27760 Federal Register / Vol. 66, No. 97 / Friday, May 18, 2001 / Rules and Regulations

1We do not edit personal, identifying

information, such as names or e-mail addresses,

from electronic submissions. Submit only

information you wish to make publicly available.

SECURITIES AND EXCHANGE

COMMISSION

17 CFR Parts 200 and 240

[Release No. 34–44291; File No. S7–12–01]

RIN 3235–AI19

Definition of Terms in and Specific

Exemptions for Banks, Savings

Associations, and Savings Banks

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

the Securities Exchange Act of 1934

AGENCY: Securities and Exchange

Commission.

ACTION: Interim final rules with request

for comments.

SUMMARY: The Securities and Exchange

Commission is adopting, as interim final

rules, new Rules 3a4–2, 3a4–3, 3a4–4,

3a4–5, 3a4–6, 3a5–1, 3b–17, 3b–18, 15a–

7, 15a–8, and 15a–9 under the Securities

Exchange Act of 1934 (‘‘Exchange Act’’),

and amending Rule 30–3 of our Rules of

Organization and Program Management.

These new rules address the functional

exceptions for banks from the

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

that were added to the Exchange Act by

the Gramm-Leach-Bliley Act and will

become effective May 12, 2001.

We are promulgating these rules on an

interim final basis, effective May 11,

2001, to clarify the terms of the

functional exceptions from the

definitions of broker and dealer as well

as to provide additional exemptions,

which will aid banks in complying with

the provisions of the Gramm-LeachBliley Act when they become effective.

We are soliciting comments on all

aspects of the interim final rules and

will amend these rules as appropriate in

response to comments received.

DATES: Effective Date: May 11, 2001.

Comment Date: Comments on the

interim final rules should be submitted

by July 17, 2001.

ADDRESSES: Comments should be

submitted in triplicate to Jonathan G.

Katz, Secretary, Securities and Exchange

Commission, 450 5th Street, N.W.,

Washington, D.C. 20549–0609.

Comments also may be submitted

electronically at the following E-mail

address: rule-comments@sec.gov. All

comment letters should refer to File No.

S7–12–01; this file number should be

included on the subject line if E-mail is

used. All comments received will be

available for public inspection and

copying in the Commission’s Public

Reference Room, 450 5th Street, N.W.,

Washington, D.C. 20549–0102.

Electronically submitted comment

letters will be posted on the

Commission’s Internet site (http://

www.sec.gov).1

FOR FURTHER INFORMATION CONTACT:

Catherine McGuire, Chief Counsel;

Lourdes Gonzalez, Assistant Chief

Counsel; Linda Stamp Sundberg,

Banking Fellow; Patricia Albrecht,

Special Counsel; or Joseph P. Corcoran,

Attorney, (202) 942–0073, Office of the

Chief Counsel, Division of Market

Regulation, Securities and Exchange

Commission, 450 5th Street, NW.,

Washington, DC 20549–1001.

SUPPLEMENTARY INFORMATION: The

Securities and Exchange Commission

(‘‘Commission’’) is adopting Rules 3a4–

2 [17 CFR 240.3a4–2], 3a4–3 [17 CFR

240.3a4–3], 3a4–4 [17 CFR 240.3a4–4],

3a4–5 [17 CFR 240.3a4–5], 3a4–6 [17

CFR 240.3a4–6], 3a5–1 [17 CFR

240.3a5–1], 3b–17 [17 CFR 240.3b–17],

3b–18 [17 CFR 240.3b–18], 15a–7 [17

CFR 240.15a–7], 15a–8 [17 CFR

240.15a–8], and 15a–9 [17 CFR 240.15a–

9] under the Exchange Act as interim

final rules clarifying certain terms in

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

Exchange Act [15 U.S.C. 78c(a)(4) and

78c(a)(5)] and providing exemptions for

banks from broker-dealer registration.

The Commission is delegating authority

to the Division of Market Regulation

through an amendment to Rule 30–3 of

its Rules of Organization and Program

Management [17 CFR 200.30–3] to issue

to banks, savings associations, and

savings banks additional exemptions

from registration and regulation.

Table of Contents

I. Introduction

A. Background

1. Exceptions From Both ‘‘Broker’’ And

‘‘Dealer’’ Definitions

2. Other Exceptions From ‘‘Broker’’

Definition

3. Other Exception From ‘‘Dealer’’

Definition

B. The Gramm-Leach-Bliley Act

II. Rule 3b–17—Definitions Related to

Exception From ‘‘Broker’’

A. Networking Exception

B. Trust And Fiduciary Activities Exception

1. Trustee Capacity

a. Indenture Trustees

b. ERISA And Other Similar Trustees

c. IRA Trustees

d. Definitional Exemption Alleviates

Uncertainty

2. Fiduciary Capacity

a. Transfer Agent

b. Investment Adviser If The Bank Receives

A Fee For Its Investment Advice

i. Continuous And Regular Investment

Advice

ii. Full And Fair Disclosure

3. Other Similar Capacity

4. Other Department That Is Regularly

Examined By Bank Examiners For

Compliance With Fiduciary Principles

And Standards

5. Chiefly Compensated

a. Account-By-Account Calculations

b. Annual Computation

c. A Flat Or Capped Per Order Processing

Fee

d. ‘‘Relationship Compensation,’’ ‘‘Sales

Compensation,’’ And ‘‘Unrelated

Compensation’’

i. Relationship Compensation

ii. Sales Compensation

iii. Unrelated Compensation

e. ‘‘Chiefly Compensated’’ Computation

f. RULE 3a4–2—Exemption For Banks That

Are Compensated By Relationship

Compensation

g. RULE 3a4–3—Exemption From ‘‘Chiefly

Computation’’ For Indenture Trustees

h. Solicitation Of Comment

C. Sweep Accounts Exception

D. Safekeeping And Custody Activities

Exception

1. RULE 3a4–4—Exemption For Small

Bank Custodians Effecting Transactions

In Investment Company Securities For

Tax-Deferred Custody Accounts

2. RULE 3a4–5—Exemption For Bank

Custodians Placing Orders As An

Accommodation To Customers

III. Discussion of Other Exceptions From

Broker

A. Affiliate Transactions Exception

B. De Minimis Exception And RULE 3a5–1

IV. Rule 3b–18—Definitions of Terms Used

In Asset-Backed Exception to Dealer

V. Rule 3a4–6—Exemption To Permit

Execution of Investment Company Securities

Through NSCC’s Mutual Fund Services

VI. Rule 15a–7—Extensions of Time

VII. Rule 15a–8—Exemption for Contracts

Entered Into by Banks Before 2003 From

Being Considered Void or Voidable

VIII.Rule 15a–9—Exemption for Savings

Associations and Savings Banks

IX. Rule 30–3—Delegation of Authority

X. Procedural Matters

A. Administrative Procedures Act And

Request For Comments

B. Paperwork Reduction Act

C. Consideration Of Costs And Benefits

1. Introduction

2. Banks’ Securities Activities Before The

GLBA

3. Options For Compliance With The

GLBA Under The Statute In Light Of

These Interim Final Rules

a. Benefits

b. Costs

D. Consideration Of Burden On Competition,

and On Promotion of Efficiency,

Competition, And Capital Formation

E. Summary Of Regulatory Flexibility

Analysis

Federal Register / Vol. 66, No. 97 / Friday, May 18, 2001 / Rules and Regulations 27761

2Pub. L. No. 106–102, 113 Stat. 1338 (1999).

3 Jaworski, Robert M., ‘‘Financial Modernization:

The Federal Government Plays Catch-up,’’ 54

Consumer Fin. L.Q. Rep. 2 (Winter, 2000).

4Pub. L. No. 73–66, ch. 89, 48 Stat. 162 (1933)

(as codified in various sections of 12 U.S.C.).

5The Garn-St. Germain Depository Institutions

Act of 1982, Pub. L. No. 97–320, 96 Stat. 1469

(1982) (as codified in various sections of 12 U.S.C.),

amending section 4(c)(8) of the Bank Holding

Company Act, 12 U.S.C. 1841–1850 (1994).

6See Jaworski, Robert M., supra note 3.

7 During recent years, the Senate, the House, and

Congressional committees acted on several versions

of Glass-Steagall reform bills. In 1988, the Senate

passed S. 1886, the ‘‘Financial Modernization Act

of 1988,’’ which would have repealed the

provisions of the Glass-Steagall Act that prohibit

affiliations between commercial banks and

investment banks. That same year the House

Banking Committee reported H.R. 5094, the

‘‘Depository Institutions Act of 1988.’’ This

legislation never reached the House floor. In 1991,

in response to the Administration’s call for

financial services reform, the Senate passed S. 543,

the ‘‘Comprehensive Deposit Insurance Reform and

Taxpayer Protection Act of 1991.’’ The House

Banking Committee voted to report favorably H.R.

6, the ‘‘Financial Institutions Safety and Consumer

Choice Act of 1991,’’ which would have allowed

banks to affiliate with securities firms, insurance

companies, and commercial entities under a

diversified holding company structure. The GlassSteagall provisions of those bills were dropped,

however. In 1995, the House Banking Committee

approved H.R. 1062, the ‘‘Financial Services

Competitiveness Act of 1995,’’ which would have

allowed banks to affiliate with securities firms and

engage in activities that were financial in nature.

Later that same year, the House Banking Committee

ordered reported another version as part of H.R.

1858, the ‘‘Financial Institutions Regulatory Relief

Act of 1995.’’ Significantly, in 1997, the

Administration supported, through the Treasury

Department, a different version of financial services

modernization legislation. The House Banking

Committee also approved financial services

modernization legislation in the form of H.R. 10, the

‘‘Financial Services Competitiveness Act of 1997.’’

Administration support for some version of

financial services legislation, together with strong

lobbying and negotiating efforts involving the

affected industries, led to the passage by the House

of H.R. 10 on May 13, 1998, by a one-vote margin

of 214 to 213. On September 11, 1998, the Senate

Banking Committee also approved its version of

H.R. 10. That legislation did not reach the Senate

floor.

Five comprehensive financial services reform

bills were introduced in the first session of the

106th Congress in 1999. Two bills, H.R. 10 and S.

900, were reported out of committee, passed by the

House and Senate, and resulted in a compromise

version of S. 900 that was enacted. There was no

activity on the other three bills, S. 753, H.R. 665,

and H.R. 823; however, some policies in those bills,

for example, in the areas of financial privacy and

treatment of bank subsidiaries, were reflected to

some extent in the legislation that eventually

passed.

8See Letter from Arthur Levitt, Chairman, U.S.

Securities and Exchange Commission, to Senator

Phil Gram, Chairman, Committee on Banking,

Housing and Urban Affairs, U.S. Senate (Oct. 14,

1999) (stating that ‘‘the Securities and Exchange

Commission has long supported financial

modernization legislation that provides the

protections of the securities laws to all investors.’’);

see, also Testimony of Arthur Levitt, Chairman,

U.S. Securities and Exchange Commission,

Concerning H.R. 10, the ‘‘Financial Services Act of

1999,’’ Before the Subcomm. On Finance and

Hazardous Materials of the House Comm. On

Commerce (May 5, 1999); Testimony of Arthur

Levitt, Chairman, U.S. Securities and Exchange

Commission, Concerning Financial Modernization

Legislation Before the Senate Comm. On Banking,

Housing, and Urban Affairs (Feb. 24, 1999);

Testimony of Harvey J. Goldschmid, General

Counsel, U.S. Securities and Exchange Commission,

Concerning H.R. 10, the ‘‘Financial Services Act of

1999,’’ Before the House Comm. On Banking and

Financial Services, U.S. House of Representatives

(Feb. 12, 1999); Testimony of Arthur Levitt,

Chairman, U.S. Securities and Exchange

Commission, Concerning H.R. 10, The ‘‘Financial

Services Act of 1998,’’ Before the Senate Comm. On

Banking, Housing, and Urban Affairs (June 25,

1998); Testimony of Arthur Levitt, Chairman, U.S.

Securities and Exchange Commission, Concerning

Financial Modernization and H.R. 10, the

‘‘Financial Services Competition Act of 1997,’’

Before the Subcomm. On Finance and Hazardous

Materials of the House Comm. On Commerce (July

17, 1997); Testimony of Arthur Levitt, Chairman,

U.S. Securities and Exchange Commission,

Concerning Financial Modernization, Before House

Comm. On Banking and Financial Services (May 22,

1997); Testimony of Arthur Levitt, Chairman, U.S.

Securities and Exchange Commission, Regarding

H.R. 1062, the ‘‘Financial Services Competitiveness

Act of 1995,’’ Before the Subcomm. On

Telecommunications and Finance and the

Subcomm. On Commerce, Trade and Hazardous

Materials of the House Comm. On Commerce (June

6, 1995); Testimony of Arthur Levitt, Chairman,

U.S. Securities and Exchange Commission,

Concerning the ‘‘Financial Services

Competitiveness Act of 1995’’ and Related Issues,

Before the House Comm. On Banking and Financial

Services (Mar. 15, 1995); Testimony of Arthur

Levitt, Chairman, U.S. Securities and Exchange

Commission, Concerning H.R. 3447 and Related

Functional Regulation Issues, Before the Subcomm.

On Telecommunications and Finance of the House

Comm. On Energy and Commerce (Apr. 14, 1994);

Testimony of Richard C. Breeden, Chairman, U.S.

Securities and Exchange Commission, Concerning

Financial Modernization, Before the Subcomm. On

Telecommunications and Finance of the House

Comm. On Energy and Commerce (July 11, 1990);

Memorandum of the Securities and Exchange

Commission (under Chairman David Ruder) to the

Subcomm. On Telecommunications and Finance of

the House Comm. On Energy and Commerce,

Concerning Financial Services Deregulation and

Repeal of the Glass-Steagall Act (Apr. 11, 1988);

Testimony of David S. Ruder, Chairman, U.S.

Securities and Exchange Commission, Concerning

the Structure and Regulation of the Financial

Services Industry, Before the Subcomm. On

Telecommunications and Finance of the House

Comm. On Energy and Commerce (Oct. 5, 1987).

9Exchange Act Sections 3(a)(4) and 3(a)(5) [15

U.S.C. 78c(a)(4) and 78c(a)(5)].

XI. Statutory Authority

XII. Text of Rules and Rule Amendments

I. Introduction

A. Background

On November 12, 1999, the President

signed the Gramm-Leach-Bliley Act

(‘‘GLBA’’) into law.2 The GLBA

represents the culmination of more than

30 years of Congressional efforts aimed

at reforming the regulation of financial

services.3 The GLBA changed federal

statutes governing the scope of

permissible activities and the

supervision of banks, bank holding

companies, and their affiliates. The

GLBA lowers (although does not

altogether eliminate) barriers between

the banking and securities industries

erected by the Banking Act of 1933

(popularly known as the ‘‘Glass-Steagall

Act’’) 4 and between the banking and the

insurance industries erected by the 1982

amendments to the Bank Holding

Company Act of 1956 (the ‘‘Bank

Holding Company Act’’).5 Some have

described the GLBA as the most

important piece of federal banking

legislation since the Depression.6

When Congress enacted the Exchange

Act in l934, it completely exempted

banks from the regulatory scheme

provided for brokers and dealers. Over

the past 60 years, however, evolution of

the financial markets driven by

competition and technology eroded the

separation that previously existed

between banks, insurance companies,

and securities firms. Regulators

responded to these changes with

interpretations that increasingly sought

to accommodate the market changes.

The Board of Governors of the Federal

Reserve System (‘‘Federal Reserve’’), the

Office of the Comptroller of the

Currency (‘‘OCC’’), and the Federal

Deposit Insurance Corporation (‘‘FDIC’’)

have long permitted banks and bank

holding companies to engage in retail

and institutional securities brokerage

and private placement activities.

Beginning in the 1980s, these

developments, coupled with arguments

for competitive equality both

domestically and internationally,

spurred Congressional action. Congress

considered major restructuring of legal

restrictions preventing financial services

firms from offering a full array of

products, while at the same time

maintaining the successful system of

functional regulation of securities,

insurance, and banking that existed

under that framework.7

The Commission long supported

modernizing the legal framework

governing financial services, so long as

it was consistent with a system of

functional regulation to ensure that

investors purchasing securities through

banks received the same protections as

those when they purchased securities

from registered broker-dealers.8 The

GLBA is the product of many years of

Congressional deliberation and reflects a

careful balance between providing

investors with the same protections

wherever they purchase securities,

while not unnecessarily disturbing

certain bank securities activities.

Sections 201 and 202 of the GLBA

substantially amended the Exchange

Act’s definitions of ‘‘broker’’ and

‘‘dealer,’’ respectively.9 The amended

definitions become effective on May 12,

27762 Federal Register / Vol. 66, No. 97 / Friday, May 18, 2001 / Rules and Regulations

10Current Exchange Act Section 3(a)(4) defines

the term ‘‘broker’’ as ‘‘any person engaged in the

business of effecting transactions in securities for

the account of others, but does not include a bank.’’

Current Exchange Act Section 3(a)(5) defines the

term ‘‘dealer’’ as ‘‘any person engaged in the

business of buying and selling securities for his

own account, through a broker or otherwise, but

does not include a bank ***.’’

11Exchange Act Section 3(a)(6) [15 U.S.C.

78c(a)(6)] defines the term ‘‘bank’’ as:

(A) a banking institution organized under the

laws of the United States, (B) a member bank of the

Federal Reserve System, (C) any other banking

institution, whether incorporated or not, doing

business under the laws of any State or of the

United States, a substantial portion of the business

of which consists of receiving deposits or exercising

fiduciary powers similar to those permitted to

national banks under the authority of the

Comptroller of the Currency * * * and which is

supervised and examined by State or Federal

authority having supervision over banks, and which

is not operated for the purpose of evading the

provisions of this title, and (D) a receiver,

conservator, or other liquidating agent of any

institution or firm included in clauses (A), (B), or

(C) of this paragraph.

12Exchange Act Section 15(a) [15 U.S.C. 78o(a)]

generally provides that:

[i]t shall be unlawful for any broker or dealer

which is either a person other than a natural person

or a natural person not associated with a broker or

dealer which is a person other than a natural person

(other than such a broker or dealer whose business

is exclusively intrastate and who does not make use

of any facility of a national securities exchange) to

make use of the mails or any means or

instrumentality of interstate commerce to effect any

transactions in, or to induce or attempt to induce

the purchase or sale of, any security (other than an

exempted security or commercial paper, bankers’

acceptances, or commercial bills) unless such

broker or dealer is registered in accordance with

[the provisions] of this section.

13This outline is a summary. It does not describe

the exceptions in full.

14Letter from Melanie L. Fein to Robert L. D.

Colby, Deputy Director, and Catherine McGuire,

Associate Director and Chief Counsel, Division of

Market Regulation, Commission (Mar. 30, 2001);

Letter from Scott M. Albinson, Managing Director,

OTS, to Annette L. Nazareth, Director, Division of

Market Regulation, Commission, and Paul F. Roye,

Director, Division of Investment Management,

Commission (Mar. 20, 2001); Letter from Lawrence

R. Uhlick, Executive Director and General Counsel,

Institute of International Bankers, to Robert L. D.

Colby, Deputy Director, and Catherine McGuire,

Associate Director and Chief Counsel, Division of

Market Regulation, Commission (Mar. 15, 2001);

Letter from Barry Harris, Chair, Bank Retail BrokerDealer Committee, Securities Industry Association,

to Laura Unger, Acting Chairman, Commission

(Mar. 13, 2001); Letter from Melanie L. Fein to

Robert L. D. Colby, Deputy Director, and Catherine

McGuire, Associate Director and Chief Counsel,

Division of Market Regulation, Commission (Mar.

13, 2001); Letter from Melanie L. Fein to Robert L.

D. Colby, Deputy Director, and Catherine McGuire,

Associate Director and Chief Counsel, Division of

Market Regulation, Commission (Mar. 7, 2001);

Letter from Sarah A. Miller, Director, Center for

Securities, Trust and Investments, American

Bankers Association, to Laura Unger, Acting

Chairman, Commission (Feb. 28, 2001).

15Several of the banking agencies promulgated

interim final rules implementing various provisions

of the GLBA and solicited comments to implement

the bank activity sections of the GLBA. See Interim

Final Rule with Request for Comments,

Repurchases of Stock by Recently Converted

Savings Associations, Mutual Holding Company

Dividend Waivers, 65 Fed Reg. 43088 (July 12,

2000), comment period extended, 65 FR 60095 (Oct.

10, 2000) (Office of Thrift Supervision (‘‘OTS’’));

Joint Interim Final Rule with Request for

Comments, Bank Holding Companies and Changes

in Bank Control, 65 FR 16460 (Mar. 28, 2000)

(Board of Governors of the Federal Reserve System

(‘‘Federal Reserve’’) and Department of Treasury

(‘‘Treasury’’)); Interim Final Rules with Request for

Comment, Activities and Investments of Insured

State Banks, 65 FR 15526 (Mar. 23, 2000), Final

Rule, 66 FR 1018 (Jan. 5, 2001) (Federal Deposit

Insurance Corporation (‘‘FDIC’’)); Interim Final Rule

with Request for Comments, Financial Subsidiaries,

65 FR 14819 (Mar. 20, 2000) (Federal Reserve); Joint

Interim Final Rule with Request for Comments,

Financial Subsidiaries, 65 FR 15050 (Mar. 20, 2000)

(Treasury and Federal Reserve); Interim Final Rule

with Request for Comments, Application of

Sections 23A and 23B of the Federal Reserve Act

to Derivative Transactions with Affiliates and

Intraday Extensions of Credit to Affiliates, 66 FR

24229 (May 11, 2001) (Federal Reserve).

16Exchange Act Section 3(b) [15 U.S.C. 78c(b)]

authorizes us to define terms in the Exchange Act.

2001. Before the amendment, Sections

3(a)(4) and 3(a)(5) of the Exchange Act

provided that the terms ‘‘broker’’ and

‘‘dealer’’ did not include a ‘‘bank.’’10

Accordingly, banks 11 that engaged in

securities activities were excepted from

the requirement to register as brokerdealers under the Exchange Act.12 The

amended definitions replace this

general exception for banks with

specific functional exceptions from

broker-dealer registration for certain

bank securities activities.

In particular, the amended definitions

create 11 ‘‘broker’’ and 4 ‘‘dealer’’

exceptions for banks. Three of these

exceptions are similar for both ‘‘broker’’

and ‘‘dealer.’’ The exceptions are

outlined briefly below:13

1. Exceptions From Both ‘‘Broker’’ And

‘‘Dealer’’ Definitions

• Trust and fiduciary activities:

permits banks to act as brokers and

dealers in securities so long as they act

as ‘‘trustees’’ or ‘‘fiduciaries’’ and meet

other conditions.

• Permissible securities transactions:

permits banks to act as brokers and

dealers with respect to exempted

securities, Canadian government

obligations, and Brady bonds.

• Identified banking products:

permits banks to act as brokers and

dealers for certain ‘‘identified banking

products,’’ as defined in Section 206 of

the GLBA.

2. Other Exceptions From ‘‘Broker’’

Definition

• Third party brokerage

arrangements: permits banks to enter

into contractual arrangements with

registered broker-dealers to sell

securities to bank customers under

specified conditions.

• Certain stock purchase plans:

permits banks, as a part of their transfer

agent activities, to effect certain

securities transactions in employee

benefit plans, dividend reinvestment

plans, and issuer plans under specified

conditions.

• Sweep accounts: permits banks to

sweep customer funds into no-load

money market funds.

• Affiliate transactions: permits

banks to effect transactions for affiliates,

other than affiliates that are registered

broker-dealers or affiliates engaged in

merchant banking.

• Private securities offerings: permits

banks that are not affiliated with brokerdealers to privately place securities

under specified conditions.

• Safekeeping and custody activities:

permits banks to hold securities, pledge

securities, lend securities held in

custody, and reinvest collateral.

• Municipal securities: permits banks

to act as brokers in municipal securities.

• De minimis exception: permits

banks to engage in 500 securities

transactions annually without

registering as brokers.

3. Other Exception From ‘‘Dealer’’

Definition

• Asset-backed products: permits

banks to underwrite and sell assetbacked securities representing

obligations predominantly originated by

a bank, an affiliate of the bank other

than a broker-dealer, or a syndicate in

which the bank is a member, for some

types of products.

In recent weeks, we have received an

increasing number of inquiries

regarding how we will interpret some of

the terms in the new specific functional

exceptions.14 Because the exceptions

from the definitions of broker and dealer

are exceptions to the Exchange Act, we

are statutorily charged with interpreting

these exceptions. In response to

interpretive questions that have arisen,

we are adopting, as interim final rules,15

new Exchange Act Rules 3b–17 and 3b–

18.16

New Rule 3b–17 defines terms

applicable to three exceptions from the

definition of broker: (1) Networking

arrangements; (2) trust and fiduciary

activities; and (3) sweep accounts. Rule

3b–17 also provides legal certainty to

banks regarding the availability of the

fiduciary activities exception when they

act as indenture trustees or as trustees

for tax-deferred accounts. New Rule 3b–

18 defines terms for the exception from

the definition of dealer for banks that

sell asset-backed securities.

To alleviate concerns that have been

expressed to us in recent months, we

also grant five exemptions under which

banks may effect transactions in

Federal Register / Vol. 66, No. 97 / Friday, May 18, 2001 / Rules and Regulations 27763

17Exchange Act Section 36 [15 U.S.C. 78mm]

authorizes us to exempt any person, security, or

transaction from the provisions of the Exchange

Act, to the extent that such exemption is necessary

or appropriate in the public interest, and consistent

with the protection of investors.

18This exemption is limited to savings

associations and savings banks that have deposits

insured by the FDIC under the Federal Deposit

Insurance Act (‘‘FDIA’’). 12 U.S.C. 1811 et seq.

19See id. The same limitation applies to this

delegation.

20 12 U.S.C. 1828(t).

21Supra note 4.

22H.R. Rep. No. 106–74, pt. 3, at 106th Cong., 1st

Sess. at 113 (1999).

securities without being registered as

broker-dealers. New Rule 3a4–2

responds to concerns banks have

expressed about calculating the

compensation condition in the trust and

fiduciary activities exception. This rule

permits banks to compute their

compensation, for purposes of the

compensation condition, based on their

total amount of trust and fiduciary

activities, subject to a 10% limit and

internal maintenance procedures. New

Rule 3a4–3 allows banks to effect

transactions as indenture trustees in noload money market funds without

meeting the ‘‘chiefly compensated’’

condition in the trust and fiduciary

activities exception.

New Rule 3a4–4 provides a

conditional exemption to allow small

banks to effect transactions in

investment company securities held in

tax-deferred custody accounts and to be

compensated for this brokerage activity.

We define small banks as banks that had

less than $100 million in assets as of

December 31 in both of the prior two

calendar years, and have not been, since

December 31 of the third prior calendar

year, an affiliate of a bank holding

company or financial holding company

that, as of December 31 of both of the

prior two calendar years, had total

assets of $1 billion or more. Small banks

may not rely this exemption if they are

affiliated with, or have networking

arrangements with, registered brokerdealers. New Rule 3a4–5 conditionally

exempts all banks that effect

transactions in securities for custody

accounts without, directly or indirectly,

receiving compensation for providing

this service. A bank relying on this

exemption may pass on to the customer

the broker-dealer’s charge for executing

the transactions. Like Rule 3a4–4, this

exemption imposes conditions on

banks’ solicitation of transactions.

New Rule 3a4–6 provides a

conditional exemption that allows

banks to continue to execute

transactions in investment company

securities through the National

Securities Clearing Corporation’s

(‘‘NSCC’’) Mutual Fund Services,

including Fund/SERV, instead of

through a registered broker-dealer as

required by Exchange Act Section

3(a)(4)(C). This exemption is available

only to banks that otherwise meet the

conditions of another exception or

exemption.

New Rule 3a5–1 conditionally

exempts from the definition of ‘‘dealer’’

banks engaged in riskless principal

transactions if they do not exceed the de

minimis transactions exception limit in

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

We understand that banks will need

time to determine whether any

securities activities must be conducted

through registered broker-dealers after

May 11, 2001. In addition, some banks

may not have completed the process of

ensuring that securities transactions are

conducted through registered brokerdealers, where required. Accordingly,

new Rule 15a–7 exempts banks that are

engaging in securities activities from the

definitions of broker and dealer until

October 1, 2001.17 In addition, Rule

15a–7 exempts banks whose

compensation arrangements do not meet

the compensation conditions of a

particular exception or exemption from

the definition of broker until January 1,

2002, if they meet the other conditions

for an exception or exemption.

