral fees paid under the 

networking exception must be paid in 

cash and fixed. The networking 

exception and the proposed rules do not 

permit a bank to pay referral fees in 

non-cash forms, such as vacation 

packages, stock grants, annual leave, or 

consumer goods.30 We request 

comments on whether these alternatives 

provide banks sufficient flexibility to 

pay nominal referral fees without 

creating inappropriate incentives. 


sroberts on PROD1PC70 with PROPOSALS
Federal Register / Vol. 71, No. 247 / Tuesday, December 26, 2006 / Proposed Rules 77525 

31Proposed Exchange Act Rule 700(a). ‘‘Referral’’

would be defined to mean the action taken by a 

bank employee to direct a customer of the bank to 

a broker or dealer for the purchase or sale of 

securities for the customer’s account. Proposed 

Exchange Act Rule 700(e). 

32Proposed Exchange Act Rule 700(a). 

33Proposed Exchange Act Rule 700(b). 

34Proposed Exchange Act Rule 700(b)(1)(ii)(A). A 

non-securities factor or variable would be 

considered ‘‘significant’’ under this proposed 

provision if it plays a non-trivial role in 

determining an employee’s compensation under the 

bonus or similar plan. Moreover, a bank would not 

be in compliance with this proposed provision to 

the extent that it established or maintained a 

‘‘sham’’ non-securities factor or variable in its 

bonus or similar plan for the purpose of evading 

this proposed restriction. 

35Proposed Exchange Act Rule 700(b)(1)(ii)(C) 

and (D). The requirement that an employee’s 

compensation not be based on ‘‘a referral’’ made by 

the employee or another person also means that the 

employee’s compensation under the bonus or 

similar plan may not vary based on the number of 

securities referrals made by the employee or 

another person to a broker or dealer. 

36Proposed Exchange Act Rule 700(b)(2). 37Proposed Exchange Act Rule 701. 

2. Proposed Definition of ‘‘Contingent 

on Whether the Referral Results in a 

Transaction’’

Under the statutory networking 

exception, a nominal fee paid to an 

unregistered bank employee for 

referring a customer to a broker or 

dealer may not be contingent on 

whether the referral results in a 

transaction. The objective is to reward 

bank employees for furthering the 

relationship with the broker without 

creating concerns about the securities 

sales practices of unregistered bank 

employees. Under the proposal, a fee 

would be considered ‘‘contingent on 

whether the referral results in a 

transaction’’ if payment of the fee is 

dependent on whether the referral 

results in a purchase or sale of a 

security; whether an account is opened 

with a broker or dealer; whether the 

referral results in a transaction 

involving a particular type of security; 

or whether the referral results in 

multiple securities transactions.31 The 

proposed rules, however, also recognize 

that a referral fee may be contingent on 

whether a customer (1) contacts or 

keeps an appointment with a broker or 

dealer as a result of the referral; or (2) 

meets any objective, base-line 

qualification criteria established by the 

bank or broker or dealer for customer 

referrals, including such criteria as 

minimum assets, net worth, income, or 

marginal federal or state income tax 

rate, or any requirement for citizenship 

or residency that the broker or dealer, or 

the bank, may have established 

generally for referrals for securities 

brokerage accounts.32

3. Proposed Definition of ‘‘Incentive 

Compensation’’

As noted above, the networking 

exception prohibits unregistered 

employees of a bank that refer 

customers to a broker or dealer under 

the exception from receiving ‘‘incentive 

compensation’’ for the referral or any 

securities transaction conducted by the 

customer at the broker-dealer other than 

a nominal, non-contingent referral fee. 

To provide banks and their employees 

additional guidance in this area, 

Proposed Rule 700(b) defines ‘‘incentive 

compensation’’ as compensation that is 

intended to encourage a bank employee 

to refer potential customers to a broker 

or dealer or give a bank employee an 

interest in the success of a securities 

transaction at a broker or dealer.33

The proposed ‘‘incentive 

compensation’’ definition excludes 

certain types of bonus compensation. 

The purpose of the exclusions is to 

recognize that certain types of bonuses 

are not likely to give unregistered 

employees a promotional interest in the 

brokerage services offered by the brokerdealers with which the bank networks 

and to avoid affecting bonus plans of 

banks generally. The proposal excludes 

compensation paid by a bank under a 

bonus or similar plan that is paid on a 

discretionary basis and based on 

multiple factors or variables. These 

factors or variables must include 

significant factors or variables that are 

not related to securities transactions at 

the broker or dealer.34 In addition, a 

referral made by the employee to a 

broker or dealer may not be a factor or 

variable in determining the employee’s 

compensation under the plan and the 

employee’s compensation under the 

plan may not be determined by 

reference to referrals made by any other 

person.35

In addition, the proposed rule 

provides that the definition of incentive 

compensation shall not be construed to 

prevent a bank from compensating an 

officer, director or employee on the 

basis of any measure of the overall 

profitability of (1) the bank, either on a 

stand-alone or consolidated basis; (2) 

any of the bank’s affiliates (other than a 

broker or dealer) or operating units; or 

(3) a broker or dealer if such 

profitability is only one of multiple 

factors or variables used to determine 

the compensation of the officer, 

director, or employee and those factors 

or variables include significant factors 

or variables that are not related to the 

profitability of the broker or dealer.36

Under this definition, banks would be 

permitted to take account of the full 

range of business for high net worth or 

institutional customers that an 

employee has brought to the bank and 

its partner broker-dealers. Comment is 

solicited on whether existing bank 

bonus programs would fit, or could be 

easily adjusted to fit, within the 

proposed exclusions from the definition 

of incentive compensation discussed in 

this Section. 

B. Proposed Exemption for Payment of 

More Than a Nominal Fee for Referring 

Institutional Customers and High Net 

Worth Customers 

The proposal also includes a 

conditional exemption that would 

permit a bank to pay an employee a 

contingent referral fee of more than a 

nominal amount for referring to a broker 

or dealer an institutional customer or 

high net worth customer with which the 

bank has a contractual or other written 

networking arrangement.37 Banks that 

pay their employees only nominal, noncontingent fees in accordance with 

Proposed Rule 700 for referring 

customers—including institutional or 

high net worth customers—to a broker 

or dealer would not need to rely on this 

exemption for these purposes. 

The purpose of the proposed 

exemption and its conditions is to 

recognize that sizable institutions and 

high net worth individuals, when 

provided appropriate information, are 

more likely to be able to understand and 

evaluate the relationship between the 

bank and its employees and its brokerdealer partner and any resulting 

securities transaction with the brokerdealer. To take advantage of the 

proposed exemption, the bank must 

comply with the conditions in the 

proposed exemption as well as the 

terms and conditions in the statutory 

networking exception (other than the 

compensation restrictions in Section 

3(a)(4)(B)(i)(VI) of the Exchange Act’s 

networking exception). The conditions 

in the proposed exemption are 

designed, among other things, to help 

ensure that institutional and high net 

worth customers receive appropriate 

investor protections and have the 

information to understand the financial 

interest of the bank employee so they 

can make informed choices. The 

following summarizes the conditions 

included in the proposed exemption. 

1. Definitions of ‘‘Institutional 

Customer’’ and ‘‘High Net Worth 

Customer’’

The proposed exemption defines an 

‘‘institutional customer’’ to mean any 

corporation, partnership, limited 

liability company, trust, or other nonVerDate Aug<31>2005 16:22 Dec 22, 2006 Jkt 211001 PO 00000 Frm 00005 Fmt 4701 Sfmt 4702 E:\FR\FM\26DEP3.SGM 26DEP3

sroberts on PROD1PC70 with PROPOSALS
77526 Federal Register / Vol. 71, No. 247 / Tuesday, December 26, 2006 / Proposed Rules 

38Proposed Exchange Act Rule 701(d)(2). 

‘‘Investment banking services’’ are defined to 

include, without limitation; acting as an 

underwriter in an offering for an issuer, acting as 

a financial adviser in a merger, acquisition, tenderoffer or similar transaction, providing venture 

capital, equity lines of credit, private investmentprivate equity transactions or similar investments, 

serving as placement agent for an issuer, and 

engaging in similar activities. Id. at 701(d)(3). When 

used in this proposal, the term ‘‘include, without 

limitation’’ means a non-exhaustive list. This usage 

is not intended to suggest that the term ‘‘including’’

as used in the Exchange Act and the rules under 

that Act means an exhaustive list. The use of the 

term ‘‘including, but not limited to’’ in Exchange 

Act Rules 10b–10 and 15b7–1 is also not intended 

to create a negative implication regarding the use 

of ‘‘including’’ without the term ‘‘but not limited 

to’’ in other Exchange Act rules. See Exchange Act 

Release No. 49879, 69 FR 39682 (June 30, 2004), at 

footnote 76. 

39Proposed Exchange Act Rule 701(a)(2)(ii). As 

discussed below (see infra at II.B.4.), the written 

agreement between the bank and the broker or 

dealer also must require the broker or dealer to 

determine whether a customer meets these 

qualification standards before the referral fee is paid 

to the bank employee. 

40Proposed Exchange Act Rule 701(a)(1)(i)(A). 

41Proposed Exchange Act Rule 701(a)(1)(i)(B). 

42Proposed Exchange Act Rule 701(a)(1)(i)(C). 

43Proposed Exchange Act Rule 701(a)(1)(ii). 

44Proposed Exchange Act Rule 701(a)(2)(i). 

45Proposed Exchange Act Rule 701(b). 

46Proposed Exchange Act Rule 701(a)(2)(iii). 

47Proposed Exchange Act Rule 701(a)(2)(iv). 

natural person that has at least $10 

million in investments or $40 million in 

assets. A non-natural person also may 

qualify as an ‘‘institutional customer’’

with respect to a referral if the customer 

has $25 million in assets and the bank 

employee refers the customer to the 

broker or dealer for investment banking 

services.38 The lower asset threshold for 

referrals for investment banking services 

is designed to permit banks to facilitate 

access to capital markets by referring 

smaller businesses to broker-dealers. 

‘‘High net worth customer’’ is defined to 

mean any natural person who, either 

individually or jointly with his or her 

spouse, has at least $5 million in net 

worth excluding the primary residence 

and associated liabilities of the person 

and, if applicable, his or her spouse. 

The dollar amount threshold for both 

institutional customers and high net 

worth customers would be adjusted for 

inflation on April 1, 2012, and every 

five years thereafter, to reflect changes 

in the value of the Personal 

Consumption Expenditures Chain-Type 

Price Index, as published by the 

Department of Commerce, from 

December 21, 2006. The Agencies 

selected this index because it is a 

widely used and broad indicator of 

inflation in the U.S. economy. 

A bank would be required to 

determine that a non-natural person 

referred to a broker or dealer under the 

exemption is an institutional customer 

before the referral fee is paid to the bank 

employee. In the case of a customer that 

is a natural person, the bank, prior to or 

at the time of any referral, would be 

required either to (1) determine that the 

customer is a high net worth customer; 

or (2) obtain a signed acknowledgment 

from the customer that the customer 

meets the standards to be considered a 

high net worth customer. The purpose 

of this condition is to provide the bank 

with a reasonable basis to believe the 

person meets the requirements of the 

exemption.39

2. Conditions Relating to Bank 

Employees 

For a bank employee to receive a 

contingent or greater-than-nominal 

referral fee under the proposed 

exemption, the bank employee must 

meet other conditions designed to help 

ensure that the referral occurs in the 

ordinary course of the unregistered bank 

employee’s activities and that the 

employee has not previously been 

disqualified under the Exchange Act. In 

particular, the bank employee—

• May not be qualified or otherwise 

required to be qualified pursuant to the 

rules of a self-regulatory organization 

(‘‘SRO’’); 40

• Must be predominantly engaged in 

banking activities other than making 

referrals to a broker-dealer; 41

• Must not be subject to a ‘‘statutory 

disqualification’’ as that term is defined 

in Section 3(a)(39) of the Exchange Act 

(other than subparagraph (E) of that 

Section); 42 and 

• Must encounter the ‘‘high net worth 

customer’’ or ‘‘institutional customer’’

in the ordinary course of the bank 

employee’s assigned duties for the 

bank.43

3. Other Conditions Relating to the 

Banks 

The proposed exemption also would 

require that the bank provide the high 

net worth customer or institutional 

customer being referred to the bank’s 

broker-dealer partner certain written 

disclosures about the employee’s 

interest in the referral prior to or at the 

time of the referral.44 These disclosures 

would have to clearly and 

conspicuously disclose (1) the name of 

the broker or dealer; and (2) that the 

bank employee participates in an 

incentive compensation program under 

which the employee may receive a fee 

of more than a nominal amount for 

referring the customer to the broker or 

dealer and that payment of the fee may 

be contingent on whether the referral 

results in a transaction with the broker 

or dealer.45

In addition, to allow verification 

before the referral fee is paid to the bank 

employee, the bank would be required 

to provide the broker or dealer the name 

of the employee and such other 

identifying information that may be 

necessary for the broker or dealer to 

determine whether the bank employee 

is associated with a broker or dealer or 

is subject to statutory disqualification 

(as defined in Section 3(a)(39) of the 

Exchange Act, other than subparagraph 

(E)).46

The proposed exemption also 

provides that a bank that acts in good 

faith and that has reasonable policies 

and procedures in place to comply with 

the requirements of the proposed 

exemption would not be considered a 

‘‘broker’’ under Section 3(a)(4) of the 

Exchange Act solely because the bank 

fails, in a particular instance, to 

determine that a customer is an 

institutional or high net worth 

customer, provide the customer the 

required disclosures, or provide the 

broker or dealer the required 

information concerning the bank 

employee receiving the referral fee 

within the time periods prescribed. If 

the bank is seeking to comply and takes 

reasonable and prompt steps to remedy 

the error, such as by promptly making 

the required determination or promptly 

providing the broker or dealer the 

required information, the bank should 

not lose the exemption from registration 

in these circumstances. Similarly, to 

promote compliance with the terms of 

the exemption, the bank must make 

reasonable efforts to reclaim the portion 

of the referral fee paid to the bank 

employee for a referral that does not, 

following any required remedial actions, 

meet the requirements of the exemption 

and that exceeds the amount the bank 

otherwise would be permitted to pay 

under the statutory networking 

exception and proposed Exchange Act 

Rule 700.47

4. Provisions of Written Agreement 

The proposed exemption also would 

require that the bank and its brokerdealer partner include certain 

provisions in their written agreement 

that obligate the bank or the broker or 

dealer to take certain actions. These 

provisions are designed to help ensure 

that banks and broker-dealers operate 

within the terms of the exemption and 

provide appropriate protections to 

customers referred under the 

exemption. Banks, brokers and dealers 

are expected to comply with the terms 

of their written networking agreements. 


sroberts on PROD1PC70 with PROPOSALS
Federal Register / Vol. 71, No. 247 / Tuesday, December 26, 2006 / Proposed Rules 77527 

48The Commission anticipates that it will be 

necessary for either NASD or the Commission to 

adopt a rule requiring broker-dealers to comply 

with the written agreements discussed in this 

Section. 

49Proposed Exchange Act Rule 701(a)(3)(i). 

50Proposed Exchange Act Rule 701(a)(3)(ii)(A). 

Because the proposed exemption provides for a 

broker or dealer to conduct its suitability analysis 

in accordance with the rules of its applicable SRO, 

the broker or dealer may follow and take advantage 

of any applicable SRO rules or interpretations that 

allow the broker or dealer to make an alternative 

suitability evaluation. See, e.g., NASD IM–2310–3 

(discussing a member’s suitability obligations with 

respect to certain institutional investors). 

51Proposed Exchange Act Rule 701(a)(3)(ii)(B)(1). 

52Proposed Exchange Act Rule 701(a)(3)(ii)(B)(2). 

53Proposed Exchange Act Rule 701(a)(3)(iii). 

54Proposed Exchange Act Rule 701(d)(4)(ii). 

55Proposed Exchange Act Rule 701(d)(4)(i). 

If a broker or dealer or bank does not 

comply with the terms of the agreement, 

however, the bank would not become a 

‘‘broker’’ under Section 3(a)(4) of the 

Exchange Act or lose its ability to 

operate under the proposed 

exemption.48 A bank should not be 

required to register as a result of the 

actions of the broker or dealer. 

a. Customer and Employee 

Qualifications 

First, the proposed exemption 

provides that the written agreement 

between the bank and the broker or 

dealer must provide for the bank and 

the broker-dealer to determine, before a 

referral fee is paid to a bank employee 

under the exemption, that the employee 

is not subject to statutory 

disqualification, as that term is defined 

in Section 3(a)(39) of the Exchange Act 

(other than subparagraph (E) of that 

Section). In addition, as noted above, 

the written agreement must provide for 

the broker-dealer to determine, before 

the referral fee is paid, that the customer 

being referred is an institutional or high 

net worth customer.49

b. Suitability or Sophistication Analysis 

by Broker-Dealer 

As a method of providing additional 

investor protections, the proposed 

exemption requires that the written 

agreement between the bank and broker 

or dealer must provide for the broker or 

dealer to perform a suitability or 

sophistication analysis of a securities 

transaction or the customer being 

referred, respectively. The type and 

timing of the analysis needed to be 

conducted by the broker or dealer 

depends on whether the referral fee is 

contingent on the completion of a 

securities transaction at the broker or 

dealer. 

For contingent fees, the written 

agreement between the bank and the 

broker-dealer must provide for the 

broker or dealer to conduct a suitability 

analysis of any securities transaction 

that triggers any portion of the 

contingency fee in accordance with the 

rules of the broker’s or dealer’s 

applicable SRO as if the broker or dealer 

had recommended the securities 

transaction.50 This analysis must be 

performed by the broker or dealer before 

each securities transaction on which the 

referral fee is contingent is conducted. 

For a non-contingent referral fee, the 

written agreement must provide for the 

broker or dealer to conduct, before the 

referral fee is paid, either (1) a 

‘‘sophistication’’ analysis of the 

customer being referred; or (2) a 

suitability analysis with respect to all 

securities transactions requested by the 

customer contemporaneously with the 

referral. Under the ‘‘sophistication’’

analysis option, the broker or dealer 

would be required to determine that the 

customer has the capability to evaluate 

investment risk and make independent 

decisions, and determine that the 

customer is exercising independent 

judgment based on the customer’s own 

independent assessment of the 

opportunities and risks presented by a 

potential investment, market factors, 

and other investment considerations.51

This ‘‘sophistication’’ analysis is based 

on elements of NASD IM–2310–3 

(Suitability Obligations to Institutional 

Customers). 

Alternatively, the broker or dealer 

could perform a suitability analysis of 

all securities transactions requested by 

the customer contemporaneously with 

the referral in accordance with the rules 

of the broker’s or dealer’s applicable 

SRO as if the broker or dealer had 

recommended the securities 

transaction.52 Thus, the proposed 

exemption gives a broker or dealer the 

flexibility to perform a suitability 

analysis in connection with all referrals 

made under the exemption (regardless 

of whether the referral fee is contingent 

or not) if the broker or dealer determines 

that such an approach is appropriate for 

business reasons. 

c. Notice From Broker-Dealer to Bank 

Regarding Customer Qualification 

Under the proposed exemption, the 

written agreement between the bank and 

the broker-dealer would also be required 

to provide that the broker-dealer must 

promptly inform the bank if the brokerdealer determines that (1) the customer 

referred to the broker-dealer is not a 

‘‘high net worth customer’’ or an 

‘‘institutional customer,’’ as applicable; 

(2) the bank employee receiving the 

referral fee is subject to statutory 

disqualification, as that term is defined 

in Section 3(a)(39) of the Exchange Act, 

except subparagraph (E) of that Section; 

or (3) the customer or the securities 

transaction(s) to be conducted by the 

customer do not meet the applicable 

standard set forth in the suitability or 

sophistication determination Section 

above.53 The notice will help banks 

monitor their compliance with the 

exemption and take remedial action 

when necessary. 

5. Referral Fees Permitted under the 

Exemption 

If the foregoing conditions are met, 

the proposed exemption would allow a 

bank employee to receive a referral fee 

for referring an institutional or high net 

worth customer to a broker or dealer 

that is greater than a ‘‘nominal’’ amount 

and that is contingent on whether the 

referral results in a transaction at the 

broker or dealer. The exemption places 

certain limits on how such a referral fee 

may be structured to reduce the 

potential ‘‘salesman’s stake’’ of the bank 

employee in securities transactions 

conducted at the broker-dealer. 

Specifically, the exemption provides 

that the referral fee may be a dollar 

amount based on a fixed percentage of 

the revenues received by the broker or 

dealer for investment banking services 

provided to the customer.54

Alternatively, the referral fee may be 

a predetermined dollar amount, or a 

dollar amount determined in 

accordance with a predetermined 

formula, so long as the amount does not 

vary based on (1) the revenue generated 

by, or the profitability of, securities 

transactions conducted by the customer 

with the broker or dealer; (2) the 

quantity, price, or identity of securities 

purchased or sold over time by the 

customer with the broker or dealer; or 

(3) the number of customer referrals 

made.55 For these purposes, 

‘‘predetermined’’ means established or 

fixed before the referral is made. 

As the exemption provides, these 

restrictions do not prevent a referral fee 

from being paid in multiple installments 

or from being based on a fixed 

percentage of the total dollar amount of 

assets placed in an account with the 

broker or dealer. Additionally, these 

restrictions do not prevent a referral fee 

from being based on the total dollar 

amount of assets maintained by the 

customer with the broker or dealer, or 

from being contingent on whether the 

customer opens an account with the 

broker or dealer or executes one or more 

transactions in the account during the 

initial phases of the account. A bank 

employee also may receive a 

permissible referral fee for each referral 


sroberts on PROD1PC70 with PROPOSALS
77528 Federal Register / Vol. 71, No. 247 / Tuesday, December 26, 2006 / Proposed Rules 

56Proposed Exchange Act Rule 701(c). 

57 15 U.S.C. 78c(a)(4)(B)(ii). 

58 Id. The Agencies will rely on the appropriate 

Federal banking agency for a bank to determine 

whether the bank’s activities are conducted in the 

bank’s trust department or other department 

regularly examined by the agency’s examiners for 

compliance with fiduciary principles and 

standards. 

59 15 U.S.C. 78c(a)(4)(B)(ii)(I). 