New Rule 15a–8 exempts banks from

the potential voiding under Exchange

Act Section 29(b) of contracts entered

into before January 1, 2003, because the

bank violated the broker-dealer

registration requirements or any

applicable provision of the Exchange

Act and rules thereunder based solely

on the bank’s status as a broker or dealer

at the time the bank entered into the

contract. Finally, new Rule 15a–9

exempts savings associations and

savings banks 18 from the definitions of

‘‘broker’’ and ‘‘dealer’’ under Exchange

Act Sections 3(a)(4) and 3(a)(5) on the

same terms and conditions that apply to

banks.

We recognize that banks have

developed their particular securities

activities under the general exception

from broker-dealer registration that

existed prior to the passage of the

GLBA. Because particular banks may

have individual considerations that may

be appropriate for additional relief, we

are authorizing the Director of the

Division of Market Regulation to

consider, on a case-by-case basis,

individual requests for exemptive relief

from banks. We also are directing the

staff to consider requests from savings

associations and savings banks for

additional exemptive relief.19 To

facilitate the processing of these

requests, we have delegated exemptive

authority to the staff of the Division of

Market Regulation through an

amendment to Rule 30–3 of our Rules of

Organization and Program Management.

We expect the staff to submit novel and

complex requests for exemption to us.

As a general matter, under the federal

securities laws, parties relying on an

exception or exemption have the burden

of demonstrating that they qualify for

such exception or exemption. We would

therefore expect banks, as a matter of

good business practice, to be able to

demonstrate that they meet the terms of

a particular exemption. We solicit

comment regarding whether the

requirements that the bank regulators

are required to adopt under Section

18(t) of the FDIA 20 will be sufficient for

this purpose or whether the

Commission itself should adopt record

keeping rules relating to these

exemptions. We solicit comment on

what records banks have or can develop

to demonstrate to the Commission that

they meet the terms of a particular

exemption. We also solicit comment on

whether it is necessary for savings

association and savings bank regulators

to adopt record keeping requirements

for savings associations and savings

banks analogous to those adopted for

banks.

We request comment on all aspects of

the interim final rules as well as

comment on the specific provisions and

issues highlighted below.

B. The Gramm-Leach-Bliley Act

As highlighted above, the GLBA

repealed certain provisions of the GlassSteagall Act 21 and other restrictions

applicable to banks and bank holding

companies. As a result, banks are able

to affiliate with securities firms and

insurance companies within the same

financial holding company.

The GLBA codified the concept of

functional regulation—that is,

regulation of the same functions, or

activities, by the same expert regulator,

regardless of the type of entity engaging

in those activities. Congress believed

that, given the expansion of the

activities and affiliations in the financial

marketplace, functional regulation was

important to building a coherent

financial regulatory scheme.22

Accordingly, Title II of the GLBA

amended the federal securities laws to

provide for functional regulation of

securities activities by eliminating the

complete exception for banks from the

definitions of ‘‘broker’’ and ‘‘dealer.’’ As

the legislative history noted, prior to the

passage of the GLBA, the exception for

banks from broker-dealer registration

27764 Federal Register / Vol. 66, No. 97 / Friday, May 18, 2001 / Rules and Regulations

23 Id. at 113–14.

24See Board of Governors of Federal Reserve

System v. Investment Co. Institute, 450 U.S. 46, 61,

101 S. Ct. 973, 984, 67 L. Ed. 2d 36 (1981); 75 Cong.

Rec. 9913–9914 (1932) (remarks of Sen. Bulkley).

Employees that perform purely cerical and

ministerial duties are not required to pass a

qualifications test.

25See, e.g., NASD Rules 1031 and 1032, relating

to the registration of representatives of member

firms; and New York Stock Exchange (‘‘NYSE’’)

Rule 345, relating to employee registration,

approval, and records.

26See, e.g., Exchange Act Section 19(h)(3) [15

U.S.C. 78s(h)(3)].

27See, e.g., NASD Rules 1021 and 1022, relating

to the registration of principals of member firms. 28See, e.g., Exchange Act Section 15(b)(7) [15

U.S.C. 78o(b)(7)]; NASD Rules 1120 (‘‘Continuing

Education Requirements’’) and 3010

(‘‘Supervision’’); NYSE Rules 345A (‘‘Continuing

Education for Registered Persons’’) and 405(b)

(‘‘Supervision of Accounts’’).

29See, e.g., Exchange Act Rule 15g–9 [17 CFR

240.15g–9] (‘‘Sales Practice Requirements for

Certain Low-Priced Securities’’); NASD Rule 2310

(‘‘Recommendations to Customers (Suitability)’’);

NASD Rule 2440 (‘‘Fair Prices and Commissions’’).

30See NASD Rule 2210 (‘‘Communications with

the Public’’); NYSE Rule 472 (‘‘Communications

with the Public’’). These rules include standards for

communications with the public, approval, record

keeping, and filing requirements. The NASD and

the NYSE also require supervisory review of

communication with the public. NASD Conduct

Rule 3010 (‘‘Supervision’’); NYSE Rule 342

(‘‘Offices-Approval, Supervision, and Control’’).

31See, e.g., The Interagency Statement on Retail

Sales of Nondeposit Investment Products (February

15, 1994), 7 Fed. Banking L. Rep. (CCH) ¶ 70–101

(joint statement by the Federal Reserve, OTS, FDIC,

and the OCC).

32H.R. Rep. No. 106–74, pt. 3, at 113–14, 161–62

(1999).

33Exchange Act Section 3(a)(4) [15 U.S.C.

78c(a)(4)].

34Former Exchange Act Section 3(a)(4).

35Exchange Act Section 3(a)(4)(B) [15 U.S.C.

78c(a)(4)(B)].

36 17 CFR 240.3b–17.

37Exchange Act Section 3(b) [15 U.S.C. 78c(b)]

authorizes us to define terms used in the Exchange

Act, consistent with the provisions and purposes of

the Exchange Act.

created a competitive disparity by

permitting banks to engage in securities

activities without being subject to the

same regulatory requirements as brokerdealers. In the legislative history,

Congress specifically expressed concern

that the complete exception had

permitted banks to engage in securities

activities without being subject to the

provisions of the federal securities laws

that were designed to protect

investors.23

The federal securities laws provide a

comprehensive and coordinated system

of regulation of securities activities.

They are specifically and uniquely

designed to assure the protection of

investors through full disclosure

concerning securities and the

prevention of unfair and inequitable

practices in the securities markets. The

securities laws also have as a goal fair

competition among all participants in

the securities markets. Broker-dealer

registration is an important element of

this regulatory system. Absent brokerdealer registration, bank securities

activities generally are regulated only

under banking law, which has as its

primary purposes the protection of

depositors and the preservation of the

financial soundness of banks.24 Thus,

bank securities activities take place

outside of the coordinated system of

securities regulation that is designed to

protect investors, leading to regulatory

disparities.

For example, to become licensed to

sell securities, all persons associated

with a broker-dealer are required to pass

a qualifications test covering substantive

aspects of the securities business.25

Commission and self-regulatory

organization (‘‘SRO’’) rules also assure

that those persons associated with

broker-dealers who have committed

abuses that would make them subject to

a statutory disqualification are

prohibited from working in the

securities industry or are subject to

conditions such as enhanced

supervision.26 The SROs also require

that persons involved in the

management of the broker-dealer pass

additional examinations relating to

supervisory procedures and

requirements.27 These qualification

requirements are supplemented by

continuing education requirements, the

broker-dealer’s duty to supervise its

employees to prevent violations of the

federal securities laws, and the specific

supervisory procedures imposed by the

SROs.28 In addition, our rules and those

of the SROs specifically address sales

practice abuses.29 By contrast, bank

personnel generally are not subject to

licensing or other regulations designed

to test their knowledge of the securities

business.

Another area in which banking and

securities regulation differ is

communications with the public,

including advertising. Broker-dealers

must comply with specific guidelines

concerning the content and review of

communications with the public,

including advertisements.30 With

certain limited exceptions, there are no

equivalent rules governing the

advertisement of bank securities

activities.31

Broker-dealers are subject to

inspections and examinations not only

by our staff but also by the SROs with

our supervision. SRO examinations are

designed to assure compliance with the

federal securities laws, in particular

sales practices and financial

responsibility regulations. Banks, on the

other hand, are not members of SROs.

While bank examiners may review for

violations of the banking agencies’

securities guidelines, the primary focus

is on ensuring the safety and soundness

of the bank rather than the protection of

investors.

Congress considered the different

purposes of bank and securities

regulation when it eliminated the

blanket exception from broker-dealer

registration for banks’ securities

activities.32 The GLBA replaced the

general exception with eleven specific

functional exceptions to the definition

of broker and four specific functional

exceptions to the definition of dealer. In

replacing the general exception with

more narrowly tailored exceptions, the

GLBA sought to apply broker-dealer

regulation to bank securities activities

where appropriate to strengthen

investor protection, taking into account

the nature of the securities activities

being conducted. This approach

resulted in the specific exceptions

enumerated in the amended definitions

of broker and dealer in the Exchange

Act that will continue to allow banks to

engage directly in many securities

activities without conducting those

activities through a registered broker or

dealer. The new exceptions go into

effect on May 12, 2001.

II. Rule 3b–17—Definitions Related to

Exception From ‘‘Broker’’

Exchange Act Section 3(a)(4)

generally defines a ‘‘broker’’ to be ‘‘any

person engaged in the business of

effecting transactions in securities for

the account of others.’’ 33 Prior to the

passage of the GLBA, this definition was

modified by the words ‘‘but does not

include a bank’’ (emphasis added).34

The GLBA repealed this exception and

replaced it with eleven specific

exceptions for certain securities

activities that a bank may engage in

without being considered a broker.35

We are adopting Rule 3b–17 36 to

clarify some of the exceptions

enumerated in amended Exchange Act

Section 3(a)(4).37 Rule 3b–17 defines

certain terms that are used in the

exceptions regarding third-party

brokerage arrangements, trust and

fiduciary activities, and sweep accounts.

In addition, both in this Part and in Part

III of this Release below, we discuss

exceptions in Exchange Act Section

3(a)(4) related to safekeeping and

custody activities, affiliate transactions,

and a de minimis number of securities

transactions.

A. Networking Exception

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

Act provides an exception from the

Federal Register / Vol. 66, No. 97 / Friday, May 18, 2001 / Rules and Regulations 27765

38This exception follows a long line of letters

issued by the Commission staff regarding these

types of arrangements. H.R. Rep. No. 106–74, pt. 3,

at 163 (1999); see, e.g., Letter re: Chubb Securities

Corp. (Nov. 24, 1993) (‘‘Chubb Letter’’). The Chubb

Letter superseded prior staff positions regarding

these arrangements. See also NASD Rule 2350

(Broker-Dealer conduct on the Premises of Financial

Institutions). The Chubb Letter will remain in effect

for required service corporations of savings

associations and savings banks; however, the Chubb

Letter is available only to service corporations so

long as a savings association or savings bank is

required to use one. A savings association or

savings bank that complies with the terms of the

networking exception will automatically comply

with the terms of the Chubb Letter.

39Exchange Act Section 3(a)(4)(B)(i) [15 U.S.C.

78c(a)(4)(B)(i)].

40Exchange Act Section 3(a)(4)(B)(i)(VI) [15

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

41See H.R. Rep. No. 106–74, pt. 3, at 163 (1999)

(‘‘The [third-party brokerage arrangements]

exception is * * * limited by a variety of

conditions designed to promote investor

protection.’’).

42See id. (‘‘[T]he conditions contained in the

networking exception * * * restrict the securities

activities of unregistered bank personnel to reduce

sales practice concerns.’’).

43The ‘‘account opening process’’ commences at

the point of first contact between a broker-dealer

and a customer. See NASD Notice to Members 97–

89 (1997), at Question 7.

definition of broker for banks that enter

into third-party brokerage

(‘‘networking’’) arrangements.38 Under

this exception, and subject to certain

conditions, a bank will not be

considered a broker if it ‘‘enters into a

contractual or other written

arrangement’’ with a registered brokerdealer through which the broker-dealer

‘‘offers brokerage services on or off the

premises of the bank.’’ 39 Statutorily

imposed conditions to the exception

address separation of brokerage and

banking services, compliance with

advertising conditions, functions and

compensation of bank employees,

conditions to fully disclose the

customers’ accounts to broker-dealers,

and conditions on banks acting as

carrying brokers.

One particular condition prohibits

unregistered bank employees from

receiving:

incentive compensation for any brokerage

transaction unless such employees are

associated persons of a broker or dealer and

are qualified pursuant to the rules of a selfregulatory organization, except that the bank

employees may receive compensation for the

referral of any customer if the compensation

is a nominal one-time cash fee of a fixed

dollar amount and the payment of the fee is

not contingent on whether the referral results

in a transaction.40

Legislative history indicates that this

condition, like the other conditions in

the networking exception, was designed

to promote investor protection.41

Specifically, Congress included the

limitation on incentive compensation to

unregistered bank employees to ensure

that those people who have a

‘‘salesman’s stake’’ in securities

transactions are subject to the sales

practice standards and other

requirements of the federal securities

laws.42

We have kept Congress’ limit in mind

in interpreting two terms in the

provision. First, Rule 3b–17(h) defines

the term ‘‘referral’’ to mean a bank

employee arranging a first securitiesrelated contact between a registered

broker-dealer and a bank customer. The

term ‘‘referral’’ does not include any

activity (including any part of the

account opening process) related to

effecting transactions in securities

beyond arranging that first securitiesrelated contact.43

Second, Rule 3b–17(g) provides two

alternative definitions of the term

‘‘nominal one-time cash fee of a fixed

dollar amount.’’ First, the rule provides

that a nominal one-time cash fee of a

fixed dollar amount may be a payment

that does not exceed one hour of the

gross cash wages of the unregistered

bank employee making the referral.

Second, the rule also provides that a

nominal one-time cash fee of a fixed

dollar amount may be a payment in the

form of points in a system or program

that covers a range of bank products and

non-securities related services, where

the points count toward a bonus that is

cash or non-cash, if the points awarded

for referrals involving securities are not

greater than the points awarded for

products or services not involving

securities. Banks may use either

alternative in setting nominal payments

if they meet the requirements discussed

below, including the requirement that

any payment not be designed as an

incentive to a bank employee to solicit

particular investors to open accounts or

to engage in securities transactions.

We provided two alternative ways to

measure cash compensation to give

banks the flexibility of compensating

their employees for securities referrals

based either on their current wages or

on what the banks pay for referrals of

other products and services. By creating

two alternative standards, we allow

banks to develop a market-based

approach to employee compensation

that is consistent with the compensation

limitation in the networking exception.

In either case, as discussed below, we

require that any payment not be

designed as an incentive to a bank

employee to solicit particular investors

to open accounts or to solicit investors

to engage in securities transactions.

We considered choosing a set dollar

amount as the measure for a nominal

cash payment. We decided against this

approach after considering that we

would likely have to adjust periodically

any set dollar amount to reflect changes

in the economy that would affect its real

value. We also determined that, given

the economic differences across the

country, an across-the-board dollar

amount may not have a nominal value

everywhere or in every part of the bank.

For example, what is considered a

nominal dollar amount in San

Francisco, California may be considered

generous in Wichita, Kansas. Similarly,

one system may be used for teller

referrals and another system for private

banker referrals. Using one hour of the

cash wages of the unregistered bank

employee making a referral should

alleviate these concerns. Hourly wages

are generally adjusted, not just to reflect

the current state of the economy, but

also to reflect the economic climate of

a particular location and the duties of a

particular employee. Also, using one

hour of cash wages as the measure for

a nominal cash payment, we ensured

that the referral fee is proportionate to

an employee’s overall wages.

We understand that bank employees

making referrals typically are paid a

yearly salary rather than an hourly

wage. In these cases, translating the

yearly salaries into hourly wages should

still be a simple task. We request

comment on whether an hour’s wages,

subject to the limits described below, is

a proper measure of a ‘‘nominal’’ fee.

Use of a point system under the

second alternative reflects our

understanding that banks do not always

reward employees with a set cash

referral fee. Payment of bonuses as part

of a point system or program offered to

bank employees is not necessarily

inconsistent with the networking

exception. A point system may do

nothing more than translate a nominal

one-time cash referral fee into nominal

one-time referral points. If the point

system is part of an overall system that

includes products other than securities

and lines of business other than

brokerage, and the securities-related

referral points have a value that is no

greater than the points received under

the system for any other product or

service, it should have only a nominal

value in the system. Accordingly, we

have provided this alternative definition

in an effort to accommodate existing

bank practices. Of course, the program

may not be structured in any way that

allows unregistered bank employees to

be compensated either directly or

indirectly for meeting sales targets

27766 Federal Register / Vol. 66, No. 97 / Friday, May 18, 2001 / Rules and Regulations

44Non-cash compensation can include, but is not

necessarily limited to, merchandise, gifts, prizes,

travel expenses, meals, and lodging. See NASD Rule

2830(b)(1)(D) (providing essentially the same

definition of non-cash compensation for NASD rule

limiting cash and non-cash compensation to

members in connection with investment company

securities activities).

45This condition does not necessarily dictate

equal weighting for referrals to different business

lines. Rather, it means that, to the extent there are

differential referral payouts, points for referrals to

broker-dealers should not have greater weight than

points for any other type of referral.

46We look behind the terms of a compensation

arrangement to determine its economic substance,

that is, to determine whether it is transactionrelated. Thus, a fee arrangement designed to

compensate a person for what that person would

have received if the person directly received

transaction-related compensation (for example, a

flat fee that is recalculated periodically to reflect an

increase or decrease in the number of transactions)

would be the equivalent of transaction-related

compensation. In this regard, a flat fee representing

a percentage of expected future commissions could

be considered transaction-related.

47See Chubb Letter, supra note 38.

48This is important, in our view, because referral

compensation may create an improper salesman’s

incentive. For example, in 1998 NationsSecurities

and NationsBank, N.A., without admitting or

denying the matters set forth in the settlement

order, settled administrative proceedings brought

by us for alleged misleading sales practices relating

to two high-risk sales of closed-end bond funds. In

the Matters of NationsSecurities and NationsBank,

N.A., Securities Act Rel. No. 7532; Exchange Act

Rel. No. 39947; File No. 3–9596 (May 4, 1998). The

bank also adopted a referral fee system that created

heightened incentives for bank employees to make

customer referrals to the broker-dealer. Under this

program, the broker-dealer paid the bank 5% of the

broker-dealer’s gross commission for making

referrals to the broker-dealer and the bank then paid

the referring bank employee. The payment was

conditioned on closing a sale of securities and was

proportional to the size of the sale. In some

instances, bank employees substantially increased

their monthly compensation during this period by

making referrals to the broker-dealer. The statutory

limitations on the networking exception are

designed to prevent precisely these types of

incentives to unregistered bank personnel.

49The statute also does not contemplate deferred

compensation on a sliding scale, a grid, or

breakpoints for referrals. See H.R. Rep., No. 106–74,

pt. 3, at 163 (‘‘[B]ank employees who are not

registered representatives may not receive incentive

compensation in connection with securities

transactions.’’). In the securities industry, variable

commission payments are designed to be incentive

compensation. See generally Report of the

Committee on Compensation Practices (April 10,

1995) (‘‘Tully Report’’).

50See generally Exchange Act Section 3(a)(4)(B)(i)

[15 U.S.C. 78c(a)(4)(B)(i)]; H.R. Rep. No. 106–74, at

163 (1999) (both the language of the statute and the

legislative history of the exception refer only to

bank employees in the context of individual natural

persons, especially when comparing their status to

registered representatives; registered representatives

are always individual natural persons).

51Banks cannot structure arrangements with

networking broker-dealers or affiliated brokerdealers in which the bank becomes the carrying

broker for the affiliates or networking brokerdealers. See Exchange Act Section 3(a)(4)(B)(viii)(II)

[15 U.S.C. 78c(a)(4)(B)(viii)(II)].

52Exchange Act Section 3(b) [15 U.S.C. 78c(b)].

53 15 U.S.C. 78c(a)(4)(B)(ii).

related to securities products or

services.

We understand that banks may choose

to provide prizes, rather than cash

bonuses, to bank employees that meet a

certain point goal.44 As long as the point

system meets the conditions described

above, including the requirement that

any payment not be designed as an

incentive to a bank employee to solicit

particular investors to open accounts or

to solicit investors to engage in

securities transactions, we would view

the system as consistent with the

statutory exception.45

Regardless of the form of payment

banks decide to use, Rule 3b–17(g) also

provides that any payment may not be

designed to provide, either directly or

indirectly,46 an incentive to a bank

employee to solicit investors to open

accounts or to solicit investors to engage

in securities transactions. Therefore,

Rule 3b–17(g) also specifies that

payments may not be based on: (1) The

size, value, or completion of any

securities transaction; (2) the amount of

securities-related assets gathered; (3) the

size or value of any customer’s bank or

securities account; or (4) the customer’s

financial status.

This interpretation is consistent with

the Commission staff’s historical

position on networking activities.47

Also, while nominal referral payments

that are not based on the success of any

securities transactions may provide a

limited salesman’s stake, we believe

these parameters will help ensure that

the effect of the stake will be small.48

We are concerned that referral

payments, while ‘‘nominal’’ when

considered independently, may not be

‘‘nominal’’ when considered in the

aggregate. For example, one referral

payment to a teller for one referral in

one day of work may be ‘‘nominal,’’ but

twenty referral payments to a teller for

twenty referrals in one day may not be

‘‘nominal’’ when considered in the

aggregate. ‘‘Nominal’’ payments are to

be paid to employees for whom referrals

to the broker-dealer constitute an

insubstantial part of an employee’s

duties. If a referral fee system were

structured in such a manner that referral

fees constituted a substantial portion of

an employee’s total compensation, it

would raise serious questions about

whether the payments were designed to

encourage the bank employee to solicit

securities activities. We solicit comment

on whether we need to establish gross

compensation standards so that referral

payments that are ‘‘nominal’’ do not

become incentive compensation when

aggregated, and if so, what those limits

should be.

Banks also have questioned whether

bonuses paid in addition to a point

system, either in the form of cash or

non-cash compensation, are acceptable

under the exception. We do not believe

that bonuses based on brokerage

referrals fall within the compensation

limits of the exception.49 While bonuses

sometimes fall within the category of a

one-time payment, by their very nature

they are incentive compensation. The

networking exception prohibits

unregistered bank employees from

receiving incentive compensation for

any brokerage-related activity except for

nominal one-time cash payments of a

fixed dollar amount for a referral.

Banks, however, may give bonuses,

either in the form of cash or non-cash

compensation, to unregistered bank

employees based on the overall

profitability of the bank regardless of the

contribution of employee or employees

receiving the bonus. To rely on the

third-party brokerage exception,

however, banks cannot indirectly pay

their unregistered bank employees

incentive compensation for securities

transactions through a branch,

department, or line of business or

through a bonus program related to the

securities transactions of a branch,

department, or line of business.

In addition, the language and

legislative history of the networking

exception indicate that brokerage

referral fees can only be paid to natural

persons who are bank employees.50 The

compensation limit, however, does not

interfere with any incentive-based

compensation arrangements between

the broker-dealer and the bank as a

whole. Therefore, a broker-dealer in a

third-party brokerage arrangement with

a bank may make transaction-related

payments to the bank for brokerage

transactions conducted by the brokerdealer with the bank’s customers.51

We find that the definitions in Rule

3b–17 related to the networking

exception are consistent with the

provisions and purposes of the

Exchange Act.52 We request comment

on the interpretation of the limits on

incentive compensation in the

networking exception. Commenters are

specifically requested to identify other

issues related to the payment of various

types of incentive compensation.

B. Trust And Fiduciary Activities

Exception

Exchange Act Section 3(a)(4)(B)(ii)53

excepts banks that act as trustees or

fiduciaries from the definition of

‘‘broker,’’ subject to certain conditions.

Under the terms of this exception, a

bank will not be considered a ‘‘broker’’

if it meets the following conditions in

conducting brokerage activities: (1)

Federal Register / Vol. 66, No. 97 / Friday, May 18, 2001 / Rules and Regulations 27767

54Exchange Act Sections 3(a)(4)(B)(ii)(I) and (II);

[15 U.S.C. 78c(a)(4)(B)(ii)(I) and (II)].

55Exchange Act Section 3(a)(4)(C) [15 U.S.C.

78c(a)(4)(C)].

56H.R. Rep. No. 106–74, pt. 3, at 164. (1999).

57H.R. Conf. Rep. No. 106–434, pt. 3, 164 (1999).

58H.R. Rep. No. 106–74, pt. 3, at 164 (1999).

59Exchange Act Section 3(a)(4)(B)(ii) [15 U.S.C.

3(a)(4)(B)(ii) excepts any bank * * * ‘‘that effects

transactions in a trustee capacity, or effects

transactions in a fiduciary capacity. * * *’’

Exchange Act Section 3(a)(4)(D)(i) [15 U.S.C.

78c(a)(4)(D)(i)] defines the term ‘‘fiduciary

capacity’’ to mean ’’* * * in the capacity as

trustee.’’

60The difficulties of issuing secured corporate

debt to numerous bondholders gave rise to the need

for indenture trustees. Since it would be wholly

impractical to have the security run to the group of

bondholders directly or to have a separate security

instrument for each bondholder, a trustee exercises

its powers and duties on behalf of the bondholders.

See G. Bogert, TRUSTS AND TRUSTEES 250, pp.

254–55 (West 1977); E.F. Hutton v. Union Planters

National Bank, 953 F.2d 963, 968 (5th Cir. 1992).

The need for an indenture trustee for issues of

modern day unsecured corporate debentures also

continues because the debt represented by the

debenture is typically not secured by specific assets

of the issuer and is frequently subordinated to

senior indebtedness of the issuer. Thus, the

corporate trustee is needed to protect the rights of

the many holders of the debentures and to perform

certain ministerial tasks connected with the normal

operation of the debentures. Although the debts

created by debentures run directly from the issuer

to the holders, the contractual rights conferred by

the indenture run from the issuer to the trustee for

the benefit of the holders of the debentures. E.F.

Hutton, 953 F.2d at 968.

61See, e.g., Investment Company Act Rel. No.

15900, Community Program Loan Trust No. 1987 A;

Application, 52 FR 28628 (Applicant represented

that trust indenture agreement permitted indenture

trustee to invest funds of indenture trust in certain

eligible investments as described in the agreement).

62 15 U.S.C. 77aaa et seq. (1988).

63Martin D. Sklar, The Corporate Indenture

Trustee: Genuine Fiduciary or Mere Stakeholder?,

106 Banking L.J. 42, 49 (1989).

64See Meckel v. Continental Resources Co., 758

F.2d 811, 816 (2d Cir. 1985) and Elliott Associates

v. J. Henry Schroder Bank and Trust Co., 838 F. 2d

66, 71 (2d Cir. 1988), both of which held that

indenture trustees have no duties above the specific

obligations imposed in the indenture. But see

Dabney v. Chase National Bank, 196 F.2d 668 (2d

Cir. 1952), appeal dismissed, 346 U.S. 863, 74 S.

Ct. 102, 103, 98 L. Ed. 374 (1953), where Judge

Learned Hand, writing for the Second Circuit,

reached a somewhat different conclusion when the

indenture trustee was a creditor of the obligor, and

the court found the indenture trustee liable for

prematurely collecting a debt from the obligor. The

bondholders sued the indenture trustee, alleging

that it had forced the obligor into bankruptcy. Judge

Hand stated that the duty of a trustee not to profit

at the possible expense of his beneficiary is the

most fundamental of the duties, which he accepts

when he becomes a trustee. It is a part of his

obligation to give his beneficiary his undivided

loyalty, free from any conflicting personal interest;

an obligation that has been nowhere more jealously

and rigidly enforced than in New York where these

indentures were executed. Judge Hand indicated

that indenture trustees are not fiduciaries by saying:

‘‘We can find no warrant for so supposing; and,

indeed, a trust for the benefit of a numerous and

changing body of bondholders appears to us to be

preeminently an occasion for a scruple even greater

than ordinary; for such beneficiaries often have too

small a stake to follow the fate of their investment

and protect their rights.’’ Id. at 671.

65 29 U.S.C. 1001 et seq.

66 29 U.S.C. 1103(a).

67 29 U.S.C. 1105(c)(1)(A).