60 15 U.S.C. 78c(a)(4)(B)(ii)(II). 

61 15 U.S.C. 78c(a)(4)(C). 

62 15 U.S.C. 78c(a)(4)(C)(i)–(iii). As discussed 

below (see infra at VI.C.), the Agencies are 

proposing to adopt a rule that would permit banks 

to effect trades in investment company securities 

through the National Securities Clearing 

Corporation’s Mutual Fund Services (‘‘Fund/ 

SERV’’) or directly with the investment company’s 

transfer agent. Trades effected by a bank in 

accordance with the proposed Fund/SERV rule 

would be conducted in accordance with section 

3(a)(4)(C) of the Exchange Act. 

63Proposed Exchange Act Rule 721(a)(1). 

64The rule provides for this process to be 

accomplished by calculating the ‘‘yearly 

compensation percentage’’ and the ‘‘relationshiptotal compensation percentage’’ for the account. 

Proposed Exchange Act Rule 721(a)(2) and (3). 

65Proposed Exchange Act Rule 721(a)(5). The 

definition of ‘‘fiduciary capacity’’ included in 

section 3(a)(4)(D) of the Exchange Act is based on 

the definition of that term in part 9 of the OCC’s 

regulations, which relates to the trust and fiduciary 

activities of national banks, in effect at the time of 

enactment of the GLB Act. 

66Proposed Exchange Act Rule 722(a)(1). 

67Proposed Exchange Act Rule 722(a)(2). 

made under the exemption. We request 

comment on all aspects of the definition 

of a referral fee. 

6. Permissible Bonus Compensation Not 

Restricted 

The proposed exemption for high net 

worth and institutional customers 

expressly provides that nothing in the 

exemption would prevent or prohibit a 

bank from paying, or a bank employee 

from receiving, any type of 

compensation under a bonus or similar 

plan that would not be considered 

incentive compensation under 

paragraph (b)(1), or that is described in 

paragraph (b)(2), of proposed Exchange 

Act Rule 700 (implementing the 

networking exception).56 As explained 

above, these types of bonus 

arrangements do not tend to create the 

kind of financial incentives for bank 

employees that the statute was designed 

to address. 

C. Scope of Networking Exception and 

Institutional/High Net Worth Exemption 

Nothing in the statutory networking 

exception or the proposed rules limits 

or restricts the ability of a bank 

employee to refer customers to other 

departments or divisions of the bank 

itself, including, for example, the bank’s 

trust, fiduciary or custodial department. 

Likewise, the networking exception and 

the proposed rules do not apply to 

referrals of retail, institutional or high 

net worth customers to a broker or 

dealer or other third party solely for 

transactions not involving securities, 

such as loans, futures contracts (other 

than a security future), foreign currency, 

or over-the-counter commodities. 

III. Trust and Fiduciary Activities 

Exception 

Section 3(a)(4)(B)(ii) of the Exchange 

Act (the ‘‘trust and fiduciary 

exception’’) permits a bank, under 

certain conditions, to effect securities 

transactions in a trustee or fiduciary 

capacity without being registered as a 

broker.57 Under this exception from the 

definition of ‘‘broker,’’ a bank must 

effect such transactions in its trust 

department, or other department that is 

regularly examined by bank examiners 

for compliance with fiduciary principles 

and standards.58 The bank also must be 

‘‘chiefly compensated’’ for such 

transactions, consistent with fiduciary 

principles and standards, on the basis 

of: (1) An administration or annual fee; 

(2) a percentage of assets under 

management; (3) a flat or capped per 

order processing fee that does not 

exceed the cost the bank incurs in 

executing such securities transactions; 

or (4) any combination of such fees.59

These fees are referred to as 

‘‘relationship compensation’’ in the 

proposed rules. 

Banks relying on this exception may 

not publicly solicit brokerage business, 

other than by advertising that they effect 

transactions in securities in conjunction 

with advertising their other trust 

activities.60 In addition, a bank that 

effects a transaction in the United States 

of a publicly traded security under the 

exception must execute the transaction 

in accordance with Exchange Act 

section 3(a)(4)(C).61

This section requires that the bank 

direct the trade to a registered brokerdealer for execution, effect the trade 

through a cross trade or substantially 

similar trade either within the bank or 

between the bank and an affiliated 

fiduciary that is not in contravention of 

fiduciary principles established under 

applicable federal or state law, or effect 

the trade in some other manner that the 

Commission permits.62 The purpose of 

the rules in this area is to explain the 

Agencies’ interpretation of certain terms 

and concepts used in the statute and to 

implement the exception. The trust and 

fiduciary exception recognizes the 

traditional securities role banks have 

performed for trust and fiduciary 

customers and includes conditions to 

help ensure that a bank does not operate 

a securities broker in the trust 

department. 

A. ‘‘Chiefly Compensated’’ Test and 

Bank-Wide Exemption Based on TwoYear Rolling Averages 

The proposed rules provide that a 

bank meets the ‘‘chiefly compensated’’

condition in the trust and fiduciary 

exception if the ‘‘relationship-total 

compensation percentage’’ for each trust 

or fiduciary account of the bank is 

greater than 50 percent.63 The 

‘‘relationship-total compensation 

percentage’’ for a trust or fiduciary 

account would be calculated by (1) 

dividing the relationship compensation 

attributable to the account during each 

of the immediately preceding two years 

by the total compensation attributable to 

the account during the relevant year; (2) 

translating the quotient obtained for 

each of the two years into a percentage; 

and (3) then averaging the percentages 

obtained for each of the two 

immediately preceding years.64 Under 

the proposal, a ‘‘trust or fiduciary 

account’’ means an account for which 

the bank acts in a trustee or fiduciary 

capacity as defined in section 3(a)(4)(D) 

of the Exchange Act.65

The proposed rules also include an 

exemption that would permit a bank to 

follow an alternate test to the accountby-account approach to the ‘‘chiefly 

compensated’’ condition. Under this 

exemption, the bank may calculate the 

compensation it receives from all of its 

trust and fiduciary accounts on a bankwide basis. The alternative is designed 

to simplify compliance, alleviate 

concerns about inadvertent 

noncompliance, and reduce the costs 

and disruptions banks likely would 

incur under the account-by-account 

approach. 

To use this bank-wide methodology, 

the bank would have to meet two 

conditions. First, the bank would have 

to comply with the conditions in the 

trust and fiduciary exception (other than 

the compensation test in Section 

3(a)(4)(B)(ii)(I)) and comply with 

Section 3(a)(4)(C) (relating to trade 

execution) of the Exchange Act.66 In 

addition, the ‘‘aggregate relationshiptotal compensation percentage’’ for the 

bank’s trust and fiduciary business as a 

whole would have to be at least 70 

percent.67 We chose this percentage to 

ensure that a bank’s trust department is 

not unduly dependent on nonrelationship compensation from 

securities transactions. We invite 

comments generally on the 

appropriateness of the proposed 

exemption as well as this percentage 


sroberts on PROD1PC70 with PROPOSALS
Federal Register / Vol. 71, No. 247 / Tuesday, December 26, 2006 / Proposed Rules 77529 

68As a technical matter, the rule provides for this 

process to be accomplished by calculating the 

‘‘yearly bank-wide compensation percentage’’ and 

the ‘‘aggregate relationship-total compensation 

percentage’’ for the bank’s trust and fiduciary 

business as a whole. Proposed Exchange Act Rule 

722(b) and (c). 

69Proposed Exchange Act Rule 721(a)(6). 

70Proposed Exchange Act Rule 721(a)(4). 

71Proposed Exchange Act Rule 721(a)(4)(iii)(A). 

72Proposed Exchange Act Rule 721(a)(4)(iii)(B). 

73Proposed Exchange Act Rule 721(a)(4)(iii)(C). 

74Proposed Exchange Act Rule 721(a)(4)(i). To 

the extent these fees are paid by an investment 

company based on a percentage of assets under 

management, these fees would be a permissible 

AUM fee. 

75Proposed Exchange Act Rule 721(a)(4)(iv). 

76A bank effecting transactions for trust or 

fiduciary customers through its trust or fiduciary 

departments may use other divisions or 

departments of the bank, or other affiliated or 

unaffiliated third parties, to handle aspects of these 

transactions. The bank must continue to act in a 

trustee or fiduciary capacity with respect to the 

account and, accordingly, should exercise 

appropriate diligence in selecting persons to 

provide services to the bank’s trust or fiduciary 

customers and in overseeing the services provided 

in accordance with the bank’s fiduciary obligations. 

No party, other than the bank (including, without 

limitation, a transfer agent or investment adviser), 

working in conjunction with the bank may rely on 

the bank’s exception or exemption from ‘‘broker’’

status. To the extent that any such third party 

Continued 

and the other specific terms of the 

exemption. 

The ‘‘aggregate relationship-total 

compensation percentage’’ of a bank 

operating under the bank-wide 

approach would be calculated in a 

similar manner as the ‘‘relationshiptotal compensation percentage’’ of an 

account under the account-by-account, 

except that the calculations would be 

based on the aggregate relationship 

compensation and total compensation 

received by the bank from all of its trust 

and fiduciary accounts during each of 

the two immediately preceding years. 

That is, it would be determined by (1) 

dividing the relationship compensation 

attributable to the bank’s trust and 

fiduciary business as a whole during 

each of the immediately preceding two 

years by the total compensation 

attributable to the bank’s trust and 

fiduciary business as a whole during the 

relevant year; (2) translating the 

quotient obtained for each of the two 

years into a percentage; and (3) then 

averaging the percentages obtained for 

each of the two immediately preceding 

years.68

Under either the account-by-account 

or bank-wide approach, a bank would 

have the flexibility to elect to use a 

calendar year or the bank’s fiscal year 

for purposes of complying with these 

compensation provisions.69 In addition, 

whether a bank decides to use the 

account-by-account approach or the 

bank-wide approach, the bank’s 

compliance with the relevant 

compensation restriction would be 

based on a two-year rolling average of 

the compensation attributable to the 

trust or fiduciary account or the bank’s 

trust or fiduciary business, respectively. 

This is to allow for short-term 

fluctuations that otherwise could lead a 

bank to fall out of compliance with the 

exception or exemption from year to 

year. 

B. Proposed Definition of ‘‘Relationship 

Compensation’

Both the account-by-account and 

bank-wide approaches discussed above 

are based in part on the relationship 

compensation attributable to one or 

more of a bank’s trust or fiduciary 

accounts. The proposal defines the term 

‘‘relationship compensation’’ to mean 

any compensation a bank receives that 

consists of (1) an administration fee; (2) 

an annual fee (payable on a monthly, 

quarterly or other basis); (3) a fee based 

on a percentage of assets under 

management; (4) a flat or capped per 

order processing fee, paid by or on 

behalf of a customer or beneficiary, that 

is equal to not more than the cost 

incurred by the bank in connection with 

executing securities transactions for 

trust or fiduciary accounts; or (5) any 

combination of these fees.70 These types 

of compensation are identified in the 

statute. 

The proposed rules also provide 

examples of fees that would be 

considered an administration fee or a 

fee based on a percentage of assets 

under management for these purposes. 

Specifically, the rule provides that a fee 

based on a percentage of assets under 

management (an ‘‘AUM fee’’) includes, 

without limitation—

• A fee paid by an investment 

company pursuant to a plan under 17 

CFR 270.12b-1. Although Rule 12b-1 

fees are related to mutual funds, we 

believe they should be viewed as 

relationship compensation because they 

are paid on an assets under management 

basis, rather than on a transactional 

basis; 71

• A fee paid by an investment 

company for personal service or the 

maintenance of shareholder accounts; 72

and 

• A fee paid by an investment 

company based on a percentage of assets 

under management for any of the 

following services: (1) Providing transfer 

agent or sub-transfer agent services for 

the beneficial owners of investment 

company shares; (2) aggregating and 

processing purchase and redemption 

orders for investment company shares; 

(3) providing the beneficial owners with 

account statements showing their 

purchases, sales, and positions in the 

investment company; (4) processing 

dividend payments to the account for 

the investment company; (5) providing 

sub-accounting services to the 

investment company for shares held 

beneficially in the account; (6) 

forwarding communications from the 

investment company to the beneficial 

owners, including proxies, shareholder 

reports, dividend and tax notices, and 

updated prospectuses; or (7) receiving, 

tabulating, and transmitting proxies 

executed by the beneficial owners of 

investment company shares in the 

account.73

In addition, the rule provides that the 

term ‘‘administration fee’’ includes, 

without limitation—

• A fee paid for personal services, tax 

preparation, or real estate settlement 

services; and 

• A fee paid by an investment 

company for personal service, the 

maintenance of shareholder accounts or 

the types of sub-transfer agent or other 

services described above.74

The examples of an administration fee 

and an asset under management fee 

included in the proposed rules are 

provided only for illustrative purposes. 

Other types of fees or fees for other 

types of services could be an 

administration fee or an AUM fee. In 

addition, an administration fee, annual 

fee or AUM fee attributable to a trust or 

fiduciary account is considered 

relationship compensation regardless of 

what entity or person pays the fee, and 

regardless of whether the fee is related 

to only securities assets, to a 

combination of securities and nonsecurities assets, or to only nonsecurities assets. These fees are part of 

the compensation for acting as a trustee 

or fiduciary. 

Under the proposal, relationship 

compensation also would include a flat 

or capped per order processing fee, paid 

by (or on behalf of) a customer or 

beneficiary, that is equal to not more 

than the cost incurred by the bank in 

connection with executing securities 

transactions for trust or fiduciary 

accounts.75 If a bank seeks to include 

within this per order processing fee any 

fixed or variable processing costs 

incurred by the bank beyond those 

charged by the executing broker or 

dealer, the bank should maintain 

appropriate policies and procedures 

governing the allocation of these costs to 

the orders processed for trust or 

fiduciary customers.76 This should help 


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77530 Federal Register / Vol. 71, No. 247 / Tuesday, December 26, 2006 / Proposed Rules 

performs activities that would make that entity a 

broker under Section 3(a)(4) of the Exchange Act 

that entity would be required to register as a broker 

(in the absence of an applicable exemption or 

regulatory relief) notwithstanding any written or 

unwritten agreement the third party may have with 

the bank. 

77Proposed Exchange Act Rule 721(b). 

78Proposed Exchange Act Rule 721(b)(2) 

(referencing Proposed Exchange Act Rule 760(g)(2)). 

79Proposed Exchange Act Rule 723(a). 

80Proposed Exchange Act Rule 723(b). 

81Proposed Exchange Act Rule 723(c). 

82Proposed Exchange Act Rule 723(d). 

83Proposed Exchange Act Rule 723(d)(3). 

84Proposed Exchange Act Rule 723(d)(1). 

85See Exchange Act Section 3(a)(4)(B)(v). 

86Proposed Exchange Act Rule 740(c). 

87See NASD Rule 2830. 

ensure that profits derived from per 

trade charges are not masked as costs of 

processing the trades. 

C. Advertising Restrictions 

Section 3(a)(4)(B)(ii)(II) of the 

Exchange Act addresses advertisements 

and the proposed rules explain the 

Agencies’ understanding of the terms 

used in the statute. The proposed rules 

provide that a bank complies with the 

advertising restriction if advertisements 

by or on behalf of the bank do not 

advertise that the bank provides 

securities brokerage services for trust or 

fiduciary accounts except as part of 

advertising the bank’s broader trust or 

fiduciary services, and do not advertise 

the securities brokerage services 

provided by the bank to trust or 

fiduciary accounts more prominently 

than the other aspects of the trust or 

fiduciary services provided to such 

accounts.77

An ‘‘advertisement’’ for these 

purposes means any material that is 

published or used in any electronic or 

other public media, including any Web 

site, newspaper, magazine or other 

periodical, radio, television, telephone 

or tape recording, videotape display, 

signs or billboards, motion pictures, 

blast e-mail, or telephone directories 

(other than routine listings).78 Other 

types of material or information that is 

not distributed through public media 

would not be considered an 

advertisement. In addition, in 

considering whether an advertisement 

advertises the securities brokerage 

services provided to trust or fiduciary 

customers more prominently than the 

bank’s other trust or fiduciary services, 

the nature, context and prominence of 

the information presented—and not 

simply the length of text or information 

devoted to a particular subject’should be 

considered. 

D. Proposed Exemptions for Special 

Accounts, Transferred Accounts, and a 

De Minimis Number of Accounts 

The proposed rules also would permit 

a bank to exclude certain types of 

accounts for purposes of determining its 

compliance with the account-byaccount or bank-wide compensation 

tests discussed above. These exclusions 

are intended to reduce administrative 

burdens and facilitate compliance in 

connection with accounts that do not 

present a pronounced risk that a bank is 

operating a securities broker within the 

trust department. We solicit comment 

on these exclusions and their specific 

proposed terms. 

Under the proposal, a bank could, in 

determining its compliance with either 

the account-by-account or bank-wide 

compensation tests, exclude any trust or 

fiduciary account that had been open for 

a period of less than 3 months during 

the relevant year.79 The proposal would 

also permit a bank to exclude, for 

purposes of determining its compliance 

with either of these compensation tests, 

any trust or fiduciary account that the 

bank acquired from another person as 

part of a merger, consolidation, 

acquisition, purchase of assets or similar 

transaction by the bank for 12 months 

after the date the bank acquired the 

account from the other person.80 Of 

course, in excluding such accounts, the 

bank would have to exclude all 

compensation it receives from such 

accounts from the relationship 

compensation to total compensation 

comparison. This approach would allow 

a bank to bring into compliance a group 

of acquired accounts. 

Two additional exemptions would be 

provided for banks using the accountby-account approach. Specifically, a 

bank that uses the account-by-account 

approach would not be considered a 

broker for purposes of Section 3(a)(4) of 

the Exchange Act solely because a 

particular trust or fiduciary account 

does not meet the ‘‘chiefly 

compensated’’ test if, within 3 months 

of the end of the year in which the 

account fails to meet such standard, the 

bank transfers the account or the 

securities held by or on behalf of the 

account to a registered broker-dealer or 

another unaffiliated entity (such as an 

unaffiliated bank) that is not required to 

be registered as a broker or dealer.81

Moreover, a bank using the accountby-account approach could exclude a 

small number of trust or fiduciary 

accounts not exceeding the lesser of (1) 

1 percent of the total number of trust or 

fiduciary accounts held by the bank 

provided that if the number so obtained 

is less than 1, the amount would be 

rounded up to 1; or (2) 500.82 To rely 

on this exemption with respect to an 

account, the bank must not have relied 

on this exemption for such account 

during the immediately preceding 

year.83 In addition, the bank would be 

required to maintain records 

demonstrating that the securities 

transactions conducted by or on behalf 

of the excluded account were 

undertaken by the bank in the exercise 

of its trust or fiduciary responsibilities 

with respect to the account.84

IV. Sweep Accounts and Transactions 

in Money Market Funds 

Exchange Act Section 3(a)(4)(B)(v) 

excepts a bank from the definition of 

‘‘broker’’ to the extent it ‘‘effects 

transactions as part of a program for the 

investment or re-investment of deposit 

funds into any no-load, open-end 

management investment company 

registered under the Investment 

Company Act that holds itself out as a 

money market fund.’’85

A. Proposed Sweep Account Definitions 

To provide banks with guidance on 

the sweep accounts exception, the 

proposal defines various terms under 

the exception. One key term is ‘‘noload.’’ Under the proposal, no-load, in 

the context of an investment company 

or the securities it issues, means that the 

securities are part of a class or series in 

which a bank effects transactions that is 

not subject to a sales charge or a 

deferred sales charge. In addition, total 

charges against net assets of that class or 

series of securities for sales or sales 

promotion expenses, personal service, 

or the maintenance of shareholder 

accounts may not exceed 0.0025 of 

average net assets annually.86

Consistent with NASD rules,87 under 

the proposed no-load definition, charges 

for the following would not be 

considered charges against net assets of 

a class or series of an investment 

company’s securities for sales or sales 

promotion expenses, personal service, 

or the maintenance of shareholder 

accounts: 

(1) Providing transfer agent or subtransfer agent services for beneficial 

owners of investment company shares; 

(2) Aggregating and processing 

purchase and redemption orders for 

investment company shares; 

(3) Providing beneficial owners with 

account statements showing their 

purchases, sales, and positions in the 

investment company; 

(4) Processing dividend payments for 

the investment company; 

(5) Providing sub-accounting services 

to the investment company for shares 

held beneficially; 

(6) Forwarding communications from 

the investment company to the 


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88Proposed Exchange Act Rule 740(c)(2). 

89Proposed Exchange Act Rule 741. 

90Proposed Exchange Act Rule 741(a)(1). 

91Proposed Exchange Act Rule 741(a)(2)(ii)(A). 

92 15 U.S.C. 78c(a)(4)(B)(viii). 

93Proposed Exchange Act Rule 760(a). 

94Proposed Exchange Act Rule 760(b). 

95 ‘‘Employee benefit plan account’’ would mean 

a pension plan, retirement plan, profit sharing plan, 

bonus plan, thrift savings plan, incentive plan, or 

other similar plan, including, without limitation, an 

employer-sponsored plan qualified under Section 

401(a) of the Internal Revenue Code (26 U.S.C. 

401(a)), a governmental or other plan described in 

Section 457 of the Internal Revenue Code (26 U.S.C. 

457), a tax-deferred plan described in Section 

403(b) of the Internal Revenue Code (26 U.S.C. 

403(b)), a church plan, governmental, 

multiemployer or other plan described in Section 

414(d), (e) or (f) of the Internal Revenue Code (26 

U.S.C. 414(d), (e) or (f)), an incentive stock option 

plan described in Section 422 of the Internal 

Revenue Code (26 U.S.C. 422); a Voluntary 

Employee Beneficiary Association Plan described in 

Section 501(c)(9) of the Internal Revenue Code (26 

U.S.C. 501(c)(9)), a non-qualified deferred 

compensation plan (including a rabbi or secular 

trust), a supplemental or mirror plan, and a 

supplemental unemployment benefit plan. 

96 ‘‘Individual retirement account or similar 

account’’ would mean an individual retirement 

account as defined in Section 408 of the Internal 

Revenue Code (26 U.S.C. 408), Roth IRA as defined 

in Section 408A of the Internal Revenue Code (26 

U.S.C. 408A), health savings account as defined in 

Section 223(d) of the Internal Revenue Code (26 

U.S.C. 223(d)), Archer medical savings accounts as 

defined in Section 220(d) of the Internal Revenue 

Code (26 U.S.C. 220(d)), Coverdell education 

savings account as defined in Section 530 of the 

Internal Revenue Code (26 U.S.C. 530), or other 

similar account. 

beneficial owners, including proxies, 

shareholder reports, dividend and tax 

notices, and updated prospectuses; or 

(7) Receiving, tabulating, and 

transmitting proxies executed by 

beneficial owners of investment 

company shares.88

B. Proposed Exemption Regarding 

Money Market Fund Transactions 

The proposal also includes a new 

exemption that would permit banks, 

without registering as a broker, to effect 

transactions on behalf of a customer in 

securities issued by a money market 

fund under certain conditions.89 This 

proposed exemption recognizes that 

banks have long offered sweeps and 

other services that invest customer 

funds in money market funds that do 

not qualify as no-load funds under 

Commission and NASD rules. In 

particular, to qualify for the proposed 

exemption from broker registration, the 

bank would be required to provide the 

customer, directly or indirectly, any 

other product or service, the provision 

of which would not, in and of itself, 

require the bank to register as a broker 

or dealer under Section 15(a) of the 

Exchange Act.90 In addition, the class or 

series of money market fund securities 

that the bank provides the customer 

either would have to be no-load, or, if 

it is not no-load, the bank could not 

characterize or refer to the class or series 

of securities as no-load. For securities 

that are not no-load, the bank would be 

required to provide the customer, not 

later than at the time the customer 

authorizes the bank to effect the 

transactions, a prospectus for the 

securities.91

V. Safekeeping and Custody 

A. Overview of Statutory Exception 

Section 3(a)(4)(B)(viii) of the 

Exchange Act provides banks with an 

exception from the ‘‘broker’’ definition 

for certain bank custody and 

safekeeping activities (‘‘custody and 

safekeeping exception’’). In particular, 

this provision allows a bank to perform 

the following activities if performed as 

part of its customary banking activities 

without registering as a ‘‘broker’’: 

• Providing safekeeping or custody 

services with respect to securities, 

including the exercise of warrants and 

other rights on behalf of customers; 

• Facilitating 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; 

• Effecting securities lending or 

borrowing transactions with or on 

behalf of customers as part of the abovedescribed custodial services or investing 

cash collateral pledged in connection 

with such transactions; 

• Holding securities pledged by a 

customer to another person or securities 

subject to purchase or resale agreements 

involving a customer, or facilitating the 

pledging or transfer of such securities by 

book entry or as otherwise provided 

under applicable law, if the bank 

maintains records separately identifying 

the securities and the customer; and 

• Serving as a custodian or provider 

of other related administrative services 

to any individual retirement account, 

pension, retirement, profit sharing, 

bonus, thrift savings, incentive, or other 

similar benefit plan.92

B. Proposed Exemption 

The proposed rules contain an 

exemption that allows banks, subject to 

certain conditions, to accept orders for 

securities transactions from employee 

benefit plan accounts and individual 

retirement and similar accounts for 

which the bank acts as a custodian.93 In 

addition, the exemption allows banks, 

subject to certain conditions, to accept 

orders for securities transactions on an 

accommodation basis from other types 

of custodial accounts.94 These proposed 

exemptions are intended to allow a bank 

to perform the types of securities ordertaking activities at times conducted in a 

custody department subject to 

conditions and limitations to protect 

investors and prevent a bank from using 

the exemptions to operate a securities 

broker in the bank. 

The Agencies seek comment on all 

aspects of the proposed exemptions, 

including the conditions they contain. 

The proposed rules do not contain other 

rules to implement the custody and 

safekeeping exception. The Agencies 

request comment on whether other rules 

in this area are appropriate or needed. 

A bank would have no need to rely on 

the custody exemption to the extent the 

bank conducts other custodial activities 

permitted by Section 3(a)(4)(B)(viii) 

(e.g., exercising warrants or other rights 

with respect to securities or effecting 

securities lending or borrowing 

transactions on behalf of custodial 

customers) or another of the proposed 

rules (e.g., proposed Exchange Act Rule 

772, which permits banks to effect 

securities lending or borrowing 

transactions on behalf of certain noncustodial customers). In addition, a 

bank would not have to rely on the 

proposed exemption to the extent the 

bank holds securities in custody for a 

customer and provides clearance and 

settlement services to the account in 

connection with such securities, but the 

bank does not accept orders for 

securities transactions for the account or 

engage in other activities with respect to 

the account that would require the bank 

to be registered as a broker. The 

following discusses the scope and terms 

of the proposed custody exemption. 

1. Employee Benefit Plan Accounts and 

Individual Retirement or Similar 

Accounts 

Under the proposed exemption, a 

bank would not be considered a broker 

for purposes of Section 3(a)(4) of the 

Exchange Act to the extent that, as part 

of its customary banking activities, the 

bank accepts orders to effect 

transactions in securities in an 

‘‘employee benefit plan account’’ 95 or 

an ‘‘individual retirement account or 

similar account’’ 96 for which the bank 

acts as a custodian if the bank complies 

with the following. 

a. Employee Compensation Restriction 

The proposed custody exemption 

provides that, if a bank accepts 

securities orders for an employee benefit 

plan or individual retirement or similar 

account under the exemption, then no 

bank employee may receive 

compensation (including a fee paid 


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97Proposed Exchange Act Rule 760(c). 

98Proposed Exchange Act Rule 760(a)(2)(i) and 

(ii). As discussed above, the proposed rules define 

the term ‘‘advertisement’’ to mean material that is 

published or used in any electronic or other public 

media, including any Web site, newspaper, 

magazine or other periodical, radio, television, 

telephone or tape recording, videotape display, 

signs or billboards, motion pictures, or telephone 

directories (other than routine listings). Proposed 

Exchange Act Rule 760(g)(2). 

99Proposed Exchange Act Rule 760(a)(3). ‘‘Sales 

literature’’ would mean any written or electronic 

communication, other than an advertisement, that 

is generally distributed or made generally available 

to customers of the bank or the public, including 

circulars, form letters, brochures, telemarketing 

scripts, seminar texts, published articles, and press 

releases concerning the bank’s products or services. 

Proposed Exchange Act Rule 760(g)(5). 

100 15 U.S.C. 78c(a)(4)(C). This provision provides 

that, to meet one of the exceptions from the 

‘‘broker’’ definition under the Exchange Act one of 

three conditions with respect to transactions 

effected under the applicable Section must be 

satisfied. In particular, the bank must direct such 

trade to a registered broker-dealer for execution. In 

the alternative, the trade must be a cross trade or 

other substantially similar trade of a security that 

is made by the bank or between the bank and an 

affiliated fiduciary and is not in contravention of 

fiduciary principles established under applicable 

Federal or State law. Alternatively, the trade must 

be conducted in some other manner permitted 

under rules, regulations, or orders as the 

Commission may prescribe or issue. 

101 15 U.S.C. 78c(a)(4)(B)(viii)(II). This provision 

prohibits a custodian bank from acting as a carrying 

broker (as such term, and different formulations 

thereof, are used in Exchange Act Section 15(c)(3) 

and the rules and regulations under that Section) 

for any broker or dealer, unless such carrying broker 

activities are engaged in with respect to government 

securities. 

102Proposed Exchange Act Rule 760(e). 

103Proposed Exchange Rule Act 760(b)(1). 

pursuant to a 12b–1 plan) from the 

bank, the executing broker or dealer, or 

any other person that is based on (1) 

whether a securities transaction is 

executed for the account; or (2) the 

quantity, price, or identity of the 

securities purchased or sold by the 

account.97 These proposed restrictions, 

which we believe are consistent with 

banking practices, are intended to 

reduce the financial incentives a bank 

employee might have to encourage a 

customer to submit securities orders to 

the bank and use a custody account as 

the functional equivalent of a securities 

brokerage account. They do not prohibit 

a bank employee from receiving 

compensation that is based on whether 

a customer establishes a custodial 

account with the bank, or that is based 

on the total amount of assets in a 

custodial account at account opening or 

at any other time. 

The proposed custody exemption also 

expressly provides that these employee 

compensation restrictions do not 

prevent a bank employee from receiving 

payments under a bonus or similar plan 

that would be permissible under 

proposed Exchange Act Rule 700(b)(1) 

of the networking rules as if a referral 

had been made, or any profitabilitybased compensation described in 

proposed Exchange Act Rule 700(b)(2) 

of the networking rules. In addition, 

because these restrictions relate to 

securities transactions conducted in the 

relevant custody account, they would 

not prevent a bank employee from 

receiving a referral fee for referring the 

customer to a broker or dealer to engage 

in securities transactions at the brokerdealer that are unrelated to the custody 

account in accordance with the 

networking exception or the 

institutional customer and high net 

worth customer exemption (proposed 

Exchange Act Rule 701) for networking 

arrangements. 

b. Advertisements and Sales Literature 

The proposed custody exemption 

provides that a bank relying on the 

exemption may not advertise that it 

accepts orders for securities transactions 

for employee benefit plan accounts or 

individual retirement accounts or 

similar accounts for which the bank acts 

as custodian, except as part of 

advertising the other custodial or 

safekeeping services the bank provides 

to these accounts. In addition, the bank 

may not advertise that such accounts are 

securities brokerage accounts or that the 

bank’s safekeeping and custody services 

substitute for a securities brokerage 

account.98 With respect only to 

individual retirement or similar 

accounts, advertisements and sales 

literature issued by or on behalf of the 

bank may not describe the securities 

order-taking services provided by the 

bank to these accounts more 

prominently than the other aspects of 

the custody or safekeeping services the 

bank provides.99 The purpose of these 

restrictions is similar to the purpose of 

the advertising rules in the trust and 

fiduciary exception. 

c. Other Conditions 

The proposed custody exemption 

provides that a bank may accept orders 

for a securities transaction for an 

employee benefit plan account or an 

individual retirement account or similar 

account only if (1) the bank does not act 

in a trustee or fiduciary capacity (as 

defined in Section 3(a)(4)(D) of the 

Exchange Act) with respect to that 

account; (2) the bank complies with 

Section 3(a)(4)(C) of the Exchange Act in 

handling any order for a securities 

transaction for the account;100 and (3) 

the bank complies with Section 

3(a)(4)(B)(viii)(II) of the Exchange Act 

relating to carrying broker activities.101

d. Non-Fiduciary and Non-Custodial 

Administrators or Recordkeepers 

The proposed exemption also would 

allow a bank that acts as a non-fiduciary 

and non-custodial administrator or 

recordkeeper for an employee benefit 

plan to accept securities orders for the 

plan if the bank and the custodian bank 

comply with all the conditions 

discussed in Sections V.B.1.a, b and c 

above and, in addition, the 

administrator/recordkeeper bank does 

not execute a cross-trade with or for the 

employee benefit plan or net orders for 

securities for the plan, other than orders 

for shares of open-end investment 

companies not traded on an 

exchange.102 Executing cross-trades 

involves setting prices for securities 

transactions. The Agencies request 

comment on whether these conditions 

are consistent with the existing 

practices of banks acting as nonfiduciary and non-custodial 

administrators or recordkeepers. 

2. Accommodation Transactions 

Besides accepting securities orders for 

employee benefit plan and individual 

retirement and similar custodial 

accounts, banks also accept securities 

orders for other custodial accounts as an 

accommodation to the customer. The 

proposed custody exemption allows 

banks to continue to provide these 

order-taking services to other custodial 

accounts, subject to certain conditions 

designed to help ensure that these 

services continue to be provided only as 

an accommodation to customers and 

that a bank does not operate a securities 

broker out of its custody department. 

These conditions are discussed below. 

a. Accommodation Basis 

The proposed custody exemption 

expressly provides that a bank may 

accept securities orders for other 

custodial accounts only as an 

accommodation to the customer.103 The 

Banking Agencies will develop 

guidance to assist Banking Agency 

examiners in reviewing, as part of the 

agencies’ ongoing supervisory and 

examination process, the order-taking 

services provided to other custodial 

accounts. This guidance will describe 

the types of policies, procedures and 

systems that a bank should have in 

place to help ensure that the bank 

accepts securities orders for other 

custodial accounts only as an 

accommodation to the customer and in 

a manner consistent with both the terms 


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104Proposed Exchange Act Rule 760(b)(2) and (c). 

105Proposed Exchange Act Rule 760(b)(3). 

106Proposed Exchange Act Rule 760(b)(4) and (5). 

107Proposed Exchange Act Rule 760(d). 

108Proposed Exchange Act Rule 760(e). 

109Exchange Act Release No. 27017 (July 11, 

1989), 54 FR 30013. 

and purposes of the custody exemption 

and the GLB Act. 

b. Employee Compensation Restriction 

In order for a bank to rely on the 

custody exemption to accept orders for 

custodial accounts on an 

accommodation basis, the bank must 

comply with the employee 

compensation restrictions described 

above in Section B.1.a that apply with 

respect to employee benefit plans and 

individual retirement and similar 

accounts.104

c. Bank Fees 

The proposed exemption also 

expressly limits the types of fees a bank 

that accepts accommodation orders for 

an account may charge for effecting 

securities transactions for the account. 

Specifically, any fee charged or received 

by the bank for effecting a securities 

transaction for the account may not vary 

based on (1) whether the bank accepted 

the order for the transaction; or (2) the 

quantity or price of the securities to be 

bought or sold.105 These restrictions do 

not prevent a bank from charging or 

receiving a fee that is based on the type 

of security purchased or sold by the 

account (e.g., a foreign security), 

provided the fee complies with the 

conditions set forth in the proposed 

exemption. 

d. Advertising and Sales Literature 

Restrictions 

Under the proposed exemption, the 

bank’s advertisements may not state that 

the bank accepts orders for securities 

transactions for a custodial account 

(other than an employee benefit plan or 

individual retirement account or similar 

account). In addition, the bank’s sales 

literature (1) may state that the bank 

accepts securities orders for such an 

account only as part of describing the 

other custodial or safekeeping services 

the bank provides to the account; and 

(2) may not describe the securities 

order-taking services provided to such 

an account more prominently than the 

other aspects of the custody or 

safekeeping services provided by the 

bank to the account.106

e. Investment Advice or 

Recommendations 

Under the proposed exemption, a 

bank that accepts securities orders for a 

custodial account on an accommodation 

basis would not be permitted to provide 

investment advice or research 

concerning securities to the account, 

make recommendations concerning 

securities to the account, or otherwise 

solicit securities transactions from the 

account. These restrictions would not, 

however, prohibit the bank from 

advertising its custodial services and 

disseminating sales literature that 

comply with the restrictions in the 

proposed exemption. These restrictions 

also would not prevent a bank employee 

from responding to customer inquiries 

regarding the bank’s safekeeping and 

custody services by providing 

advertisements or sales literature 

describing the safekeeping, custody and 

related services the bank offers 

(provided those advertisement and sales 

literature comply with the restrictions 

in the proposed exemption), a 

prospectus prepared by a registered 

investment company, sales literature 

prepared by a registered investment 

company or by the broker or dealer that 

is the principal underwriter of the 

registered investment company 

pertaining to the registered investment 

company’s products, or information 

based on any of those materials. 

Moreover, the proposed exemption 

allows a bank’s employees to respond to 

customer inquiries concerning the 

bank’s safekeeping, custodial or other 

services, such as inquiries concerning 

the customer’s account or the 

availability of sweep or other services, 

so long as the bank does not provide 

investment advice or research 

concerning securities to the account or 

make a recommendation to the account 

concerning securities. 

The limitations and restrictions 

discussed in this part V.B.2, including 

those relating to investment advice and 

recommendations, relate only to those 

custodial accounts for which the bank 

accepts securities orders on an 

accommodation basis. Thus, for 

example, these limitations would not 

apply to (1) an employee benefit plan 

account or an individual retirement 

account or similar account; or (2) a trust 

or fiduciary account maintained by a 

customer with a bank even if that 

customer also maintains a custodial 

account with the bank. Similarly, the 

custody exemption does not prohibit a 

bank from cross-marketing the other 

products or services of the bank, 

including trust or fiduciary services, to 

its custodial customers. 

f. Other Conditions 

In addition to these conditions, a bank 

that accepts securities orders as an 

accommodation to a custodial account 

must comply with the conditions 

described in Section V.B.1.c. Thus, the 

bank may not rely on this proposed 

exemption to accept accommodation 

orders for a custodial account if the 

bank is acting in a trustee or fiduciary 

capacity (as defined in Section 

3(a)(4)(D) of the Exchange Act) with 

respect to that account. In addition, the 

bank must comply with Section 

3(a)(4)(C) of the Exchange Act in 

handling any order for a securities 

transaction for the account and with 

Section 3(a)(4)(B)(viii)(II) concerning 

carrying broker activities.107 The reason 

for these additional conditions is to 

reinstate the statutory requirements for 

executing transactions and for the bank 

to refrain from acting as a carrying 

broker. In addition, a condition is added 

that makes it clear that a bank may not 

use this exemption to avoid the 

conditions applicable to a trust or 

fiduciary account when it is acting in a 

trustee or fiduciary capacity with 

respect to that account. 

3. Evasion 

As the proposed rules provide, to 

prevent evasions of the custody 

exemption, the Agencies will consider 

both the form and substance of the 

relevant account(s), transaction(s) and 

activities (including advertising 

activities) in considering whether a 

bank meets the terms of the 

exemption.108 As part of the regular 

examination process, the Banking 

Agencies will monitor the securities 

transactions in custodial accounts. If the 

appropriate Banking Agency were to 

find that a bank is evading the terms of 

the custody exemption to run a 

brokerage business out of its custody 

department, the agency would take 

appropriate action to address the 

problem. 

VI. Other Proposed Exemptions 

The proposal also includes certain 

other exemptions relating to the 

securities ‘‘broker’’ activities of banks. 

These are discussed below. 

A. Proposed Exemption for Regulation S 

Transactions With Non-U.S. Persons 

Persons that conduct a broker or 

dealer business while located in the 

United States must register as brokerdealers (absent an exception or 

exemption), even if they direct all of 

their selling efforts offshore.109 A bank 

industry group requested an exemption 

from broker-dealer registration 

requirements to permit banks to sell to 

non-U.S. persons securities that are 

covered by Regulation S, the safe harbor 

from U.S. securities registration 


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110Letter dated May 27, 2004, from Lawrence R. 

Uhlick, Executive Director & General Counsel, 

Institute of International Bankers to Catherine 

McGuire, Chief Counsel, Division of Market 

Regulation, Commission. Regulation S specifies the 

requirements for an offer or sale of securities to be 

deemed to occur outside the United States and 

therefore not subject to the registration 

requirements of Section 5 of the Securities Act. 

Regulation S permits the sale of newly issued offshore securities and re-sales of off-shore securities 

from a non-U.S. person to a non-U.S. person. 17 

CFR 230.901, et seq. The letter also requests a 

separate exemption from Section 3(b)(5) of the 

Exchange Act for riskless principal transactions, 

which are treated as a ‘‘dealer’’ (and not a ‘‘broker’’) 

activity under the Exchange Act. The Commission 

will solicit comments on that proposed rule in a 

separate contemporaneous release. 

111Although no rules have been adopted, the 

exemption provided by Exchange Act Section 30(b), 

pertaining to foreign securities, has been held 

unavailable if the United States is used as a base 

for securities fraud perpetuated on foreigners. See 

Arthur Lipper Corp. v. SEC, 547 F.2d 171 (2d Cir. 

1976); see also Exchange Act Release No. 27017 

supra note 110. 

112Under the proposal, ‘‘eligible security’’ would 

mean a security that: (1) is not being sold from the 

inventory of the bank or an affiliate of the bank; and 

(2) is not being underwritten by the bank or an 

affiliate of the bank on a firm-commitment basis, 

unless the bank acquired the security from an 

unaffiliated ‘‘distributor’’ that did not purchase the 

security from the bank or an affiliate of the bank. 

‘‘Distributor’’ under the proposal would have the 

same meaning as in 17 CFR 230.902(d). ‘‘Purchaser’’

under the proposal would mean a person who 

purchases an ‘‘eligible security’’ and who is not a 

U.S. person under 17 CFR 230.902(k). 

113 15 U.S.C. 78c(a)(54)(A). 

114Proposed Exchange Act Rule 772. Under the 

proposal, ‘‘securities lending transaction’’ would 

mean a transaction in which the owner of a security 

lends the security temporarily to another party 

pursuant to a written securities lending agreement 

under which the lender retains the economic 

interests of an owner of such securities, and has the 

right to terminate the transaction and to recall the 

loaned securities on terms agreed by the parties. 

Under the proposal, ‘‘securities lending services’’

would mean: (1) Selecting and negotiating with a 

borrower and executing, or directing the execution 

of the loan with the borrower; (2) receiving, 

delivering, or directing the receipt or delivery of 

loaned securities; (3) receiving, delivering, or 

directing the receipt or delivery of collateral; (4) 

providing mark-to-market, corporate action, 

recordkeeping or other services incidental to the 

administration of the securities lending transaction; 

(5) investing, or directing the investment of, cash 

collateral; or (6) indemnifying the lender of 

securities with respect to various matters. 

115See 17 CFR 240.15a–11. See also Exchange Act 

Release No. 49879 (June 17, 2004), 69 FR 39682 

(June 30, 2004). A bank that acts as custodian with 

respect to securities may effect securities lending 

transactions (and provide related securities lending 

services) with respect to such securities as agent 

under the statutory custody and safekeeping 

exception. 

116The Commission does not propose to modify 

or re-adopt the other portions of the ‘‘dealer’’ rules 

adopted for banks under the GLBA, including the 

exemption that permits banks to engage in riskless 

principal transactions subject to certain conditions. 

See 17 CFR 240.3a5–1. 

117 15 U.S.C. 78c(a)(4)(C)Ii). 

requirements.110 The group also 

requested that the exemption extend to 

the resale of Regulation S securities held 

by non-U.S. persons to other non-U.S. 

persons in transactions pursuant to 

Regulation S. 