68Subparagraph (B) states that an investment

company registered under the Investment Company

Act of 1940, and the company’s investment adviser

or principal underwriter, are not deemed to be

Continued

Effects transactions in a trustee or

fiduciary capacity; (2) effects such

transactions in its trust department or

other department that is regularly

examined by bank examiners for

compliance with fiduciary principles

and standards; (3) is chiefly

compensated for such transactions,

consistent with fiduciary principles and

standards, on the basis of an

administration or annual fee (payable on

a monthly, quarterly, or other basis), a

percentage of assets under management,

or a flat or capped per order processing

fee equal to not more than the cost

incurred by the bank in connection with

executing such securities transactions or

any combination of such fees; and (4)

does not publicly solicit brokerage

business, other than by advertising that

it effects transactions in securities in

conjunction with advertising its other

trust activities.54 A bank also must

execute such transactions through a

registered broker-dealer or in a cross

trade.55

This exception recognizes the

traditional role banks have played in

effecting securities transactions for trust

customers. These activities generally

were inherent in a bank’s trust operation

itself, or arose as an accommodation to

bank customers or through a traditional

trust arrangement, rather than through

promotion and public solicitation of

bank brokerage services.56 Congress

expressed the expectation that we

would not disturb traditional bank trust

activities under this exception.57

Congress, however, did not intend the

trust exception to be used to conduct a

securities brokerage operation in the

bank trust department without the

appropriate investor protections

provided under the federal securities

laws.58 We believe that this legislative

history indicates that the trust and

fiduciary activities exception was

designed not only to preserve these

traditional securities-related bank trust

activities but also to apply broker-dealer

protections to securities activities

outside those traditional lines. We have

kept that intent in mind in interpreting

this exception.

1. Trustee Capacity

The trust and fiduciary activities

exception excepts banks that act in a

‘‘trustee capacity’’ or in a ‘‘fiduciary

capacity’’ from the definition of

broker.59 Trustees typically are subject

to the strongest of fiduciary duties to

trust beneficiaries.

We have been asked, however,

whether a bank that acts as a ‘‘trustee’’

in three specific situations involving

securities accounts directed by others

qualify for trust and fiduciary activities

exception. This question arises because

banks in these situations may not be

subject to significant fiduciary

responsibilities. These three situations

are indenture trustees, Employee

Retirement Security Act (‘‘ERISA’’) and

other pension plan trustees, and

Individual Retirement Account (‘‘IRA’’)

trustees. In each of these situations, the

person who assumes certain ministerial

duties for tax, employee benefit, or trust

indenture purposes is labeled a trustee,

often under a federal statute, but does

not actually assume a comprehensive

set of fiduciary duties under either state

or federal law.

a. Indenture Trustees. Under certain

forms of trust indenture,60 a bank acting

as an indenture trustee may invest idle

cash in shares of money market mutual

funds or other securities.61 Sometimes,

the issuer of the bonds actually directs

the investments. In this case, an

indenture trustee might act as an ordertaker at the direction of the bond issuer,

within the investment parameters set

forth in the indenture. However, an

indenture trustee acts in a constrained

order-taking capacity, because the

indenture trustee is responsible for

making sure that any investments it

undertakes fall within the investment

parameters of the trust indenture.

Indenture trustees are subject to the

Trust Indenture Act of 1939 (‘‘TIA’’)

when the corporate securities that

underlie the indenture are sold to the

public by use of the mails or in

interstate commerce.62 State law also

may provide additional duties in

circumstances where the TIA and

federal common law are not

controlling.63 However, the courts, in

expounding and construing the law

regarding indenture trustees, have not

always agreed on the type and nature of

the duties of indenture trustees.64

b. ERISA And Other Similar Trustees.

ERISA 65 Section 403(a) generally

requires that ‘‘all assets of an employee

benefit plan shall be held in trust by one

or more trustees,’’ who are to be named

in the trust instrument or appointed by

a named fiduciary of the plan. 66 The

term ‘‘fiduciary,’’ as defined under

ERISA Section 3(21)(A),67 provides that:

Except as otherwise provided in

subparagraph (B),68 a person is a fiduciary

27768 Federal Register / Vol. 66, No. 97 / Friday, May 18, 2001 / Rules and Regulations

fiduciaries or parties in interest to plans investing

in the company’s securities (except for in-house

plans of such persons). ERISA Section 3(21)(B) [29

U.S.C. 1002(21)(B)]. 69ERISA Section 405(c)(1)(B) [29 U.S.C.

1105(c)(1)(B)] describes the designation by named

fiduciaries of other persons to carry out fiduciary

responsibilities. 70See, e.g., Olson v. E.F. Hutton and Co., 957

F.2d 622 (8th Cir. 1992) (ERISA applied to a brokerdealer). 71See, e.g., Chicago Board Options Exchange v.

Connecticut General Life, 713 F.2d 254 (7th Cir.

1983). 72See Class Exemption for Plan Asset

Transactions Determined by Independent Qualified

Professional Asset Managers, 49 F.R. 9494, 9496

(1984). 73See Sections 403(a) and 404(c) of ERISA, 29

U.S.C. 1103(a) and 1104(c). 74 26 U.S.C. 457(b). Assets and deferred amounts

of Section 457(b) plans can be held in trust,

custodial accounts, or annuity contracts. 26 U.S.C.

457(g). However, custodial accounts and annuity

contracts are treated as trusts, and regardless of how

the assets and deferred amounts are held, they must

be held for the exclusive benefit of participants and

their beneficiaries for the plan. 26 U.S.C. 457(g)(1)

and (3). 75See, e.g, Bedall v. State Street Bank and Trust

Co., 137 F.3d 12 (1st Cir. 1998) (bank, which held

plan assets ‘‘in trust’’ but did not manage,

administer, or conduct valuations of the assets, was

not a fiduciary); Maniace v. Commerce Bank of

Kansas City, N.A., 40 F.3d 264 (8th Cir. 1994), cert.

denied, 514 U.S. 1111 (1995) (bank trustee of an

employee stock ownership plan was not a fiduciary

under ERISA because it did not have real discretion

over the plan’s assets, and because the trust

document explicitly limited the bank’s discretion

with respect to employer stock); Donovan v.

Cunningham, 541 F. Supp. 276, 290 (S.D. Tex

1982), modified on other grounds, 716 F.2d 1455

(5th Cir. 1983), cert. denied, 476 U.S. 1251 (1984)

(trustee, who was a ‘‘directed trustee’’ under ERISA

Section 403(a)(1), was not liable for breach of

fiduciary duties where its activities were confined

to the ‘‘limited role of directed trustee’’); Robbins

v. First American Bank, 514 F. Supp. 1183 (1981

N.D. Ill.) (bank was not a fiduciary when acting as

directed trustee following instructions of a plan

fiduciary, or is custodian of plan assets); Bradshaw

v. Jenkins, 1984 WL 2405, Fed. Sec. L. Rep. P

99,719 (W.D.Wash. Mar. 9, 1984) (bank, which was

a ‘‘directed trustee,’’ was a ‘‘mere custodian of plan

assets who follows the instructions of another

fiduciary’’).

76See 29 CFR 2509.75–8, D–3 (trustee is a

fiduciary by the very nature of its position). If a

bank trustee does not make any recommendations

concerning the selection of particular investment

company securities, but another plan fiduciary

independently selects, from mutual fund families

made available to the bank, particular funds to be

made available for investment by plan participants,

these duties will not arise if the bank gives notice

to the plan sponsor before modifying the list of

funds available for investment by plan participants.

See Department of Labor (‘‘DOL’’) Advisory

Opinion 97–16A (May 22, 1997) regarding Frost

National Bank (‘‘The Department points out that the

act of limiting designative investment options

which are intended to constitute all or part of the

investment universe of an ERISA 404(c) plan is a

fiduciary function, which, whether achieved

through fiduciary designation or express plan

language, is not a direct or necessary result of any

particular direction of such plan.’’); DOL

Information Letter to Mark H. Sokolsky, WSB File

No. DL0523 (Sept. 5, 1996) (a trustee subject to

direction from a named fiduciary has ‘‘residual’’

fiduciary authority for determining whether the

direction is proper and consistent with ERISA); see

also 29 CFR 2550.404c–1(f)(8).

77See Section 408 of the Internal Revenue Code

of 1986 [26 U.S.C. 408] and the regulations

promulgated thereunder. 26 CFR 1.408–2.

78The IRC permits an IRA to be denominated as

a ‘‘trust’’ or a ‘‘custodial account.’’ See 26 CFR

1.408–2(b) and (d). Other entities also may become

the holder of custodial or trustee accounts for IRAs

if they meet the requirements established by the

Internal Revenue Service under the Department of

the Treasury. 26 U.S.C. 408(h) and 26 CFR 408–2(e).

For our purposes, this alternative qualification

procedure is not relevant because banks, which are

the focus of our analysis, are automatically

qualified to undertake this role under the statute.

79See 26 CFR 1.408–2(b).

80The bank must file form ‘‘5498 IRA

Contribution Information’’ on an annual basis. The

bank also must file appropriate form ‘‘1099–R

Distributions from Pensions, Annuities, Retirement

or Profit-Sharing Plans, IRAs, Insurance Contracts,

etc.’’ to reflect distributions from any IRA account.

81ERISA Section 403(a) establishes the general

requirement that a plan trustee ‘‘shall have

exclusive authority and discretion to manage and

control the assets of a plan.’’ An exception to the

general rule is when a trustee receives directions

from a named plan fiduciary, that is, when it acts

as a ‘‘directed trustee.’’ See ERISA Section 403(a)(1)

for basis of ‘‘directed trustee’’ exception.

82For example, Texas courts have likened IRAs

to safe deposit boxes where the bank administers

the IRA, keeping records and compiling reports,

and the IRA depositor decides what assets the IRA

will contain. See Colvin v. Alta Mesa Resources,

Inc., 920 S.W. 2d 688 (Tex.App.’’Houston 1996);

Lee v. Gutierrez, 876 S.W. 2d 382 (Tex.App.’’Austin

1994, writ denied). Other courts have reached

similar conclusions. See In re Houck, Eisenberg v.

Houck, 181 B.R. 187 (Bankr. E.D. Pa. April 19, 1995)

(court found that an IRA was not a trust as that term

was commonly used); Estate of Davis v. Davis, 171

Cal.App.3d 854, 217 Cal. Rptr. 734 (1985) (court

found that an IRA was not an express trust because

there was no intent to establish a trust; an IRA was

a trust for the purpose of tax deferment only). But

see In re Gillett, Tavormina v. Merchants Bank of

Miami, 55 B.R. 675, 13 Bankr.Ct.Dec. 1101 (Bankr.

S.D. Fla., Dec. 19, 1985).

83Because banks may act as trustees or custodians

for IRAs, it is important to note that this exemption

is available only when the bank acts as a trustee and

meets all of the other conditions of the trustee

exception. The trust and fiduciary activities

exception does not apply to IRA custodians.

However, as described below, we are using our

exemptive authority to grant two conditional

exemptions under the safekeeping and custody

exception to permit banks to effect securities

with respect to a plan to the extent (i) he

exercises any discretionary authority or

discretionary control respecting management

of such plan or exercises any authority or

control respecting management or

disposition of its assets, (ii) he renders

investment advice for a fee or other

compensation, direct or indirect, with respect

to any moneys or other property of such plan,

or has any authority or responsibility to do

so, or (iii) he has any discretionary authority

or discretionary responsibility in the

administration of such plan. Such term

includes any person designated under

section 405(c)(1)(B).69

Under ERISA, a person performing

any of the duties described in the

definition of ‘‘fiduciary’’ would be

considered a fiduciary.70 A person is a

fiduciary, however, only to the extent

that he performs ‘‘fiduciary’’

functions.71 For example, a person may

be a fiduciary with respect to some plan

assets but not others.72

While a trustee can be considered a

plan fiduciary if the trustee has

discretionary authority over the plan

and its assets, depending on the

structure of the particular retirement

plan, the trustee may be subject to

investment direction from the ‘‘named

fiduciary’’ of the plan, investment

managers, or plan participants.73 Thus,

the issue becomes whether an ERISA

plan trustee who is subject to another

person’s investment direction is a

fiduciary. Similar issues may arise

regarding state and local government

plans permitted under Section 457 of

the Internal Revenue Code (‘‘IRC’’).74

Although courts have disagreed

regarding whether a trustee subject to

investment direction is a fiduciary

under ERISA,75 the Department of Labor

takes the position that a trustee of an

ERISA plan is a fiduciary by the very

nature of its position.76

c. IRA Trustees. An IRA 77 account

can be created through a trust or

custody agreement with a bank under

the IRC.78 Whichever type of agreement

is used, an IRA account must be

maintained at all times as a domestic

trust in the United States. 79 The

trustee’s duties with respect to an

account are generally ministerial in

nature. 80 IRA trustees do not have

discretion regarding the management of

the IRA assets. 81

Courts that have considered IRA

trustees in other contexts generally, but

not uniformly, have reached the

conclusion that an IRA trust does not

establish a fiduciary relationship and

that an IRA should not be treated as a

trust is treated under other law.82 An

IRA trustee does not actually assume a

comprehensive set of fiduciary duties

towards investors under either state or

federal law.

d. Definitional Exemption Alleviates

Uncertainty. The law is unclear as to

whether banks acting in these three

capacities should be covered by the

trust and fiduciary activities exception

because they are acting, at most, in a

limited fiduciary capacity with regard to

investors who direct their investments,

despite their ‘‘trustee’’ label. To

alleviate this legal uncertainty, we are

providing an exemption for these

trustees if they conduct their securities

activities in accordance with all of the

other terms of the exception for trustee

activities, including being within a

‘‘trust department or other department

that is regularly examined by bank

examiners for compliance with

fiduciary principles and standards.’’83

Federal Register / Vol. 66, No. 97 / Friday, May 18, 2001 / Rules and Regulations 27769

transactions as IRA custodians. Furthermore, the

small bank custody exemption is available to

trustees and fiduciaries that are acting as

custodians. For example, the small bank custody

exemption is available to small bank trustees that

have custody of assets and are effecting transactions

in investment company securities consistent with

the terms of that exemption.

84We are providing this definitional exemption

under our exemptive authority under Exchange Act

Section 36(a)(1) [15 U.S.C. 78mm(a)(1)]. Exchange

Act Section 36(a)(1) allows us to grant exemptions

from any provision of the Exchange Act or the

Exchange Act’s Rules, if an exemption is necessary

or appropriate in the public interest, and is

consistent with the protection of investors. See also

Exchange Act Section 15(a)(2) [15 U.S.C. 78o(a)(2)],

Exchange Act Section 15(a)(2) [15 U.S.C. 78o(a)(2)]

allows us to grant exemptions from Exchange Act

15(a)(1) [15 U.S.C. 78o(a)(1)], which generally

requires brokers and dealers to be registered if

effecting transactions in securities, if the exemption

is consistent with the public interest and the

protection of investors.

85 It is important to note that our definitional

exemption regarding the term ‘‘trustee capacity’’ in

Section 3(a)(4)(B)(ii) of the Act does not alter our

view that Section 3(c)(3) of the Investment

Company Act of 1940 [15 U.S.C. 80a–3(c)(3)] is

unavailable to common trust funds holding IRA

assets.

As amended by the GLBA, Section 3(c)(3)

excludes from the definition of investment

company:

‘‘any common trust fund or similar trust fund

maintained by a bank exclusively for the collective

investment and reinvestment of moneys contributed

thereto by the bank in its capacity as a trustee,

executor, administrator, or guardian, if—

‘‘(A) such fund is employed by the bank solely

as an aid to the administration of trusts, estates, or

other accounts created and maintained for a

fiduciary purpose;

‘‘(B) except in connection with the ordinary

advertising of the bank’s fiduciary services,

interests in such fund are not—

‘‘(i) advertised; or

‘‘(ii) offered for sale to the general public; and

‘‘(C) fees and expenses charged by such fund are

not in contravention of fiduciary principles

established under applicable Federal or State law.’’

The GLBA added paragraphs (A) through (C).

These changes, among other things, codify our

longstanding interpretation that the common trust

fund exception is unavailable to common trust

funds holding IRA assets because such assets are

not held ‘‘for a fiduciary purpose.’’ See In re

Commercial Bank and Marvin C. Abeene, Securities

Act Rel. No. 7116, Investment Company Act Rel.

No. 20757, Admin. Proc. File No. 3–8567, 58 SEC

Dkt. 0487, 0491 (Dec. 6, 1994) (Order Instituting

Public Proceedings Pursuant to Section 8A of the

Securities Act of 1933 and Sections 9(b) and 9(f) of

the Investment Company Act of 1940, Making

Findings, Imposing Remedial Sanctions and

Ordering Respondents to Cease and Desist). See also

Santa Barbara Bank and Trust, SEC No-Action

Letter (Nov. 1, 1991) (citing Testimony of Richard

C. Breeden, Chairman, U.S. Securities and

Exchange Commission, Before the Subcommittee

On Telecommunications and Finance of the House

Committee on Energy and Commerce (Oct. 4,

1990)); United Missouri Bank of Kansas City, N.A.,

SEC No-Action Letter (Dec. 31, 1981).

86This exception should not, however, be

considered by banks in analyzing whether they are

acting in a ‘‘similar capacity’’ as that term is used

in the definition of ‘‘fiduciary capacity.’’ Exchange

Act Section 3(a)(4)(D). See also discussion of

‘‘similar capacity,’’ infra at Part 3 of this section.

87Exchange Act Section 3(a)(4)(D)(i) [15 U.S.C.

78c(a)(4)(D)(i)].

88Exchange Act Sections 3(a)(4)(D)(i) and (ii) [15

U.S.C. 78c(a)(4)(D)(i) and (ii)].

89Exchange Act Section 3(a)(4)(D)(iii) [15 U.S.C.

78c(a)(4)(D)(iii)].

90SEC v. Chenery Corp., 318 U.S. 80, 85–86, 87

L. Ed. 626, 63 S. Ct. 454 (1943).

91See 1 Austin Wakeman Scott and William

Franklin Fratcher, The Law of Trusts 8.1 (4th ed.

1987) (‘‘When a bank * * * receives the position

of securities or other property from a customer, its

duties depend on what it undertakes to do.’’).

92See H.R. Rep. No. 106–74, pt. 3, at 165 (1999)

note 9 above, at 165 (‘‘Because these activities will

be conducted by banks acting in a strict trustee or

fiduciary capacity, subject to Federal and State trust

law, and rigorously and regularly examined by bank

examiners, bank trust customers will be afforded

some basic protections. This mitigates concerns that

would otherwise exist because of the lack of Federal

securities law protections for these customers.

Absent this protection, the exemption may be

inappropriate.’’) (emphasis added).

93Exchange Act Section 3(a)(4)(B)(iv) [15 U.S.C.

78c(a)(4)(B)(iv)] also provides a separate exception

for banks that effect transactions, as part of their

transfer agent activities, in certain stock purchase

plans.

94Exchange Act Section 3(a)(25) [15 U.S.C.

78c(a)(25)] provides that a transfer agent is:

‘‘any person who engages on behalf of an issuer

of securities or on behalf of itself as an issuer of

securities in (A) countersigning such securities

upon issuance; (B) monitoring the issuance of such

securities with a view to preventing unauthorized

issuance, a function commonly performed by a

person called a registrar; (C) registering the transfer

of such securities; (D) exchanging or converting

such securities; or (E) transferring record ownership

of securities by bookkeeping entry without physical

issuance of securities certificates. The term

‘‘transfer agency’’ does not include any insurance

company or separate account which performs such

functions solely with respect to variable annuity

contracts or variable life policies which it issues or

any registered clearing agency which performs such

functions solely with respect to options contracts

which it issues.’’

Specifically, Rule 3b–17(k) defines the

term ‘‘trustee capacity’’ in the trust and

fiduciary activities exception to include

trust indenture trustees and trustees for

certain tax-deferred accounts.84 By

clarifying that ‘‘trustee capacity,’’85 as

set forth in the trustee and fiduciary

activities exception, includes these

types of trustees, banks will be able to

continue to effect securities transactions

for investors free from doubt regarding

their broker-dealer status under the trust

and fiduciary activities exception.86

We invite comment on the scope of

the fiduciary responsibilities of

indenture trustees, ERISA trustees, IRA

trustees, and trustees for other pension

plans. We also invite comment on the

scope of the fiduciary responsibilities of

indenture trustees that are not subject to

the TIA. In addition, we invite comment

on the circumstances under which, if

any, indenture trustees, ERISA trustees,

IRA trustees and trustees for other

pension plans may disclaim fiduciary

responsibilities, which fiduciary

responsibilities they may or may not

disclaim, and whether, in such

circumstances, this definitional

exemption is appropriate.

2. Fiduciary Capacity

The trust and fiduciary activities

exception applies to banks acting in a

trustee or fiduciary capacity to

investors. The term fiduciary capacity is

defined in Exchange Act Section

3(a)(4)(D), which identifies several

alternative forms of fiduciary capacity.

Banks may qualify as acting in a

fiduciary capacity if they act as a

‘‘trustee, executor, administrator,

registrar of stocks and bonds, transfer

agent, guardian, assignee, receiver, or

custodian under a uniform gift to minor

act * * *’’87 Banks also may qualify as

acting in a fiduciary capacity if they act

as an investment adviser if the bank

‘‘receives a fee for its investment

advice’’ or ‘‘possess[es] investment

discretion on behalf of another.’’88

Finally, banks may act in a fiduciary

capacity if they act ‘‘in any other similar

capacity.’’89

In general, we analyze the activities

that a person is engaged in, as well as

the label used, to determine whether a

person is acting in a particular capacity.

We take the same approach in

considering whether a bank is acting as

a fiduciary under the trust and fiduciary

activities exception. As Justice

Frankfurter stated in another context,

‘‘to say that a man is a fiduciary only

begins the analysis; it gives direction to

further inquiry. To whom is he a

fiduciary? What obligations does he owe

as a fiduciary?’’90 We understand that

the exact nature of the fiduciary

obligations differ depending on the type

and nature of the fiduciary relationship

between the customer and the bank.91

Congress intended that banks act in a

‘‘strict trustee or fiduciary capacity’’92

that provides investors the protection of

strong fiduciary principles if conducting

securities activities without brokerdealer regulation under the trust and

fiduciary activities exception. We

address specific situations with respect

to the term ‘‘fiduciary capacity.’’

a. Transfer Agent. One category

included in the statutory definition of

fiduciary capacity that requires special

explanation is ‘‘transfer agent.’’93 In

considering the fiduciary capacity role

of transfer agents for purposes of the

trust and fiduciary activities exception,

we must take into account the Exchange

Act definition of transfer agent.94 Under

the Exchange Act, a transfer agent is

generally any person who engages in

certain activities ‘‘on behalf of an issuer

of securities or on behalf of itself as an

issuer of securities.***’’ This

definition makes clear that the fiduciary

relationship of acting as a transfer agent

runs primarily to the issuer, and any

27770 Federal Register / Vol. 66, No. 97 / Friday, May 18, 2001 / Rules and Regulations

95See generally Uniform Commercial Code

Section 8–407 (transfer agent performing transfer

agent functions has the same obligation, with regard

to those functions, as the issuer has with those

functions). See also Caleb and Co. v. E.I. DuPont

de Nemours and Co., 599 F. Supp. 1468, 1475

(S.D.N.Y. 1984) (transfer agent acting within scope

of agency, if found to have acted detrimentally to

alter the rights of shareholders, would be held to

fiduciary standards with respect to shareholders).

96Legal authorities have generally found that

transfer agents who have acted outside the scope of

usual transfer agent activities are more than transfer

agents and therefore, owe shareholders more

extensive fiduciary duties under the federal

securities laws. See Affiliated Ute Citizens v. United

States, 406 U.S. 128, 151–52 (1972) (if bank

employees claiming to be acting as transfer agents

had performed purely transfer agent functions,

instead of acting as market makers for stock, they

would not have expanded their liability under the

federal securities laws); see also Goldman v.

McMahan, Brafman, Morgan and Co., 1987 WL

12820, *22 (S.D.N.Y. June 18, 1987) (citing

Affiliated Ute Citizens to support holding that

defendant acted as more than a transfer agent by

actively engaging in activity to create fraudulent

trading losses, thereby expanding its fiduciary

duties beyond the scope of the transfer agency to

plaintiff).

97Banks have a separate exception for

transactions effected ‘‘as part of [their] transfer

agency activities’’ in the securities of an issuer as

part of certain stock purchase plans of the issuer.

Exchange Act Section 3(a)(4)(B)(iv) [15 U.S.C.

78c(a)(4)(B)(iv)].

98Exchange Act Section 3(a)(4)(D)(i).

99See H.R. Rep. No. 106–74, pt. 3, at 164 (1999).

100Robinson v. Merrill Lynch, Pierce, Fenner and

Smith, Inc., 337 F. Supp. 107, 111 (N.D. Ala.

11971), aff’d, 453 F.2d 417 (5th Cir.1972); see also

E.F. Hutton and Company, Inc., 49 S.E.C. 829, 832

n.9 (1988) (citing Robinson v. Merrill Lynch, Pierce,

Fenner and Smith, Inc. as support for conclusion

that broker-dealer became customer’s agent for the

purpose of executing a limit order). The decision in

E.F. Hutton and Company, Inc., also known as the

Manning Decision after the name of the customer,

became the genesis for the NASD’s Limit Order

Protection Rule, IM–2110–2, which prohibits any

member from trading at the same price as, or at a

better price than, a customer limit order that it

holds.

101See Certain Broker-Dealers Deemed Not To Be

Investment Advisers, Exchange Act Rel. No. 42099,

Investment Advisers Act Rel. No. 1845 (Nov. 4,

1999) (notice of proposed rulemaking); see also

Merrill Lynch, Pierce, Fenner and Smith, Inc. v.

Cheng, 697 F. Supp. 1224, 1226–27 (D.D.C. 1988)

(finding that fiduciary relationship between

stockbroker and customer holding a nondiscretionary account limited to time between

placement of order and subsequent purchase).

102See Certain Broker-Dealers Deemed Not To Be

Investment Advisers, Exchange Act Rel. No. 42099,

Investment Advisers Act Rel. No. 1845 (Nov. 4,

1999) (proposing to codify the position that the

Advisers Act applies only to those customers to

whom the broker-dealer provides advice that is not

incidental to brokerage services); see also De

Kwiatkowski v. Bear Stearns and Co., Inc., 126 F.

Supp. 2d 672 (S.D.N.Y. 2000) (finding that brokerdealer acted as investment adviser when brokerdealer gave continuous investment advice that went

beyond ancillary matters).

fiduciary duties that a transfer agent

may have to shareholders when carrying

out transfer agent activities are the same

as the issuer’s duty to the shareholder.95

Taken together, the definitions of

‘‘fiduciary capacity’’ and ‘‘transfer

agent’’ in the Exchange Act indicate that

the trust and fiduciary activities

exception in Exchange Act Section

3(a)(4)(B)(ii) does not extend to

securities activities that a bank transfer

agent conducts with the shareholders of

an issuer that resemble those of a

broker-dealer. If a bank that is registered

as a transfer agent engages in transfer

agent activities for shareholders on

behalf of the issuer of the type that are

specified in the Exchange Act’s

definition of transfer agent and other

similar activities, the bank may rely on

the trust and fiduciary activities

exception for those particular activities.

Other securities activities would not be

covered by the fiduciary responsibilities

owed to the shareholder that are

contemplated under the exception.96

Accordingly, unless another exemption

was available,97 broker-dealer

registration would be required for bank

transfer agents that also effected

securities transactions for investors.

We request comment on any fiduciary

role of transfer agents. We also request

comment on any fiduciary

responsibilities owed directly to the

shareholders.

b. Investment Adviser If The Bank

Receives A Fee For Its Investment

Advice. As further described below, if a

bank provides its customer with

investment advice for a fee for an

account, even though the customer is

free to accept or reject the bank’s advice,

the bank may rely on the trust and

fiduciary activities exception. In this

situation, the bank would be acting as

‘‘an investment adviser if the bank

receives a fee for its investment advice,’’

as described in the definition of

fiduciary capacity.98 For the reasons

stated below, Rule 3b–17(d) defines the

term ‘‘investment adviser if the bank

receives a fee for its investment advice’’

to mean a relationship between the bank

and a customer in which the bank: (1)

provides, in return for a fee, continuous

and regular investment advice to a

customer’s account that is based upon

the individual needs of the customer;

and (2) under state law, federal law,

contract, or customer agreement owes a

duty of loyalty, including an affirmative

duty to make full and fair disclosure to

the customer of all material facts

relating to conflicts.

i. Continuous And Regular Investment

Advice. Banks act in an advisory

capacity to varying degrees in nondiscretionary accounts. It may be

difficult to determine whether a bank

that provides some investment advice to

a non-discretionary account falls within

the fiduciary capacity category of an

investment adviser that receives a fee

for its advice. Accordingly, we are

providing guidance to aid banks in

determining which advisory

relationships to non-discretionary

accounts are covered by the fiduciary

category of ‘‘investment adviser if the

bank receives a fee for its investment

advice.’’

Congress did not intend the trust and

fiduciary activities exception to allow a

bank to administer an account offering

primarily brokerage without the investor

protections of the federal securities

laws.99 At its narrowest, a brokerage

relationship comes into existence when

‘‘the order has been placed and the

broker has consented to execute it’’ and

‘‘ends when the transaction is

complete.’’100 Accordingly, where the

responsibilities of a bank to its customer

arise only when the customer places an

order for his account, and terminate

once the transaction is complete,101 that

account has the indicia of a brokerage

account that the federal securities laws

are designed to regulate. The bank’s

activities, therefore, would not fall

within the trust and fiduciary activities

exception. We reach the same

conclusion even if the bank provides

incidental, ancillary investment advice

to the account. Because full-service

broker-dealers frequently also give

incidental, ancillary investment

advice,102 such an account would still

have the indicia of a brokerage account,

and thus, the fees paid would be

primarily for brokerage services, not for

advice.

Accordingly, Rule 3b–17(c) provides

that a bank providing only nondiscretionary investment advice must

provide the customer’s account with

‘‘continuous and regular investment

advice * * * that is based on the

individual needs of the customer’’ in

order for the bank to fall within the

definition of an ‘‘investment adviser if

the bank receives a fee for its investment

advice.’’ Rule 3b–17(e) neither purports

nor attempts to provide a

comprehensive definition of

‘‘investment advice’’ or of the types of

investment advice banks may offer their

customers. The rule identifies the

circumstances where the bank’s nondiscretionary advisory services to a

customer’s account for a fee are

sufficiently substantial that any

brokerage services provided for that fee

are merely ancillary to the advice. To

state it another way, the rule identifies

the circumstances where the fees paid

by the account may be viewed properly

as for investment advice, rather than for

brokerage, when the bank provides both

investment advice and brokerage to the

account. The rule thus gives effect to

Congress’ intent, as discussed earlier,

Federal Register / Vol. 66, No. 97 / Friday, May 18, 2001 / Rules and Regulations 27771

103H.R. Rep. No. 106–74, pt. 3, at 164 (1999).

104 Investment Advisers Act Release No. 1633,

Rules Implementing Amendments to the Investment

Advisers Act of 1940 (May 15, 1997) [62 FR 33008

(May 22, 1997)] (adopting release).

105The amendment was part of the Investment

Advisers Supervision Coordination Act, which was

Title III of NSMIA. Pub. L. 104–290, 110 Stat. 3416

(1996). The Coordination Act effected several

amendments to the Advisers Act, and the most

significant of these was to divide responsibility for

regulating investment advisers between the

Commission and the securities administrators of the

several states. Following NSMIA, the Commission

regulates advisers that have at least $25 million in

‘‘assets under management’’ and the states regulate

advisers with assets under management under $25

million. Congress defined ‘‘assets under

management’’ to mean the ‘‘securities portfolios

with respect to which an investment adviser

provides continuous and regular supervisory or

management services.’’ [15 U.S.C. 80b–3a].

106See Investment Advisers Act Rel. No. 1601,

Rules Implementing Amendments to the Investment

Advisers Act of 1940 (December 20, 1996)

(proposing release) (‘‘Whether an adviser that does

not have discretionary authority will be considered

to provide continuous and regular management or

supervisory services with respect to an account

would depend upon the nature of the adviser’s

responsibilities. The greater the amount of day-today responsibility an adviser has, the more likely

the adviser would be providing continuous and

regular supervisory or management service.’’); see

also Item 2 of Part 1A of Form ADV.

107This approach is consistent with the OCC’s

view on a bank receiving a fee for providing

investment advice. In describing its definition of

‘‘fiduciary capacity,’’ upon which the GLBA’s

definition of fiduciary capacity is based, the OCC

indicated that, if the bank received a fee from the

customer for investment advisory activities

(regardless of whether or not the customer followed

the advice) the account would be brought under the

fiduciary umbrella because ‘‘the customer has a

reasonable expectation of receiving advice that is

free of conflicts of interest.’’ Final Rule; Fiduciary

Activities of National Banks; Rules of Practice and

Procedure, 61 FR 68543, 68545 (Dec. 30, 1996)

(codified at 12 CFR 9.2(e)). However, if a customer

is paying a minimal fee for ancillary investment

advice, there is very little, if anything, the fiduciary

umbrella is covering that can be protected by the

fiduciary principles that are replacing the investor

protection provided under the federal securities

laws.

108These examples are taken, in part, from

examples we have previously given to provide

guidance on what accounts receive continuous and

regular supervisory or management services and

what accounts do not. See Item 2 of Part 1A of Form

ADV. We have included only those examples that

involve the giving of advice and do not involve

providing management services.

109SEC v. Capital Gains Research Bureau, Inc.,

375 U.S. 180, 187 (1963) (recognizing that

investment advisers have historically been

considered fiduciaries).

110 Id. at 191–92, 194.

111 Id. at 192–92, 194.

112 Id. at 191–92, 194; see also Laird v. Integrated

Resources, Inc., 897 F.2d 826, 834 (5th Cir. 1990)

(citing Capital Gains for proposition that an

investment adviser has a fiduciary duty of utmost

good faith and full and fair disclosure of all material

facts, as well as an affirmative obligation to employ

reasonable care to avoid misleading his clients);

SEC v. Blavin, 760 F.2d 706, 711–12 (6th Cir. 1985)

(same).

113Applicability of the Investment Advisers Act to

Financial Planners, Pension Consultants, and Other

Persons Who Provide Investment Advisory Services

as a Component of Other Financial Services,

Investment Advisers Act Rel. No. 1092 (Oct. 8,

1987), 52 FR 38400 (Oct. 16, 1987).

that a bank not be permitted to offer

what is essentially a brokerage account

absent the investor protections of the

federal securities laws.103

A bank will provide ‘‘continuous and

regular’’ investment advice under Rule

3b–17(e) if the bank has ongoing (as

opposed to episodic or periodic)

responsibility to select or make

recommendations, based upon the

needs of the client, as to specific

securities or other investments the

customer may purchase or sell. We

adopted this same standard under

Section 203A(a)(2) of the Investment

Advisers Act (‘‘Advisers Act’’), which

uses ‘‘continuous and regular’’ to

determine which advisers have $25

million or more of ‘‘assets under

management’’ and thus are eligible for

Commission registration.104 Congress

added this provision to the Advisers Act

in 1996, as part of the National

Securities Markets Improvement Act

(‘‘NSMIA’’).105

In developing the Commission’s rules

to implement NSMIA, we faced the

question of when are non-discretionary

advisory services significant and

ongoing enough to constitute ‘‘assets

under management.’’ Albeit with

different import, we face a similar

question here ‘‘ namely, when are the

bank’s non-discretionary advisory

services significant enough that the fee

paid ‘‘for advice’’ is for an ongoing

advisory relationship with the customer

account rather than a brokerage

relationship. In both cases, we look to

the actual nature of the underlying

advisory services that the adviser, or

bank, provides and to the duties and

responsibilities that the adviser, or

bank, accepts.106

If a bank provides continuous and

regular guidance for a fee to a nondiscretionary account based on the

individual needs of that account, the

bank would fit the definition of

‘‘investment adviser if the bank receives

a fee for its investment advice,’’ even if

a customer makes self-directed trades in

the account independent of the bank’s

advice. Accordingly, we would consider

the bank to be acting in a fiduciary

capacity for purposes of the trust and

fiduciary activities exception.107

If, however, the bank provides

brokerage and ancillary, incidental

advice in return for a fee to a selfdirected non-discretionary account,

such advice would not meet the

continuous and regular standard, and

the fee would be viewed as payment for

brokerage, rather than payment for the

advice. For instance, if the bank

provides only impersonal advice, such

as market newsletters, or provides

advice only on an intermittent or

periodic basis upon the request of the

client or in response to some market

event, the bank would not be giving

continuous and regular investment

advice.108 Also, if a bank offers a certain

number of trades for a set fee for an

‘‘advisory’’ account without providing

continuous and regular advisory

services, we would not consider the

account to fall within the trust and

fiduciary activities exception. Such an

account is more similar to a brokerage

account described above than the type

of fiduciary account covered under the

trust and fiduciary activities exception.

Customer agreements outlining an

account holder’s relationship with a

bank will be instructive in

distinguishing those non-discretionary

accounts for which banks provide

continuous and regular investment

advice from those for which they

provide little investment advice. The

nature of the bank’s advice and the

nature of the trading in the account also

will be relevant to the analysis.

ii. Full And Fair Disclosure.

Investment advisers historically have

been considered to be fiduciaries with

corresponding duties.109 If a bank acts

in the capacity of an investment adviser

and receives a fee for its advice, the

bank will perforce be subject to an

investment adviser’s duties. The

Supreme Court has stated that the most

important duty an investment adviser

has is a duty of loyalty.110 This includes

an affirmative duty to make full and fair

disclosure of material facts, thereby

eliminating, or at least exposing,

conflicts of interest.111 Therefore, the

investment adviser must act with

‘‘utmost good faith’’ and ‘‘solely’’ in the

best interests of the client.112 By

disclosing all of its potential conflicts of

interest to a client, the investment

adviser enables the client to make an

informed decision of whether to enter

into or continue in an advisory

relationship with the adviser or whether

to take some action to protect himself

against the specific conflict of interest

involved.113 The definition of

‘‘investment adviser if the bank receives

a fee for its investment advice’’ in Rule

3b–17(c) acknowledges the importance

of this duty by providing that banks

giving investment advice for a fee must

owe a duty of loyalty that includes

making full and fair disclosure to their

clients. We find that this definition is

27772 Federal Register / Vol. 66, No. 97 / Friday, May 18, 2001 / Rules and Regulations

114Exchange Act Section 3(b) [15 U.S.C. 78c(b)].

115Exchange Act Section 3(a)(4)(D)(iii) [15 U.S.C.

78c(a)(4)(D)(iii)].

116The National Conference of Commissioners of

Uniform State Laws has worked for the uniformity

of state laws since 1892. Today the Conference is

recognized primarily for its work in securities law,

commercial law, family law, probate and estates,

law of business organizations, health law, and

conflicts of law. See The National Conference of

Commissioners of Uniform State Laws website at

http://www.nccusl.org/uniformact_factsheets/

uniformacts-fs-upc.htm.

117 Id.

118 Id.

119 Id.

120The Uniform Transfers to Minors Act was

developed in 1983, amended in 1986 and

supersedes the Uniform Gifts to Minor Act (1956,

amended 1965 and 1966), which was perceived to

be inadequate to address all of the issues inherent

in this area of the law. See The National Conference

of Commissioners of Uniform State Laws,

Summary, Uniform Transfer to Minors Act,

available at http://www.nccusl.org/

uniformact_summaries/uniformacts-s-uttma.htm.

121H.R. Rep. No. 106–74, pt. 3, at 165 (1999).

122 Id. at 164–65.

123We note the use by the federal financial

institutions’ regulators of the Uniform Interagency

Trust Rating System (‘‘UITRS’’) in evaluating

financial institutions’ fiduciary activities. In 1999,

there were 3,034 banks and trust companies (both

insured and uninsured) that were subject to

reporting requirements of the Federal Financial

Institutions Examinations Council regarding their

trust assets. See http://www2.fdic.gov/structur/

trust/99trustdata.html.

124Solicitation is one of the most relevant factors

in determining whether a person is effecting

transactions. See, e.g., SEC v. Century Investment

Transfer Corp., [1971–72 Transfer Binder]

Fed.Sec.L.Rep. (CCH) ¶ 93,232 (S.D.N.Y. 1971) at

91,441–3 (entity acted as a broker by soliciting

customers for securities transactions, among other

things); SEC v. National Executive Planners, 503 F.

Supp. 1066, 1073 (M.D.N.C. 1980) (where entity

solicited clients actively and sold $4.3 million

worth of securities, ‘‘[c]learly, [the entity] was a

broker-dealer as defined in the 1934 Act’’); see also

15 David A. Lipton, Broker-Dealer Regulation, at

1.04[3][a] (1998) (‘‘Solicitation is considered a

badge of securities activity that would bring a

person within the definition of broker’’). As we

have previously stated, ‘‘no amount of disclosure in

a prospectus can be effective to protect investors

unless the securities are sold by a salesman who

understands and appreciates both the nature of the

securities he sells and his responsibilities to the

investor to whom he sells.’’ See Persons Not

Deemed To Be Brokers, Exchange Act Rel. No.

20943, 49 FR 20512 (May 15, 1984). Solicitation

includes any affirmative effort intended to induce

transactional business for a broker-dealer and

encompasses such activities as advertising and

providing investment advice or recommendations

intended to induce transactions that benefit or

consistent with the provisions of the

Exchange Act.114

We invite comments on all aspects of

this definition. Commenters also are

encouraged to suggest alternative ways

to evaluate whether a bank meets the

definition of ‘‘investment adviser if the

bank receives a fee for its investment

advice.’’

3. Other Similar Capacity

The definition of fiduciary capacity

also provides that a bank may qualify

for the trust and fiduciary activities

exception if it acts ‘‘in any other similar

capacity’’ to the fiduciary relationships

already described in the definition.115

We have identified from uniform acts

and codes several capacities that are not

expressly set forth in the definition of

fiduciary capacity that we believe are

similar to the fiduciary capacities that

are covered by the trust and fiduciary

activities exception.116

For example, the Uniform Probate

Code, which has been adopted in 18

states,117 uses the term ‘‘Personal

Representative’’ and similar successor

titles in place of executor or

administrator as the representative of a

decedent. Under the Uniform Custodial

Trust Act, which has been adopted in 14

states,118 the terms that are used for

fiduciaries who act for persons who

have become incapacitated include

‘‘Conservator’’ and ‘‘Custodial trustee.’’

A bank would be eligible to act in any

of these capacities under these uniform

acts.

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

references only the capacity of a

‘‘custodian under a uniform gift to

minor act.’’ In contrast, the Uniform

Transfers to Minors Act, which has been

adopted in 49 States and the District of

Columbia,119 uses both the terms

‘‘Conservator’’ and ‘‘Custodian’’ for

fiduciaries that act for minors.120 A

bank would be eligible to act in either

or both of these capacities for a minor

under this uniform act.

We consider banks that act as

fiduciaries in these representative

capacities are acting in similar fiduciary

capacities for purposes of the trust and

fiduciary activities exception, provided

that the other requirements of that

exception are met. We invite comment

on whether there are additional roles,

functions, or relationships of banks that

should be considered as being an ‘‘other

similar capacity’’ for purposes of this

exception.

As noted above, courts have raised

serious questions regarding whether

indenture trustees and trustees for taxdeferred accounts are fiduciaries. Thus,

although we have provided legal

certainty to permit them to operate

within the exception, we do not believe

that banks operating in a similar

capacity to such exempted entities are

necessarily acting in a fiduciary

capacity. For example, an IRA custodian

is virtually indistinguishable from an

IRA trustee, but does not take on the

‘‘trustee’’ label. Thus, it is not eligible

for the definitional exemption in Rule

3b–17(k).

4. Other Department That Is Regularly

Examined By Bank Examiners For

Compliance With Fiduciary Principles

And Standards

To protect investors, Congress

specifically required that the activities

conducted by banks under the trust and

fiduciary activities exception be

‘‘rigorously and regularly examined by

bank examiners.’’ 121 Because Congress

believed that the ‘‘examinations of bank

trust departments are today rigorous in

nature,’’ these examinations would

provide customers with ‘‘some basic

protections’’ to mitigate the lack of

federal securities law protections.122

While the bank trust department is

the traditional center of bank fiduciary

services, the trust and fiduciary

activities exception recognizes that

banks may effect transactions in a

fiduciary capacity in bank departments

other than the trust department, as long

as those departments are ‘‘regularly

examined by bank examiners for

compliance with fiduciary principles

and standards.’’ This condition is key in

affording investors some protection

when banks conduct activities under

this exception.

Some banks place all of their

fiduciary activities in the trust

department, while others conduct them

in different bank departments

depending on the nature of the fiduciary

service. As a result, the number and

type of banking departments that are

regularly examined by bank examiners

for compliance with fiduciary principles

and standards could easily vary from

bank to bank. Because of this variance,

we intend to rely primarily on the bank

regulatory agencies in determining

whether the activities are conducted in

an area subject to examination by

fiduciary examiners and examined on a

regular basis.123

We also note that for a bank to be

effecting securities transactions in

compliance with the trust and fiduciary

activities exception, the bank needs to

ensure that all aspects of its role in

effecting those transactions are

conducted in a part of the bank that is

regularly examined by bank examiners

for compliance with fiduciary principles

and standards. Effecting transactions in

securities includes more than just

executing trades or forwarding

securities orders to a broker-dealer for

execution. Generally, effecting securities

transactions can include participating in

the transactions through the following

activities: (1) Identifying potential

purchasers of securities; (2) screening

potential participants in a transaction

for creditworthiness; (3) soliciting

securities transactions;124 (4) routing or

Federal Register / Vol. 66, No. 97 / Friday, May 18, 2001 / Rules and Regulations 27773

involve the solicitor. See SEC v. Margolin, [1992

Transfer Binder] Fed. Sec. L. Rep. (CCH) ¶ 97,025

(S.D.N.Y. 1992) at 94,517 (person acted as a broker

by, among other things, advertising for clients); see

also Letters re: Attkisson, Carter and Akers (June 17,

1998) (among other things, the person seeking relief

from Section 15(a) of the Exchange Act would

neither recommend nor endorse specific

investments); Charles Schwab and Co., Inc. (Nov.

27, 1996) (same).

125See, e.g., 15 David A. Lipton, Id. at 1.04[3]

(having custody or control over the funds and

securities of others is a badge of being a brokerdealer); SEC v. Margolin, [1992 Transfer Binder]

Fed. Sec. L. Rep. (CCH) ¶ 97,025 (S.D.N.Y. 1992)

(defendant was ‘‘engaged in the business’’ because

he provided clearing services for the securities

trading of his clients; other evidence of brokerage

activity included receiving transaction-based

compensation, advertising for clients, and

possessing client funds and securities). However,

where banks customarily hold securities for

customers in accounts in other parts of the bank,

these funds and securities may be accessed as part

of a transaction covered by the trust and fiduciary

exception.

126See 15 David A. Lipton, Broker-Dealer

Regulation, supra note 124 at 1.04[3].

127Exchange Act Section 3(a)(4)(B)(ii) [15 U.S.C.

78c(a)(4)(B)(ii)].

128 Id.

129H.R. Rep. No. 106–74, pt. 3, at 164 (1999)

(‘‘The Commission is expected to interpret * * *

the reference[ ] to ‘chiefly’ * * * so as to limit a

bank’s ability to receive incentive compensation or

similar compensation that could foster a ‘salesman’s

stake’ in promoting a securities transaction.’’).

130H.R. Rep. No. 106–74, pt. 3, at 164 (1999).

131 Generally, trust instruments and state trust

laws allow trustee compensation on an account

basis that is ‘‘reasonable’’ and ‘‘not excessive.’’ 1

Scott, supra note 91, Section 242 at 275. Moreover,

we note that courts consider the cost of performing

trustee services in determining the reasonableness

of trustee compensation. See, e.g., In re Powell, 411

P.2d 162 (Wash. 1966) (stating that the ‘‘universal’’

standards needed to determine trustee

compensation are: (1) The amount of risk and

responsibility involved, (2) the time actually

required of the trustee in the performance of the

trust, (3) the size of the estate, (4) the amount of

income received, and (5) the manual and overall

services performed).

132We chose 10% as a threshold because we

understand that many banks would fit within this

exemption using that threshold.

133Exchange Act Sections 15(a)(2), 23(a)(1), and

36(a)(1) [15 U.S.C. 78o(a)(2), 78w(a)(1), and

78mm(a)(1)].

matching orders, or facilitating the

execution of a securities transaction; (5)

handling customer funds and

securities;125 and (6) preparing and

sending transaction confirmations (other

than on behalf of a broker-dealer that

executes the trades).126 In other words,

for purposes of qualifying for the trust

and fiduciary activities exception, the

bank must make sure that all of the key

points in a transaction that it

participates in are in a part of the bank

that meets the examination conditions

of the exception.

We invite comment on this discussion

of this prong of the trust and fiduciary

activities exception. We particularly

invite commenters to provide

information on the location within

banks of activities related to effecting

securities transactions in a trust or

fiduciary capacity.

5. Chiefly Compensated

To qualify for the trust and fiduciary

activities exception from the definition

of broker, banks must meet certain

compensation limits for transactions

effected in a fiduciary capacity. First,

banks must be ‘‘chiefly compensated

* * * on the basis of an administration

or annual fee (payable on a monthly,

quarterly, or other basis), a percentage of

assets under management, or a flat or

capped per order processing fee equal to

not more than the cost incurred by the

bank in connection with executing

securities transactions for trustee and

fiduciary customers, or any combination

of such fees.’’127 Second, this revenue

must be consistent with fiduciary

principles and standards.128

The first question that must be

addressed, then, is how to determine

when a bank is ‘‘chiefly’’ compensated.

The term ‘‘chiefly’’ has not been

previously defined in the federal

securities or banking laws. In choosing

the term, Congress not only expected us

to interpret it, Congress also expected

that our interpretation would limit a

bank’s ability to receive incentive

compensation or similar compensation

that could foster a ‘‘salesman’s stake’’ in

promoting a securities transaction.129 In

framing our definition of the term

‘‘chiefly compensated,’’ we have sought

to apply the purposes of the GLBA so

that the broker-dealer requirements of

the federal securities laws apply to

situations that could foster a salesman’s

stake in promoting securities

transactions.130 This definition is

discussed below.

a. Account-By-Account Calculations.

Determining when a bank is ‘‘chiefly

compensated’’ requires, ultimately, a

comparison of the different types of

compensation that a bank receives. We

considered several alternatives, but

believe that the calculation to determine

whether a bank is chiefly compensated

by the statutorily enumerated fees

should be done on an account-byaccount basis. In our view, this

calculation is consistent with assuring

the protection of each investor and with

determinations that trustees must make

under state trust law.131 Moreover,

fiduciaries often use fee schedules,

which should provide a basis to make

an account level calculation of

compensation.

We considered, alternatively, whether

this calculation should be made on a

transaction-by-transaction or customerby-customer basis. We concluded,

however, that these methods would be

unnecessarily burdensome for banks,

without providing significantly more

protection for investors. We also

considered whether the ‘‘chiefly

compensated’’ calculation should be

made across a bank’s entire fiduciary

department or on a business line basis.

While a department or business line

approach would provide administrative

convenience to banks, we believe that

adopting this approach as a guiding

principle is inconsistent with the

wording of the statute, which reads

‘‘chiefly compensated for such

transactions.’’ (emphasis added). In

referring to ‘‘such transactions,’’ the

statute focuses on the compensation at

the level at which the transactions

occurred, which is the account level,

and focuses on protection of investors

making such transactions. Making the

‘‘chiefly compensated’’ calculation at

the department or business line level

would potentially allow a bank to

primarily engage in a brokerage

relationship, without investor

protection, with a large number of

customers if the compensation from the

statutorily enumerated fees across the

department or business line exceeded

that from brokerage. Moreover, a

department or line of business is

difficult to define because lines of

business vary from institution to

institution.

Nonetheless, as discussed below, for

administrative simplicity, we are

adopting Rule 3a4–2, which provides an

exemption to permit banks to compute

compensation on the basis of their total

fiduciary activities if sales

compensation is less than 10% of

relationship compensation for these

total fiduciary activities.132 To rely on

this exemption, however, banks must

have in place procedures that are

reasonably designed to ensure

compliance at certain key times in the

life of the account with the condition

that they be ‘‘chiefly compensated’’ by

relationship compensation.

We believe this exemption reduces

costs for many banks by avoiding

account level calculations where most

accounts are likely to satisfy the

‘‘chiefly’’ standard. This exemption also

balances Congress’s intent that

brokerage relationships be administered

in a broker-dealer with its desire that we

not disturb traditional trust activities.

Accordingly, we find that this

exemption is necessary or appropriate

in the public interest and is consistent

with the protection of investors.133

b. Annual Computation. The accountby-account ‘‘chiefly’’ calculation should

be conducted on a yearly basis. We

27774 Federal Register / Vol. 66, No. 97 / Friday, May 18, 2001 / Rules and Regulations

134Exchange Act Section 3(a)(4)(B)(ii)(I) [15

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

135We find that this definition is consistent with

the provisions and purposes of the Exchange Act.

See Exchange Act Section 3(b) [15 U.S.C. 78c(b)];

see also Exchange Act Section 23(a)(1) [15 U.S.C.

78w(a)(1)].

136The soft dollar safe harbor only applies to

persons who exercise ‘‘investment discretion with

respect to an account.’’ Exchange Act Section

28(e)(1) [15 U.S.C. 78bb(e)(1)]. The term

‘‘investment discretion’’ is defined in Exchange Act

Section 3(a)(35) [15 U.S.C. 78c(a)(35)].

137Soft dollar arrangements are understood

generally as arrangements under which products,

services, or other economic benefits, other than the

execution of securities transactions, are obtained by

a money manager in exchange for the direction by

the money manager of client brokerage transactions

to a broker-dealer. Investment Advisers Act Rel. No.

1469, 60 FR 9750 (Feb. 21, 1995).

138We also note that bank trust departments that

accept soft dollar payments for expenses other than

brokerage and research do not fit within the Section

28(e) safe harbor. ‘‘Brokerage and research services’’

are defined in Section 28(e)(3) of the Exchange Act

as: (1) Furnishing advice, either directly or through

publications or writings, as to the value of

securities, the advisability of investing in,

purchasing, or selling securities, and the

availability of securities or purchasers or sellers of

securities; (2) furnishing analyses and reports

concerning issuers, industries, securities, economic

factors and trends, portfolio strategy, and the

performance of accounts; or (3) effecting securities

transactions and performing functions incidental

thereto (such as clearance, settlement, and custody)

or required in connection therewith by rules of the

Commission or a self-regulatory organization of

which such person is a member or person

associated with a member or in which such person

is a participant. Exchange Act Section 28(e)(3) [15

U.S.C. 78bb(e)(3)].

139The OCC has stated, for example, that the

general rule followed by it is that national banks

could only effect securities transactions through an

affiliated discount broker-dealer if the transactions

are performed on a non-profit basis. See OCC Trust

Banking Circular 23 (Oct. 4, 1983). The OCC

subsequently stated that ‘‘[t]o the extent that TBC–

23, ‘‘Policy of the OCC with Respect to Trust

Department Purchase of Securities Through

Affiliated Discount Brokerage Companies,’’ (Oct. 4,

1983) permitted affiliated brokerage transactions on

a nonprofit basis, that policy is no longer in effect.’’

See OCC Trust Interpretive Letter No. 273 (Sept. 23,

1992). 140We find that this definition is consistent with

the provisions and purposes of the Exchange Act.

See Exchange Act Section 3(b) [15 U.S.C. 78c(b)];

see also Exchange Act Section 23(a)(1) [15 U.S.C.

78w(a)(1)]. 141H.R. Rep. No. 106–74, pt. 3, at 164 (1999).

considered calculations on a more

frequent basis, such as quarterly, but

concluded that annual calculations

would achieve the purposes of the

provision with lower burdens for banks.

The definition of ‘‘chiefly compensated’’

incorporates this concept by allowing

banks to use a calendar year or other

fiscal year consistently used by the bank

for recordkeeping and reporting

purposes.

c. A Flat Or Capped Per Order

Processing Fee. A bank may count as

one of its statutorily enumerated sources

of compensation ‘‘a flat or capped per

order processing fee equal to not more

than the cost incurred by the bank in

connection with executing securities

transactions for trustee and fiduciary

customers.’’ 134 New Rule 3b–17(b)

defines this term as a fee that is no more

than the amount a broker-dealer charged

the bank for executing the transaction,

plus the costs of any resources of the

bank that are solely dedicated to

transaction execution, comparison, and

settlement for trust and fiduciary

customers. Per transaction charges are a

hallmark of a brokerage relationship,

and Congress explicitly limited a bank

trust department to cost recovery for

these charges.135

These dedicated resources would

include the salary of a bank trust

department employee whose sole

responsibility is working on a trading

desk that is exclusively dedicated to

executing and comparing trades for trust

or fiduciary customers. These dedicated

resources would also include

information technology resources

exclusively related to trade execution,

comparison, and settlement for trust or

fiduciary customers, such as trade

execution and comparison software that

links a bank trust department trading

desk with broker-dealers.