Non-U.S. persons typically will not 

rely on the protections of the U.S. 

securities laws when purchasing 

Regulation S securities from U.S. 

banks.111 Non-U.S. persons usually can 

purchase the same securities from banks 

located outside of the United States and 

would not have the protections of U.S. 

law when purchasing these securities 

offshore. The proposal therefore would 

exempt a bank from the definition of 

‘‘broker’’ under Section 3(a)(4) of the 

Exchange Act, to the extent that, as 

agent, the bank effects one of three types 

of transactions. In particular, the 

proposed exemption would apply if the 

bank effects a sale in compliance with 

the requirements of 17 CFR 230.903 of 

an ‘‘eligible security’’ to a ‘‘purchaser’’

who is outside of the United States 

within the meaning of 17 CFR 230.903. 

The proposed exemption would also 

be available if the bank effects a resale 

of an ‘‘eligible security’’ after its initial 

sale with a reasonable belief that the 

‘‘eligible security’’ was initially sold 

outside of the United States within the 

meaning of and in compliance with the 

requirements of 17 CFR 230.903, by or 

on behalf of a person who is not a U.S. 

person under 17 CFR 230.902(k) to a 

‘‘purchaser’’ who is outside the United 

States within the meaning of 17 CFR 

230.903 or a registered broker-dealer. 

Under this provision of the proposal, if 

the sale is made prior to the expiration 

of the distribution compliance period 

specified in 17 CFR 230.903(b)(2) or 

(b)(3), the sale would have to be made 

in compliance with the requirements of 

17 CFR 230.904. 

Moreover, the proposed Regulation S 

exemption would apply if the bank 

effects a resale of an ‘‘eligible security’’

after its initial sale outside of the United 

States within the meaning of and in 

compliance with the requirements of 17 

CFR 230.903, by or on behalf of a 

registered broker-dealer to a 

‘‘purchaser’’ who is outside the United 

States within the meaning of 17 CFR 

230.903. Under this proposed provision, 

if the sale is made prior to the 

expiration of the distribution 

compliance period specified in 17 CFR 

230.903(b)(2) or (b)(3), the sale would 

have to be made in compliance with the 

requirements of 17 CFR 230.904.112 We 

invite comment on whether U.S. brokerdealer registration should be required 

for these transactions. 

B. Proposed Securities Lending 

Exemption 

Another exemption in the proposal 

addresses certain securities lending 

activities conducted as agent. Under the 

proposal, a bank would be exempt from 

the definition of ‘‘broker’’ under Section 

3(a)(4) of the Exchange Act, to the extent 

that, as an agent, it engages in or effects 

‘‘securities lending transactions’’ and 

any ‘‘securities lending services’’ in 

connection with such transactions, with 

or on behalf of a person the bank 

reasonably believes to be (1) a qualified 

investor as defined in Section 

3(a)(54)(A) of the Exchange Act; 113 or 

(2) any employee benefit plan that owns 

and invests on a discretionary basis, not 

less than $25,000,000 in investments.114

We understand that the primary role of 

banks in securities lending transactions, 

whether operating with or without 

custody of the securities, is to act in an 

agency capacity. A non-custodial 

securities lending arrangement permits 

a customer to divide custody and 

securities lending management between 

two expert entities. 

The proposed exemption would 

reinstate, without modification, an 

exemption from the definition of 

‘‘broker’’ under Section 3(a)(4) of the 

Exchange Act that the Commission 

adopted in the release implementing the 

GLBA bank exceptions from the 

definition of ‘‘dealer.’’ This exemption, 

would become void under the 

Regulatory Relief Act once the Agencies 

adopt a single set of final ‘‘broker’’

rules.115 This exemption allows banks 

to engage in securities lending 

transactions as agent when they either 

do not have custody of the securities or 

have custody for less than the entire 

period of the stock loan. The exemption 

would permit banks to continue these 

activities without disruption. As 

discussed in an accompanying release, 

the Commission proposes to re-adopt, 

without modification, the ‘‘dealer’’

portions of Exchange Act Rule 15a–11 

that relate to, among other things, 

conduit lending transactions.116

C. Proposed Exemption for the Way in 

Which Banks Effect Transactions in 

Investment Company Securities 

The proposal also includes an 

exemption for the way in which banks 

may effect transactions in investment 

company securities. Under the proposal, 

a bank that meets the conditions for an 

exception or exemption from the 

definition of ‘‘broker’’ except for the 

condition in Section 3(a)(4)(C)(i) of the 

Exchange Act,117 which requires banks, 

under certain circumstances, to direct 

securities transactions to a registered 

broker-dealer for execution, is exempt 

from such condition to the extent that 

the bank effects transactions in 


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118 15 U.S.C. 80a–22(b)(1). Under the proposal 

‘‘interdealer quotation system’’ would have the 

same meaning as in 17 CFR 240.15c2–11. ‘‘Openend company’’ would have the same meaning as in 

17 CFR 247.740. 

119 15 U.S.C. 78cc(b). Exchange Act Section 29(b) 

provides, in pertinent part, that every contract made 

in violation of the Exchange Act or of any rule or 

regulation adopted under the Exchange Act (with 

certain exceptions) shall be void. 

120Proposed Exchange Act Rule 780. 

121President Clinton signed the GLBA into law 

on November 12, 1999. 

122Exchange Act Release No. 44291 (May 11, 

2001), 66 FR 27760 (May 18, 2001). 

123 17 CFR 240.3a4–2 through 3a4–6 and 17 CFR 

240.3b–17. 124 17 CFR 242.710 through 781. See Exchange 

Act Release No. 49879 (June 17, 2004), 69 FR 39682 

(June 30, 2004). 125 44 U.S.C. 3501, et seq. 126 5 CFR 1320.16; Appendix A.1. 127 44 U.S.C. 3512. 

securities issued by an open-end 

company that is neither traded on a 

national securities exchange nor 

through the facilities of a national 

securities association or an interdealer 

quotation system if certain conditions 

are met. In particular, the proposed 

exemption would allow a bank to effect 

such transactions through the National 

Securities Clearing Corporation’s 

Mutual Fund Services (Fund/SERV) or 

directly with a transfer agent acting for 

the open-end company. Under the 

proposed exemption, the securities 

would have to be distributed by a 

registered broker-dealer, or, in the 

alternative, the sales charge for the 

transaction would have to be no more 

than the amount a registered brokerdealer could charge pursuant to the 

rules of a registered securities 

association adopted pursuant to Section 

22(b)(1) of the Investment Company 

Act.118

D. Proposed Temporary and Permanent 

Exemption for Contracts Entered Into by 

Banks From Being Considered Void or 

Voidable 

Other proposed exemptions would 

address inadvertent failures by banks 

that could trigger rescission of contracts 

between a bank and a customer under 

Section 29(b) of the Exchange Act for a 

transition period.119 Under the first 

proposed exemption, no contract 

entered into before 18 months after the 

effective date of the proposed 

exemption would be void or considered 

voidable by reason of Section 29 of the 

Exchange Act because any bank that is 

a party to the contract violated the 

registration requirements of Section 

15(a) of the Exchange Act, any other 

applicable provision of that Act, or the 

rules and regulations adopted under the 

Exchange Act based solely on the bank’s 

status as a broker when the contract was 

created.120

Under the second proposed 

exemption, no contract entered into 

would be void or considered voidable 

by reason of Section 29(b) of the 

Exchange Act without a time limit. This 

exemption would provide relief to a 

bank that violated the registration 

requirements of Section 15(a) of the 

Exchange Act or the rules and 

regulations adopted thereunder based 

solely on the bank’s status as a broker 

when a contract was created if two 

conditions are met (1) at the time the 

contract was created, the bank acted in 

good faith and had reasonable policies 

and procedures in place to comply with 

Section 3(a)(4)(B) of the Exchange Act, 

and the rules and regulations, 

thereunder; and (2) any violation of the 

registration requirements by the bank 

did not result in any significant harm, 

financial loss or cost to the person 

seeking to void the contract. This 

exemption is provided because a bank 

that is acting in good faith and has 

reasonable policies and procedures in 

effect at the time a securities contract is 

created should not be subject to 

rescission claims as a result of an 

inadvertent failure to comply with the 

requirements under Section 3(c)(4) of 

the Exchange Act if customers are not 

significantly harmed. 

E. Extension of Time and Transition 

Period 

The proposal also would extend the 

time that banks would have to come 

into compliance with the Exchange Act 

provisions relating to the definition of 

‘‘broker.’’ Under the proposed 

exemption, a bank would be exempt 

from the definition of ‘‘broker’’ under 

Section 3(a)(4) of Exchange Act until the 

first day of its first fiscal year 

commencing after June 30, 2008. 

VII. Withdrawal of Proposed 

Regulation B and Removal of Exchange 

Act Rules 3a4–2—3a4–6, and 3b–17 

Under the Regulatory Relief Act, a 

final single set of rules or regulations 

jointly adopted by the Board and 

Commission in accordance with that 

Act shall supersede any other proposed 

or final rule issued by the Commission 

on or after the date of enactment of 

Section 201 of the GLBA with regard to 

the definition of ‘‘broker’’ under 

Exchange Act Section 3(a)(4).121

Moreover, the new law states that ‘‘[n]o 

such other rule, whether or not issued 

in final form, shall have any force or 

effect on or after that date of 

enactment.’’

In 2001, the Commission adopted 

Interim Rules discussing the way in 

which the Commission would interpret 

the GLBA.122 The rules that address the 

definition of ‘‘broker’’ under Section 

3(a)(4) of the Exchange Act (and 

applicable exemptions) are Exchange 

Act Rules 3a4–2 through 3a4–6 and 

Rule 3b–17.123 In 2004, the Commission 

proposed to revise and restructure the 

‘‘broker’’ provisions of the Interim Rules 

and codify them in a new regulation, 

proposed Regulation B, which consists 

of proposed new Exchange Act Rules 

710 through 781.124 By operation of the 

Regulatory Relief Act, the joint adoption 

of new final rules will supersede 

Exchange Act Rules 3a4–2 through 3a4–

6, 3b-17, and proposed Rules 710 

through 781. Any discussion or 

interpretation of these prior rules in 

their accompanying releases would not 

apply to the single set of rules adopted 

by the Agencies. 

VIII.Administrative Law Matters 

A. Paperwork Reduction Act Analysis 

Certain provisions of proposed 

Exchange Act Rules 701, 723, and 741, 

contain ‘‘collection of information’’

requirements within the meaning of the 

Paperwork Reduction Act of 1995.125

The Commission has submitted these 

information collections to the Office of 

Management and Budget (‘‘OMB’’) for 

review in accordance with 44 U.S.C. 

3507(d) and 5 CFR 1320.11. The Board 

has reviewed the proposed rules under 

authority delegated by OMB.126

The collections of information under 

proposed Exchange Act Rules 701, 723, 

and 741 are new. The title for the new 

collection of information under 

proposed Exchange Act Rule 701 is 

‘‘Rule 701: Exemption from the 

definition of ‘broker’ for certain 

institutional referrals.’’ The title for the 

new collection of information under 

proposed Exchange Act Rule 723 is 

‘‘Rule 723: Exemptions for special 

accounts, transferred accounts, and a de 

minimis number of accounts.’’ The title 

for the new collection of information 

under proposed Exchange Act Rule 741 

is ‘‘Rule 741: Exemption for banks 

effecting transactions in money market 

funds.’’ OMB has not yet assigned a 

control number to the new collections of 

information contained in proposed 

Exchange Act Rules 701, 723, and 741. 

An agency may not conduct or sponsor, 

and a person is not required to respond 

to, a collection of information unless it 

displays a currently valid control 

number.127

1. Proposed Exchange Act Rule 701 

Proposed Exchange Act Rule 701 

would provide a conditional exemption 


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128See proposed Exchange Act Rules 701(a)(2)(i) 

and (b). 

129See proposed Exchange Act Rules 701(a) and 

(a)(3). 

130This proposed requirement would not apply to 

subparagraph (E) of Section 3(a)(39) of the Exchange 

Act (15 U.S.C. 78c(a)(39)). 

131See proposed Exchange Act Rule 701(a)(3)(iii). 

132See proposed Exchange Act Rule 701(a)(2)(iii). 

133See proposed Exchange Act Rule 723(d)(2), 

which would require that the total number of 

accounts excluded by the bank, under the exclusion 

from the chiefly compensated test in proposed Rule 

721(a)(1), do not exceed the lesser of 1 percent of 

the total number of trust or fiduciary accounts held 

by the bank (if the number so obtained is less than 

1, the amount would be rounded up to 1) or 500. 

134See proposed Exchange Act Rule 723(d)(1). 

from the requirements under the 

networking exception under the 

Exchange Act. This proposed exemption 

would permit bank employees to receive 

payment of more than a nominal fee for 

referring institutional customers and 

high net worth customers to a broker or 

dealer and would permit such payments 

to be contingent on whether the 

customer effects a securities transaction 

with the broker or dealer. 

a. Collection of Information 

Proposed Exchange Act Rules 

701(a)(2)(i) and (b) would require banks 

that wish to utilize the exemption 

provided in this proposed rule to make 

certain disclosures to high net worth or 

institutional customers. Specifically, 

these banks would need to clearly and 

conspicuously disclose (1) the name of 

the broker or dealer; and (2) that the 

bank employee participates in an 

incentive compensation program under 

which the bank employee may receive 

a fee of more than a nominal amount for 

referring the customer to the broker or 

dealer and payment of this fee may be 

contingent on whether the referral 

results in a transaction with the broker 

or dealer.128

In addition, one of the conditions of 

the exemption is that the broker or 

dealer and the bank need to have a 

contractual or other written arrangement 

containing certain elements, including 

notification and information 

requirements.129 Proposed Exchange 

Act Rule 701(a)(3)(iii) requires a broker 

or dealer to notify its bank partner if the 

broker or dealer determines that (1) the 

customer referred under the exemption 

is not a high net worth or institutional 

customer, as applicable; (2) the bank 

employee making the referral is subject 

to statutory disqualification (as defined 

in Section 3(a)(39) of the Exchange 

Act); 130 or (3) the customer or the 

securities transaction(s) to be conducted 

by the customer do not meet the 

applicable suitability or sophistication 

determination standards set forth in the 

rule.131 Similarly, the bank would be 

required to provide its broker or dealer 

partner with the name of the bank 

employee receiving the referral fee and 

certain other identifying information.132

b. Proposed Use of Information 

The purpose of the collection of 

information in proposed Exchange Act 

Rules 701(a)(2)(i) and (b) is to provide 

a customer of a bank relying on the 

exemption with information to assist the 

customer in identifying and assessing 

any conflict of interest on the part of the 

bank employee making a referral to a 

broker or dealer. The collection of 

information in proposed Exchange Act 

Rules 701(a)(2)(iii) and (a)(3)(iii) is 

designed to help a bank determine 

whether it is acting in compliance with 

the proposed exemption. 

c. Respondents 

The proposed collection of 

information in proposed Exchange Act 

Rule 701 would apply to banks that 

wish to utilize the exemption provided 

in this proposed rule and broker-dealers 

with which those banks enter into 

networking arrangements. 

d. Reporting and Recordkeeping Burden 

The Agencies estimate that 

approximately 1,000 banks annually 

would use the exemption in proposed 

Exchange Act Rule 701 and each bank 

would on average make the required 

referral fee disclosures to 200 customers 

annually and provide one notice 

annually to its broker or dealer partner 

regarding the name of a bank employee 

and other identifying information. The 

Agencies also estimate that brokerdealers would, on average, notify each 

of the 1,000 banks approximately two 

times annually about a determination 

regarding a customer’s high net worth or 

institutional status or suitability or 

sophistication standing as well as a 

bank employee’s statutory 

disqualification status. 

Based on these estimates, the 

Agencies anticipate that proposed 

Exchange Act Rule 701 would result in 

approximately 200,000 disclosures to 

customers, 1,000 notices to brokers or 

dealers, and 2,000 notices to banks per 

year. The Agencies further estimate 

(based on the level of difficulty and 

complexity of the applicable activities) 

that a bank would spend approximately 

5 minutes per customer to comply with 

the disclosure requirement and 15 

minutes per notice to a broker or dealer. 

The Agencies also estimate that a broker 

or dealer would spend approximately 15 

minutes per notice to a bank. Thus, the 

estimated total annual reporting and 

recordkeeping burden for these 

requirements in proposed Exchange Act 

Rule 701 are 16,917 hours for banks and 

500 hours for brokers or dealers. We 

solicit comment on this point as well as 

on the validity of all of our estimates 

and statements in this Section. 

e. Collection of Information Is 

Mandatory 

This collection of information would 

be mandatory for banks relying on 

proposed Exchange Act Rule 701 and 

their broker-dealer partners. 

f. Confidentiality 

A bank relying on the exemption 

provided in proposed Exchange Act 

Rule 701 would be required to provide 

certain referral fee disclosures to its 

customers as required by this proposed 

rule. Banks relying on the exemption 

provided in proposed Exchange Act 

Rule 701 would be also be required to 

enter into agreements with a broker or 

dealer obligating the broker or dealer to 

notify the bank upon becoming aware of 

certain information with respect to the 

customer, the bank employee, or the 

nature of the securities transaction. 

Similarly, a bank would be required to 

notify a broker or dealer about the name 

of the bank employee receiving a 

referral fee and certain other identifying 

information. 

g. Record Retention Period 

Proposed Exchange Act Rule 701 

would not include a specific record 

retention requirement. Banks, however, 

would be required to retain the records 

in compliance with any existing or 

future recordkeeping requirements 

established by the Banking Agencies. 

2. Proposed Exchange Act Rule 723 

a. Collection of Information 

Proposed Exchange Act Rule 723(d)(1) 

would require a bank that desires to 

exclude a trust or fiduciary account in 

determining its compliance with the 

chiefly compensated test, pursuant to a 

de minimis exclusion,133 to maintain 

records demonstrating that the 

securities transactions conducted by or 

on behalf of the account were 

undertaken by the bank in the exercise 

of its trust or fiduciary responsibilities 

with respect to the account.134

b. Proposed Use of Information 

The collection of information in 

proposed Exchange Act Rule 723 is 

designed to help ensure that a bank 

relying on the de minimis exclusion 


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would be able to demonstrate that it was 

acting in a trust or fiduciary capacity 

with respect to an account excluded 

from the chiefly compensated test in 

proposed Rule 721(a)(1). 

c. Respondents 

The proposed collection of 

information in Exchange Act Rule 723 

would apply to banks relying on the de 

minimis exclusion from the chiefly 

compensated test. 

d. Reporting and Recordkeeping Burden 

Because the Agencies expect a small 

number of banks would use the accountby-account approach in monitoring their 

compensation, the Agencies estimate 

that approximately 50 banks annually 

would use the de minimis exclusion in 

proposed Exchange Act Rule 723 and 

each such bank would, on average, need 

to maintain records with respect to 10 

trust or fiduciary accounts annually 

conducted in the exercise of the banks’

trust or fiduciary responsibilities. 

Therefore, the Agencies estimate that 

proposed Exchange Act Rule 723 would 

result in approximately 500 accounts 

annually for which records are required 

to be maintained. The Agencies 

anticipate that these records would 

consist of records that are generally 

created as part of the securities 

transaction and the account relationship 

and minimal additional time would be 

required in maintaining these records. 

Based on this analysis, the Agencies 

estimate that a bank would spend 

approximately 15 minutes per account 

to comply with the record maintenance 

requirement of proposed Exchange Act 

Rule 723. Thus, the estimated total 

annual reporting and recordkeeping 

burden for proposed Exchange Act Rule 

723 is 125 hours. We solicit comment 

on this point as well as on the validity 

of all of our estimates and statements in 

this Section. 

e. Collection of Information Is 

Mandatory 

This collection of information would 

be mandatory for banks desiring to rely 

on de minimis exclusion contained in 

proposed Exchange Act Rule 723. 

f. Confidentiality 

Proposed Exchange Act Rule 723 does 

not address or restrict the 

confidentiality of the documentation 

prepared by banks under the rule. 

Accordingly, banks would have to make 

the information available to regulatory 

authorities or other persons to the extent 

otherwise provided by law. 

g. Record Retention Period 

Proposed Exchange Act Rule 723 

would include a requirement to 

maintain records related to certain 

securities transactions. Banks would be 

required to retain these records in 

compliance with any existing or future 

recordkeeping requirements established 

by the Banking Agencies. 

3. Proposed Exchange Act Rule 741 

a. Collection of Information 

Proposed Exchange Act Rule 

741(a)(2)(ii)(A) would require a bank 

relying on this proposed exemption (i.e., 

the exemption from the definition of the 

term ‘‘broker’’ under Section 3(a)(4) of 

the Exchange Act for effecting 

transactions on behalf of a customer in 

securities issued by a money market 

fund) to provide customers with a 

prospectus of the money market fund 

securities, not later than the time the 

customer authorizes the bank to effect 

the transaction in such securities, if they 

are not no-load. 

b. Proposed Use of Information 

The purpose of the collection of 

information in proposed Exchange Act 

Rule 741 is to help ensure that a 

customer of a bank relying on the 

exemption would have sufficient 

information upon which to make an 

informed investment decision, in 

particular, regarding the fees the 

customer would pay with respect to the 

securities. 

c. Respondents 

The proposed collection of 

information in Exchange Act Rule 741 

would apply to banks relying on the 

exemption provided in the proposed 

rule. 

d. Reporting and Recordkeeping Burden 

The Agencies believe that banks 

generally sweep or invest their customer 

funds into no-load money market funds. 

Accordingly, the Agencies estimate that 

approximately 500 banks annually 

would use the exemption in proposed 

Exchange Act Rule 741 and each bank, 

on average, would deliver the 

prospectus required by the proposed 

rule to approximately 1,000 customers 

annually. Therefore, the Agencies 

estimate that proposed Exchange Act 

Rule 741 would result in approximately 

500,000 disclosures per year. The 

Agencies estimate further that a bank 

would spend approximately 5 minutes 

per response to comply with the 

delivery requirement of proposed 

Exchange Act Rule 741. Thus, the 

estimated total annual reporting and 

recordkeeping burden for proposed 

Exchange Act Rule 741 is 41,667 hours. 