In contrast, these dedicated resources

would not include the cost of an

employee’s incentive based

compensation related to the number,

size, or value of trades executed. Such

incentive payments typically do not

reflect costs incurred to execute trades,

but rather are inducements to encourage

trades. These dedicated resources also

would not include the cost of shared

resources, general overhead allocation,

or a return on capital.

If a per order processing fee exceeds

the broker-dealer charges and the costs

of dedicated resources, that entire fee

would be excluded from the ‘‘per order

processing fee’’ source of revenue. We

also believe that brokerage commissions

paid to execute trust and fiduciary

transactions would not fall within the

‘‘flat or capped per order processing

fee’’ definition if they result in cash

rebates or soft dollar benefits to the bank

other than for brokerage, research, or

expenses covered by this definition.136

Soft dollar benefits are, on their face,

more than the cost of executing a

trade.137 However, commissions

resulting in payments for general

research and brokerage expenses of the

trust department that are strictly within

the safe harbor of Exchange Act Section

28(e) would not need to be deducted

from the costs that are permitted to be

passed through to customers.138

We note that, consistent with

fiduciary principles and standards,

banks may send trades to be executed by

affiliated broker-dealers under the trust

and fiduciary activities exception.

However, banking regulators have

recognized that sending trust customer

trades to an affiliated broker-dealer

raises issues regarding the bank’s

fiduciary obligation to its trust

customers.139 In addition, we note that

fees charged to fiduciary accounts,

including brokerage commissions, must

be consistent with fiduciary principles.

We intend to rely primarily on the

banking regulators’ supervision of

whether these fees are in fact consistent

with fiduciary principles.

d. ‘‘Relationship Compensation,’’

‘‘Sales Compensation,’’ And ‘‘Unrelated

Compensation’’. To calculate whether

banks are ‘‘chiefly compensated’’ for

effecting transactions in a manner

consistent with the terms of the trust

and fiduciary activities exception, we

compare two categories of bank

compensation related to transactions,

which we call ‘‘sales’’ compensation

and ‘‘relationship’’ compensation.

‘‘Relationship’’ compensation, which is

based on the statutorily enumerated

sources of compensation, must exceed

‘‘sales’’ compensation for the account to

be ‘‘chiefly compensated.’’ We exclude

other compensation not related to

transactions in making the ‘‘chiefly

compensated’’ calculation.140

i. Relationship Compensation. We

have defined the term ‘‘relationship

compensation’’ in Rule 3b–17(i) to

include the eligible statutory fees,

which are generally charged based on an

account relationship. As defined in the

rule, relationship compensation must be

received directly from the customer or

beneficiary, or directly from the assets

of the trust or fiduciary account. An

annual or administrative account fee, or

an account fee that is based on a

percentage of assets under management,

received from these sources would be

relationship compensation. We interpret

a percentage of assets under

management fee as a fee for the bank’s

managing or otherwise caring for the

assets of a trust or fiduciary account.

Assets under management fees would

not include payments from other

persons, such as investment companies,

that are based on the amount of assets

maintained by the bank’s trust and

fiduciary accounts with those other

persons. We believe this interpretation

is consistent with the intent of the trust

and fiduciary activities exception.141 In

addition, relationship compensation

would include a flat or capped per order

processing fee equal to not more than

the cost incurred by the bank in

connection with executing securities

Federal Register / Vol. 66, No. 97 / Friday, May 18, 2001 / Rules and Regulations 27775

142We find that this definition is consistent with

the provisions and purposes of the Exchange Act.

See Exchange Act Section 3(b) [15 U.S.C. 78c(b)];

see also Exchange Act Section 23(a)(1) [15 U.S.C.

78w(a)(1)].

143 17 CFR 240.10b–10(d)(9).

144Exchange Act Section 3(a)(4)(B)(i) [15 U.S.C.

78c(a)(4)(B)(i)]. See, e.g., NASD Rule 2420; NYSE

Rule 345. See also NASD Guide to Rule

Interpretations, III. Questions and Answers, A.

Frequently Asked Interpretive Questions About

NASD Rules and Regulations With Responses From

Its Office of General Counsel, Question 1. (as of 9/

12/2000) (NASD’s Office of General Counsel stated

that ‘‘it is improper for a member or person to [pay

finders’ or referral fees to third parties that

introduce or refer prospective customers to the

member] unless the recipient is registered as a

representative of an NASD member firm. * * *’’

The NASD has consistently maintained that persons

who introduce or refer prospective customers and

receive compensation for such activities are

engaged in the securities business for the member

in the form of solicitation’’); IV NYSE Interpretation

Handbook, Rule 345, Employees—Registration,

Approval, Records, at (a)(i)/02 (Compensation to

non-registered persons) (‘‘Rule 345(a) precludes

members and member organizations from paying to

non-registered persons compensation based upon

the business of customers they direct to members

or members organization if (a) the compensation is

formulated as a direct percentage of the

commissions or income generated, or * * * (d)

such person regularly engages in activity which

may be reasonably expected to result in the

procurement of new customers or orders.***’’).

145Rule 12b–1 under the Investment Company

Act of 1940 [17 CFR 270.12b–1] allows investment

companies to use their assets to finance sales

related expenses. See Investment Company Act Rel.

No. 11414, 45 FR 73898 (Nov. 7, 1980).

146Our definition is based on the NASD’s

definition of ‘‘service fees.’’ ‘‘Service fees’’ are

distinguished from other fees because they relate to

personal services provided to the customer, such as

a registered representative providing information on

investments. The NASD excludes from the term

‘‘service fees’’ fees paid to a transfer agent for

performing shareholder services pursuant to its

transfer agent agreement. The term ‘‘service fees’’

also does not include record keeping charges,

accounting expenses, transfer costs, or custodian

fees. Specific services not covered by the term

‘‘services fees’’ include: (1) Transfer agent and

subtransfer agent services for beneficial owners of

the funds’ shares; (2) aggregating and processing

purchase and redemption orders; (3) providing

beneficial owners with statements showing their

positions in the investment companies; (4)

processing dividend payments; (5) providing

subaccounting services for fund shares held

beneficially; (6) forwarding shareholder

communications, such as proxies, shareholder

reports, dividend tax notices; and updating

prospectuses to beneficial owners; and (7)

receiving, tabulating, and transmitting proxies

executed by beneficial owners. Unlike ‘‘service

fees,’’ these other fees would be unrelated

compensation rather than sales compensation. See

NASD Rule 2830(b)(9); NASD Notice to Members

93–12 (1993) at Question 17 (explanation of term

‘‘service fees’’).

147 Id. See also Investment Company Act Rel. No.

16244, 53 FR 3192 (Feb. 4, 1988); Exchange Act Rel.

No. 30897, 57 FR 30985–02 (July 13, 1992). 148See supra note 146, regarding Rule 12b–1 fees. 149See supra note 144, regarding finders’ fees. 150By way of contrast, such conflicts of interest

are managed differently under the fiduciary

principles that take the place of the protections of

broker-dealer regulations for activities covered by

the trust and fiduciary activities exception. For

example, in 1983, the FDIC issued an opinion,

which generally addressed the use of unaffiliated

discount brokers, stating that bank trust

departments ‘‘should not share in any commission

associated with the transactions’’ for a trust

customer. See FDIC General Counsel’s Opinion No.

6, 48 FR 22989 (May 23, 1983). The FDIC

subsequently stated that, in the absence of a

statutory prohibition, and assuming no unusual

facts, the sharing of commissions would not itself

give rise to a breach of fiduciary obligations if ‘‘(1)

a trust instrument expressly authorizes the bank

trustee to share in commissions generated by

securities transactions effected on behalf of the

account, and (2) the settlor of the trust entered into

the authorization after full disclosure of the facts.’’

See FDIC–84–10 (Apr. 3, 1984).

transactions for trustee and fiduciary

customers.

ii. Sales Compensation. We also

define the term ‘‘sales compensation’’ in

Rule 3b–17(j) for purposes of

determining whether a bank is ‘‘chiefly

compensated.’’142 Sales compensation

includes: (1) A fee for effecting a

transaction in securities that is not a flat

or capped per order processing fee equal

to not more than the cost incurred by

the bank in connection with executing

securities transactions for trustee and

fiduciary customers; (2) compensation

that if paid to a broker or dealer would

be payment for order flow;143 (3) a fee

received in connection with a securities

transaction or account, except for those

finders’ fees received pursuant to the

networking exception in Exchange Act

Section 3(a)(4)(B)(i);144 (4) fees paid for

an offering of securities that are not

received directly from a customer or

beneficiary, or directly from the assets

of the trust or fiduciary account; (5) fees

paid pursuant to a Rule 12b–1 plan

under the Investment Company Act of

1940 (‘‘Investment Company Act’’);145

and (6) ‘‘service fees’’ paid by an

investment company for personal

service or the maintenance of

shareholder accounts.146

We understand that some banks

acting as trustees or fiduciaries may

charge customers an annual or assetbased fee that includes a specified

number of securities transactions, or

even unlimited trading on an irregular

and occasional basis. If a bank charges

an annual fee for effecting a certain

number of securities transactions, this

fee should be scrutinized to determine

whether the fee is for transactions or

fiduciary services. We believe that this

approach is consistent with the

statutory intent to separate

compensation giving rise to sales

incentives from non-sales oriented

compensation. For example, if the bank

effects transactions in a trustee or other

fiduciary capacity where the bank is

exercising investment discretion, in

addition to offering trades for the annual

fee, we believe the entire annual fee

should be counted as relationship

revenue. If a bank offers continuous and

regular investment advice and a

specified number of trades for a fee but

separately charges for additional trades,

we believe that the fees for combined

advice/trading would be relationship

revenues. The separate charges for

trades, however, must be evaluated

under the ‘‘per order processing fee’’

definition to determine their status. If

the bank acts as an IRA trustee and

offers a specified number of trades for

a fee, this fee should be evaluated under

the ‘‘per order processing fee’’ definition

unless the fee permits an unlimited

number of trades. If a fiduciary provides

an unlimited number of transactions for

an annual or assets under management

fee, this fee would be considered

relationship compensation.

Paying banks to distribute securities,

such as when an investment company

pays a bank to distribute its shares

through Rule 12b–1 fees, creates a

conflict of interest between the bank

distributor and investors. Rule 12b–1

fees are fees for distributing investment

company securities and not for

managing investors’ assets.147 We view

Rule 12b–1 fees as commissions, and in

fact, these fees are often described as

trail commissions.148 Unlike fees for

assets under management by the bank,

which do not differ depending on the

investment selected by the bank but are

paid for the management role of the

bank, the Rule 12b–1 fees differ based

on the particular investment company

securities in which the assets are

invested and maintained. These

differing fees create incentives to

distribute particular investment

company securities and raise conflicts

between the bank and investors.

Similarly, finders’ fees create incentives

for bank trust departments to solicit

trust customers to engage in securities

transactions with other entities.149 It is

precisely these divided loyalties or

conflicts of interest faced by securities

salesmen that drive much of brokerdealer regulation, and particularly rules

governing securities practice

standards.150 Therefore, these fees are

defined as sales compensation.

iii. Unrelated Compensation.

Compensation that does not fall within

the definitions of ‘‘sales compensation’’

or ‘‘relationship compensation,’’ we call

‘‘unrelated compensation.’’ Unrelated

compensation should not be used to

determine whether banks are ‘‘chiefly

compensated’’ in a manner consistent

with the terms of the trust and fiduciary

activities exception. For example,

unrelated compensation includes fees

charged separately for any activity of the

bank that is not related to securities

27776 Federal Register / Vol. 66, No. 97 / Friday, May 18, 2001 / Rules and Regulations

151See Exchange Act Section 3(a)(4)(B)(i)(VI) [15

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

152For a complete list of payments included in

this category, see NASD Notice to Members 93–12

(1993) at Question 17 (what does the term ‘‘service

fees’’ include or exclude?). See supra note 146,

regarding service fees.

153We find that this definition is consistent with

the provisions and purposes of the Exchange Act.

See Exchange Act Section 3(b) [15 U.S.C. 78c(b)];

see also Exchange Act Section 23(a)(1) [15 U.S.C.

78w(a)(1)]. 154Even if this fee is related to the customer’s

self-directed trades, it would be relationship

compensation if the customer effected the trades as

part of the bank’s fiduciary relationship.

155The word ‘‘chiefly’’ is defined as: (1) in chief,

in particular; preeminently; especially, particularly;

above all, most of all; and (2) (relative to others)

principally, mainly, for the most part (usually with

the force of ‘‘mainly but not exclusively’’). 3 J.A.

Simpson & E.S.C. Weiner, The Oxford English

Dictionary (2d ed. 1989).

156See infra at notes 276–78 (Section 20).

157 17 CFR 240.3a4–2.

158Exchange Act Section 36(a)(1) [15 U.S.C.

78mm(a)(1). See Exchange Act Section 3(b) [15

U.S.C. 78c(b)]; see also Exchange Act Section

23(a)(1) [15 U.S.C. 78w(a)(1)].

transactions, such as taking deposits,

lending funds (including margin

lending), managing non-securities

assets, or providing other services that

are not related to managing securities

accounts pursuant to the trust and

fiduciary activities exception. Unrelated

compensation also includes

compensation received pursuant to

another exception under the GLBA,

such as a fee received pursuant to the

networking exception, except for a

referral fee listed in that exception.151

In addition, unrelated compensation

includes other compensation received

by the bank, such as when the bank acts

as an investment adviser, transfer agent,

or custodian to an investment company,

or receives administrative fees from an

investment company, including

payments for providing subtransfer

agent, subaccounting, or administrative

services for securities accounts.152 As

stated previously, where the customer is

charged an annual or assets under

management fee by a bank that meets

the conditions of acting in a trustee or

fiduciary capacity or as an investment

adviser for a fee, the entire annual or

assets under management fee would be

relationship compensation. This would

also be the case if the fee included

compensation for an unlimited number

of transactions, even though the investor

may only effect a few transactions.

e. ‘‘Chiefly Compensated’’

Computation. To calculate whether it is

‘‘chiefly compensated,’’ Rule 3b–17(a)

requires that a bank must first set aside

any compensation received from an

account that does not fall within the

definitions of ‘‘relationship

compensation’’ or ‘‘sales

compensation,’’ in Rules 3b–17(i) and

(j), respectively. In other words, the

bank must set aside ‘‘unrelated

compensation.’’ The bank then must

identify the remaining compensation

received from the account either as

‘‘relationship compensation’’ or ‘‘sales

compensation,’’ again based on the

definitions of those terms in Rule 3b–17.

To meet the definition of ‘‘chiefly

compensated’’ in Rule 3b–17(a) for this

account, the bank’s relationship

compensation from the account must

exceed its sales compensation for that

account in the immediately preceding

year, which can be either a calendar

year or other fiscal year consistently

used by the bank for recordkeeping and

reporting purposes.153

A simple chart providing an example

of the ‘‘chiefly’’ calculation is set forth

below. This chart is based on a trust

customer with $1,000,000 in trust

assets, all of which are invested in

investment company securities. In this

chart, the bank trust department charges

a $1,000 annual base fee plus 1.235% of

the first $1,000,000 under management.

For the $1,000 annual base fee, the bank

provides continuous and regular

investment advice and allows the

customer to effect securities transactions

on an occasional and irregular basis.

Because the bank also provides

fiduciary services in addition to trades

for this fee, this fee would be

relationship compensation. The 1.235%

of assets under management fee is not

related to the customer’s self-directed

trades, and therefore would be

relationship compensation.154 The bank

also receives 41 basis points as sales

compensation in the form of Rule 12b–

1 fees from the investment company.

Bank A receives:

Relationship compensation

for

$1,000,000

in trust assets

Sales compensation

for

$1,000,000

in trust assets

Base fee $1,000 1,000 ...................

Assets under

management

fee of 1.235% 12,350 ...................

Rule 12b–1 fees $4,100

Total ................ 13,350 4,100

The account meets the ‘‘chiefly

compensated’’ definition because the

$13,350 in relationship compensation

exceeds the $4,100 in sales

compensation.

In defining ‘‘chiefly compensated,’’

we have taken a conservative approach

by adopting a definition that requires

that the ‘‘relationship compensation’’

simply exceed the ‘‘sales compensation’’

on an annual basis. This definition

depends upon all of the imbedded

definitions and interpretations,

including our definitions of the terms

‘‘relationship compensation,’’ ‘‘sales

compensation,’’ and ‘‘flat or capped per

order processing fee equal to not more

than the cost incurred by the bank in

connection with executing securities

transactions for trustee and fiduciary

customers.’’ In addition, the items

included within each of the categories

of compensation were carefully chosen

in consideration of the test that simply

requires that the ‘‘relationship

compensation’’ exceed the ‘‘sales

compensation.’’ We considered

requiring a higher level of relationship

compensation in interpreting this

phrase as we did in interpreting

‘‘predominantly’’ with respect to the

origination of asset-backed transactions

in Rule 3b–18.155 Requiring a higher

level of relationship compensation, at

least initially, also would have been

consistent with the approach taken by

the Federal Reserve as the revenue test

for so-called section 20 subsidiaries

developed.156 We chose the more than

50% approach for the purposes of this

interim final rule. We solicit comment

on whether the chiefly test should be

higher, such as 75% or 90%.

f. Rule 3a4–2—Exemption For Banks

That Are Compensated By Relationship

Compensation. We are particularly

sensitive to the concerns expressed by

banks regarding the compensation

computations required under the trust

and fiduciary activities exception.

Therefore, we are adopting Rule 3a4–

2 157 to permit banks that are

compensated almost entirely by

relationship compensation to avoid

making calculations on an account-byaccount basis. We find that this

exception is necessary or appropriate in

the public interest and is consistent

with the protection of investors.158 It

should minimize the costs and

regulatory burdens on banks arising

from the GLBA requirements relating to

the trust and fiduciary compensation

computations discussed above.

New Rule 3a4–2 exempts a bank from

the definition of ‘‘broker’’ if it: (1)

Complies with the trust and fiduciary

activities exception, except for the

‘‘chiefly compensated’’ condition; (2)

can demonstrate that sales

compensation, as that term is defined in

Rule 3b–17, received during the

immediately preceding year for its total

fiduciary activities is less than 10% of

the total amount of relationship

compensation, as that term is defined in

Federal Register / Vol. 66, No. 97 / Friday, May 18, 2001 / Rules and Regulations 27777

159Section 3(a)(4)(B)(iii) of the Exchange Act [15

U.S.C. 78c(a)(4)(B)(iii)].

Rule 3b–17, received for its total

fiduciary activities during the same

year; (3) maintains procedures

reasonably designed to ensure

compliance with the definition of

‘‘chiefly compensated’’ with respect to a

trust or fiduciary account: (i) When the

account is opened, (ii) when the

compensation arrangement for the

account is changed, and (iii) when sales

compensation received from the account

is reviewed by the bank for purposes of

determining an employee’s

compensation; and (4) complies with

the requirement that resulting orders be

executed through a broker-dealer (or in

a cross trade).

A bank must first determine whether

a trust or fiduciary account involves

activities for which the bank relies on

the trust and fiduciary activities

exception. Compensation from accounts

that do not hold securities would not be

included in the 10% calculation

because the definitions of relationship

compensation and sales compensation

are based on securities activities

conducted under the trust and fiduciary

activities exception. Similarly,

compensation received by the bank for

activities covered by another exception

or exemption would not be included in

the 10% calculation. Once a bank

determines which accounts contain

securities, which should be done at the

same time as the 10% calculation, the

bank can use the total compensation

received from these accounts for the

10% calculation.

A simple chart providing an example

of the 10% calculation is set forth

below. The bank’s total revenue is

$1,000,000 from its trust and fiduciary

accounts that contain securities. The

bank acts as a personal trustee, and as

an ERISA trustee. Asset under

management and annual fees from its

personal trusts and ERISA trusts are the

bank’s main source of revenue. The

bank also receives sales compensation

in the form of Rule 12b–1 fees and fees

for executing trades that are not flat or

capped per order processing fees.

Bank A receives:

Relationship compensation

Sales

compensation

Personal trustee:

a. Total annual and

assets under management fees ....... $500,000 ..............

b. Total 12b–1 fees ................ $4,000

ERISA trustee:

a. Total annual and

assets under management fees ....... 480,000 ..............

b. Total non-flat or

capped per order

fees ...................... ................ 16,000

Total ..................... 980,000 20,000

The bank would meet the 10%

calculation because its sales

compensation, $20,000, is less than 10%

of its relationship compensation,

$980,000 ($20,000/$980,000 = 2%).

A second chart using the example of

a bank acting as an indenture trustee

illustrates the interaction of this

exemption with other exemptions,

statutory exceptions, and non-securities

income. An indenture trustee receives

income from five sources: annual fees,

fees for effecting transactions in

government securities that are not flat or

capped per order fees, fees for nonsecurities related services, Rule 12b–1

fees for investing in no-load money

market funds, and non-flat or capped

per order fees for effecting transactions

in securities that are not covered by

another exception. Even though the

bank is charging the indenture trusts

transaction fees for government

securities that are not flat or capped per

order processing fees, these fees would

count as unrelated compensation for

purposes of the 10% calculation

because the transactions are covered by

the permissible securities transactions

exception.159 Similarly, the Rule 12b–1

fees for no-load money funds (which are

sales compensation) would count as

unrelated compensation for purposes of

the 10% calculation because the bank is

exempt for effecting transactions in noload money funds when acting as an

indenture trustee under Rule 3a4–3.

Fees for non-securities related services

would also be excluded from the 10%

calculation as unrelated compensation.

Bank A receives:

Relationship

compensation

Sales compensation

Unrelated

compensation

Indenture trustee:

a. Annual fees ...................................................................................................................................... $5,000,000 .................... ....................

b. Non-flat or capped per order fees for gov’t securities transactions ................................................ .................... .................... $5,000

c. Non-securities related fees .............................................................................................................. .................... .................... 5,000

d. 12b–1 fees for no-load money funds ............................................................................................... .................... .................... 150,000

e. Non-flat or capped per order fees for other securities transactions ............................................... .................... 50,000 ....................

Total .................................................................................................................................................. 5,000,000 50,000 160,000

The bank would meet the 10%

calculation because its sales

compensation, $50,000, is less than 10%

of its relationship compensation,

$5,000,000 ($50,000/$5,000,000 = 1%).

As discussed above, the bank must

maintain procedures reasonably

designed to ensure compliance with the

chiefly compensated condition with

respect to a trust or fiduciary account:

(1) When the account is opened; (2)

when the compensation arrangement for

the account is changed; (3) and when

sales compensation received from the

account is reviewed by the bank for

purposes of determining an employee’s

compensation. We do not believe that

these procedures will be unduly

burdensome to banks. Rather, the

procedures need to be reasonably

designed to ensure compliance with the

definition of ‘‘chiefly compensated’’

with respect to a trust or fiduciary

account in the three described

situations. For new accounts, bank

employees could project on a

prospective basis whether an account,

depending on the type and activity of

the account, is likely to generate more

of its revenue from relationship

compensation than sales compensation.

For existing accounts, bank employees

could review whether an account,

depending on the type and activity of

the account, generated more of its

revenue from relationship compensation

than sales compensation.

In addition, under the compensation

element of the requirement, the bank

27778 Federal Register / Vol. 66, No. 97 / Friday, May 18, 2001 / Rules and Regulations

160 17 CFR 240.3a4–3.

161The term ‘‘money market fund’’ is defined in

Rule 3b–17(e). 162Exchange Act Section 36(a)(1) [15 U.S.C.

78mm(a)(1). See Exchange Act Section 3(b) [15

U.S.C. 78c(b)]; see also Exchange Act Section

23(a)(1) [15 U.S.C. 78w(a)(1)]. 163 15 U.S.C. 78c(a)(4)(B)(v).

needs to maintain procedures for

situations in which the bank uses sales

compensation received from accounts in

determining the compensation of an

employee. The bank does not need these

procedures if it only uses relationship

compensation received from accounts in

determining an employee’s

compensation.

If, after reviewing an account, a bank

determines that the account either is

likely to exceed the compensation limits

or has done so in the past, the bank

must follow its procedures to bring the

account into compliance with the

‘‘chiefly compensated’’ definition. For

example, a bank can do this by revising

the compensation schedule or shifting

the securities trades into the client’s

brokerage account.

We believe this exemption, which

permits banks to avoid calculations on

a continuous basis in much of their

traditional trust business, is consistent

with Congress’ dual intents of not

disturbing traditional trust activities and

requiring securities business that has

been conducted in the trust department

to be administered in the future by a

broker-dealer that is subject to the

investor protections available under the

federal securities laws.

g. Rule 3a4–3—Exemption From

‘‘Chiefly Computation’’ For Indenture

Trustees. We are adopting Rule 3a4–

3 160 to provide an exemption to address

the use of the trust and fiduciary

activities exception from the broker

registration for banks that serve as

indenture trustees. As discussed

previously, banks may serve as

indenture trustees in accordance with

the requirements of the TIA. The issuer

of a bond indenture may be a state, a

municipality, a quasi-public authority, a

school, a church, or any organization

that needs to raise cash through the sale

of bonds. Bonds may be sold to the

general public, to a limited investor

group, or to a single investor such as an

insurance company or governmental

agency.

As a part of its duties as an indenture

trustee, a bank also may invest

otherwise idle cash in shares of money

market investment companies or other

securities, solely at the direction of the

issuer of the bonds. Commonly,

compensation that may be received from

an investment company or its

distributor for investments of mutual

funds is considered when the terms of

the trust indenture, including the bank’s

compensation, are negotiated.

The trust and fiduciary activities

exception requires banks to compute for

each trustee or fiduciary account

whether the bank meets the ‘‘chiefly

compensated’’ condition. A bank acting

as a trustee under an indenture may not

meet the condition that it receive more

of its compensation from relationship

compensation than from sales

compensation because of fee structures

individually negotiated with the issuers.

Therefore, we are adopting, in Rule 3a4–

3, an exemption from the definition of

broker for banks acting in the narrow

role of indenture trustees investing in

no-load money market funds.

Rule 3a4–3 provides that, if a bank,

acting in its capacity as a bond

indenture trustee, complies with all of

the conditions of the trust and fiduciary

activities exception, other than the

compensation condition, the bank is

exempt from the definition of the term

‘‘broker’’ solely for effecting transactions

as an indenture trustee in no-load

money market funds.161 Granting banks

acting as indenture trustees an

exemption to directly place idle cash in

a no-load money market fund, an

investment vehicle with a constant net

asset value per shares and without a

sales load, does not create any serious

risk of abuse. In addition, the limit in

the exemption to no-load, money market

funds is consistent with the sweep

accounts exception, which provides that

a bank may invest depositors’ funds

through a sweep program without being

considered a broker as long as the bank

limits its sweep program to no-load,

money market funds. Also, granting

such an exemption relieves banks acting

as indenture trustees of the task of

continually watching the maturity of an

instrument with the draw schedule of a

project financed by bond proceeds.

Therefore, we find that this exception is

necessary or appropriate in the public

interest and is consistent with the

protection of investors.162

h. Solicitation of Comment. We invite

comment on the definition of ‘‘chiefly

compensated,’’ including whether other

methods of calculation would

accurately assess whether a bank is

meeting the ‘‘chiefly compensated’’

condition, consistent with the investor

protection concerns that we have

expressed. We also request comment on

whether we set the threshold test for

being ‘‘chiefly compensated’’ too low

and whether we should consider raising

that test to a higher level, such as 75%

or 90%. In addition, we request

comment on whether the definition of

‘‘chiefly compensated’’ also should be

changed to require a higher relative

amount of ‘‘relationship compensation’’

in the event that any of the underlying

definitions were to be changed.

Further, we seek comment on the

definition of ‘‘a flat or capped per order

processing fee equal to not more than

the cost incurred by the bank in

connection with executing securities

transactions for trustee and fiduciary

customers.’’ In particular, we are

interested in whether we have struck an

appropriate balance between accuracy

and simplicity by permitting banks to

pass on costs of resources exclusively

dedicated to trustee and fiduciary

transactions, but not pass on the

proportional allocations of costs of

shared resources. If proportional

allocations of costs were permitted,

would the record keeping costs exceed

the benefits of permitting the

allocations? We also solicit comment on

both exemptions, and are especially

interested other ways to exempt banks

that receive small amounts of sales

compensation and whether a line of

business calculation is feasible.