We solicit comment on this point as 

well as on the validity of all of our 

estimates and statements in this Section. 

e. Collection of Information Is 

Mandatory 

This collection of information would 

be mandatory for banks relying on the 

proposed exemption. 

f. Confidentiality 

The collection of information 

delivered pursuant to proposed 

Exchange Act Rule 741 would be 

provided by banks relying on the 

exemption in this rule to customers that 

are engaging in transactions in securities 

issued by a money market fund that is 

not a no-load fund. 

g. Record Retention Period 

Proposed Exchange Act Rule 741 

would not include a record retention 

requirement. 

4. Request for Comment 

Pursuant to 44 U.S.C. 3506(c)(2)(B), 

the Agencies solicit comments to: 

(1) Evaluate whether the proposed 

collections of information are necessary 

for the proper performance of the 

functions of the Agencies, including 

whether the information would have 

practical utility; 

(2) Evaluate the accuracy of the 

Agencies’ estimates of the burden of the 

proposed collections of information and 

provide the Agencies with data on 

proposed Exchange Act Rules 701, 723, 

and 741; 

(3) Enhance the quality, utility, and 

clarity of the information to be 

collected; and 

(4) Minimize the burden of the 

collections of information on those 

required to respond, including through 

the use of automated collection 

techniques or other forms of information 

technology. 

In addition to the general solicitation 

of comments above regarding the 

collections of information contained in 

the proposed rules, the Agencies also 

solicit comments regarding how many 

banks would rely on the exemptions 

provided in proposed Exchange Act 

Rules 701, 723, and 741, and whether 

banks relying on such exemptions 

would be able to use existing systems, 

programs, and procedures to comply 

with the collections of information 

requirements contained in the proposed 

rules. 

Persons desiring to submit comments 

on the collection of information 

requirements should direct them in the 

manner discussed below. The Agencies 

propose that the information collections 


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135See Exchange Act Section 3(a)(4)(B)(i) ‘‘ (xi). 

136Exchange Act Section 3(a)(4)(B)(i)(VI) limits 

such referral fees to a ‘‘nominal one-time cash fee 

of a fixed dollar amount’’ and requires that the 

payment of the fees not be contingent on whether 

the referral results in a transaction. 

and burden estimates discussed above 

will be associated with the Board for 

banks and with the Commission for 

brokers or dealers. 

Commission. Comments should be 

directed to the Office of Management 

and Budget, Attention: Desk Officer for 

the Securities and Exchange 

Commission, Office of Information and 

Regulatory Affairs, Washington, DC 

20503, and should send a copy of their 

comments to Nancy M. Morris, 

Secretary, Securities and Exchange 

Commission, 100 F Street, NE., 

Washington, DC 20549–1090, and refer 

to File No. S7–22–06. OMB is required 

to make a decision concerning the 

collection of information between 30 

and 60 days after publication of this 

release in the Federal Register. 

Therefore, comments to OMB are best 

assured of having full effect if OMB 

receives them within 30 days of this 

publication. Requests for materials 

submitted to OMB by the Agencies with 

regard to this collection of information 

should be in writing, refer to File No. 

S7–22–06, and be submitted to the 

Securities and Exchange Commission, 

Records Management, Office of Filings 

and Information Services, 100 F Street, 

NE, Washington, DC 20549. 

Board. You may submit comments, 

identified by the Docket number, by any 

of the following methods: 

• Agency Web site: http:// 

www.federalreserve.gov. Follow the 

instructions for submitting comments 

on the http:// www.federalreserve.gov/ 

generalinfo/foia/ProposedRegs.cfm. 

• Federal eRulemaking Portal: http:// 

www.regulations.gov. Follow the 

instructions for submitting comments. 

• E-mail: 

regs.comments@federalreserve.gov. 

Include docket number in the subject 

line of the message. 

• FAX: 202–452–3819 or 202–452–

3102. 

• Mail: Jennifer J. Johnson, Secretary, 

Board of Governors of the Federal 

Reserve System, 20th Street and 

Constitution Avenue, NW., Washington, 

DC 20551. 

All public comments are available 

from the Board’s Web site at http:// 

www.federalreserve.gov/generalinfo/ 

foia/ProposedRegs.cfm as submitted, 

unless modified for technical reasons. 

Accordingly, your comments will not be 

edited to remove any identifying or 

contact information. Public comments 

may also be viewed electronically or in 

paper form in Room MP–500 of the 

Board’s Martin Building (20th and C 

Streets, NW) between 9 a.m. and 5 p.m. 

on weekdays. 

B. Consideration of Benefits and Costs 

1. Introduction 

Prior to enactment of the GLBA, banks 

were exempted from the definition of 

‘‘broker’’ in Section 3(a)(4) of the 

Exchange Act. Therefore, 

notwithstanding the fact that banks may 

have conducted activities that would 

have brought them within the scope of 

the broker definition, they were not 

required by the Exchange Act to register 

as such. The GLBA replaced banks’

historic exemption from the definition 

of ‘‘broker’’ with eleven exceptions.135

While banks’ efforts to comply with 

the GLBA and the exemptions we 

propose would result in certain costs, 

the Agencies have sought to minimize 

these burdens to the extent possible 

consistent with the language and 

purposes of the GLBA. For example, the 

Agencies are proposing exemptions and 

interpretations which should provide 

banks with increased options and 

flexibility and help to reduce overall 

costs. 

2. Discussion of Proposed 

Interpretations and Exemptions 

The potential benefits and costs of the 

principal exemptions and 

interpretations in the proposal are 

discussed below. 

a. Networking Exception 

Exchange Act Section 3(a)(4)(B)(i) 

excepts banks from the definition of 

‘‘broker’’ if they enter into a contractual 

or other written arrangement with a 

registered broker-dealer under which 

the broker-dealer offers brokerage 

services to bank customers. This 

networking exception is subject to 

several conditions. The Section also 

prohibits banks from paying 

unregistered bank employees—such as 

tellers, loan officers, and private 

bankers—‘‘incentive compensation’’ for 

any brokerage transaction, except that 

bank employees may receive a 

‘‘nominal’’ referral fee for referring bank 

customers to their broker-dealer 

networking partners.136

Under the proposal, a ‘‘nominal’’

referral fee would be defined as a fee 

that does not exceed any of the 

following standards (1) twice the 

average of the minimum and maximum 

hourly wage established by the bank for 

the current or prior year for the job 

family that includes the employee or 1/ 

1000th of the average of the minimum 

and maximum annual base salary 

established by the bank for the current 

or prior year for the job family that 

includes the employee; (2) twice the 

employee’s actual base hourly wage; or 

(3) twenty-five dollars ($25), as adjusted 

for inflation pursuant to proposed 

Exchange Act Rule 700(f). 

The Agencies believe these 

alternatives should provide banks 

appropriate flexibility while being 

consistent with the statute. For example, 

some banks, and particularly small 

banks, may find it most useful to 

establish a flat fee or inflation-adjusted 

fee for securities referrals as this method 

is easy to understand and requires no 

complicated calculations. In addition, 

permitting banks to pay referral fees 

based on either an employee’s base 

hourly rate of pay or the average rate of 

pay for a job family would give banks 

objective and easily calculable 

approaches to paying their employees 

referrals while remaining consistent 

with the requirements of the GLBA that 

such fees be ‘‘nominal’’ in relation to 

the overall compensation of the 

referring employees. While some startup costs may be incurred by banks in 

the process of developing a fee structure 

in line with the requirements of the 

GLBA, the ability to choose among 

alternative methods (as reflected in 

proposed rules) should enable banks to 

minimize their overall costs based on 

their individual referral programs and 

cost structures. 

In light of the statutory provision 

allowing banks to pay a ‘‘nominal onetime cash fee,’’ the proposal requires 

that all referral fees paid under the 

exception be paid in cash. The Agencies 

request comment on whether existing 

bank securities referral programs would 

be able to operate, or could easily be 

adjusted to operate, in accordance with 

the terms of proposed Exchange Act 

Rule 700. 

The proposed rules also include a 

conditional exemption that would 

permit a bank to pay an employee a 

contingent referral fee of more than a 

nominal amount for referring an 

institutional customer or high net worth 

customer to a broker or dealer with 

which the bank has a contractual or 

other written networking arrangement. 

This exemption would provide a 

benefit to banks by expanding the types 

of referrals fees that banks could utilize 

with respect to institutional customers 

and high net worth customers. However, 

there likely would be costs associated 

with complying with the conditions in 

the proposed exemption (such as the 

requirement for banks to make certain 

disclosures to high net worth or 

institutional customers and the 


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137Proposed Exchange Act Rules 701(a)(2)(i), 

701(a)(3)(iii), and 701(b). 

138The trust and fiduciary exception is addressed 

in proposed Exchange Act Rules 721–723. 

139See proposed Exchange Act Rule 722. 

140See proposed Exchange Act Rule 723. 

141See NASD Rule 2830. 

142See proposed Exchange Act Rule 741. 

requirement for broker-dealers to make 

certain determinations and provide 

certain notifications to banks)137 as well 

as the other terms and conditions in the 

statutory networking exception. 

However, these costs would be either a 

result of the statutory requirements or 

costs voluntarily incurred by banks 

because they want to take advantage of 

the proposed exemption. 

Proposed Exchange Act Rule 700 also 

contains a definition of ‘‘incentive 

compensation’’ and excludes from this 

definition compensation paid by a bank 

under a bonus or similar plan that meets 

certain criteria. The bonus or similar 

program must be paid on a discretionary 

basis and based on multiple factors or 

variables. These factors or variables 

must include significant factors or 

variables that would not be related to 

securities transactions at the broker or 

dealer. Moreover, a referral made by the 

employee could not be a factor or 

variable in determining the employee’s 

compensation under the plan and the 

employee’s compensation under the 

plan could not be determined by 

reference to referrals made by any other 

person. 

We request comments generally on 

the costs and benefits associated with 

the proposed provisions regarding the 

networking exception and the related 

exemption. We also invite banks to 

provide information, including data, to 

assist us in further evaluating the costs 

and benefits associated with the 

proposed provisions. We invite banks to 

include estimates of their start-up costs 

for updating their systems, and their 

annual ongoing costs for complying 

with the proposed changes discussed 

above. We invite commenters to provide 

us with data to assist in further 

evaluating these proposed rules. For 

example, we request comment on 

whether the proposed provisions 

relating to bonus and similar plans 

would be consistent with current 

compensation and bonus arrangements 

and any costs or burdens that would be 

incurred to bring existing plans into 

compliance with the provisions. We 

also request comment on any other costs 

banks would likely need to incur as a 

result of the proposal, and ask that 

commenters provide us with data to 

support their views. 

b. Trust and Fiduciary Activities 

Exception 

Exchange Act Section 3(a)(4)(B)(ii) 

permits a bank, under certain 

conditions, to effect transactions in a 

trustee or fiduciary capacity in its trust 

department or other department that is 

regularly examined by bank examiners 

for fiduciary principles and standards 

without registering as a broker. To 

qualify for the trust and fiduciary 

activities exception, Exchange Act 

Section 3(a)(4)(B)(ii) requires that the 

bank be ‘‘chiefly compensated’’ for such 

transactions on the basis of the types of 

fees specified in the GLBA and comply 

with certain advertising restrictions set 

forth in the statute. 

The Agencies believe that the 

proposed rules dealing with the trust 

and fiduciary activities exception 

should provide a number of benefits to 

banks and their customers without 

imposing significant costs on either 

group.138 The proposed provisions 

regarding the ‘‘chiefly compensated’’

condition and related exemptions, while 

imposing some costs related to systems 

necessary to perform the calculations 

and track compensation, should reduce 

banks’ compliance costs and make the 

trust and fiduciary activities exception 

more useful. For example, the proposed 

rules would permit a bank to follow an 

alternate test to the account-by-account 

approach to the ‘‘chiefly compensated’’

condition. Under this proposed 

exemption, a bank could calculate the 

compensation it receives from all of its 

trust and fiduciary accounts on a bankwide basis, subject to certain 

conditions.139 This proposed alternative 

should provide banks with a potentially 

less costly approach for determining 

compliance with the trust and fiduciary 

activities exception. Similarly, the 

Agencies’ proposal to provide 

exemptions from the ‘‘chiefly 

compensated’’ condition for certain 

short-term accounts, accounts acquired 

as part of a business combination or 

asset acquisition, accounts transferred to 

a broker or dealer or other unaffiliated 

entity, and a de minimis number of 

accounts should also reduce banks’

compliance costs by facilitating banks’

ability to comply with the ‘‘chiefly 

compensated’’ condition.140 While 

compliance with the conditions in these 

proposed exemptions would likely 

result in some costs, such as the 

recordkeeping requirement associated 

with the de minimis exclusion, these 

costs would likely be more than 

justified by the benefits associated with 

the exemptions given that banks could 

individually determine whether they 

wish to utilize the exemptions. 

As previously noted, banks are likely 

to incur some costs to comply with the 

GLBA. The proposed rules, however, 

include a number of exemptions which 

should help to reduce overall costs. As 

a result, the Agencies do not believe that 

banks would incur significant 

additional costs to comply with the 

liberalized exemptions proposed in 

Exchange Act Rules 722 through 723 or 

the definitional guidance proposed in 

Exchange Act Rule 721. 

We solicit comment on the costs and 

benefits, if any, banks expect to incur in 

complying with the ‘‘chiefly 

compensated’’ condition in the statute 

and the proposed rules. In particular, 

we would like information on the startup and annual ongoing costs to update 

systems to track compensation under 

the account-by-account approach and 

under the proposed bank-wide 

approach. We also solicit comments on 

the costs and burdens associated with 

the advertising provisions of proposed 

Exchange Act Rule 721(b), which would 

apply to banks operating under both the 

account-by-account and bank-wide 

tests. 

c. Sweep Accounts and Transactions in 

Money Market Funds 

Section 3(a)(4)(B)(v) of the Exchange 

Act provides banks with an exception 

from the definition of ‘‘broker’’ to the 

extent it effects transactions as part of a 

program for the investment or reinvestment of deposit funds into any noload, open-end management investment 

company registered under the 

Investment Company Act that holds 

itself out as a money market fund. The 

proposed rules provide guidance, 

consistent with NASD rules,141

regarding the definition of ‘‘no-load’’ as 

used in the exception. This guidance 

should benefit banks by clarifying the 

types of charges that are permissible and 

by providing greater legal certainty. 

The proposed rules also contain an 

exemption that would permit banks to 

effect transactions on behalf of a 

customer in securities issued by a 

money market fund, subject to certain 

conditions.142 While compliance with 

the conditions associated with this 

proposed exemption, such as the 

prospectus delivery requirement in 

certain circumstances, could require 

banks to incur some costs, these costs 

are likely to be more than justified by 

the investor protection benefits enjoyed 

by the banks’ customers and the 

enhanced flexibility granted banks by 

the exemption. Furthermore, because 

banks would be able to freely determine 

whether to incur these costs, the 

exemption should provide a net benefit 


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143See proposed Exchange Act Rule 771. 

144See proposed Exchange Act Rule 775. 

145See proposed Exchange Act Rule 772. 

146See proposed Exchange Act Rule 780. 

147 Id. 

148See proposed Exchange Act Rule 781. 149 15 U.S.C. 78c(f). 

for banks that wish to utilize the 

exemption. We solicit comment on the 

costs and benefits, if any, banks expect 

to incur in complying with the 

conditions in this proposed rule. 

d. Safekeeping and Custody Exception 

Section 3(a)(4)(B)(viii) of the 

Exchange Act provides banks with an 

exception from the definition of 

‘‘broker’’ for certain bank custody and 

safekeeping activities. The proposed 

rules contain an exemption that would 

permit banks, subject to certain 

conditions, to accept orders to effect 

transactions in securities for accounts 

for which the bank acts as a custodian. 

Specifically, this proposed custody 

exemption (proposed Exchange Act 

Rule 760) would allow banks, subject to 

certain conditions, to accept orders for 

securities transactions from employee 

benefit plan accounts and individual 

retirement and similar accounts for 

which the bank acts as a custodian. In 

addition, the exemption allows banks, 

subject to certain conditions, to accept 

orders for securities transactions on an 

accommodation basis from other types 

of custodial accounts. This proposal 

would allow banks to accept orders 

from custody accounts while imposing 

conditions designed to prevent a bank 

from operating a securities broker out of 

its custody department. 

The exemption should benefit banks 

by permitting certain order-taking 

activities for securities transactions. 

While banks may incur some costs in 

complying with the conditions 

contained in the exemption, such as 

developing systems for making 

determinations regarding compliance 

with advertising and compensation 

restrictions, the Agencies believe the 

conditions contained in the rules are 

consistent with the practices of banks 

and any costs would only be imposed 

on banks that choose to utilize the 

exemption. 

We solicit comment on any costs and 

benefits banks expect to incur in 

complying with the conditions in the 

proposed exemption. 

e. Other Proposed Changes 

We are proposing certain special 

purpose exemptions. Specifically, we 

are proposing an exemption that would 

permit banks to effect transactions 

pursuant to Regulation S with non-U.S. 

persons.143 Another proposed 

exemption also would, under certain 

conditions, allow a bank to effect 

transactions in investment company 

securities through Fund/SERV or 

directly with a transfer agent acting for 

an open-end company.144 In addition, 

we are proposing an exemption that 

would permit banks, as an agent, to 

effect securities lending transactions 

(and engage in related securities lending 

services) for securities that they do not 

hold in custody with or on behalf of a 

person the bank reasonably believes is 

a qualified investor (as defined in 

Section 3(a)(54)(A) of the Exchange Act) 

or any employee benefit plan that owns 

and invests on a discretionary basis at 

least $25 million in investments.145

Furthermore, we are proposing to 

extend the exemption from rescission 

liability under Exchange Act Section 29 

to contracts entered into by banks acting 

in a broker capacity until a date that 

would be 18 months after the effective 

date of the final rule.146 This proposed 

exemption also would, under certain 

circumstances, provide protections from 

rescission liability under Exchange Act 

Section 29 resulting solely from a bank’s 

status as a broker, if the bank has acted 

in good faith, adopted reasonable 

policies and procedures, and any 

violation of broker registration 

requirements did not result in 

significant harm or financial loss to the 

person seeking to void the contract.147

Finally, we are proposing a temporary 

general exemption from the definition of 

‘‘broker’’ under Section 3(a)(4) of the 

Exchange Act until the first day of a 

bank’s first fiscal year commencing after 

June 30, 2008.148

The Agencies believe these proposed 

changes could offer a number of benefits 

to banks and their customers. In 

particular, the proposed Regulation S 

exemption could help to ensure that 

U.S. banks that effect transactions in 

Regulation S securities with non-U.S. 

customers would be more competitive 

with foreign banks or other entities that 

offer those services. The proposed 

exemption from rescission liability 

under Exchange Act Section 29 should 

also provide banks some legal certainty, 

both temporarily and on a permanent 

basis, as they conduct their securities 

activities. The proposed exemption 

related to securities lending services 

should enable banks to engage in the 

types of services which they currently 

engage thereby minimizing compliance 

costs, while providing the banks’

customers with continuity of service. 

The temporary general exemption from 

the definition of ‘‘broker’’ should also be 

of benefit to banks by providing them 

with an adequate period of time to 

transition to the requirements under the 

proposed rules. 

We estimate that the costs of these 

proposed exemptions would be minimal 

and would be justified by the benefits 

the proposed exemptions would offer. 

For example, the Regulation S 

exemption could impose certain costs 

on banks that are designed to ensure 

that they remain in compliance with the 

conditions under the exemption. In 

particular, the proposed exemption 

would require banks to incur certain 

administrative costs so that the 

proposed exemption is used only for 

‘‘eligible securities’’ and for a purchaser 

who is outside of the United States 

within the meaning of Section 903 of 

Regulation S. Nevertheless, the 

proposed exemption is an 

accommodation to banks that wish to 

effect transactions in Regulation S 

securities and, as a result, the 

compliance costs would only be 

imposed on those banks that believe 

that it is in their best business interests 

to take advantage of the proposed 

exemption. We request comment on 

whether banks would incur any costs 

related to this proposed exemption. 

Given that Exchange Act Section 29 is 

rarely used as a remedy, we do not 

anticipate that this proposed exemption 

would impose significant costs on the 

industry or on investors. We request 

comment on whether any bank would 

incur any costs or would benefit as a 

result of this proposed exemption. We 

also request comment on whether banks 

would incur any costs or benefits in 

association with the proposed 

exemptions concerning securities 

lending services and effecting 

transactions in investment company 

securities. Please provide any 

supporting data with respect to any 

costs or benefits. We would also 

welcome comments on the usefulness of 

the temporary general exemption from 

the definition of ‘‘broker’’ under Section 

3(a)(4) of the Exchange Act. 

C. Consideration of Burden on 

Competition, and on Promotion of 

Efficiency, Competition, and Capital 

Formation 

Exchange Act Section 3(f) requires the 

Commission, whenever it engages in 

rulemaking and is required to consider 

or determine if an action is necessary or 

appropriate in the public interest, to 

consider whether the action will 

promote efficiency, competition, and 

capital formation.149 Exchange Act 

Section 23(a)(2) requires the 

Commission, in adopting rules under 

that Act, to consider the impact that any 


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150 15 U.S.C. 78w(a)(2). 

151See infra at VIII.A.1.d., VIII.A.2.d., and 

VIII.A.3.d. 

152 $68/hour figure for a clerk (e.g. compliance 

clerk) is from the SIA Report on Office Salaries in 

the Securities Industry 2005, modified to account 

for an 1800-hour work-year and multiplied by 2.93 

to account for bonuses, firm size, employee benefits 

and overhead. 

153For example, banks may incur start-up costs 

in the process of reviewing or developing their 

networking arrangements in line with the 

requirements of the proposed rules. See infra at 

VIII.B.2.a. In addition, there would likely be costs 

for developing systems for making determinations 

regarding compliance with advertising and 

compensation restrictions pursuant to the proposed 

rules regarding safekeeping and custody. See infra 

at VIII.B.2.d. 

154The hourly figures for an attorney, 

intermediate account, and compliance manager is 

from the SIA Report on Management & Professional 

Earnings in the Securities Industry 2005, modified 

to account for an 1800-hour work-year and 

multiplied by 5.35 to account for bonuses, firm size, 

employee benefits and overhead. 

155Some banks may choose to utilize outside 

counsel, either exclusively or as a supplement to inhouse resources. The Agencies estimate these costs 

as being similar to the in-house costs (Industry 

sources indicate the following hourly costs for 

hiring external workers: Attorneys—$400, 

accountant—$250, auditor—$250, and 

programmer—$160.). 

such rule would have on competition. 