In addition, some banking industry

representatives have told us that banks

may charge one comprehensive fee for

several accounts of an individual or

members of one family. We seek

comment on how to treat clusters of

accounts for which a bank may charge

a single fee attributable to all of the

accounts in that cluster. We also seek

comment on how to determine a nexus

among such accounts to consider the

scope of any additional relief that may

be necessary.

C. Sweep Accounts Exception

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

Act163 provides an exception from the

definition of broker for sweep account

activities. Under the exception, a bank

will not be considered a broker if it

‘‘effects transactions as part of a

program for the investment or

reinvestment 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.’’ The

sweep accounts exception is intended to

continue to allow banks to sweep funds

into no-load money market funds

without having to register as brokerdealers.

Payments by investment companies of

asset-based fees to distributors of their

securities create a conflict of interest for

the brokers and banks that are

distributing these shares. The sweep

account exception protects sweep

customers from conflicts of interest

Federal Register / Vol. 66, No. 97 / Friday, May 18, 2001 / Rules and Regulations 27779

164See Investment Company Act Release No.

15431 (June 13, 1988), 53 FR 23258.

165 Investment Company Act Release No. 11414

(Oct. 28, 1980), 45 FR 73898 (Nov. 7, 1980).

166NASD Rule 2830(d)(4) specifically states that

a member broker-dealer may not ‘‘describe an

investment company as being ‘‘no-load’’ or as

having ‘‘no sales charge’’ if the investment company

has a front-end or deferred sales charge or its total

charges against net assets to provide for sales

related expenses and/or service fees exceed .25 of

1% of average net assets per annum.’’ (emphasis

added). See Exchange Act Release No. 30897 (July

7, 199), 57 FR 30985–02 (July 13, 1992). NASD Rule

2830(d)(4) was formerly classified as Article III,

Section 26(d)(3) of the NASD Rules of Fair Practice.

See Exchange Act Release No. 36698 (Jan. 11, 1996),

61 FR 1419 (Jan. 19, 1996).

167Rule 12b–1 under the Investment Company

Act [17 CFR 270.12b–1] provides that an investment

company may make payments with respect to the

distribution of shares of the investment company

securities as long as, among other things, those

payments are made pursuant to a written plan.

Payments made by a fund pursuant to Rule 12b–

1 must be disclosed in the fund’s prospectus. See

Item 8(b) of Form N–1A. In practice, however, fees

paid pursuant to a Rule 12b–1 plan sometimes also

may relate to types of services other than

distribution-related services.

168 Interim Final Rule 3b–17(f) provides, however,

that certain charges a money market fund makes

against fund assets will not be considered charges

for personal service or the maintenance of

shareholder accounts. In particular, charges against

a money market fund’s assets for transfer agent and

subtransfer agent services for beneficial owners of

the fund shares; aggregating and processing

purchase and redemption orders; providing

beneficial owners with statements showing their

positions in the investment companies; processing

dividend payments; providing subaccounting

services for fund shares held beneficially; and

forwarding shareholder communications, such as

proxies, shareholder reports, dividend and tax

notices, updating prospectuses to beneficial owners;

and receiving, tabulating, and transmitting proxies

executed by beneficial owners will not count

toward the 0.25 of 1% limit in Rule 3b–17(f)(2).

169Accordingly, banks relying on the sweep

accounts exception should ensure that any money

market fund included in the bank’s sweep program

that discloses Rule 12b–1 fees in its prospectus that

exceed 0.25 of 1% of the fund’s net assets does not

use more than 0.25 of 1% of the fund’s net assets

to pay for sales or sales promotion expenses and

personal services or the maintenance of shareholder

accounts. A bank could satisfy this obligation by

using only money market funds that hold

themselves out as no-load funds or by obtaining

written confirmation from the money market fund

that it is a no-load fund before including the fund

in its sweep program.

170Exchange Act Section 3(b) [15 U.S.C. 78c(b)].

171 15 U.S.C. 78c(a)(4)(B)(viii).

172Exchange Act Section 3(a)(4)(B)(viii)(aa–ee).

173See, e.g., 15 David A. Lipton, supra note 124,

at 1.04[3] (having custody or control over the funds

and securities of others is a badge of being a brokerdealer); SEC v. Margolin, [1992 Transfer Binder]

Fed. Sec. L. Rep. (CCH) ¶97,025 (S.D.N.Y. 1992)

(defendant was ‘‘engaged in the business’’ because

he provided clearing services for the securities

trading of his clients; other evidence of brokerage

activity included receiving transaction-based

Continued

created by compensation arrangements

by limiting banks that are not registered

as broker-dealers to sweeping deposit

accounts into no-load, money market

funds that pay minimal distribution

fees. In addition, the sweep accounts

exception’s limitation to no-load money

market funds results in limited risks to

bank customers because of the constant

net asset value of the funds, the absence

of a sales load, and the minimal

distribution fees that funds may pay to

the banks.

The term ‘‘no-load’’ is not defined in

the GLBA or in the federal securities

laws. Historically, the term ‘‘no-load’’

was viewed as meaning that neither

investors in the fund, nor the fund itself,

bore the costs of distributing the fund’s

shares, including making payments to

broker-dealers.164 The Commission’s

adoption in 1980 of Investment

Company Act Rule 12b–1, which for the

first time permitted funds to use their

assets to finance distribution expenses,

created some confusion as to the

meaning of the term.165 To address this

confusion, the National Association of

Securities Dealers, Inc. (‘‘NASD’’)

adopted Rule 2830(d)(4), which

describes what a ‘‘no-load’’ investment

company is. Rule 2830(d)(4) allows an

NASD member broker-dealer to describe

an investment company as being ‘‘noload’’ or as having ‘‘no sales charge’’ if

the investment company does not have

a front-end or deferred sales charge, and

if its total charges against net assets to

provide for sales related expenses and/

or service fees do not exceed 0.25 of 1%

of average net assets per annum.166

Although the rules of the NASD

expressly apply only to the conduct of

NASD member broker-dealers and their

associated persons, our Division of

Investment Management has endorsed

the NASD’s definition of ‘‘no load’’

regardless of whether an investment

company is associated with an NASD

member. We believe that the NASD’s

definition of ‘‘no load in NASD Rule

2830(d)(4) is reasonable, and we have

adopted this definition in Rule 3b–17(f).

This definition should help clarify the

sweep accounts exception.

We also are adopting a definition of

‘‘money market fund.’’ Specifically,

Rule 3b–17(e) defines that term as an

open-end management investment

company registered under the

Investment Company Act that is

regulated as a money market fund

pursuant to Rule 2a–7 under the

Investment Company Act. Rule 3b–17(f)

provides that an investment company

registered under the Investment

Company Act is ‘‘no-load’’ if: (1)

Purchases of the investment company’s

securities are not subject either to a

sales load (as that term is defined in

Section 2(a)(35) of the Investment

Company Act) or a deferred sales load

(as that term is defined in Rule 6c–10

under the Investment Company Act);

and (2) its total charges against net

assets that provide for sales or sales

promotion expenses 167 and for personal

services or the maintenance of

shareholder accounts do not exceed 0.25

of 1% of average net assets annually and

are disclosed in the mutual fund’s

prospectus.168

A bank can meet the conditions of the

sweep accounts exception contained in

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

invests customer assets through its

sweep program in money market funds

that meet the definition contained in

new Rule 3b–17(e). All charges against

fund assets that fall within the

definition count toward the 0.25 of 1%

limit, whether they are disclosed as an

item in the fund’s fee table or as part of

the fund’s miscellaneous or aggregate

expenses.

Rule 3b–17(f) gives effect to the ‘‘noload money market fund’’ condition of

the sweep account exception by

reflecting current industry and public

understanding of what ‘‘no-load’’

means. The rule would not prevent a

bank from directly charging its

customers for the bank’s sweep services,

because such direct charges would have

no effect on whether the fund is a ‘‘noload’’ fund. The rule also would not

prevent a bank from sweeping accounts

into a money market fund that charges

more than 0.25 of 1% of net assets

under its Rule 12b–1 plan, provided that

it charges a total of no more than 0.25

of 1% of the fund’s net assets for sales

or sales-related expenses and fees for

personal service or the maintenance of

the shareholder accounts.169

We find that our definitions of the

terms ‘‘no-load’’ and ‘‘money market

fund’’ used in the sweep accounts

exception are consistent with the

provisions and puroses of the Exchange

Act.170

D. Safekeeping And Custody Activities

Exception

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

provides an exception from the

definition of broker for certain

safekeeping and custody activities.171

Under the exception, a bank will not be

considered a ‘‘broker’’ because, as part

of customary bank activities, it engages

in certain specified types of safekeeping

and custody services with respect to

securities on behalf of its customers.172

Traditionally, activities that have

been identified as the type of activity

requiring broker-dealer registration

include, among other things, executing

securities transactions and holding

customer funds and securities.173 The

27780 Federal Register / Vol. 66, No. 97 / Friday, May 18, 2001 / Rules and Regulations

compensation, advertising for clients, and

possessing client funds and securities). 174 15 U.S.C. 78c(a)(4)(B)(viii)(II). A bank acting as

a carrying broker facilitates the transfer of funds

and securities associated with the clearance and

settlement of securities and related margin lending

on behalf of a broker-dealer and executes trades for

itself and its customers. A carrying broker

relationship is distinguished from a custody

relationship by the fact that the bank is selected and

its systems are utilized primarily by the brokerdealer rather than primarily by the customer. In a

situation where the broker-dealer arranges for a

substantial majority of its customers to use bank

custody or deposit services of a bank, a carrying

broker relationship may be established particularly

if the bank performs clearance and settlement

functions that the broker-dealer cannot perform

economically or efficiently. In contrast, a bank

would not be a carrying broker when it acts as

custodian for a customer of a broker-dealer and

responds to customer directions to deliver

securities against payment or cash against receipt of

securities.

175Exchange Act Section 3(a)(14) provides, ‘‘[t]he

terms ‘‘sale’’ and ‘‘sell’’ each include any contract

to sell or otherwise dispose of.’’ Similarly,

Exchange Act Section 3(a)(13) provides, ‘‘[t]he

terms ‘‘buy’’ and ‘‘purchase’’ each include any

contract to buy, purchase, or otherwise acquire.’’

Courts have read this language broadly. For

example, the Supreme Court has stated that a

transaction does not need to involve cash to

constitute a sale of securities for purposes of the

anti-fraud provisions of the Exchange Act. Gelles v.

TDA Industries, 44 F.3d 102, 104 (2d Cir. 1994)

(citing SEC v. National Securities, Inc., 393 U.S. 453

(1969)). Moreover, neither delivery nor the passing

of title is required for the transaction to be

considered a ‘‘sale’’ for these purposes. The pledge

of stock is a ‘‘sale’’ within the meaning of Section

2(3) of the Securities Act. Rubin v. United States,

449 U.S. 424 (1981). The Court stated that although

full title to the pledged securities were not

transferred, the transaction nonetheless could be a

sale. In the Court’s view, the ‘‘inchoate but valuable

interest’’ transferred by a pledge (i.e., the right to

absolute title and ownership in the event of a

default) was an ‘‘interest in a security’’ within the

meaning of Section 2(3) of the Securities Act. 449

U.S. at 429–30.

176 15 U.S.C. 78c(a)(4)(B)(viii)(ee). See H.R. Rep.

No. 106–74, pt. 3, note 9 above, at 169 (1999)

(‘‘Many of the activities permitted under the

safekeeping and custody exception are incidental to

activities that banks perform today.’’).

177See H.R. Rep. No. 106–74, pt. 3, at 169 (1999)

(‘‘This exception is not intended to allow banks to

engage in broader securities activities.’’).

178We note that securities in retirement plans,

including IRAs, are not immune to the sales

practice abuses and fraudulent conduct that the

rules of the SROs and securities laws are designed

to address. The NASD has brought several

enforcement actions for unsuitable

recommendations and unauthorized trading in IRA

accounts. See, e.g., In re Frederick C. Heller, 1991

NASD Discip. LEXIS 115 (Aug. 26, 1991) (registered

representative engaged in excessive and

unauthorized trading in an IRA account); In re Paul

D. Baune, 1994 NASD Discip. LEXIS 17 (Aug. 4,

1994) (registered representative violated the

NASD’s suitability rule by recommending illiquid

limited partnerships for the IRA account and nonIRA account of an elderly widow); In re William J.

Lucadamo et al., 1997 NASD Discip. LEXIS 35 (May

20, 1997) (registered representative made unsuitable

recommendations and engaged in unauthorized

trading in IRA accounts). In addition, a pension

plan administrator was permanently enjoined from,

among other things, violating Sections 10(b), 15(a),

and 17(a) of the Exchange Act for acting as an

unregistered broker-dealer and misappropriating

customer funds, some of which were held at a

custodial bank. See Securities and Exchange

Commission v. Qualified Pensions Inc. et al., Civil

Action No. 95–1746 (LFO) (D.D.C. July 2, 1997),

Litigation Releases No. 15403, 64 S.E.C. Docket

2280 (July 2, 1997) and No. 14680, 60 S.E.C. Docket

1086 (Oct. 5, 1995). See also In re Bankers Pension

Services, Inc., Exchange Act Rel. No. 37567 (Aug.

14, 1996) (order instituting a public administrative

proceeding, making findings, and imposing a ceaseand-desist order); In re Transcorp Pension Services,

Inc., Exchange Act Rel. No. 37278 (June 4, 1996)

(order instituting a public administrative

proceeding, making findings, and imposing a ceaseand-desist order); First Philadelphia Corp., 50 SEC

360 (1990) (allocation of shares in a ‘‘hot issue’’ to

a custodial account for the benefit of securities

firm’s president’s son).

179Although the term ‘‘related administrative

services’’ is not defined in the securities laws, in

the broker-dealer industry, administrative services

generally are considered to be those services that

are labeled as ‘‘clerical and ministerial.’’ Clerical

and ministerial activities include, for example,

mechanical tasks such as bookkeeping and record

keeping, performing calculations, and data

processing functions. Accepting general orders to

buy and sell securities, however, is not a ‘‘clerical

and ministerial’’ activity. Cf. Exchange Services,

Inc. v. S.E.C., 797 F.2d 188, 190 (4th Cir. 1986) (The

court determined that the SEC was not being

arbitrary and capricious when it relied, as a reason

to deny an exemption, on NASD’s policy that

anyone taking orders from the public must

register.). A person accepting general securities

orders must, at a minimum, register as an assistant

representative for order processing with the NASD.

See generally NASD Rules 1041 and 1042 (listing

registration requirements, and limits on the

activities of, assistant representatives).

safekeeping and custody exception

makes clear that banks, as part of

customary banking activities, may hold

customer funds and securities without

being considered a broker if, except

with respect to government securities,

they do not act as a carrying broker.174

In addition, the safekeeping and

custody exception explicitly allows

banks that hold securities for their

customers, on behalf of their customers,

to exercise warrants or other rights,

facilitate the transfer of funds or

securities in connection with the

clearance and settlement of the

customers’ transactions, effect securities

lending or borrowing transactions when

the securities are in the custody of the

bank, invest cash collateral pledged in

connection with securities lending or

borrowing transactions, and facilitate

the pledging or transfer of securities that

involve the sale of those securities.175

Moreover, banks may provide custody

and related administrative services to

IRAs, pension, retirement, profit

sharing, bonus, thrift savings, incentive,

or other similar benefit plans without

being considered a broker.176

Securities trades conducted under the

safekeeping and custody exception must

still be executed in compliance with

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

Exchange Act Section 3(a)(4)(C) requires

banks that accept orders to the extent

they engage in transactions under a

specified safekeeping and custody

function either to transmit orders to be

executed to a registered broker-dealer or

to internally cross those orders.

Exchange Act Section 3(a)(4)(C) ensures

that when investors purchase or sell

securities through banks under the trust

and fiduciary activities exception,

safekeeping and custody exception, and

certain stock purchase plans exception,

registered broker-dealers, rather than

unregulated market intermediaries,

ultimately execute those transactions.

Exchange Act Section 3(a)(4)(C) does

not require all orders to purchase and

sell a security to be sent to a registered

broker-dealer. To read the section

otherwise would mean that a bank

would always be required to purchase

or sell the underlying securities through

a registered broker-dealer in connection

with, for example, an investor’s exercise

of rights or warrants. This would

preclude a bank from filling an

investors’ exercise of rights or warrants

by delivery of shares from the issuer—

a commonly used method. However, if

a bank does purchase or sell the

underlying securities in the open

market, Exchange Act Section 3(a)(4)(C)

requires banks either to execute the

transactions through a registered brokerdealer or internally to cross the trade.

Furthermore, Exchange Act Section

3(a)(4)(C) should not be read to permit

a bank to accept orders for the purchase

or sale of securities in situations not

specifically provided for under the

safekeeping and custody exception. In

this regard, it does not expand a bank’s

ability to accept orders for the purchase

or sale of securities without registering

as a broker-dealer.

Congress also did not intend the

safekeeping and custody activities

exception to allow banks to engage in

broader securities activities.177 For

example, although the safekeeping and

custody exception permits banks to

provide custody and related

administrative services to IRAs and

various benefit plans,178 as one of the

limited securities-related activities that

can be conducted under the safekeeping

and custody activities exception, the

exception does not allow banks, under

the rubric of providing these ‘‘related

administrative services’’ 179 to accept

orders to purchase and sell securities.

The point at which orders are

accepted from customers and routed for

execution represents a critical juncture

for an investment decision and results

in the consummation of the sale.

Therefore, it is important that the

customer protections, such as employee

sales practice and training requirements,

Federal Register / Vol. 66, No. 97 / Friday, May 18, 2001 / Rules and Regulations 27781

180A critical aspect of the federal securities laws

is the protection of investors that is accomplished

not only through our rules, but also through

investor protection conditions imposed by SROs on

registered entities and their personnel.

181The duty of best execution requires a brokerdealer to seek the most advantageous terms

reasonably available under the circumstances for a

customer’s transaction. The duty of best execution

derives from the common law duty of loyalty,

which obligates an agent to act exclusively in the

principal’s best interest. When a broker-dealer acts

as agent on behalf of a customer in a transaction,

the agent is under a duty to exercise reasonable care

to obtain the most advantageous terms for a

customer. Restatement 2d Agency Sec. 424 (1958).

Traditionally price has been the predominant factor

in determining whether a broker-dealer has satisfied

its best execution obligations. Exchange Act Release

No. 34902, 59 FR 55006 (1994). We also have stated

that broker-dealers should consider at least six

additional factors: (1) The size of the order; (2) the

speed of execution available on competing markets;

(3) the trading characteristics of the security; (4) the

availability of accurate information comparing

markets and the technology to process such data;

(5) the availability of access to competing markets;

and (6) the cost of such access. See, e.g., Second

Report on Bank Securities Activities, at 97–98,

n.233, as reprinted in H.R. Rep. No. 145, 95 Cong.,

1st Sess. 233 (Comm. Print 1977).

182 If banks were allowed to effect transactions for

compensation as custodians, they would be subject

to fewer requirements than banks effecting

transactions for investors under other exceptions

contained in the GLBA amendments to Exchange

Act Section 3(a)(4). Congress created at least three

specific exceptions to permit banks to effect

securities transactions with retail investors—as part

of networking arrangements with broker-dealers;

pursuant to the trust and fiduciary exception; and

as registered transfer agents for issuer plans. To

read the term ‘‘administrative services’’ to include

accepting orders for the purchase and sale of

securities would mean that banks acting as

custodians would be subject to significantly fewer

limits than banks that effect transactions with

investors in these three situations. In short, an

expansive reading of the word ‘‘administrative

services’’ would circumvent the conditions of all of

the other exceptions that restrict banks’ ability to

become active brokerage distribution channels

outside of the investor protections of the federal

securities laws.

183Exchange Act Section 36(a)(1) [15 U.S.C.

78mm(a)(1)]; see also Exchange Act Sections

15(a)(2) and 23(a)(1) [15 U.S.C. 78o(b)(2) and

78w(a)(1)].

184 17 CFR 240.3a4–4. Of course small bank

trustees for tax-deferred accounts that are effecting

transactions in investment company securities and

that are acting as custodian may alternatively rely

on this exemption.

185We define the term ‘‘small bank’’ as a bank

with less than $100 million in assets as of December

31 of both of the prior two calendar years, and since

December 31 of the third prior calendar year has not

been, an affiliate of a bank holding company or a

financial holding company that as of December 31

of both of the prior two calendar years had

consolidated assets of more than $1 billion. The

$100 million in assets cut-off was derived from The

Small Business Administration, Small Business

Size Regulations. 13 CFR 121.201; see also 66 FR

10212 (citing 13 CFR 121.201).

186A ‘‘tax deferred account’’ is defined as those

accounts described in Sections 401(a), 403, 408, and

408A under Subchapter D and in Section 457 under

Subchapter E of the Internal Revenue Code of 1986.

187See Testimony of Andrew C. Hove, Jr., Acting

Chairman Federal Deposit Insurance Corporation,

on Financial Modernization before the

Subcommittee on Finance and Hazardous Materials,

Committee on Commerce, United States House of

Representatives, July 17, 1997, where he said:

Second, the vast majority of insured institutions

already use registered broker/dealers for sales of

nondeposit investment products. Recent surveys,

including the FDIC’s 1996 survey of nondeposit

investment product sales practices, have found that

very few banks—less than 300 out of 10,000—sell

such products using their own employees under the

present exemption from registration as a broker/

dealer. Thus, most of those selling nondeposit

investment products at banks and thrifts already are

registered representatives of broker/dealers subject

to the regulatory oversight of the Securities and

Continued

that flow from broker-dealer registration

and application of the federal securities

laws apply at this juncture.180

Accepting orders necessarily involves

communication with customers. The

risks inherent in communication with

customers relating to securities

transactions—sales practice abuses and

customer confusion—as well as related

order taking risks, are risks that the

securities laws are uniquely designed to

address. Accepting orders to buy and

sell securities also implicates concerns

traditionally covered by the federal

securities laws and the requirement of

best execution.181 For these reasons and

the others discussed above, we have

determined that ‘‘custody’’ or ‘‘related

administrative services’’ do not include

accepting orders from investors to

purchase or sell securities. In particular,

we do not believe that by its terms the

safekeeping and custody exception

covers a bank that accepts orders from

investors to purchase or sell securities

other than those specifically permitted

in the exception, such as with respect to

securities lending and borrowing or

investing collateral.

We are supported in our conclusion

by a comprehensive reading of the

GLBA broker exceptions. An

interpretation that banks engaged in

safekeeping and custody services may

accept orders without being required to

register as broker-dealers would

contradict the comprehensive statutory

scheme of limited brokerage exceptions

with the attendant conditions that

Congress established for banks to be

able to effect securities transactions

without any of the investor protections

available under the federal securities

laws.182

Bankers have asserted that the

custody exception was intended to

preserve all ‘‘customary’’ activities

involving custody accounts. This

exception, however, just like the other

exceptions from broker-dealer

registration, was not designed to protect

from the federal securities laws every

existing bank brokerage activity. Prior to

the passage of the GLBA, banks could

operate a brokerage business without

any conditions and still be excepted

from broker-dealer registration. By

replacing the blanket exception with

specific exceptions, the GLBA limited

the range of excluded bank securities

activities. Therefore, the terms of a

specific exception and the purpose of

the exceptions must be examined to

determine what bank securities

activities were, in fact, excepted. This

determination cannot be made merely

based on an assumption that all

‘‘customary’’ bank securities activities

were excepted.

Although we conclude that the

safekeeping and custody activities

exception allows banks to accept only

those orders specifically permitted in

the exception, we are creating two

exemptions to permit banks to accept

orders from investors for the purchase

and sale of securities under limited

circumstances in a safekeeping and

custody capacity. Rule 3a4–4 provides

that small banks may effect transactions

in investment company securities in

customers’ tax-deferred custody

accounts. In addition, Rule 3a4–5

provides that banks may accept orders

for securities for safekeeping and

custody accounts where the bank is not

compensated for these transactions. The

bank, however, may pass on the brokerdealer’s charge for executing the

transactions. As discussed below, we

find that these exceptions are consistent

with the public interest and the

protection of investors.183

1. Rule 3a4–4—Exemption For Small

Bank Custodians Effecting Transactions

In Investment Company Securities For

Tax-Deferred Custody Accounts

To permit small banks to continue

assisting IRA customers to invest in

investment company securities under

conditions designed to foster a passive

sales environment, new Rule 3a4–4 184

provides that, under certain conditions,

a small bank 185 is exempt from the

definition of the term ‘‘broker’’ under

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

solely for effecting transactions in

securities of an investment company in

a tax-deferred account 186 for which the

bank acts as custodian under the

safekeeping and custody activities

exception, or as trustee under the trust

and fiduciary activities exception.

We have been advised that small

banks offering tax-deferred custody

accounts may not have an affiliated

broker-dealer or networking

arrangements with registered brokerdealers. In 1996—the last year for which

data was available—over 90% of banks

used registered broker-dealers to effect

securities transactions as brokers.187

27782 Federal Register / Vol. 66, No. 97 / Friday, May 18, 2001 / Rules and Regulations

Exchange Commission and securities industry selfregulatory organizations, such as the National

Association of Securities Dealers (NASD).

188Because a new bank, bank holding company,

or financial holding company would have no assets

in either one or both of the two prior years, it would

qualify for the exemption for at least the period of

time in which had no assets.

189We chose $1 billion to indicate small bank

holding companies or financial holding companies

because the Federal Reserve Board has previously

categorized these companies as ‘‘small, noncomplex

bank holding companies’’ for the purpose of

determining the type of supervisory review that

they receive. See 1999 Federal Reserve Annual

Report at 122.

190Banks cannot structure arrangements with

networking broker-dealers or affiliated brokerdealers in which the custody department becomes

the carrying broker for the affiliates or networking

broker-dealers. See Section 3(a)(4)(B)(viii)(II) of the

Act [15 U.S.C. 78c(a)(4)(B)(viii)(II)].

191Section 3(a)(4)(C) of the Exchange Act [15

U.S.C. 78c(a)(4)(C)]. The bank also may use the

NSCC’s Mutual Fund Services, including Fund/

SERV to execute the order, pursuant to Rule 3a4–

6.

192 Id.

193Exchange Act Section 3(a)(4)(B)(ii)(II) [15

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

194 Investment Company Act Section 2(a)(3) [15

U.S.C. 80a–2(a)(3)].

195The term ‘‘compensation related to effecting

transactions in securities pursuant to this

exemption’’ means the total annual compensation

received for effecting transactions in securities

pursuant to this exemption, including fees received

from investment companies for distribution.

196Revenue is defined as the annual total net

interest income and noninterest income from the

bank’s four most recent Reports of Condition and

Income or any successor reports required to be filed

by the bank’s appropriate federal banking agency.

Nevertheless, small banks without

broker-dealers might occasionally

accept unsolicited orders for investment

company securities from customers in

these tax-deferred accounts.

Because the IRC requires tax-deferred

accounts to be held by a custodian or

trustee, investors often hold these

accounts with banks. To avoid

unnecessarily disrupting this service in

small banks that do not have an affiliate

or networking arrangement with a

broker-dealer, we provide an exemption

from the definition of broker for small

banks with under $100 million in assets

as of December 31 of both of the two

prior years.188 Such a bank may also not

be an affiliate of a bank holding

company or financial holding company

with more than $1 billion in

consolidated assets in the two prior

calendar years.189 Under this

exemption, small banks may effect

transactions in investment company

securities for customers’ tax-deferred

custody accounts and receive

compensation for these securities

transactions, subject to a revenue limit.

This exemption does not apply to banks

that do not meet the definition of ‘‘small

banks’’ because these banks can more

easily affiliate with a broker-dealer or

develop a networking arrangement with

a registered broker-dealer.190

Because this exemption is designed to

allow the bank to effect transactions in

securities as an accommodation to its

customers, the bank must not be

affiliated with a broker or dealer or have

a networking arrangement with a broker

or dealer to effect transactions in

securities for the bank’s customers.