This Section also prohibits the 

Commission from adopting any rule that 

would impose a burden on competition 

not necessary or appropriate in 

furtherance of the purposes of the 

Exchange Act.150

The Agencies have designed the 

proposed interpretations, definitions, 

and exemptions to minimize any burden 

on competition. Indeed, the Agencies 

believe that by providing legal certainty 

to banks that conduct securities 

activities, by clarifying the GLBA 

requirements, and by exempting a 

number of activities from those 

requirements, the proposed rules should 

allow banks to continue to conduct 

securities activities they already 

conduct consistent with the GLBA. As 

a result, the Agencies believe that the 

proposed rules would permit banks to 

continue to compete with broker-dealers 

in providing a wide range of financial 

services, which should preserve 

competition and help to keep 

transaction costs low for investors and 

for companies. 

The proposed rules define terms in 

the statutory exceptions to the 

definition of broker added to the 

Exchange Act by Congress in the GLBA, 

and provide guidance to banks as to the 

appropriate scope of those exceptions. 

In addition, the proposed rules contain 

a number of exemptions that should 

provide banks flexibility in conducting 

their securities activities, which should 

further promote competition and reduce 

costs. 

The Commission is, however, 

interested in receiving comments 

regarding the effect of the proposed 

rules on efficiency, competition, and 

capital formation. 

1. General Costs 

Based on the burden hours discussed 

in the Paperwork Reduction Act 

Analysis Section the Agencies expect 

the ongoing requirements of the 

proposed rules to result in a total of 

58,709 annual burden hours for banks 

and 500 annual burden hours for brokerdealers, for a grand total of 59,209 

annual burden hours.151 The Agencies 

estimate that the hourly costs for these 

burden hours will be approximately $68 

per hour.152 Therefore, the annual total 

costs would be approximately 

$4,026,212. 

In addition to the costs associated 

with burden hours discussed in the 

Paperwork Reduction Act Analysis 

Section, the Agencies expect that many 

banks also could incur start-up costs for 

legal and other professional services.153

Many banks would utilize their inhouse counsel, accountants, compliance 

officers, and programmers in an effort to 

achieve compliance with the proposed 

rules. Industry sources indicate the 

following hourly labor costs: 

Attorneys—$324 per hour, intermediate 

accountants—$162 per hour, 

compliance manager—$205 per hour, 

and senior programmer—$268.154

Taking an average of these professional 

costs, the Agencies estimate a general 

hourly in-house labor cost of $240 per 

hour for professional services. 

Based on our expectation that most 

start-up costs would involve bringing 

systems into compliance and that many 

banks would be able to do so either 

using existing systems or by slightly 

modifying existing systems, the 

Agencies estimate that the proposed 

rules would require banks to utilize an 

average of 30 hours of professional 

services. The Agencies expect that most 

banks affected by the proposed rules 

would either use in-house counsel or 

employees resulting in an average total 

cost of $7,200 per affected bank.155 The 

Agencies estimate that the proposed 

rules would apply to approximately 

9,475 banks and approximately 25 

percent of these banks would incur 

more than a de minimis cost. Using 

these values, the Agencies estimate total 

start-up costs of $17,055,000 (9,475 × 

.25 × $7,200). As previously discussed 

the Agencies have sought to minimize 

these costs to the extent possible 

consistent with the language and 

purposes of the GLBA. 

Based on these estimates, the total 

costs for the first year would be 

approximately $21,081,212 ($17,055,000 

+ $4,026,212). The Agencies request 

comment on these cost estimates or any 

other applicable costs. 

2. General Benefits 

The Agencies believe that the 

proposed rules would provide greater 

legal certainty for banks in connection 

with their determination of whether 

they meet the terms and conditions for 

an exception to the definition of broker 

under the Exchange Act as well as 

provide additional relief through the 

proposed exemptions. Without the 

proposed rules, banks could have 

difficulty planning their businesses and 

determining whether their operations 

are in compliance with the GLBA. This, 

in turn, could hamper their business. 

The Agencies anticipate these benefits 

would prove to be useful to banks and 

provide saving in legal fees. 

Specifically, difficulties in interpreting 

the GBLA, absent any regulatory 

guidance, could result in the need for 

greater input from outside counsel. 

Based on the number of interactive 

issues raised by the GBLA, the Agencies 

estimate that absent any regulatory 

guidance, banks on average would use 

the services of outside counsel for 

approximately 25 more hours for the 

initial year and 5 more hours per year 

thereafter, than with the existence of the 

proposed rules. Industry sources 

indicate that the hourly costs for hiring 

outside counsel is approximately $400 

per hour. The proposed rules would 

therefore result in an average total cost 

savings of approximately $10,000 per 

affected bank per year during the initial 

year and $2,000 per affected bank per 

year thereafter. The Agencies estimate 

that the proposed rules would apply to 

approximately 9,475 banks and 

approximately 25 percent of these banks 

would enjoy more than a de minimis 

cost savings benefit. Using these values, 

the Agencies estimate a total cost 

savings of $23,687,500 (9,475 × .25 × 

$10,000) for the initial year and 

$4,737,500 (9,475 × 0.25 × $2,000) per 

year thereafter. The Agencies request 

comment on these benefits or any other 

applicable benefit. 

3. Request for Comments 

The Agencies request comment on the 

costs and benefits of the proposed rules, 

and ask commenters to provide 

supporting empirical data for any 

positions advanced. Commenters should 

address in particular whether any of the 

new rules would generate the 


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156Pub. L. 104–121, Title II, 110 Stat. 857 (1996) 

(codified in various Sections of 5 U.S.C., 15 U.S.C. 

and as a note to 5 U.S.C. 601). 

157 5 U.S.C. 603. 

158 15 U.S.C. 78c(a)(4). 

159Pub. L. 109–351, 120 Stat. 1966 (2006). 

160See Exchange Act Section 3(a)(4)(F), as added 

by Section 101 of the Regulatory Relief Act. The 

Regulatory Relief Act also requires that the Board 

and SEC consult with, and seek the concurrence of, 

the OCC, FDIC and OTS prior to jointly adopting 

final rules. As noted above, the Board and the SEC 

also have consulted extensively with the OCC, FDIC 

and OTS in developing these joint proposed rules. 

161 15 U.S.C. 78c(b), 78o, 78w(a), and 78mm. 

162See 15 U.S.C. 78c(a)(6); Pub. L. 109–351, 120 

Stat. 1966 (2006). 

163Small Business Administration regulations 

define ‘‘small entities’’ to include banks and savings 

associations with total assets of $165 million or 

less. 13 CFR 121.201. 

164The Agencies’ estimates related to 

recordkeeping and disclosure are detailed in the 

‘‘Paperwork Reduction Act Analysis’’ Section of 

this Release. 

165The Agencies’ estimates of the costs and 

benefits of the proposed rule amendments are 

detailed in the ‘‘Consideration of Costs and 

Benefits’’ Section of this release. 

166 5 U.S.C. 603(c). 

anticipated benefits or impose any costs 

on investors, banks, customers of banks, 

registered broker-dealers or other market 

participants. As always, commenters are 

specifically invited to share quantifiable 

costs and benefits. 

D. Consideration of Impact on the 

Economy 

For purposes of the Small Business 

Regulatory Enforcement Fairness Act of 

1996, or ‘‘SBREFA,’’ 156 the Agencies 

must advise the Office of Management 

and Budget as to whether the proposed 

rules constitute a ‘‘major’’ rule. Under 

SBREFA, a rule is considered ‘‘major’’

where, if adopted, it results or is likely 

to result in: 

• An annual effect on the economy of 

$100 million or more (either in the form 

of an increase or a decrease); 

• A major increase in costs or prices 

for consumers or individual industries; 

or 

• A significant adverse effect on 

competition, investment, or innovation. 

If a rule is ‘‘major,’’ its effectiveness 

will generally be delayed for 60 days 

pending Congressional review. The 

Agencies do not believe that the 

proposed rules, in their current form, 

would constitute a major rule. We 

request comment on the potential 

impact of the proposed rules on the 

economy on an annual basis. 

Commenters are requested to provide 

empirical data and other factual support 

for their views to the extent possible. 

E. Initial Regulatory Flexibility Analysis 

The Agencies have prepared an Initial 

Regulatory Flexibility Analysis 

(‘‘IRFA’’), in accordance with the 

provisions of the Regulatory Flexibility 

Act (‘‘RFA’’),157 regarding the proposed 

rules. 

1. Reasons for the Proposed Action 

Section 201 of the GLBA amended the 

definition of ‘‘broker’’ in Section 3(a)(4) 

of the Exchange Act to replace a blanket 

exemption from that term for ‘‘banks,’’

as defined in Section 3(a)(6) of the 

Exchange Act. Congress replaced this 

blanket exemption with eleven specific 

exceptions for securities activities 

conducted by banks.158 On October 13, 

2006, President Bush signed into law 

the Regulatory Relief Act.159 Section 

101 of that Act, among other things, 

requires the Agencies jointly to issue a 

single set of proposed rules 

implementing the bank broker 

exceptions in Section 3(a)(4) of the 

Exchange Act within 180 days of the 

date of enactment of the Regulatory 

Relief Act.160 These rules are being 

proposed by the Agencies to fulfill this 

requirement. The proposed rules are 

designed generally to provide guidance 

on GLBA exceptions from the definition 

of broker in Exchange Act Section 

3(a)(4) and to provide conditional 

exemptions from the broker definition 

consistent with the purposes of the 

Exchange Act and the GLBA. 

2. Objectives 

The proposed rules would provide 

guidance to the industry with respect to 

the GLBA requirements. The proposal 

also provides certain conditional 

exemptions from the broker definition 

to allow banks to perform certain 

securities activities. The Supplementary 

Information Section above contains 

more detailed information on the 

objectives of the proposed rules. 

3. Legal Basis 

Pursuant to Section 101 of the 

Regulatory Relief Act, the Agencies are 

issuing the proposed rules for comment. 

In addition, pursuant to the Exchange 

Act and, particularly, the Sections 3(b), 

15, 23(a), and 36 thereof, the 

Commission is issuing the proposed 

rules for comment.161

4. Small Entities Subject to the Rule 

The proposed rule would apply to 

‘‘banks,’’ which is defined in Section 

3(a)(6) of the Exchange Act to include 

banking institutions organized in the 

United States, including members of the 

Federal Reserve System, Federal savings 

associations, as defined in Section 2(5) 

of the Home Owners’ Loan Act, and 

other commercial banks, savings 

associations, and nondepository trust 

companies that are organized under the 

laws of a state or the United States and 

subject to supervision and examination 

by state or federal authorities having 

supervision over banks and savings 

associations.162 Congress did not 

exempt small entity banks from the 

application of the GLBA. Moreover, 

because the proposed rules are intended 

to provide guidance to and exemptions 

for all banks that are subject to the 

GBLA, the Agencies determined that it 

would not be appropriate or necessary 

to exempt small entity banks from the 

operation of the proposed rules 

Therefore, the proposed rules generally 

apply to all banks, including banks that 

would be considered small entities (i.e., 

banks with total assets of $165 million 

or less) for purposes of the RFA.163

The Agencies estimate that the 

proposed rules would apply to 

approximately 9,475 banks, 

approximately 5,816 of which could be 

considered small banks with assets of 

$165 million or less. We do not 

anticipate any significant costs to small 

entity banks as a result of the proposed 

rules. 

5. Reporting, Recordkeeping and Other 

Compliance Requirements 

The proposed rules would not impose 

any significant reporting, recordkeeping, 

or other compliance requirements on 

banks that are small entities.164

Nevertheless, the Agencies request 

comment on the costs of compliance 

with any recordkeeping, reporting, or 

other requirements under the proposed 

rules. The Agencies also request 

comment on any anticipated ongoing 

costs associated with complying with 

the proposed rules.165 Commenters 

should provide detailed estimates of 

these costs. 

6. Duplicative, Overlapping, or 

Conflicting Federal Rules 

The Agencies believe that there are no 

rules that duplicate, overlap, or conflict 

with the proposed rules. 

7. Significant Alternatives 

Pursuant to Section 3(a) of the 

RFA,166 the Agencies must consider the 

following types of alternatives (1) the 

establishment of differing compliance or 

reporting requirements or timetables 

that take into account the resources 

available to small entities; (2) the 

clarification, consolidation, or 

simplification of compliance and 

reporting requirements under the 

proposed rule for small entities; (3) the 

use of performance rather than design 

standards; and (4) an exemption from 


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coverage of the proposed rules, or any 

part thereof, for small entities. 

As discussed above, the GLBA does 

not exempt small entity banks from the 

Exchange Act broker registration 

requirements and because the proposed 

rules are intended to provide guidance 

to, and exemptions for, all banks that 

are subject to the GLBA, the Agencies 

determined that it would not be 

appropriate or necessary to exempt 

small entity banks from the operation of 

the proposed rules. Moreover, providing 

one or more special exemptions for 

small banks could place broker-dealers, 

including small broker-dealers, or larger 

banks at a competitive disadvantage 

versus small banks. 

The proposed rules are intended to 

clarify and simplify compliance with 

the GLBA by providing guidance with 

respect to exceptions and by providing 

additional exemptions. As such, the 

proposed rules should facilitate 

compliance by banks of all sizes, 

including small entity banks. 

The Agencies do not believe that it is 

necessary to consider whether small 

entity banks should be permitted to use 

performance rather than design 

standards to comply with the proposed 

rules because the proposed rules already 

use performance standards. Moreover, 

the proposed rules do not dictate for 

entities of any size any particular design 

standards (e.g., technology) that must be 

employed to achieve the objectives of 

the proposed rules. 

8. Request for Comments 

The Agencies encourage written 

comments on matters discussed in the 

IRFA. In particular, the Agencies 

request comments on (1) the number of 

small entities that would be affected by 

the proposed rules; (2) the nature of any 

impact the proposed rules would have 

on small entities and empirical data 

supporting the extent of the impact; and 

(3) how to quantify the number of small 

entities that would be affected by and/ 

or how to quantify the impact of the 

proposed rules. Such comments will be 

considered in the preparation of the 

Final Regulatory Flexibility Analysis, if 

the proposed rules are adopted, and will 

be placed in the same public file as 

comments on the proposal itself. 

Persons wishing to submit written 

comments should refer to the 

instructions for submitting comments in 

the front of this release. 

F. Plain Language 

Section 722 of the GLBA (12 U.S.C. 

4809) requires the Board to use plain 

language in all proposed and final rules 

published by the Board after January 1, 

2000. The Board has sought to present 

the proposed rules, to the maximum 

extent possible, in a simple and 

straightforward manner. The Board 

invites comments on whether there are 

additional steps that could be taken to 

make the proposed rules easier to 

understand. 

IX. Statutory Authority 

Pursuant to authority set forth in the 

Exchange Act and particularly Sections 

3(a)(4), 3(b), 15, 17, 23(a), and 36 thereof 

(15 U.S.C. 78c(a)(4), 78c(b), 78o, 78q, 

78w(a), and 78mm, respectively) the 

Commission proposes to repeal by 

operation of statute current Rules 3a4–

2, 3a4–3, 3a4–4, 3a4–5, 3a4–6, and 3b–

17 (§§ 240.3a4–2, 240.3a4–3, 240.3a4–4, 

240.3a4–5, 240.3a4–6, and 240.3b–17, 

respectively). The Commission is 

proposing to repeal Exchange Act Rules 

15a–7 and 15a–8 (§ 240.15a–7 and 

§ 240.15a–8, respectively). The 

Commission, jointly with the Board of 

Governors of the Federal Reserve 

System, is also proposing new Rules 

700, 701, 721, 722, 723, 740, 741, 760, 

771, 772, 775, 780, and 781 under the 

Exchange Act (§§ 247.700, 247.701, 

247.721, 247.722, 247.723, 247.740, 

247.741, 247.760, 247.771, 247.772, 

247.775, 247.780, and 247.881, 

respectively). 

X. Text of Proposed Rules and Rule 

Amendments 

List of Subjects 

12 CFR Part 218 

Banks, Brokers, Securities. 

17 CFR Part 240 

Broker-dealers, Reporting and 

recordkeeping requirements, Securities. 

17 CFR Part 247 

Banks, Brokers, Securities. 

Federal Reserve System 

Authority and Issuance 

For the reasons set forth in the 

preamble, the Board proposes to amend 

Title 12, Chapter II of the Code of 

Federal Regulations by adding a new 

Part 218 as set forth under Common 

Rules at the end of this document: 

PART 218—EXCEPTIONS FOR BANKS 

FROM THE DEFINITION OF BROKER 

IN THE SECURITIES EXCHANGE ACT 

OF 1934 (REGULATION R) 

Sec. 

218.100 Definition. 

218.700 Defined terms relating to the 

networking exception from the definition 

of ‘‘broker.’’

218.701 Exemption from the definition of 

‘‘broker’’ for certain institutional 

referrals. 

218.721 Defined terms relating to the trust 

and fiduciary activities exception from 

the definition of ‘‘broker.’’

218.722 Exemption allowing banks to 

calculate trust and fiduciary 

compensation on a bank-wide basis. 

218.723 Exemptions for special accounts, 

transferred accounts, and a de minimis 

number of accounts. 

218.740 Defined terms relating to the sweep 

accounts exception from the definition of 

‘‘broker.’’

218.741 Exemption for banks effecting 

transactions in money market funds. 

218.760 Exemption from definition of 

‘‘broker’’ for banks accepting orders to 

effect transactions in securities from or 

on behalf of custody accounts. 

218.771 Exemption from the definition of 

‘‘broker’’ for banks effecting transactions 

in securities issued pursuant to 

Regulation S. 

218.772 Exemption from the definition of 

‘‘broker’’ for banks engaging in securities 

lending transactions. 

218.775 Exemption from the definition of 

‘‘broker’’ for the way banks effect 

excepted or exempted transactions in 

investment company securities. 

218.780 Exemption for banks from liability 

under section 29 of the Securities 

Exchange Act of 1934. 

218.781 Exemption from the definition of 

‘‘broker’’ for banks for a limited period 

of time. 

Authority: 15 U.S.C. 78c(a)(4)(F). 

Securities and Exchange Commission 

Authority and Issuance 

For the reasons set forth in the 

preamble, the Commission proposes to 

amend title 17, chapter II of the Code of 

Federal Regulations as follows: 

PART 240—GENERAL RULES AND 

REGULATIONS, SECURITIES 

EXCHANGE ACT OF 1934 

1. The authority citation for part 240 

continues to read, in part, as follows: 

Authority: 15 U.S.C. 77c, 77d, 77g, 77j, 

77s, 77z–2, 77z–3, 77eee, 77ggg, 77nnn, 

77sss, 77ttt, 78c, 78d, 78e, 78f, 78g, 78i, 78j, 

78j–1, 78k, 78k–1, 78l, 78m, 78n, 78o, 78p, 

78q, 78s, 78u–5, 78w, 78x, 78ll, 78mm, 80a–

20, 80a–23, 80a–29, 80a–37, 80b–3, 80b–4, 

80b–11, and 7201 et seq.; and 18 U.S.C. 1350, 

unless otherwise noted. 

§§ 240.3a4–2 through 240.3a4–6, 240.3b–17, 

240.15a–7, and 240.15a–8 [Removed and 

Reserved] 

2. Sections 240.3a4–2 through 

240.3a4–6, 240.3b–17, 240.15a–7, and 

240.15a–8 are removed and reserved. 

3. Part 247 is added as set forth under 

Common Rules at the end of this 

document: 


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PART 247—REGULATION R—

EXEMPTIONS AND DEFINITIONS 

RELATED TO THE EXCEPTIONS FOR 

BANKS FROM THE DEFINITION OF 

BROKER 

Sec. 

247.100 Definition. 

247.700 Defined terms relating to the 

networking exception from the definition 

of ‘‘broker.’’

247.701 Exemption from the definition of 

‘‘broker’’ for certain institutional 

referrals. 

247.721 Defined terms relating to the trust 

and fiduciary activities exception from 

the definition of ‘‘broker.’’

247.722 Exemption allowing banks to 

calculate trust and fiduciary 

compensation on a bank-wide basis. 

247.723 Exemptions for special accounts, 

transferred accounts, and a de minimis 

number of accounts. 

247.740 Defined terms relating to the sweep 

accounts exception from the definition of 

‘‘broker.’’

247.741 Exemption for banks effecting 

transactions in money market funds. 

247.760 Exemption from definition of 

‘‘broker’’ for banks accepting orders to 

effect transactions in securities from or 

on behalf of custody accounts. 

247.771 Exemption from the definition of 

‘‘broker’’ for banks effecting transactions 

in securities issued pursuant to 

Regulation S. 

247.772 Exemption from the definition of 

‘‘broker’’ for banks engaging in securities 

lending transactions. 

247.775 Exemption from the definition of 

‘‘broker’’ for the way banks effect 

excepted or exempted transactions in 

investment company securities. 

247.780 Exemption for banks from liability 

under section 29 of the Securities 

Exchange Act of 1934. 

247.781 Exemption from the definition of 

‘‘broker’’ for banks for a limited period 

of time. 

Authority: 15 U.S.C. 78c, 78o, 78q, 78w, 

and 78mm. 

Common Rules 

The common rules that are proposed 

to be adopted by the Board as part 218 

of title 12, chapter II of the Code of 

Federal Regulations and by the 

Commission as part 247 of title 17, 

chapter II of the Code of Federal 

Regulations follow: 

§ll.100 Definition. 

For purposes of this part the following 

definition shall apply: Act means the 

Securities Exchange Act of 1934 (15 

U.S.C. 78a et seq.). 

§ll.700 Defined terms relating to the 

networking exception from the definition of 

‘‘broker.’’

When used with respect to the Third 

Party Brokerage Arrangements 

(‘‘Networking’’) Exception from the 

definition of the term ‘‘broker’’ in 

section 3(a)(4)(B)(i) of the Act (15 U.S.C. 

78c(a)(4)(B)(i)) in the context of 

transactions with a customer, the 

following terms shall have the meaning 

provided: 

(a) Contingent on whether the referral 

results in a transaction means 

dependent on whether the referral 

results in a purchase or sale of a 

security; whether an account is opened 

with a broker or dealer; whether the 

referral results in a transaction 

involving a particular type of security; 

or whether it results in multiple 

securities transactions; provided, 

however, that a referral fee may be 

contingent on whether a customer: 

(1) Contacts or keeps an appointment 

with a broker or dealer as a result of the 

referral; or 

(2) Meets any objective, base-line 

qualification criteria established by the 

bank or broker or dealer for customer 

referrals, including such criteria as 

minimum assets, net worth, income, or 

marginal federal or state income tax 

rate, or any requirement for citizenship 

or residency that the broker or dealer, or 

the bank, may have established 

generally for referrals for securities 

brokerage accounts. 

(b)(1) Incentive compensation means 

compensation that is intended to 

encourage a bank employee to refer 

potential customers to a broker or dealer 

or give a bank employee an interest in 

the success of a securities transaction at 

a broker or dealer. The term does not 

include compensation paid by a bank 

under a bonus or similar plan that is: 

(i) Paid on a discretionary basis; and 

(ii) Based on multiple factors or 

variables and: 

(A) Those factors or variables include 

significant factors or variables that are 

not related to securities transactions at 

the broker or dealer; 

(B) A referral made by the employee 

is not a factor or variable in determining 

the employee’s compensation under the 

plan; and 

(C) The employee’s compensation 

under the plan is not determined by 

reference to referrals made by any other 

person. 

(2) Nothing in this paragraph (b) shall 

be construed to prevent a bank from 

compensating an officer, director or 

employee on the basis of any measure 

of the overall profitability of: 

(i) The bank, either on a stand-alone 

or consolidated basis; 

(ii) Any of the bank’s affiliates (other 

than a broker or dealer) or operating 

units; or 

(iii) A broker or dealer if: 

(A) Such profitability is only one of 

multiple factors or variables used to 

determine the compensation of the 

officer, director or employee; and 

(B) The factors or variables used to 

determine the compensation of the 

officer, director or employee include 

significant factors or variables that are 

not related to the profitability of the 

broker or dealer. 

(c) Nominal one-time cash fee of a 

fixed dollar amount means a cash 

payment for a referral in an amount that 

meets any of the following standards: 

(1) The payment does not exceed: 

(i) Twice the average of the minimum 

and maximum hourly wage established 

by the bank for the current or prior year 

for the job family that includes the 

employee; or 

(ii) 1/1000th of the average of the 

minimum and maximum annual base 

salary established by the bank for the 

current or prior year for the job family 

that includes the employee; or 

(2) The payment does not exceed 

twice the employee’s actual base hourly 

wage; or 

(3) The payment does not exceed 

twenty-five dollars ($25), as adjusted in 

accordance with paragraph (f) of this 

section. 

(d) Job family means a group of jobs 

or positions involving similar 

responsibilities, or requiring similar 

skills, education or training, that a bank, 

or a separate unit, branch or department 

of a bank, has established and uses in 

the ordinary course of its business to 

distinguish among its employees for 

purposes of hiring, promotion, and 

compensation. 

(e) Referral means the action taken by 

a bank employee to direct a customer of 

the bank to a broker or dealer for the 

purchase or sale of securities for the 

customer’s account. 

(f) Inflation adjustment—(1) In 

general. On April 1, 2012, and on the 1st 

day of each subsequent 5-year period, 

the dollar amount referred to in 

paragraph (c)(3) of this section shall be 

adjusted by: 

(i) Dividing the annual value of the 

Employment Cost Index For Wages and 

Salaries, Private Industry Workers (or 

any successor index thereto), as 

published by the Bureau of Labor 

Statistics, for the calendar year 

preceding the calendar year in which 

the adjustment is being made by the 

annual value of such index (or 

successor) for the calendar year ending 

December 31, 2006; and 

(ii) Multiplying the dollar amount by 

the quotient obtained in paragraph 

(f)(1)(i) of this section. 

(2) Rounding. If the adjusted dollar 

amount determined under paragraph 

(f)(1) of this section for any period is not 

a multiple of $1, the amount so 


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determined shall be rounded to the 

nearest multiple of $1. 

§ll.701 Exemption from the definition 

of ‘‘broker’’ for certain institutional 

referrals. 

(a) General. A bank that meets the 

requirements for the exception from the 

definition of ‘‘broker’’ under section 

3(a)(4)(B)(i) of the Act (15 U.S.C. 

78c(a)(4)(B)(i)), other than section 

3(a)(4)(B)(i)(VI) of the Act (15 U.S.C. 

78c(a)(4)(B)(i)(VI)), is exempt from the 

conditions of section 3(a)(4)(B)(i)(VI) of 

the Act solely to the extent that a bank 

employee receives a referral fee for 

referring a high net worth customer or 

institutional customer to a broker or 

dealer with which the bank has a 

contractual or other written arrangement 

of the type specified in section 

3(a)(4)(B)(i) of the Act, if: 

(1) Bank employee. (i) The bank 

employee is: 

(A) Not qualified or otherwise 

required to be qualified pursuant to the 

rules of a self-regulatory organization; 

(B) Predominantly engaged in banking 

activities, other than making referrals to 

a broker or dealer; and 

(C) Not subject to statutory 

disqualification, as that term is defined 

in section 3(a)(39) of the Act (15 U.S.C. 

78c(a)(39)), except subparagraph (E) of 

that section; and 

(ii) The high net worth customer or 

institutional customer is encountered by 

the bank employee in the ordinary 

course of the employee’s assigned duties 

for the bank. 

(2) Bank determinations and 

obligations. (i) Disclosures. Prior to or at 

the time of the referral, the bank 

provides the customer with the 

information set forth in paragraph (b) of 

this section. 

(ii) Customer qualification. (A) In the 

case of a customer that is a not a natural 

person, the bank determines, before the 

referral fee is paid to the bank 

employee, that the customer is an 

institutional customer. 

(B) In the case of a customer that is 

a natural person, the bank, prior to or 

at the time of the referral, either: 

(1) Determines that the customer is a 

high net worth customer; or 

(2) Obtains a signed acknowledgment 

from the customer that the customer 

meets the standards to be considered a 

high net worth customer. 

(iii) Employee qualification 

information. Before the referral fee is 

paid to the bank employee, the bank 

provides the broker or dealer the name 

of the employee and such other 

identifying information that may be 

necessary for the broker or dealer to 

determine whether the bank employee 

is associated with a broker or dealer or 

is subject to statutory disqualification, 

as that term is defined in section 

3(a)(39) of the Act (15 U.S.C. 78c(a)(39)), 

except subparagraph (E) of that section. 

(iv) Good faith compliance and 

corrections. A bank that acts in good 

faith and that has reasonable policies 

and procedures in place to comply with 

the requirements of this section shall 

not be considered a ‘‘broker’’ under 

section 3(a)(4) of the Act (15 U.S.C. 

78c(a)(4)) solely because the bank fails 

to comply with the provisions of this 

paragraph (a)(2) with respect to a 

particular customer if the bank: 

(A) Takes reasonable and prompt 

steps to remedy the error (such as, for 

example, by promptly making the 

required determination or promptly 

providing the broker or dealer the 

required information); and 

(B) Makes reasonable efforts to 

reclaim the portion of the referral fee 

paid to the bank employee for the 

referral that does not, following any 

required remedial action, meet the 

requirements of this section and that 

exceeds the amount otherwise permitted 

under section 3(a)(4)(B)(i)(VI) of the Act 

(15 U.S.C. 78c(a)(4)(B)(i)(VI)) and 

§ ll.700. 

(3) Provisions of written agreement. 

The written agreement between the 

bank and the broker or dealer provides 

for the following: 

(i) Customer and employee 

qualifications. Before the referral fee is 

paid to the bank employee: 

(A) The bank and broker or dealer 

must determine that the bank employee 

is not subject to statutory 

disqualification, as that term is defined 

in section 3(a)(39) of the Act (15 U.S.C. 

78c(a)(39)), except subparagraph (E) of 

that section; and 

(B) The broker or dealer must 

determine that the customer is a high 

net worth customer or an institutional 

customer. 

(ii) Suitability or sophistication 

determination by broker or dealer—(A) 

Contingent referral fees. In any case in 

which payment of the referral fee is 

contingent on completion of a securities 

transaction at the broker or dealer, the 

broker or dealer must, before such 

securities transaction is conducted, 

perform a suitability analysis of the 

securities transaction in accordance 

with the rules of the broker or dealer’s 

applicable self-regulatory organization 

as if the broker or dealer had 

recommended the securities transaction. 

(B) Non-contingent referral fees. In 

any case in which payment of the 

referral fee is not contingent on the 

completion of a securities transaction at 

the broker or dealer, the broker or dealer 

must, before the referral fee is paid, 

either: 

(1) Determine that the customer: 

(i) Has the capability to evaluate 

investment risk and make independent 

decisions; and 

(ii) Is exercising independent 

judgment based on the customer’s own 

independent assessment of the 

opportunities and risks presented by a 

potential investment, market factors and 

other investment considerations; or 

(2) Perform a suitability analysis of all 

securities transactions requested by the 

customer contemporaneously with the 

referral in accordance with the rules of 

the broker or dealer’s applicable selfregulatory organization as if the broker 

or dealer had recommended the 

securities transaction. 

(iii) Notice. The broker or dealer must 

promptly inform the bank if the broker 

or dealer determines that: 

(A) The customer is not a high net 

worth customer or institutional 

customer, as applicable; 

(B) The bank employee is subject to 

statutory disqualification, as that term is 

defined in section 3(a)(39) of the Act (15 

U.S.C. 78c(a)(39)), except subparagraph 

(E) of that section; or 

(C) The customer or the securities 

transaction(s) to be conducted by the 

customer do not meet the applicable 

standard set forth in paragraph (a)(3)(ii) 

of this section. 

(b) Required disclosures. The 

information provided to the high net 

worth customer or institutional 

customer pursuant to paragraph (a)(2)(i) 

of this section shall clearly and 

conspicuously disclose: 

(1) The name of the broker or dealer; 

and 

(2) That the bank employee 

participates in an incentive 

compensation program under which the 

bank employee may receive a fee of 

more than a nominal amount for 

referring the customer to the broker or 

dealer and payment of this fee may be 

contingent on whether the referral 

results in a transaction with the broker 

or dealer. 

(c) Receipt of other compensation. 

Nothing in this section prevents or 

prohibits a bank from paying or a bank 

employee from receiving any type of 

compensation that would not be 

considered incentive compensation 

under § ll.700(b)(1) or that is 

described in § ll.700(b)(2). 

(d) Definitions. When used in this 

section: 

(1) High net worth customer means 

any natural person who, either 

individually or jointly with his or her 

spouse, has at least $5 million in net 

worth excluding the primary residence 


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and associated liabilities of the person 

and, if applicable, his or her spouse. In 

determining whether any person is a 

high net worth customer, there may be 

included in the assets of such person 

assets held individually and fifty 

percent of any assets held jointly with 

such person’s spouse and any assets in 

which such person shares with such 

person’s spouse a community property 

or similar shared ownership interest. In 

determining whether spouses acting 

jointly are high net worth customers, 

there may be included in the amount of 

each spouse’s assets any assets of the 

other spouse (whether or not such assets 

are held jointly). 

(2) Institutional customer means any 

corporation, partnership, limited 

liability company, trust or other nonnatural person that has at least: 

(i) $10 million in investments; or 

(ii) $40 million in assets; or 

(iii) $25 million in assets if the bank 

employee refers the customer to the 

broker or dealer for investment banking 

services. 

(3) Investment banking services 

includes, without limitation, acting as 

an underwriter in an offering for an 

issuer; acting as a financial adviser in a 

merger, acquisition, tender-offer or 

similar transaction; providing venture 

capital, equity lines of credit, private 

investment-private equity transactions 

or similar investments; serving as 

placement agent for an issuer; and 

engaging in similar activities. 

(4) Referral fee means a fee (paid in 

one or more installments) for the referral 

of a customer to a broker or dealer that 

is: 

(i) A predetermined dollar amount, or 

a dollar amount determined in 

accordance with a predetermined 

formula (such as a fixed percentage of 

the dollar amount of total assets placed 

in an account with the broker or dealer), 

that does not vary based on: 

(A) The revenue generated by or the 

profitability of securities transactions 

conducted by the customer with the 

broker or dealer; or 

(B) The quantity, price, or identity of 

securities transactions conducted over 

time by the customer with the broker or 

dealer; or 

(C) The number of customer referrals 

made; or 

(ii) A dollar amount based on a fixed 

percentage of the revenues received by 

the broker or dealer for investment 

banking services provided to the 

customer. 

(e) Inflation adjustments—(1) In 

general. On April 1, 2012, and on the 1st 

day of each subsequent 5-year period, 

each dollar amount in paragraphs (d)(1) 

and (d)(2) of this section shall be 

adjusted by: 

(i) Dividing the annual value of the 

Personal Consumption Expenditures 

Chain-Type Price Index (or any 

successor index thereto), as published 

by the Department of Commerce, for the 

calendar year preceding the calendar 

year in which the adjustment is being 

made by the annual value of such index 

(or successor) for the calendar year 

ending December 31, 2006; and 

(ii) Multiplying the dollar amount by 

the quotient obtained in paragraph 

(e)(1)(i) of this section. 

(2) Rounding. If the adjusted dollar 

amount determined under paragraph 

(e)(1) of this section for any period is 

not a multiple of $100,000, the amount 

so determined shall be rounded to the 

nearest multiple of $100,000. 

§ll.721 Defined terms relating to the 

trust and fiduciary activities exception from 

the definition of ‘‘broker.’’

(a) Defined terms for chiefly 

compensated test. For purposes of this 

part and section 3(a)(4)(B)(ii) of the Act 

(15 U.S.C. 78c(a)(4)(B)(ii)), the following 

terms shall have the meaning provided: 

(1) Chiefly compensated—account-byaccount test. Chiefly compensated shall 

mean the relationship-total 

compensation percentage for each trust 

or fiduciary account of the bank is 

greater than 50 percent. 

(2) The relationship-total 

compensation percentage for a trust or 

fiduciary account shall be the mean of 

the yearly compensation percentage for 

the account for the immediately 

preceding year and the yearly 

compensation percentage for the 

account for the year immediately 

preceding that year. 

(3) The yearly compensation 

percentage for a trust or fiduciary 

account shall be equal to the 

relationship compensation attributable 

to the trust or fiduciary account during 

the year divided by the total 

compensation attributable to the trust or 

fiduciary account during that year, with 

the quotient expressed as a percentage. 

(4) Relationship compensation means 

any compensation a bank receives that 

consists of: 

(i) An administration fee, including, 

without limitation, a fee paid for 

personal services, tax preparation, or 

real estate settlement services, or a fee 

paid by an investment company for 

personal service, the maintenance of 

shareholder accounts or any service 

described in paragraph (a)(4)(iii)(C) of 

this section; 

(ii) An annual fee (payable on a 

monthly, quarterly or other basis); 

(iii) A fee based on a percentage of 

assets under management, including, 

without limitation: 

(A) A fee paid by an investment 

company pursuant to a plan under 17 

CFR 270.12b–1; 

(B) A fee paid by an investment 

company for personal service or the 

maintenance of shareholder accounts; or 

(C) A fee paid by an investment 

company based on a percentage of assets 

under management for any of the 

following services: 

(1) Providing transfer agent or subtransfer agent services for beneficial 

owners of investment company shares; 

(2) Aggregating and processing 

purchase and redemption orders for 

investment company shares; 

(3) Providing beneficial owners with 

account statements showing their 

purchases, sales, and positions in the 

investment company; 

(4) Processing dividend payments for 

the investment company; 

(5) Providing sub-accounting services 

to the investment company for shares 

held beneficially; 

(6) Forwarding communications from 

the investment company to the 

beneficial owners, including proxies, 

shareholder reports, dividend and tax 

notices, and updated prospectuses; or 

(7) Receiving, tabulating, and 

transmitting proxies executed by 

beneficial owners of investment 

company shares; 

(iv) A flat or capped per order 

processing fee, paid by or on behalf of 

a customer or beneficiary, that is equal 

to not more than the cost incurred by 

the bank in connection with executing 

securities transactions for trust or 

fiduciary accounts; or 

(v) Any combination of such fees. 

(5) Trust or fiduciary account means 

an account for which the bank acts in 

a trustee or fiduciary capacity as defined 

in section 3(a)(4)(D) of the Act (15 

U.S.C. 78c(a)(4)(D)). 

(6) Year means a calendar year, or 

fiscal year consistently used by the bank 

for recordkeeping and reporting 

purposes. 

(b) Advertising restrictions. 

(1) In general. A bank complies with 

the advertising restriction in section 

3(a)(4)(B)(ii)(II) of the Act (15 U.S.C. 

78c(a)(4)(B)(ii)(II)) if advertisements by 

or on behalf of the bank do not 

advertise: 

(i) That the bank provides securities 

brokerage services for trust or fiduciary 

accounts except as part of advertising 

the bank’s broader trust or fiduciary 

services; and 

(ii) The securities brokerage services 

provided by the bank to trust or 

fiduciary accounts more prominently 


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than the other aspects of the trust or 

fiduciary services provided to such 

accounts. 

(2) Advertisement. For purposes of 

this section, the term advertisement has 

the same meaning as in § ll.760(g)(2). 

§ll.722 Exemption allowing banks to 

calculate trust and fiduciary compensation 

on a bank-wide basis. 

(a) General. A bank is exempt from 

meeting the ‘‘chiefly compensated’’

condition in section 3(a)(4)(B)(ii)(I) of 

the Act (15 U.S.C. 78c(a)(4)(B)(ii)(I)) to 

the extent that it effects transactions in 

securities for any account in a trustee or 

fiduciary capacity within the scope of 

section 3(a)(4)(D) of the Act (15 U.S.C. 

78c(a)(4)(D)) if: 

(1) The bank meets the other 

conditions for the exception from the 

definition of the term ‘‘broker’’ under 

sections 3(a)(4)(B)(ii) and 3(a)(4)(C) of 

the Act (15 U.S.C. 78c(a)(4)(B)(ii) and 15 

U.S.C. 78c(a)(4)(C)); and 

(2) The aggregate relationship-total 

compensation percentage for the bank’s 

trust and fiduciary business is at least 

70 percent. 

(b) Aggregate relationship-total 

compensation percentage. For purposes 

of this section, the aggregate 

relationship-total compensation 

percentage for a bank’s trust and 

fiduciary business shall be the mean of 

the bank’s yearly bank-wide 

compensation percentage for the 

immediately preceding year and the 

bank’s yearly bank-wide compensation 

percentage for the year immediately 

preceding that year. 

(c) Yearly bank-wide compensation 

percentage. For purposes of this section, 

a bank’s yearly bank-wide compensation 

percentage for a year shall equal the 

relationship compensation attributable 

to the bank’s trust and fiduciary 

business as a whole during the year 

divided by the total compensation 

attributable to the bank’s trust and 

fiduciary business as a whole during 

that year, with the quotient expressed as 

a percentage. 

§ll.723 Exemptions for special 

accounts, transferred accounts, and a de 

minimis number of accounts. 

(a) Short-term accounts. A bank may, 

in determining its compliance with the 

chiefly compensated test in 

§ ll.721(a)(1) and § ll.722(a)(2), 

exclude any trust or fiduciary account 

that had been open for a period of less 

than 3 months during the relevant year. 

(b) Accounts acquired as part of a 

business combination or asset 

acquisition. For purposes of 

determining compliance with the 

chiefly compensated test in 

§ ll.721(a)(1) or § ll.722(a)(2), any 

trust or fiduciary account that a bank 

acquired from another person as part of 

a merger, consolidation, acquisition, 

purchase of assets or similar transaction 

may be excluded by the bank for 12 

months after the date the bank acquired 

the account from the other person. 

(c) Accounts transferred to a broker or 

dealer or other unaffiliated entity. 

Notwithstanding section 3(a)(4)(B)(ii)(I) 

of the Act (15 U.S.C. 78c(a)(4)(B)(ii)(I)) 

and § ll.721(a)(1), a bank shall not be 

considered a broker for purposes of 

section 3(a)(4) of the Act (15 U.S.C. 

78c(a)(4)) solely because a trust or 

fiduciary account does not meet the 

chiefly compensated standard in 

§ ll.721(a)(1) if, within 3 months of 

the end of the year in which the account 

fails to meet such standard, the bank 

transfers the account or the securities 

held by or on behalf of the account to 

a broker or dealer registered under 

section 15 of the Act (15 U.S.C. 78o) or 

another entity that is not an affiliate of 

the bank and is not required to be 

registered as a broker or dealer. 

(d) De minimis exclusion. A bank 

may, in determining its compliance 

with the chiefly compensated test in 

§ ll.721(a)(1), exclude a trust or 

fiduciary account if: 

(1) The bank maintains records 

demonstrating that the securities 

transactions conducted by or on behalf 

of the account were undertaken by the 

bank in the exercise of its trust or 

fiduciary responsibilities with respect to 

the account; 

(2) The total number of accounts 

excluded by the bank under this 

paragraph (d) does not exceed the lesser 

of: 

(i) 1 percent of the total number of 

trust or fiduciary accounts held by the 

bank, provided that if the number so 

obtained is less than 1, the amount shall 

be rounded up to 1; or 

(ii) 500; and 

(3) The bank did not rely on this 

paragraph (d) with respect to such 

account during the immediately 

preceding year. 

§ll.740 Defined terms relating to the 

sweep accounts exception from the 

definition of ‘‘broker.’’

For purposes of section 3(a)(4)(B)(v) of 

the Act (15 U.S.C. 78c(a)(4)(B)(v)), the 

following terms shall have the meaning 

provided: 

(a) Deferred sales load has the same 

meaning as in 17 CFR 270.6c-10. 

(b) Money market fund means an 

open-end company registered under the 

Investment Company Act of 1940 (15 

U.S.C. 80a–1 et seq.) that is regulated as 

a money market fund pursuant to 17 

CFR 270.2a–7. 

(c)(1) No-load, in the context of an 

investment company or the securities 

issued by an investment company, 

means, for securities of the class or 

series in which a bank effects 

transactions, that: 

(i) That class or series is not subject 

to a sales load or a deferred sales load; 

and 

(ii) Total charges against net assets of 

that class or series of the investment 

company’s securities for sales or sales 

promotion expenses, for personal 

service, or for the maintenance of 

shareholder accounts do not exceed 0.25 

of 1% of average net assets annually. 