Similarly, a bank employee effecting

transactions under this exemption must

not be an associated person of a broker

or dealer, must primarily perform duties

for the bank other than effecting

transactions in securities for customers,

and must not receive incentive

compensation for such transactions. In

effecting transactions under this

exemption, the bank also must execute

the order through a broker-dealer (or in

a cross transaction).191

In addition, the bank may solicit

transactions only through certain

limited activities. First, a bank may

deliver only advertising and sales

literature about an investment

company’s securities that is prepared by

the registered broker-dealer that is the

principal underwriter of the investment

company, or prepared by the investment

company that is not an affiliated person

of the bank, as defined in Section 2(a)(3)

of the Investment Company Act.192 The

requirement to use sales literature

prepared by a broker-dealer that

complies with the NASD’s advertising

rules is designed to protect investors

from representations about investments

that could not be made by a registered

broker-dealer. Second, banks may

respond to questions from potential

purchasers of securities, but the bank

must limit its answers to information

contained in the registration statement

for the investment company security or

sales literature prepared by the

investment company security’s

principal underwriter that is a registered

broker-dealer. Third, a bank may

advertise its trust activities, but only as

permitted under the advertising

conditions of the trust and fiduciary

activities exception.193 Finally, banks

may notify their existing customers that

they accept orders for investment

company securities in conjunction with

solicitations related to their other

activities concerning tax-deferred

accounts.

We are concerned that this exemption

could be used primarily as a means to

market proprietary investment company

securities without the protections

available under the federal securities

laws. Thus, to meet the conditions of

the exemption in Rule 3a4–4, a bank

that sells investment company securities

of affiliated persons must make

available to the tax-deferred account the

securities of similar investment

companies that are not affiliated persons

of the bank.194 Investment companies

with similar characteristics would be

investment companies with similar

investment objectives and strategies,

such as two global equity funds. We

solicit comment on whether we need to

define further the term ‘‘similar

characteristics.’’

Finally, the bank’s compensation

related to effecting transactions in

securities pursuant to this exemption 195

must be less than 3% of its annual

revenue.196 This exemption is provided

to permit small banks to accept the

occasional investor order to purchase

and sell investment company securities

for tax-deferred accounts. We have

chosen the 3% revenue limit consistent

with this intent.

We expect small banks effecting

transactions in securities under the

terms of this exemption to be offering

brokerage services solely as an

accommodation to their customers. We

do not intend for this exemption to be

used to allow an unregistered sales force

to market widely securities without

complying with the requirements of the

federal securities laws, such as

licensing, advertising, and other sales

practice standards, and continuing

education requirements. The conditions

a bank must meet to qualify for this

exemption reflect this purpose.

In adopting this exemption, we have

carefully balanced the administrative

convenience to investors of submitting

orders to small bank custodians that do

not have arrangements with brokerdealers to interact with these customers,

with the loss of the protections afforded

to those investors under the federal

securities laws. We also have

considered that small broker-dealers do

not have a similar exemption from the

application of the federal securities

laws. Nonetheless, in this limited

situation, we believe that the exemption

for small banks is appropriate.

We have imposed a 3% annual

revenue limit under this exemption and

imposed conditions to limit banks’

solicitation of investors to ensure a

passive securities distribution channel

because none of the protections

available to investors under the federal

securities laws are available in this

situation. We solicit comment on

whether this exemption poses a burden

on competition for broker-dealers that

do not have a similar exemption. We

also solicit comment on whether this

exemption is necessary and consistent

Federal Register / Vol. 66, No. 97 / Friday, May 18, 2001 / Rules and Regulations 27783

197 17 CFR 240.3a4–5. 198 15 U.S.C. 78c(a)(4)(C). The bank also may use

the Fund/SERV system to execute orders in

investment company securities, pursuant to Rule

3a4–6.

199Bank Holding Company Act Section 2(k) [12

U.S.C. 1841(k)] defines affiliate to mean ‘‘any

company that controls, is controlled by or that is

under common control with another company.’’ 200 15 U.S.C. 78c(a)(4)(B)(vi). 201 17 CFR 240.15a–6. 202 17 CFR 240.15a–6. Rule 15a–6 and other

exemptions from registration remain viable after the

passage of the GLBA to the extent that the

conditions of such exemptions can be met. Even

when the GLBA permits a bank to engage in

securities-related activities without itself registering

as a broker-dealer, a broker-dealer engaged in the

business of effecting transactions for such bank still

must register absent an exemption or other

exclusion from the requirements of the Exchange

Act. For instance, this would be the case for a

foreign broker-dealer that handles trades for a bank

under Exchange Act Section 3(a)(4)(C). Moreover,

foreign banks do not enjoy the bank exemptions

because they do not fall within the definition of

bank in Exchange Act Section 3(a)(6).

203 17 CFR 240.15a–6(a)(4)(i).

204Exchange Act Section 3(a)(4)(B)(vi) [15 U.S.C.

78c(a)(4)(B)(vi)].

205 15 U.S.C. 78c(a)(4)(B)(xi) [15 U.S.C.

78c(a)(4)(B)(xi)].

206 ‘‘Riskless’’ principal transactions are generally

described as trades in which, after receiving an

order to buy (or sell) from a customer, the brokerdealer purchases (or sells) the security from (or to)

another person in a contemporaneous offsetting

transaction. See Exchange Act Rule 10b–

10(a)(2)(ii)(A) [17 CFR 240. 10b–10(a)(2)(ii)(A)];

Exchange Act Rel. No. 33743 (Mar. 9, 1994) at n.11.

with the protection of investors under

the federal securities laws.

2. Rule 3a4–5—Exemption for Bank

Custodians Placing Orders as an

Accommodation to Customers

New Rule 3a4–5 197 is broader than

Rule 3a4–4 in that it is available to all

banks for the full range of securities.

However, the exemption builds upon

the passive sales conditions developed

in Rule 3a4–4 by also prohibiting

receipt by the bank of any transactionrelated compensation.

Rule 3a4–5 exempts a bank from the

definition of the term ‘‘broker’’ solely

for effecting transactions in securities in

an account for which the bank acts as

custodian under the safekeeping and

custody activities exception if the bank

meets certain conditions. Specifically,

the bank may not directly or indirectly

receive any compensation for effecting

such transactions. We also impose the

same limitations on soliciting orders,

and other conditions, as apply to small

banks effecting transactions for

investors under Rule 3a4–4. The bank

also must comply with the order

execution condition in Exchange Act

Section 3(a)(4)(C).198

We believe that the exemption

balances the intent of not unnecessarily

disrupting bank securities activities

with the intent to require active and

compensated securities sales operations

to be subject to the federal securities

laws as required by the GLBA. It will

allow existing custody customers to

maintain their relationships with their

banks to the extent the service of

effecting securities transactions is

provided as a true accommodation.

However, because the protection of the

securities laws will not be available, nor

will fiduciary standards be applicable,

the exemption contains strict

compensation limits on the bank and its

employees. For example, the bank may

not receive sales compensation, as that

term is defined in Rule 3b–17. The

bank, however, may pass on the brokerdealer’s charge for executing the

transaction. Thus, under the exemption,

if a bank charges an annual or assets

under management custodial fee, it

must charge the same custody fee to an

investor who engaged in many

securities transactions as it would to

one who engaged in only a few

securities transactions or none at all. A

bank must also charge the same custody

fees regardless of whether the investor

invested in proprietary investment

company securities or investment

company securities sponsored by

unaffiliated broker-dealers. These

conditions are consistent with our

intent to permit banks in their custody

capacity to accept investors’ orders for

the purchase or sale of securities, while

limiting to a passive securities

distribution channel brokerage that does

not carry the investor protections found

in the federal securities laws.

We solicit comment on whether this

exemption is necessary, and consistent

with the protection of investors under

the federal securities laws. We also

request comments on the exemptions

that we have provided for banks that

engage in certain securities activities.

Are there other areas or lines of business

of the banks where an exemption may

be appropriate if there are sufficient

investor protection obligations? Are

there conditions that may be imposed in

those circumstances to limit solicitation

of securities brokerage and

compensation that could address our

investor protection concerns?

III. Discussion of Other Exceptions

From Broker

A. Affiliate Transactions Exception

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

excepts from the definition of broker a

bank that ‘‘effects transactions for the

account of any affiliate (as defined in

section 2 of the Bank Holding Company

Act) 199 of the bank.’’ 200 Questions have

arisen regarding this exception,

particularly in light of one of the

exemptions from broker-dealer

registration found in Exchange Act Rule

15a–6.201

The affiliate exception applies to

banks effecting trades for the accounts

of affiliates of the bank, excluding

registered broker-dealers or affiliates

engaged in merchant banking. The

exception was provided because

affiliates were not deemed to need the

protections of broker-dealer registration.

The exception does not cover a bank

effecting trades with non-affiliated

customers, even when the customer

transaction also is effected as part of a

trade involving an affiliate. A separate

exception is necessary for the customer

side of the trade.

Exchange Act Rule 15a–6 provides an

exemption from U.S. broker-dealer

registration for certain foreign brokerdealers.202 Subsection (a)(4)(i) of Rule

15a–6 203 allows a foreign broker-dealer

to effect transactions in securities with

or for a U.S. registered broker-dealer or

bank acting in a broker-dealer capacity

as permitted by U.S. law. If a foreign

broker-dealer or bank is an affiliate of a

U.S. bank acting in a broker-dealer

capacity permitted by U.S. law, the

foreign broker-dealer or bank can rely

on Rule 15a–6(a)(4)(i) to effect

transactions in securities with or for

such U.S. bank without registering in

the United States as a broker-dealer.

Moreover, in these transactions with its

foreign affiliate, the U.S. bank could rely

on the affiliate transactions

exception.204 However, if the foreign

broker-dealer or bank seeks to have

direct contact with customers of the

U.S. bank, the foreign entity may not

avail itself of the exemption in Rule

15a–6(a)(4)(i). Similarly, the U.S. bank

could not rely on the affiliate

transactions exception to avoid any

registration requirements arising out of

its role in the foreign broker-dealer’s or

bank’s dealings with its customers.

B. De Minimis Exception and RULE

3a5–1

Exchange Act Section 3(a)(4)(B)(xi) 205

excepts from the definition of broker

banks that effect no more than 500

securities transactions, other than

transactions that qualify for one of the

other statutory exceptions. A transaction

in which the bank is acting as an agent

for a customer would count as one

transaction toward the 500-transaction

limit. Questions have arisen, however,

as to whether banks can rely on this

exception if they engage in ‘‘riskless’’

principal transactions.206

In the context of permissible bank

activity under the Glass-Steagall Act,

the OCC has interpreted ‘‘riskless’’

27784 Federal Register / Vol. 66, No. 97 / Friday, May 18, 2001 / Rules and Regulations

207The OCC stated that, ‘‘riskless principal

activities are the legal and economic equivalent of

permissible brokerage activities inasmuch as

riskless principal brokerage is conducted in a

manner consistent with the express terms of section

16,’’ of the Glass-Steagall Act. See OCC Interpretive

Letter No. 371 (June 13, 1986).

208See Securities Exchange Act Section 3(a)(5). In

connection with amendments to Rule 10b–10,

however, the Commission stated that ‘‘riskless’’

principal transactions are in many respects

equivalent to transactions effected on an agency

basis. See Securities Confirmations, Exchange Act

Rel. No. 15219 (Oct. 6, 1978), 43 FR 47495 (Oct. 6,

1978).

209We find that this exception is necessary and

appropriate in the public interest and consistent

with the protection of investors. See Exchange Act

Sections 15(a)(2), 23(a)(1), and 36(a)(1) [15 U.S.C.

78o(a)(2), 78w(a)(1), and 78mm(a)(1)].

210 15 U.S.C. 78c(a)(5)(B) [15 U.S.C. 78c(a)(5)(B)]. 211Exchange Act Section 3(a)(5)(C) [15 U.S.C.

78c(a)(5)(C)]. 212Exchange Act Section 3(a)(5)(C)(i) [15 U.S.C.

78c(a)(C)(i)]. 213Exchange Act Section 3(a)(5)(C)(ii) [15 U.S.C.

78c(a)(C)(ii)]. 214Exchange Act Section 3(a)(5)(C)(iii) [15 U.S.C.

78c(a)(C)(iii)]. 215Exchange Act Section 3(a)(5)(C)(iv) [15 U.S.C.

78c(a)(C)(iv)]. 216Exchange Act Section 3(a)(5)(C)(iii) [15 U.S.C.

78c(a)(5)(c)(iii)].

principal activity as equivalent to

agency activity.207 Nevertheless, under

the securities laws, ‘‘riskless’’ principal

transactions involve dealer activity

because entities that engage in

‘‘riskless’’ principal transactions as a

matter of course would be involved in

the business of buying and selling

securities for their own accounts, even

if the risk associated with the

transactions is minimal or nonexistent.208 In light of the differing

interpretations regarding ‘‘riskless’’

principal transactions, we have

determined to adopt Rule 3a5–1 to

exempt banks from the definition of

dealer provided that the number of

‘‘riskless’’ principal transactions and

agency transactions engaged in by a

bank does not exceed 500 transactions

per year.209 We believe that this

exemption provides relief to banks in an

area that may have been understood to

have been covered by the de minimis

exception because of the differing legal

interpretations under the banking and

securities laws. This exemption,

however, does not expand the number

of transactions permitted under the

statutory exception. Rather, this is a

technical exemption to clarify that

banks may act as a riskless principal, as

well as an agent, and meet the terms of

the de minimis exception.

Rule 3a5–1 provides that a bank is

exempt from the definition of the term

‘‘dealer’’ solely for engaging in riskless

principal transactions if the number of

such riskless principal transactions

combined with transactions in which

the bank is acting as an agent for a

customer under the de minimis

exception do not exceed 500

transactions. A ‘‘riskless principal

transactions’’ is defined as a transaction

in which, after having received an order

to buy from a customer, the bank

purchased the security from another

person to offset a contemporaneous sale

to such customer or, after having

received an order to sell from a

customer, the bank sold the security to

another person to offset a

contemporaneous purchase from such

customer.

For purposes of Rule 3a5–1 and the de

minimis exception, riskless principal

transactions should be counted toward

the 500-transaction limit in the

following manner. First, a transaction in

which the dealer bank is acting as a

riskless principal intermediary between

a broker-dealer and a non-broker-dealer

customer would count as one trade

toward the 500-transaction limit.

Second, a transaction in which the

dealer bank is acting as a riskless

principal intermediary between two

non-broker-dealer customers would

count as two trades toward the 500-

transaction limit. We have included this

methodology in Rule 3a5–1(b), which

explicitly provides that for purposes of

the 500-transaction limit ‘‘a riskless

principal transaction counts as: (1) Two

transactions if neither transaction

comprising the riskless principal

transaction is with a broker or dealer; or

(2) one transaction if either transaction

comprising the riskless principal

transaction is with a broker or dealer.’’

We believe this methodology is

consistent with the de minimis

exception to the definition of ‘‘broker.’’

Specifically, a broker acts as an agent for

a customer in executing securities

transactions. Because riskless principal

transactions are in many respects

equivalent to transactions effected on

agency basis for customers, we

determined to focus on transactions

between banks and customers that are

similar to agency transactions.

Transactions between banks and brokerdealers appear in many respects to be

transactions between principals. We

therefore determined not to count

transactions with broker-dealers for

purpose of this exemption.

We request comment on whether

riskless principal transactions should be

counted as provided in Rule 3a5–1 for

purposes of the de minimis exception.

Should this exception be limited to

instances where a broker or dealer is the

counterparty to a particular transaction?

Are there other specific types of

transactions that should be specially

accounted for in determining the de

minimis exception?

IV. Rule 3b–18—Definitions of Terms

Used in Asset-Backed Exception to

Dealer

Exchange Act Section 3(a)(5)(A)

defines the term ‘‘dealer’’ generally as

‘‘any person engaged in the business of

buying and selling securities for such

person’s own account through a broker

or otherwise * * *’’ Exchange Act

Section 3(a)(5)(B) 210 provides an

exception for any ‘‘person that buys or

sells securities for such person’s own

account, either individually or in a

fiduciary capacity, but not as a part of

a regular business.’’ Prior to the passage

of the GLBA, the Exchange Act

completely excepted banks from the

definition. However, the Glass-Steagall

Act generally prohibited banks from

acting as underwriters or dealers of

corporate securities and certain other

types of securities. The GLBA retained

the general prohibition on bank

underwriting and dealing in corporate

securities and certain other types of

securities but repealed the Exchange

Act’s blanket exception for banks acting

as dealers. The GLBA replaced the

blanket exception with four specific

exceptions for certain securities

activities that a bank may engage in

without being considered a dealer.211

The four exceptions are for: (1)

Permissible securities transactions; 212

(2) investment, trustee, and fiduciary

transactions; 213 (3) asset-backed

transactions; 214 and (4) transactions in

identified banking products.215 The

permissible securities transactions

exception allows banks to buy and sell

permissible securities, which include

commercial paper and exempted

securities. The second exception

permits banks to buy and sell securities

for investment purposes for the bank or

for the accounts for which the bank acts

as a trustee or fiduciary. The third

exception is discussed below. The

fourth exception permits the bank to

buy and sell identified banking

products, which include deposit

accounts, letters of credit issued by a

bank, and loans made by a bank. We

view the first, second, and fourth

exceptions as not needing additional

clarification by rule at this time.

However, we do solicit comment on

whether there are any issues

surrounding the interpretation of these

three exceptions of which we should be

aware and as to which we should

provide guidance.

The third exception allows banks to

issue and sell certain asset-backed

securities.216 Under this exception

banks are permitted to issue or sell

Federal Register / Vol. 66, No. 97 / Friday, May 18, 2001 / Rules and Regulations 27785

217 Id.

218Exchange Act Sections 3(a)(5)(C)(iii)(I), (II),

and (III) [15 U.S.C. 78c(a)(C)(iii)(I), (II), and (III)].

219See H.R. Rep. No. 106–74, pt. 3, at 171 (1999).

220Exchange Act Section 3(a)(5)(C)(ii) [15 U.S.C.

78c(a)(C)(ii)]. In contrast, a bank also may deal in

government securities, such as securities of the

Federal National Mortgage Association (‘‘Fannie

Mae’’) and the Federal Home Loan Mortgage

Corporation (‘‘Freddie Mac’’). Exchange Act

Sections 3(a)(5)(C)(II) (exception from ‘‘dealer’’ for

exempted securities) [15 U.S.C. 78c(a)(5)(C)(II)],

3(a)(12)(A) (exempted security defined) [15 U.S.C.

78c(a)(12)(A)], and 3(a)(42)(B) and (C) (government

securities defined) [15 U.S.C. 78c(a)(42)(B) and (C)].

221Section 206 of the GLBA defines the term

‘‘identified banking product’’ as:

‘‘(1) a deposit account, savings account,

certificate of deposit, or other deposit instrument

issued by a bank;

‘‘(2) a banker’s acceptance;

‘‘(3) a letter of credit issued or loan made by a

bank;

‘‘(4) a debit account at a bank arising from a credit

card or similar arrangement;

‘‘(5) a participation in a loan which the bank or

an affiliate of the bank (other than a broker or

dealer) funds, participates in, or owns that is sold—

‘‘(A) to qualified investors; or

‘‘(B) to other persons that—

‘‘(i) have the opportunity to review and assess

any material information, including information

regarding the borrower’s creditworthiness; and

‘‘(ii) based on such factors as financial

sophistication, net worth, and knowledge and

experience in financial matters, have the capability

to evaluate the information available, as determined

under generally applicable banking standards or

guidelines; or

‘‘(6) any swap agreement, including credit and

equity swaps, except that an equity swap that is

sold directly to any person, other than a qualified

investor (as defined in section 3(a)(54) of the

Securities Act of 1934) shall not be treated as an

identified banking product.’’ 15 U.S.C. 78c note.

222Exchange Act Section 3(a)(5)(C)(iv) [15 U.S.C.

78c(a)(5)(C)(iv)].

223Exchange Act Section 3(b) [15 U.S.C. 78c(b)].

224Bank Holding Company Act Section 4(n)(2)

[12 U.S.C. 1843(n)(2)].

specified securities to qualified

investors through a grantor trust or other

separate entity without being

considered a dealer. The specified

securities generally must be originated

by the bank and backed by the

obligations of the bank’s customers. We

have identified several issues under this

exception that require clarification. We

are adopting Rule 3b–18 to assist banks

in structuring their activities in

accordance with the new asset-backed

transaction exception.217

The exception to the definition of

dealer registration for banks engaging in

asset-backed issuance and sale

transactions specifically provides that a

bank may ‘‘engage in the issuance or

sale to qualified investors, through a

grantor trust or other separate entity, of

securities backed by or representing an

interest in notes, drafts, acceptances,

loans, leases, receivables, other

obligations (other than securities of

which the bank is not the issuer), or

pools of any such obligations

predominantly originated by: (1) The

bank; (2) an affiliate of any such bank

other than a broker or dealer; or (3) a

syndicate of banks of which the bank is

a member, if the obligations or pool of

obligations consist of mortgage

obligations or consumer-related

receivables.’’ 218

This language makes it clear that

Congress intended to create a narrow

dealer exception for banks that engage

in the issuance and sale of securities

based on assets created by the bank

itself and sold only to qualified

investors. Congress’ intent to limit this

exception to bank-generated underlying

assets is shown by the language found

at the conclusion of the section that

requires any of the obligations to be

‘‘predominantly originated’’ by the

group consisting of the bank and its

affiliates. In the case of mortgage

obligations and consumer-related

receivables, the limitation is expanded

to permit a syndicate of banks that

includes the issuing bank to originate

the obligations or pool of obligations.

Moreover, the legislative history

indicates that this exception should be

limited to syndicates in which the bank

is more than an insignificant member. It

states that, ‘‘[t]he Committee expects

this provision shall be interpreted so

that the bank will [have] not less than

ten percent of the assets in the syndicate

or pool of obligations.’’ 219 This

interpretation generally limits the

availability of the underwriting

exception to asset-backed transactions

predominantly originated by the bank

that is underwriting the transaction, or

involving syndicates where that bank is

not an insignificant member. In

addition, the exception requires the

asset-backed securities to be placed into

a grantor trust or other separate entity.

The exception by its terms does not

cover repurchases by the bank of the

asset-backed securities after they have

been originated and issued; rather, the

terms of the exception cover the

issuance or sale of asset-backed

securities. Thus, the exception permits

a bank to create, underwrite, and issue

asset-backed securities predominantly

originated by the bank and its affiliates.

This exception does not permit the bank

to be a dealer by regularly repurchasing

and reselling the asset-backed securities

that it issues. A bank may purchase

these securities for investment

purposes, so long as the bank is not

acting as a dealer.220

We note that this is the only

exception that permits this type of

securitized transaction. The exception

to the definition of dealer for banks

buying or selling identified banking

products 221 does not permit the

packaging of securities for sale in an

asset-backed transaction.222

We are clarifying several terms in the

asset-backed securities exception to

assist banks in understanding how this

section applies to their asset-backed

securities activities. Specifically, Rule

3b–18 defines the terms ‘‘affiliate,’’

‘‘consumer-related receivable,’’

‘‘member of a syndicate of banks,’’

‘‘obligation,’’ ‘‘originated,’’ ‘‘pool,’’

‘‘predominantly originated,’’ and

‘‘syndicate of banks’’ as used in this

exception. We find that these

definitions are consistent with the

provisions and purposes of the

Exchange Act.223

First, in defining the term

‘‘predominantly,’’ which modifies the

term ‘‘originated,’’ we looked to other

sections of the GLBA in which the term

is used. Section 103(n) of the GLBA uses

the term ‘‘predominantly’’ to modify

‘‘financial’’ and to allow analysis of

whether nonfinancial activities and

affiliations may be retained.224 Section

103(n)(2) of the GLBA expressly

provides that a firm is predominantly

engaged in financial activities when at

least 85% of the annual gross revenues

of the consolidated company derive

from financial activities, excluding any

revenue from banks. To be consistent,

we are applying the same numerical test

found in Section 103(n)(2) of GLBA for

loan product originations for the

purpose of the asset-backed securities

exception from the definition of dealer.

Therefore, for the purpose of the

asset-backed transaction exception, Rule

3b–18(g) defines ‘‘predominantly

originated’’ so that a bank may engage

in the issuance or sale of asset-backed

securities without registration as a

dealer if at least 85% of the obligations

underlying the securities were

originated by the bank or its affiliates,

other than its broker-dealer affiliates, or

any permitted syndicate of which the

bank is more than an insignificant

member. Specifically, the bank, its

affiliates, or any such syndicate must

have originated 85% of the obligations

in any pool as measured by the value of

the obligations. We considered and

27786 Federal Register / Vol. 66, No. 97 / Friday, May 18, 2001 / Rules and Regulations

225See, e.g., John Downes and Jordan Elliot

Goodman, Dictionary of Finance and Investment

Terms 422 (5th ed. 1998); Glenn G. Munn, updated

by F.L. Garcia, Encyclopedia of Banking and

Finance 743 (8th ed 1983); and Yahoo! Financial

Glossary at http://dir.yahoo.com/

Business_and_Economy/Finance_and_Investment/

Reference_and_Guides/Glossaries.

226See, e.g., Dictionary of Finance and

Investment Terms, Id., at 405; John F. Marshall,

Dictionary of Financial Engineering, 122 (2000);

and Encyclopedia of Banking and Finance, Id. at

728.

227Exchange Act Section 3(a)(4)(B)(vi) adopts the

definition of ‘‘affiliate’’ found in Bank Holding

Company Act Section 2(k) [12 U.S.C. 1841(k)]. Both

definitions are the same.

228See, e.g., Dictionary of Finance and

Investment Terms, supra note 225 at 555;

Encyclopedia of Banking and Finance, supra note

225, at 907; Yahoo! Financial Glossary, supra note

225; see also Federal Deposit Insurance Corporation

Regional Outlook, First Quarter 1999, at 19, citing

American Bankers Association, Banking

Terminology, 3rd ed., 1989, p. 435.

229Exchange Act Section 3(a)(5)(C)(iii)(I–III) [15

U.S.C. 78c(a)(5)(C)(iii)(I–III)].

230Adapted from 1989 Fed. Res. Interp. Ltr. Lexis

283 (Aug. 1, 1989).

231See e.g., Dictionary of Financial Engineering,

supra note 226, at 117; Yahoo! Financial Glossary

supra note 225.

232NSCC is a clearing agency registered pursuant

to Section 17A of the Exchange Act [15 U.S.C. 78q–

1].

233 15 U.S.C. 78c(a)(4)(B)(ii), (iv), and (viii).

234Exchange Act Section 36(a)(1) [15 U.S.C.

78mm(a)(1); see also Exchange Act Sections 15(a)(2)

and 23(a)(1) [15 U.S.C. 78o(a)(2) and 78w(a)(1)].

rejected also having banks apply the

predominantly originated test to the

number and dollar amount owing on the

obligations as well as the value in an

asset-backed transaction pool. We

rejected this more extensive test as too

burdensome for any increased reliability

that it might offer. We invite comment

on this definition.

Many of the definitions we are

adopting are intended to shed light on

the financial terms used in the

exception and avoid ambiguities

without delving into complex financial

issues that may not be relevant to the

analysis of whether a bank would be

considered a dealer. Thus, the

definitions should be relatively

straightforward and uncomplicated. In

defining the terms, we have looked to

generally understood meanings and the

interpretations of the other financial

participants, including regulators.

For instance, Rule 3b–18(e) provides

that ‘‘originated’’ means initially making

and funding an obligation.225 Thus, to

count as an obligation originated by the

bank or its affiliates, the bank and its

affiliates must be the initial lender as

shown both by creating and supplying

the money for a loan. Rule 3b–18(d)

provides that ‘‘obligation’’ means any

note, draft, acceptance, loan, lease,

receivable, or other evidence of

indebtedness that is not a security

issued by a person other than the

bank.226

Rule 3b–18(a) defines the term

‘‘affiliate’’ by using the same definition

found in Section 509 of the GLBA and

Section 2 of the Bank Holding Company

Act.227 This definition states that

affiliate means ‘‘any company that

controls, is controlled by, or is under

common control with another

company.’’ Rule 3b–18(h) defines the

term ‘‘syndicate of banks’’ to mean a

group of banks that acts jointly, on a

temporary basis, to loan money in one

or more bank credit obligations.228

The asset-backed transaction

exception allows ‘‘consumer-related

receivables’’ to be originated by a

syndicate of banks of which a bank is

a member, as well as being originated by

the bank itself or an affiliate of the bank,

other than a broker-dealer.229 Rule 3b–

18(b) defines ‘‘consumer-related

receivable,’’ as any obligation incurred

by any natural person to pay money

arising out of a transaction in which the

money, property, insurance, or services

(being purchased) are primarily for

personal, family, or household

purposes.230

Rule 3b–18(g) defines a ‘‘pool’’ as

more than one obligation or type of

obligation grouped together to provide

collateral for a securities offering.231

Finally, we note that the term ‘‘qualified

investor’’ is defined in Section 3(a)(54)

of the Exchange Act, as amended by

Section 207 of the GLBA. This

definition limits the universe of

purchasers of asset-backed securities to

a more sophisticated group when there

is not a registered broker-dealer

underwriting the securities offering.