(2) For purposes of this definition, 

charges for the following will not be 

considered charges against net assets of 

a class or series of an investment 

company’s securities for sales or sales 

promotion expenses, for personal 

service, or for the maintenance of 

shareholder accounts: 

(i) Providing transfer agent or subtransfer agent services for beneficial 

owners of investment company shares; 

(ii) Aggregating and processing 

purchase and redemption orders for 

investment company shares; 

(iii) Providing beneficial owners with 

account statements showing their 

purchases, sales, and positions in the 

investment company; 

(iv) Processing dividend payments for 

the investment company; 

(v) Providing sub-accounting services 

to the investment company for shares 

held beneficially; 

(vi) Forwarding communications from 

the investment company to the 

beneficial owners, including proxies, 

shareholder reports, dividend and tax 

notices, and updated prospectuses; or 

(vii) Receiving, tabulating, and 

transmitting proxies executed by 

beneficial owners of investment 

company shares. 

(d) Open-end company has the same 

meaning as in section 5(a)(1) of the 

Investment Company Act of 1940 (15 

U.S.C. 80a–5(a)(1)). 

(e) Sales load has the same meaning 

as in section 2(a)(35) of the Investment 

Company Act of 1940 (15 U.S.C. 80a–

2(a)(35)). 

§ll.741 Exemption for banks effecting 

transactions in money market funds. 

(a) A bank is exempt from the 

definition of the term ‘‘broker’’ under 

section 3(a)(4) of the Act (15 U.S.C. 

78c(a)(4)) to the extent that it effects 

transactions on behalf of a customer in 

securities issued by a money market 

fund, provided that: 

(1) The bank provides the customer, 

directly or indirectly, any other product 


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77548 Federal Register / Vol. 71, No. 247 / Tuesday, December 26, 2006 / Proposed Rules 

or service, the provision of which would 

not, in and of itself, require the bank to 

register as a broker or dealer under 

section 15(a) of the Act (15 U.S.C. 

78o(a)); and 

(2)(i) The class or series of securities 

is no-load; or 

(ii) If the class or series of securities 

is not no-load, (A) The bank provides 

the customer, not later than at the time 

the customer authorizes the bank to 

effect the transactions, a prospectus for 

the securities; and 

(B) The bank does not characterize or 

refer to the class or series of securities 

as no-load. 

(b) Definitions. For purposes of this 

section: 

(1) Money market fund has the same 

meaning as in § ll.740(b). 

(2) No-load has the same meaning as 

in § ll.740(c). 

§ll.760 Exemption from definition of 

‘‘broker’’ for banks accepting orders to 

effect transactions in securities from or on 

behalf of custody accounts. 

(a) Employee benefit plan accounts 

and individual retirement accounts or 

similar accounts. A bank is exempt from 

the definition of the term ‘‘broker’’

under section 3(a)(4) of the Act (15 

U.S.C. 78c(a)(4)) to the extent that, as 

part of its customary banking activities, 

the bank accepts orders to effect 

transactions in securities for an 

employee benefit plan account or an 

individual retirement account or similar 

account for which the bank acts as a 

custodian if: 

(1) Employee compensation 

restriction. The bank complies with the 

employee compensation restrictions in 

paragraph (c) of this section; 

(2) Advertisements. Advertisements 

by or on behalf of the bank do not: 

(i) Advertise that the bank accepts 

orders for securities transactions for 

employee benefit plan accounts or 

individual retirement accounts or 

similar accounts, except as part of 

advertising the other custodial or 

safekeeping services the bank provides 

to these accounts; or 

(ii) Advertise that such accounts are 

securities brokerage accounts or that the 

bank’s safekeeping and custody services 

substitute for a securities brokerage 

account; and 

(3) Advertisements and sales 

literature for individual retirement or 

similar accounts. Advertisements and 

sales literature issued by or on behalf of 

the bank do not describe the securities 

order-taking services provided by the 

bank to individual retirement or similar 

accounts more prominently than the 

other aspects of the custody or 

safekeeping services provided by the 

bank to these accounts. 

(b) Accommodation trades for other 

custodial accounts. A bank is exempt 

from the definition of the term ‘‘broker’’

under section 3(a)(4) of the Act (15 

U.S.C. 78c(a)(4)) to the extent that, as 

part of its customary banking activities, 

the bank accepts orders to effect 

transactions in securities for an account 

for which the bank acts as custodian 

other than an employee benefit plan 

account or an individual retirement 

account or similar account if: 

(1) Accommodation. The bank accepts 

orders to effect transactions in securities 

for the account only as an 

accommodation to the customer; 

(2) Employee compensation 

restriction. The bank complies with the 

employee compensation restrictions in 

paragraph (c) of this section; 

(3) Bank fees. Any fee charged or 

received by the bank for effecting a 

securities transaction for the account 

does not vary based on: 

(i) Whether the bank accepted the 

order for the transaction; or 

(ii) The quantity or price of the 

securities to be bought or sold; 

(4) Advertisements. Advertisements 

by or on behalf of the bank do not state 

that the bank accepts orders for 

securities transactions for the account; 

(5) Sales literature. Sales literature 

issued by or on behalf of the bank: 

(i) Does not state that the bank accepts 

orders for securities transactions for the 

account except as part of describing the 

other custodial or safekeeping services 

the bank provides to the account; and 

(ii) Does not describe the securities 

order-taking services provided to the 

account more prominently than the 

other aspects of the custody or 

safekeeping services provided by the 

bank to the account; and 

(6) Investment advice and 

recommendations. The bank does not 

provide investment advice or research 

concerning securities to the account, 

make recommendations to the account 

concerning securities or otherwise 

solicit securities transactions from the 

account; provided, however, that 

nothing in this paragraph (b)(6) shall 

prevent a bank from: 

(i) Publishing, using or disseminating 

advertisements and sales literature in 

accordance with paragraphs (b)(4) and 

(b)(5) of this section; and 

(ii) Responding to customer inquiries 

regarding the bank’s safekeeping and 

custody services by providing: 

(A) Advertisements or sales literature 

consistent with the provisions of 

paragraphs (b)(4) and (b)(5) of this 

section describing the safekeeping, 

custody and related services that the 

bank offers; 

(B) A prospectus prepared by a 

registered investment company, or sales 

literature prepared by a registered 

investment company or by the broker or 

dealer that is the principal underwriter 

of the registered investment company 

pertaining to the registered investment 

company’s products; 

(C) Information based on the materials 

described in paragraphs (b)(6)(ii)(A) and 

(B) of this section; or 

(iii) Responding to inquiries regarding 

the bank’s safekeeping, custody or other 

services, such as inquiries concerning 

the customer’s account or the 

availability of sweep or other services, 

so long as the bank does not provide 

investment advice or research 

concerning securities to the account or 

make a recommendation to the account 

concerning securities. 

(c) Employee compensation 

restriction. A bank may accept orders 

pursuant to this section for a securities 

transaction for an account described in 

paragraph (a) or (b) of this section only 

if no bank employee receives 

compensation, including a fee paid 

pursuant to a plan under 17 CFR 

270.12b–1, from the bank, the executing 

broker or dealer, or any other person 

that is based on whether a securities 

transaction is executed for the account 

or that is based on the quantity, price, 

or identity of securities purchased or 

sold by such account, provided that 

nothing in this paragraph shall prohibit 

a bank employee from receiving 

compensation that would not be 

considered incentive compensation 

under § ll.700(b)(1) as if a referral had 

been made by the bank employee, or 

any compensation described in 

§ ll.700(b)(2). 

(d) Other conditions. A bank may 

accept orders for a securities transaction 

for an account for which the bank acts 

as a custodian under this section only 

if the bank: 

(1) Does not act in a trustee or 

fiduciary capacity (as defined in section 

3(a)(4)(D) of the Act (15 U.S.C. 

78c(a)(4)(D)) with respect to the 

account; 

(2) Complies with section 3(a)(4)(C) of 

the Act (15 U.S.C. 78c(a)(4)(C)) in 

handling any order for a securities 

transaction for the account; and 

(3) Complies with section 

3(a)(4)(B)(viii)(II) of the Act (15 U.S.C. 

78c(a)(4)(B)(viii)(II)) regarding carrying 

broker activities. 

(e) Non-fiduciary administrators and 

recordkeepers. A bank that acts as a 

non-fiduciary and non-custodial 

administrator or recordkeeper for an 

employee benefit plan for which 

another bank acts as custodian may rely 


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on the exemption provided in this 

section if: 

(1) Both the custodian bank and the 

administrator or recordkeeper bank 

meet the requirements of this section; 

and 

(2) The administrator or recordkeeper 

bank does not execute a cross-trade with 

or for the employee benefit plan or net 

orders for securities for the plan, other 

than orders for shares of open-end 

investment companies not traded on an 

exchange. 

(f) Evasions. In considering whether a 

bank meets the terms of this section, 

both the form and substance of the 

relevant account(s), transaction(s) and 

activities (including advertising 

activities) of the bank will be considered 

in order to prevent evasions of the 

requirements of this section. 

(g) Definitions. When used in this 

section: 

(1) Account for which the bank acts 

as a custodian means an account that is: 

(i) An employee benefit plan account 

for which the bank acts as a custodian; 

(ii) An individual retirement account 

or similar account for which the bank 

acts as a custodian; or 

(iii) An account established by a 

written agreement between the bank and 

the customer that sets forth the terms 

that will govern the fees payable to, and 

rights and obligations of, the bank 

regarding the safekeeping or custody of 

securities. 

(2) Advertisement means any material 

that is published or used in any 

electronic or other public media, 

including any Web site, newspaper, 

magazine or other periodical, radio, 

television, telephone or tape recording, 

videotape display, signs or billboards, 

motion pictures, or telephone 

directories (other than routine listings). 

(3) Employee benefit plan account 

means a pension plan, retirement plan, 

profit sharing plan, bonus plan, thrift 

savings plan, incentive plan, or other 

similar plan, including, without 

limitation, an employer-sponsored plan 

qualified under section 401(a) of the 

Internal Revenue Code (26 U.S.C. 

401(a)), a governmental or other plan 

described in section 457 of the Internal 

Revenue Code (26 U.S.C. 457), a taxdeferred plan described in section 

403(b) of the Internal Revenue Code (26 

U.S.C. 403(b)), a church plan, 

governmental, multiemployer or other 

plan described in section 414(d), (e) or 

(f) of the Internal Revenue Code (26 

U.S.C. 414(d), (e) or (f)), an incentive 

stock option plan described in section 

422 of the Internal Revenue Code (26 

U.S.C. 422); a Voluntary Employee 

Beneficiary Association Plan described 

in section 501(c)(9) of the Internal 

Revenue Code (26 U.S.C. 501(c)(9)), a 

non-qualified deferred compensation 

plan (including a rabbi or secular trust), 

a supplemental or mirror plan, and a 

supplemental unemployment benefit 

plan. 

(4) Individual retirement account or 

similar account means an individual 

retirement account as defined in section 

408 of the Internal Revenue Code (26 

U.S.C. 408), Roth IRA as defined in 

section 408A of the Internal Revenue 

Code (26 U.S.C. 408A), health savings 

account as defined in section 223(d) of 

the Internal Revenue Code (26 U.S.C. 

223(d)), Archer medical savings account 

as defined in section 220(d) of the 

Internal Revenue Code (26 U.S.C. 

220(d)), Coverdell education savings 

account as defined in section 530 of the 

Internal Revenue Code (26 U.S.C. 530), 

or other similar account. 

(5) Sales literature means any written 

or electronic communication, other than 

an advertisement, that is generally 

distributed or made generally available 

to customers of the bank or the public, 

including circulars, form letters, 

brochures, telemarketing scripts, 

seminar texts, published articles, and 

press releases concerning the bank’s 

products or services. 

(6) Principal underwriter has the same 

meaning as in section 2(a)(29) of the 

Investment Company Act of 1940 (15 

U.S.C. 80a–2(a)(29)). 

§ll.771 Exemption from the definition 

of ‘‘broker’’ for banks effecting transactions 

in securities issued pursuant to Regulation 

S. 

(a) A bank is exempt from the 

definition of the term ‘‘broker’’ under 

section 3(a)(4) of the Act (15 U.S.C. 

78c(a)(4)), to the extent that, as agent, 

the bank: 

(1) Effects a sale in compliance with 

the requirements of 17 CFR 230.903 of 

an eligible security to a purchaser who 

is outside of the United States within 

the meaning of 17 CFR 230.903; 

(2) Effects a resale of an eligible 

security after its initial sale with a 

reasonable belief that the eligible 

security was initially sold outside of the 

United States within the meaning of and 

in compliance with the requirements of 

17 CFR 230.903, by or on behalf of a 

person who is not a U.S. person under 

17 CFR 230.902(k) to a purchaser who 

is outside the United States within the 

meaning of 17 CFR 230.903 or a 

registered broker or dealer, provided 

that if the sale is made prior to the 

expiration of the distribution 

compliance period specified in 17 CFR 

230.903(b)(2) or (b)(3), the sale is made 

in compliance with the requirements of 

17 CFR 230.904; or 

(3) Effects a resale of an eligible 

security after its initial sale outside of 

the United States within the meaning of 

and in compliance with the 

requirements of 17 CFR 230.903, by or 

on behalf of a registered broker or dealer 

to a purchaser who is outside the United 

States within the meaning of 17 CFR 

230.903, provided that if the sale is 

made prior to the expiration of the 

distribution compliance period 

specified in 17 CFR 230.903(b)(2) or 

(b)(3), the sale is made in compliance 

with the requirements of 17 CFR 

230.904. 

(b) Definitions. For purposes of this 

section: 

(1) Distributor has the same meaning 

as in 17 CFR 230.902(d). 

(2) Eligible security means a security 

that: 

(i) Is not being sold from the 

inventory of the bank or an affiliate of 

the bank; and 

(ii) Is not being underwritten by the 

bank or an affiliate of the bank on a 

firm-commitment basis, unless the bank 

acquired the security from an 

unaffiliated distributor that did not 

purchase the security from the bank or 

an affiliate of the bank. 

(3) Purchaser means a person who 

purchases an eligible security and who 

is not a U.S. person under 17 CFR 

230.902(k). 

§ll.772 Exemption from the definition 

of ‘‘broker’’ for banks engaging in 

securities lending transactions. 

(a) A bank is exempt from the 

definition of the term ‘‘broker’’ under 

section 3(a)(4) of the Act (15 U.S.C. 

78c(a)(4)), to the extent that, as an agent, 

it engages in or effects securities lending 

transactions, and any securities lending 

services in connection with such 

transactions, with or on behalf of a 

person the bank reasonably believes to 

be: 

(1) A qualified investor as defined in 

section 3(a)(54)(A) of the Act (15 U.S.C. 

78c(a)(54)(A)); or 

(2) Any employee benefit plan that 

owns and invests on a discretionary 

basis, not less than $25,000,000 in 

investments. 

(b) Securities lending transaction 

means a transaction in which the owner 

of a security lends the security 

temporarily to another party pursuant to 

a written securities lending agreement 

under which the lender retains the 

economic interests of an owner of such 

securities, and has the right to terminate 

the transaction and to recall the loaned 

securities on terms agreed by the 

parties. 

(c) Securities lending services means: 


sroberts on PROD1PC70 with PROPOSALS
77550 Federal Register / Vol. 71, No. 247 / Tuesday, December 26, 2006 / Proposed Rules 

(1) Selecting and negotiating with a 

borrower and executing, or directing the 

execution of the loan with the borrower; 

(2) Receiving, delivering, or directing 

the receipt or delivery of loaned 

securities; 

(3) Receiving, delivering, or directing 

the receipt or delivery of collateral; 

(4) Providing mark-to-market, 

corporate action, recordkeeping or other 

services incidental to the administration 

of the securities lending transaction; 

(5) Investing, or directing the 

investment of, cash collateral; or 

(6) Indemnifying the lender of 

securities with respect to various 

matters. 

§ll.775 Exemption from the definition 

of ‘‘broker’’ for the way banks effect 

excepted or exempted transactions in 

investment company securities. 

(a) A bank that meets the conditions 

for an exception or exemption from the 

definition of the term ‘‘broker’’ except 

for the condition in section 3(a)(4)(C)(i) 

of the Act (15 U.S.C. 78c(a)(4)(C)(i)), is 

exempt from such condition to the 

extent that it effects transactions in 

securities issued by an open-end 

company that is neither traded on a 

national securities exchange nor 

through the facilities of a national 

securities association or an interdealer 

quotation system, provided that: 

(1) Such transactions are effected 

through the National Securities Clearing 

Corporation’s Mutual Fund Services or 

directly with a transfer agent acting for 

the open-end company; and 

(2) The securities are distributed by a 

registered broker or dealer, or the sales 

charge is no more than the amount a 

registered broker or dealer may charge 

pursuant to the rules of a securities 

association registered under section 15A 

of the Act (15 U.S.C. 78o-3) adopted 

pursuant to section 22(b)(1) of the 

Investment Company Act of 1940 (15 

U.S.C. 80a-22(b)(1)). 

(b) Definitions. For purposes of this 

section: 

(1) Interdealer quotation system has 

the same meaning as in 17 CFR 

240.15c2–11. 

(2) Open-end company has the same 

meaning as in § ll.740. 

§ .ll780 Exemption for banks from 

liability under section 29 of the Securities 

Exchange Act of 1934. 

(a) No contract entered into before 

[date 18 months after effective date of 

the final rule], shall be void or 

considered voidable by reason of section 

29(b) of the Act (15 U.S.C. 78cc(b)) 

because any bank that is a party to the 

contract violated the registration 

requirements of section 15(a) of the Act 

(15 U.S.C. 78o(a)), any other applicable 

provision of the Act, or the rules and 

regulations thereunder based solely on 

the bank’s status as a broker when the 

contract was created. 

(b) No contract shall be void or 

considered voidable by reason of section 

29(b) of the Act (15 U.S.C. 78cc(b)) 

because any bank that is a party to the 

contract violated the registration 

requirements of section 15(a) of the Act 

(15 U.S.C. 78o(a)) or the rules and 

regulations thereunder based solely on 

the bank’s status as a broker when the 

contract was created, if: 

(1) At the time the contract was 

created, the bank acted in good faith and 

had reasonable policies and procedures 

in place to comply with section 

3(a)(4)(B) of the Act (15 U.S.C. 

78c(a)(4)(B)) and the rules and 

regulations thereunder; and 

(2) At the time the contract was 

created, any violation of the registration 

requirements of section 15(a) of the Act 

by the bank did not result in any 

significant harm or financial loss or cost 

to the person seeking to void the 

contract. 

§ll.781 Exemption from the definition 

of ‘‘broker’’ for banks for a limited period 

of time. 

A bank is exempt from the definition 

of the term ‘‘broker’’ under section 

3(a)(4) of the Act (15 U.S.C. 78c(a)(4)) 

until the first day of its first fiscal year 

commencing after June 30, 2008. 

By order of the Board of Governors of the 

Federal Reserve System, December 18, 2006. 

Jennifer J. Johnson, 

Secretary of the Board. 

Dated: December 18, 2006. 

By the Securities and Exchange 

Commission. 

Nancy M. Morris, 

Secretary. 

[FR Doc. 06–9825 Filed 12–22–06; 8:45 am] 

BILLING CODE 6210–01–P; 8011–01–P 

SECURITIES AND EXCHANGE 

COMMISSION 

17 CFR Part 240 

[Release No. 34–54947; File No. S7–23–06] 

RIN 3235–AJ77 

Exemptions for Banks Under Section 

3(a)(5) of the Securities Exchange Act 

of 1934 and Related Rules 

AGENCY: Securities and Exchange 

Commission. 

ACTION: Proposed rule. 

SUMMARY: The Securities and Exchange 

Commission is publishing for comment 

proposed rules and rule amendments 

regarding exemptions from the 

definitions of ‘‘broker’’ and ‘‘dealer’’

under the Securities Exchange Act of 

1934 (‘‘Exchange Act’’) for banks’’

securities activities. In particular, the 

Commission is re-proposing a 

conditional exemption originally 

proposed in 2004 that would allow 

banks to effect riskless principal 

transactions with non-U.S. persons 

pursuant to Regulation S under the 

Securities Act of 1933 (‘‘Securities 

Act’’). The Commission also is 

proposing to amend and redesignate an 

existing exemption from the definition 

of ‘‘dealer’’ for banks’ securities lending 

activities as a conduit lender. In 

addition, the Commission is proposing 

to amend a rule that grants a limited 

exemption from U.S. broker-dealer 

registration for foreign broker-dealers, 

conforming the rule to amended 

definitions of ‘‘broker’’ and ‘‘dealer’’

under the Exchange Act. Finally, the 

Commission is requesting comment on 

its intention to withdraw a rule defining 

the term ‘‘bank’’ for purposes of 

Sections 3(a)(4) and 3(a)(5) of the 

Exchange Act, because of judicial 

invalidation, a time-limited exemption 

for banks’ securities activities, because 

of the passage of time, and an 

exemption from the definition of 

‘‘broker’’ and ‘‘dealer’’ for savings 

associations and savings banks, an 

exemption no longer necessary because 

of the passage of the Regulatory Relief 

Act. 

DATES: Comments should be received on 

or before March 26, 2007. 

ADDRESSES: Comments may be 

submitted by any of the following 

methods: 

Electronic Comments: 

• Use the Commission’s Internet 

comment form (http://www.sec.gov/ 

rules/proposed.shtml); or 

• Send an e-mail to rulecomments@sec.gov. Please include File 

Number S7–23–06 on the subject line. 

Paper Comments 

• Send paper comments in triplicate 

to Nancy M. Morris, Secretary, 

Securities and Exchange Commission, 

100 F Street, NE., Washington, DC 

20549–1090. 

All submissions should refer to File 

Number S7–23–06. This file number 

should be included on the subject line 

if e-mail is used. To help us process and 

review your comments more efficiently, 

please use only one method. The 

Commission will post all comments on 

the Commission’s Internet Web site 

(http://www.sec.gov/rules/ 

proposed.shtml). Comments are also 


sroberts on PROD1PC70 with PROPOSALS