We invite comment on these

definitions, including whether there are

any alternate definitions of these terms

that would be more appropriate for the

purposes of this specific functional

exception to the definition of dealer. We

also invite comment on whether the

85% test for ‘‘predominantly

originated’’ and whether calculating the

‘‘predominantly originated by’’ test

based on the value of the obligations is

a workable approach, or whether other

means of determining ‘‘predominantly’’

should be considered. Commenters also

are requested to give their views on

whether there are any other definitions

or interpretations that should be added,

or issues that should be considered to

enhance the clarity of this exception.

V. Rule 3a4–6—Exemption To Permit

Execution of Investment Company

Securities Through NSCC’S Mutual

Fund Services

We have been asked whether banks

may purchase and redeem shares of

open-end investment companies

through NSCC’s Mutual Fund

Services,232 including Fund/SERV, and

still comply with Exchange Act Section

3(a)(4)(C). NSCC’s Mutual Fund

Services provide an automated system

to participants to process transactions in

investment company securities. Fund/

SERV centralizes order entry,

confirmation, registration, and

settlement of purchases and

redemptions of investment company

securities. NSCC’s Mutual Fund

Services are available to investment

companies, broker-dealers, banks, trust

companies, and other financial

institutions that have been accepted for

membership in NSCC.

Exchange Act Section 3(a)(4)(C)

requires banks to execute through a

registered broker-dealer (or internally

cross) securities transactions effected

pursuant to the trust and fiduciary

activities exception, safekeeping and

custody exception, or certain stock

purchase plans exception.233 Banks that

use NSCC’s Mutual Fund Services to

execute transactions in investment

company securities may not use a

registered broker-dealer to execute these

transactions, depending on whether the

NSCC arrangement is with the principal

underwriter or the transfer agent of the

investment company. Therefore, some

banks require an exemption from the

trade execution requirements of

Exchange Act Section 3(a)(4)(C) to

continue to use NSCC’s Mutual Fund

Services while complying with

exceptions and exemptions from the

definition of broker. We are adopting

this exemption to allow banks to

continue to execute transactions in

shares of open-end investment

companies through NSCC’s Mutual

Fund Services because NSCC’s Mutual

Fund Services simplify and automate

the process for purchasing and

redeeming investment company

securities without raising investor

protection concerns. This exemption is

available only to banks that process

orders through a service of a registered

clearing agency subject to our

supervision and regulation. We find that

this exception is necessary or

appropriate in the public interest and

consistent with the protection of

investors.234

VI. Rule 15a–7—Extentions of Time

We have received a number of

requests from representatives of banks

for an extension of time to comply with

Federal Register / Vol. 66, No. 97 / Friday, May 18, 2001 / Rules and Regulations 27787

235Letter from Lawrence R. Uhlick, Executive

Director and General Counsel, Institute of

International Bankers, to Robert L. D. Colby, Deputy

Director, and Catherine McGuire, Associate Director

and Chief Counsel, Division of Market Regulation,

Commission (Mar. 15, 2001); Letter from Barry

Harris, Chair, Bank Retail Broker-Dealer Committee,

Securities Industry Association, to Laura Unger,

Acting Chairman, Commission (Mar. 13, 2001);

Letter from Sarah A. Miller, Director, Center for

Securities, Trust and Investments, American

Bankers Association, to Laura Unger, Acting

Chairman, Commission (February 28, 2001).

236Exchange Act Section 36(a)(1) [15 U.S.C.

78mm(a)(1); see also, Exchange Act Sections

15(a)(2) and 23(a)(1) [15 U.S.C. 78o(a)(2) and

78w(a)(1)].

237Banks should be aware that the definitions of

broker and dealer do not include any exceptions for

banks acting as municipal securities dealers. Banks

acting as municipal securities dealers are still

required to be registered under Exchange Act

Section 15B [15 U.S.C. 78o–4] and to comply with

requirements of the Exchange Act applicable to

municipal securities dealers.

238 15 U.S.C. 78cc(b).

239Exchange Act Section 29(b) does not make the

contract automatically a nullity. Rather, the contract

is voidable at the option of the innocent party. Mills

v. Electric Auto-Lite Co., 396 U.S. 375, 387 (1970).

In this manner, ‘‘interests of the victim are

sufficiently protected by giving him the right to

rescind; to regard the contract as void where he has

not invoked the right would only create the

possibility of hardships to him or others without

necessarily advancing the statutory policy of

disclosure.’’ Id. at 388.

240 Id. at 388; see also Occidental Life Ins. Co. v.

Pat Ryan and Assoc., 496 F.2d 1255, 1267 (4th Cir.),

cert. denied, 419 U.S. 1023 (1974) (principles of

equity, like estoppel and waiver, apply to actions

brought under Exchange Act Section 29(b)).

241See Boguslavsky v. Kaplan, 159 F.3d 715, 722

(2nd Cir. 1998) (under the liberal pleading standard

accorded pro se litigants, an investor properly

presented an identifiable claim for rescission under

Exchange Act Section 29(b) in asserting that the

firm opeated without director of compliance and

thus was not properly registered as securities

broker-dealer); Regional Properties, Inc. v. Financial

and Real Estate Consulting Co., 752 F.2d 178, 182

(5th Cir. 1985) (subject to equitable defenses, real

estate developers were entitled to rescind

agreement with broker to structure and market

limited partnership interest where broker had failed

to register as required by the Exchange Act);

Regional Properties v. Financial and Real Estate

Consulting Co., 678 F.2d 552, 557, 566–67 (5th Cir.

1982) (recognizing that Exchange Act Section 29(b)

provides for a private, equitable cause of action for

the rescission of a contract where the securities

broker was unlicensed); Eastside Church of Christ

v. National Plan, Inc., 391 F.2d 357, 362 (5th Cir.).,

cert. denied, 393 U.S. 913 (1968) (churches could

void a transaction with broker under Exchange Act

Section 29(b) because the broker was unregistered);

Couldock and Bohan, Inc. v. Societe Generale

Securities, Corp., 93 F. Supp. 2d 220, 233 (D. Conn.

2000) (a contract violating broker registration

requirements of the Exchange Act is voidable at the

option of the innocent party under Exchange Act

Section 29(b)).

242 17 CFR 240.15a–8.

the broker-dealer provisions of the

GLBA.235 These requests indicate that a

number of banks will not have

completed the process of shifting certain

necessary securities activities to a

registered broker-dealer by May 12,

2001, to avoid being considered a broker

or dealer subject to registration

requirements. They also request time to

adapt to the guidance provided by the

Commission regarding these provisions.

We recognize the time concerns that

banks have raised. Because banks have

historically enjoyed an exception from

broker-dealer regulation, we believe

they may need additional time to more

fully comply with the GLBA

amendments and these rules.

Accordingly, we are adopting Rule 15a–

7, which provides two conditional

exemptions from broker-dealer

registration to allow additional time for

banks to make the necessary

arrangements either to register or to

comply with a specific functional

exception to the definitions of broker or

dealer. We find that these exemptions

are necessary or appropriate in the

public interest and consistent with the

protection of investors.236

First, Rule 15a–7(a) exempts until

October 1, 2001 banks that would

otherwise be required to register as a

broker or dealer because the bank’s

securities activities do not fit within the

exceptions to the definitions of broker

or dealer. Second, Rule 15a–7(b)

exempts until January 1, 2002, banks

that would be a broker solely because

their compensation arrangements—

either for the bank or for its

employees—do not meet the

compensation conditions of a particular

exception or exemption.237 This would

include effecting transactions in a

money market fund that does not

qualify as no-load under the sweeps

exception.

VII. Rule 15a–8—Exemption for

Contracts Entered Into by Banks Before

2003 From Being Considered Void or

Voidable

We recognize that banks may need to

adjust their procedures to shift their

securities activities to registered brokerdealers or to comply with the conditions

of the specific functional exceptions or

exemptions to the definitions of broker

and dealer. We also are aware that there

may be instances where, despite having

reasonable procedures in place, a bank

may inadvertently fail to meet the terms

and conditions of the specific functional

exceptions upon which it is relying.

This could result in the bank engaging

in securities activities in violation of the

registration requirements of Exchange

Act Section 15 and the rules

promulgated under that section.

Exchange Act Section 29(b) 238

provides that any contract made in

violation of the Exchange Act or

Exchange Act rules shall be void as

regards the rights of any person who

made or engaged in the performance of

any such contract.239 Occasionally,

private parties have invoked this

remedy, which is purely equitable in

nature,240 in instances involving brokerdealer registration violations by the

opposite party.241

As explained above, the amended

Exchange Act contains numerous

broker-dealer definitional provisions

that apply only to banks, which were

previously excepted from broker-dealer

regulation. Because of this history, we

believe that banks may have unique

issues in complying with these

definitional provisions. It is, therefore,

appropriate to provide a transitional

period before these provisions fully

apply. Therefore, to provide certainty to

banks while they become fully familiar

with the operation of the exceptions, we

are adopting Rule 15a–8.242 This rule

provides an exemption for contracts

entered into by banks before January 1,

2003 from being considered void or

voidable by reason of Exchange Act

Section 29 because a bank that is a party

to the contract violated the registration

requirements of Section 15(a) of the

Exchange Act or any applicable

provision of this Act and the rules and

regulations thereunder based solely on a

bank’s status as a broker or dealer when

the contract was created. We expect the

banks are already working to come into

full compliance with the functional

regulation provisions of the GLBA.

Banks may, however, have inadvertent,

technical violations as they become

accustomed to the new regulatory

requirements. This exemption is

designed to recognize the unique

compliance problems that many banks

have by preventing any inadvertent

failures by banks to meet the conditions

of the functional exceptions from

triggering potential rescission under

Exchange Act Section 29 during this

transitional period.

We note that this provision does not

relieve banks of the obligation to register

as a broker or dealer if their securities

activities do not fit within a specific

functional exception or exemption. We

also note that banks’ securities activities

continue to be subject to the antifraud

provisions of the federal securities laws,

irrespective of the bank’s lack of

registration or failure to comply with

the provisions of the Exchange Act and

the rules thereunder that otherwise

apply to banks based on their status as

broker-dealers. We, therefore, find that

this exemption is consistent with the

27788 Federal Register / Vol. 66, No. 97 / Friday, May 18, 2001 / Rules and Regulations

243Exchange Act Section 36(a)(1) [15 U.S.C.

78mm(a)(1)].

244This exemption requires savings associations

and savings banks to have deposits insured by the

FDIC under the FDIA and to not be operated for the

purpose of evading the provisions of the Exchange

Act. 12 U.S.C. 1811 et seq.

245Nevertheless, savings associations and savings

banks that are municipal securities dealers must

register and be regulated as municipal securities

dealers pursuant to Exchange Act Section 15B [15

U.S.C. 78o–4]. Banks must also register pursuant to

Exchange Act Section 15B. Exchange Act Section

3(a)(34)(A) [15 U.S.C. 78c(a)(34)(A) provides that

the ‘‘appropriate regulatory agency’’ of a municipal

securities dealer that is a bank regulated by the

OCC, the Federal Reserve, or the FDIC is the agency

that already regulates the bank. Exchange Act

Section 3(a)(34)(A)(iv) [15 U.S.C. 78c(a)(34)(A)(iv)]

designates the Commission as the appropriate

regulatory agency in the case of all other municipal

securities dealers, which includes savings

associations and savings banks that are municipal

securities dealers.

246See Letter re: AmeriFed Federal Savings Bank

(Jan. 18, 1990). The OTS is the appropriate federal

regulator for savings associations, which include

federally chartered savings banks, and the FDIC is

the appropriate federal regulator for state-chartered

savings banks as it is for all state-chartered banks

that are not members of the Federal Reserve System.

12 U.S.C. 1813(q); see also, Investment Company

Act Rel. No. 13666, Status of Savings and Loan

Associations Under the Federal Securities Laws;

Advance Notice of Possible Commission Action, 49

FR 6383 (December 19, 1983).

247See, e.g., Chubb Letter, supra note 38.

248See FDIC Banking Review, Volume 10, No., 1

pp. 3–18 (June 1997).

249See e.g., 12 U.S.C. 1828(c), dealing with the

regulatory responsibilities of the banking agencies

regarding mergers of insured depository

institutions; 12 U.S.C. 1828(i), governing the

statutory requirements for a reduction in stock

capital; 12 U.S.C. 1828(m), governing activities of

savings associations and their subsidiaries; 12

U.S.C. 1818(e), governing insured depository

institutions removal and prohibition authority; 12

U.S.C. 1831m, governing early identification of

needed improvements in financial condition; and

12 U.S.C. 1831o, governing prompt corrective

action. In each of these instances, the OTS has

exactly the same regulatory authority as do the

federal banking agencies with regard to the banks

under their jurisdiction.

The FDIC also must approve the applications of

savings associations and savings banks for deposit

insurance. 12 U.S.C. 1815. The FDIC receives a

notice every time a savings association or savings

bank establishes or acquires a new subsidiary or

commences a new activity. 12 U.S.C. 1828(m). The

FDIC also has additional regulatory and

examination authority over these insured

depository institutions in its role as the insurer of

their deposits, just like it does over state and

national banks. 12 U.S.C. 1820. The FDIC also

reviews the activities of state chartered savings

associations and state chartered banks, including

savings banks, whenever they engage in activities

that are not permissible for federally chartered

savings associations or national banks, respectively.

12 U.S.C. 1831e and 1831a, respectively.

250Exchange Act Section 36(a)(1) [15 U.S.C.

78mm(a)(1).

251See 12 U.S.C. 1828(t).

252See 17 CFR 200.30–3(a), which is entitled

‘‘Delegation of authority to Director of Division of

Market Regulation.’’

253Section 15(a) generally requires a broker or

dealer to register with us prior to effecting,

inducing, or attempting to induce securities

transactions.

254This delegation of authority does not apply to

banks seeking exemptions from registration as a

municipal securities dealer under Exchange Act

Section 15B [15 U.S.C. 78o–4], which regulates the

activities of municipal securities dealers. Banks that

act as municipal securities dealers are still required

to comply with the requirements of the Exchange

Act applicable to non-bank municipal securities

dealers. Savings associations and savings banks are

required to comply with the requirements

applicable to bank municipal securities dealers but

by the terms of the exemption in Rule 15a–9 are

exempted from complying with those requirements

if they comply with rules applicable to bank

municipal securities dealers.

255The APA provides that prior notice and

comment is not required: ‘‘(A) [for] interpretive

rules, general statements of policy, or rules of

agency organization, procedure, or practice; or (B)

when the agency for good cause finds (and

incorporates the finding and a brief statement of

reasons therefore in the rules issued) that notice

and public procedure thereon are impracticable,

unnecessary, or contrary to the public interest.’’ 5

U.S.C. 553(b)(A) and (B).

public interest and the protection of

investors.243

We request comment on the

appropriateness of this temporary

exemption from Exchange Act Section

29(b).

VIII. Rule 15a–9—Exemption for

Savings Associations and Savings

Banks

We are granting an exemption from

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

for savings associations and savings

banks 244 on the same terms and

conditions that banks are excepted or

exempted from broker-dealer

registration.245 Savings associations and

savings banks are not ‘‘banks’’ as

defined in Exchange Act Section

3(a)(6).246 Accordingly, they have not

had the same general exception from

broker-dealer registration for securities

transactions as banks have had. Savings

associations and savings banks have

typically established networking

arrangements with broker-dealers.247

Now that the general exception for

banks has been replaced, and the

differences between banks and savings

associations have narrowed;248 it seems

reasonable to afford savings associations

and savings banks the same type of

exemptions. Moreover, insured savings

associations are subject to a similar

regulatory structure and examination

standards as banks.249 We find that

extending the exemption for banks to

savings associations and savings banks

is necessary or appropriate in the public

interest and is consistent with the

protection of investors.250

In addition, the existence of some of

the bank exceptions from broker-dealer

registration, such as the trust and

fiduciary activities exception, the

safekeeping and custody exception, and

the sweep accounts exception, that may

suggest registration is necessary for

certain limited conduct, create legal

uncertainty for savings associations and

savings banks engaging in such

activities. The exemption will allow

savings associations and savings banks

that are governed by a similar regulatory

structure to operate under the same

terms and conditions as banks. We

emphasize, however, that consistent

with functional regulation, savings

associations and savings banks, as well

as banks, using the trust and fiduciary

activities, safekeeping and custody, or

stock purchase plan exceptions, must

execute securities transactions through

registered broker-dealers or internally

cross their trades. We note that the OTS,

the FDIC, or the Federal Financial

Institutions Examinations Council may

adopt recordkeeping requirements.251

We solicit comment on whether there is

a need for us to propose regulations to

assure parallel recordkeeping

requirements. We also request comment

on all aspects of this exemption as well

as whether it should be extended to any

other entities.

IX. Rule 30–3—Delegation of Authority

We are amending Rule 30–3 of our

Rules of Organization and Program

Management 252 by adding new

paragraph (a)(72) to Rule 30–3 to

delegate to the Director of the Division

of Market Regulation authority to review

and, either unconditionally or on

specified terms and conditions, to grant

or deny to banks, savings associations,

and savings banks exemptions from the

broker-dealer registration

requirements,253 pursuant to the

authority provided in Section 15 and

Section 36 of the Exchange Act.254 The

delegation of authority to the Division is

designed to conserve our resources by

permitting Division staff to grant or

deny exemptions where appropriate and

in a timely manner. We expect the staff

to submit to us novel and complex

requests for exemption.

X. Procedural Matters

A. Administrative Procedures Act And

Request For Comments

The Administrative Procedures Act

(‘‘APA’’) permits an agency to issue a

rule without prior notice and comment

upon a finding of good cause, or if the

rule is interpretive, a general statement

of policy, or a rule of agency

organization, procedure, or practice.255

The APA also permits an agency to

issue a rule without delaying its

effective date for 30 days from the date

of publication if the agency finds good

Federal Register / Vol. 66, No. 97 / Friday, May 18, 2001 / Rules and Regulations 27789

256The APA provides that publication of a

substantive rule must be made not less than 30 days

prior to its effective date, except ‘‘(1) a substantive

rule which grants or recognizes an exemption or

relieves a restriction; (2) interpretive rules and

statements of policy; or (3) otherwise provided by

the agency for good cause found and published

with the rule.’’ 5 U.S.C. 553(d).

257See Interim Final Rule with Request for

Comments, Repurchases of Stock by Recently

Converted Savings Associations, Mutual Holding

Company Dividend Waivers, 65 FR 43088 (July 12,

2000), comment period extended, 65 FR 60095 (Oct.

10, 2000) (OTS); Joint Interim Final Rule with

Request for Comments, Bank Holding Companies

and Changes in Bank Control, 65 FR 16460 (Mar.

28, 2000) (Board of Governors of the Federal

Reserve System (Federal Reserve and Treasury);

Interim Final Rules with Request for Comment,

Activities and Investments of Insured State Banks,

65 FR 15526 (Mar. 23, 2000), Final Rule, 66 FR 1018

(Jan. 5, 2001) (FDIC); Interim Final Rule with

Request for Comments, Financial Subsidiaries, 65

FR 14819 (Mar. 20, 2000) (Federal Reserve); Joint

Interim Final Rule with Request for Comments,

Financial Subsidiaries, 65 FR 15050 (Mar. 20, 2000)

(Treasury and Federal Reserve); Interim Final Rule

with Request for Comments, Application of

Sections 23A and 23B of the Federal Reserve Act

to Derivative Transactions with Affiliates and

Intraday Extensions of Credit to Affiliates, 66 FR

24229 (May 11, 2001) (Federal Reserve).

258See, e.g., Letter from Lawrence R. Uhlick,

Executive Director and General Counsel, Institute of

International Bankers, to Robert L. D. Colby, Deputy

Director, and Catherine McGuire, Associate Director

and Chief Counsel, Division of Market Regulation,

Commission (Mar. 15, 2001); Letter from Barry

Harris, Chair, Bank Retail Broker-Dealer Committee,

Securities Industry Association, to Laura S. Unger,

Acting Chairman, Commission (Mar. 13, 2001);

Letter from Robert M. Kurucza, General Counsel,

Bank Securities Association, to Laura S. Unger,

Acting Chairman, Commission (Mar. 12, 2001);

Letter from Sarah A. Miller, Director, Center for

Securities, Trusts, and Investments, American

Bankers Association, to Laura S. Unger, Acting

Chairman, Commission (Feb. 28, 2001).

259Letter from Melanie L. Fein, Counsel,

Federated Investors, Inc., to Robert L. D. Colby,

Deputy Director, and Catherine McGuire, Associate

Director and Chief Counsel, Division of Market

Regulation, Commission (Mar. 30, 2001).

260Letter from Melanie L. Fein to Robert L. D.

Colby, Deputy Director, and Catherine McGuire,

Associate Director and Chief Counsel, Division of

Market Regulation, Commission (Mar. 13, 2001).

261Letter from Melanie L. Fein to Robert L. D.

Colby, Deputy Director, and Catherine McGuire,

Associate Director and Chief Counsel, Division of

Market Regulation, Commission (Mar. 7, 2001).

262Letter from Scott M. Albinson, Managing

Director, OTS, to Annette L. Nazareth, Director,

Division of Market Regulation, Commission and

Paul F. Roye, Director, Division of Investment

Management, Commission (Mar. 20, 2001).

263Letter from Barry Harris, Chair, Bank Retail

Broker-Dealer Committee, Securities Industry

Association, to Laura S. Unger, Acting Chairman,

Commission (Mar. 13, 2001); Letter from Senator

Phil Gramm, U.S. Senate Committee on Banking,

Housing, and Urban Affairs, to Arthur Levitt,

Chairman, Commission (Feb. 6, 2001).

cause and publishes its finding with the

rule, or if the rule is not substantive.256

For the reasons discussed below, we

find that there is good cause for issuing

Rules 3a4–2, 3a4–3, 3a4–4, 3a4–5, 3a4–

6, 3a5–1, 3b–17, 3b–18, 15a–7, 15a–8

and 15a–9 under the Exchange Act

without prior notice and comment and

without a delayed effective date. We

also find that the amendment to Rule

30–3 of our Rules of Organization and

Program Management relates solely to

agency organization, procedure, or

practice, and is not a substantive rule.

Accordingly, we are issuing the

amendment without prior notice and

comment and without a delayed

effective date.

As the banking regulators found with

respect to certain of their regulations

under the GLBA,257 we find good cause

for issuing Rules 3a4–2, 3a4–3, 3a4–4,

3a4–5, 3a4–6, 3a5–1, 3b–17, 3b–18, 15a–

7, 15a–8 and 15a–9 without notice and

comment or a delayed effective date. We

make this finding for the following

reasons: (1) The short time available

between the time members of the

banking community requested specific

guidance as to the meaning of certain

provisions of the GLBA and the date on

which those provisions become

effective; (2) the amount of input we

already have received from the industry

on the issues addressed by the rules; (3)

the fact that the rules do not impose any

new obligations in addition to those

created by the GLBA, but rather provide

guidance as to the meaning of certain

provisions of that statute or provide

exemptive relief consistent with the

intent of those provisions; and (4) the

interim nature of the rules, which come

after discussions with the industry, and

which invite further comment, with

possible revision of the rules in light of

those comments.

Although Congress enacted the GLBA

in November 1999, members of the

banking community more recently

requested specific guidance as to the

meaning of certain key terms used in the

GLBA amendments to the definitions of

‘‘broker’’ and ‘‘dealer’’ and as to the

application of those terms to certain

activities. The GLBA does not require us

to engage in rulemaking in this area, and

we initially anticipated that we could

work with banks on an individual basis

to address their particular concerns. In

recent weeks, however, we have

received a significant number of

inquiries regarding how we interpret

some of the key terms in the new

definitions. Based on these inquiries, we

now believe that it is necessary to

provide guidance in the form of

rulemaking before the effective date of

May 12, 2001.

We recently received many requests

for guidance and certain relief by letter.

Several of the letters asked us to delay

implementing the GLBA amendments to

the definitions of ‘‘broker’’ and

‘‘dealer.’’ 258 One of the letters expressed

the writer’s view on how the trust and

fiduciary activities exception applied to

conduct by indenture trustees and

requested an exemption for this conduct

from the statute.259 A different letter

from the same writer asked how the

trust and fiduciary activities exception

applied to banks acting as trustees for

certain benefit plans and self-directed

IRAs.260 A separate letter by the same

writer asked whether certain investment

management services offered by bank

trust departments.261 Another letter

asked that we extend the exceptions to

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

to thrifts.262 Still other letters noted that

the term ‘‘no-load’’ was not defined in

the GLBA and inquired if we interpreted

the term in the same manner as the

NASD’s definition of that term.263 In

addition, Commission staff has had

numerous discussions with industry

members during the past few weeks

concerning the GLBA amendments.

These requests and discussions

persuaded us that immediate guidance

concerning the scope of the functional

exceptions to the definitions of ‘‘broker’’

and ‘‘dealer’’ added by the GLBA is

imperative.

The industry requests not only

clarified the need for immediate

rulemaking, but also provided us with

valuable information in drafting the

rules. In this regard, Commission staff

has received critical input from the

banking industry through frequent

discussions with staff from banks and

industry associations, as well as banking

regulators. Our staff has traveled

throughout the country to determine

what, if any, regulatory issues are of

concern to industry members in light of

the GLBA amendments. In addition, we

initiated a dialogue with the affected

industries by soliciting inquiries,

participating in industry conferences,

and conducting question and answer

sessions. Finally, we reviewed

information provided to Congress by

industry sources, including the

American Bankers Association, at the

time the GLBA was enacted. As a result,

we have received much of the input and

information that we would expect to

receive from commenters during a preeffective comment period.

The rules we have adopted in

response to industry concerns do not

impose any new obligations beyond

those created by the statute. Rules 3b–

17 and 3b–18 are primarily definitional

and are designed to clarify certain terms

used in the functional exceptions to the

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

added by the GLBA although the

definitions of trustee in Rule 3b–17 is

also exemptive in nature. Six of the

rules, Rules 3a4–2, 3a4–3, 3a4–4, 3a4–

27790 Federal Register / Vol. 66, No. 97 / Friday, May 18, 2001 / Rules and Regulations

264We would expect banks, as a matter of good

business practice, to be able to demonstrate that

they meet the terms of a particular exemption. We

also note that Section 203 of the GLBA specifically

requires the bank regulators to promulgate

recordkeeping requirements. Banks affected by the

GLBA should already be aware of these specific

GLBA requirements. See, e.g., ‘‘Gramm-Leach-Bliley

Deadlines Draw Near: Be Aware, Prepared’’,

Information Access Company, Mar. 1, 2001 (noting

that to comply with GLBA ‘‘push-out’’ provisions,

or to fall within an exemption in the GLBA, banks

must ‘‘maintain records that will clearly indicate

that the trust department securities activities fall

within the exemptions. * * * While banking

regulators will provide guidance on the nature any

types of records they will ask banks to maintain,

there are a few steps banks can take immediately

to ensure compliance with the new rules.’’).

265Banks had been excepted from the definitions

of ‘‘broker’’ and ‘‘dealer’’ under the Exchange Act

since 1934. Until recent years, banks’ ability to

engage in securities activities had been constrained

by federal banking laws. As these constraints

lessened, banks have engaged in a broader range of

securities activities.

266Banks have had varying reasons for choosing

to conduct securities activities through a separate

entity. For example, some banks believed that their

securities activities had greater marketing

credibility with a registered securities sales force.

Separation of these activities also permitted banks

to pay bank and securities sales teams differential

compensation. See John L. Douglas, Banking

Organizations: Structural and Other Considerations

Involving Non-Banking Activities, 1 N.C. Banking

Inst. 59, March 1997 (giving reasons why certain

activities may be moved outside of the bank,

including ‘‘compensation concerns may result in

shifting highly commissioned salespeople out of the

bank in order to avoid jealousies or salary

complaints’’); see also Michael G. Capatides, A

Guide to the Capital Markets Activities of Banks

and Bank Holding Companies (Mar. 1, 1993) at 154

(although banks may act as private placement

agents directly, banks establish separate entities for

‘‘operational convenience as well as the desire to

develop an investment bank environment with a

stand alone compensation plan’’).

267Reform Law Leaves Some Doubters, Am.

Banker, November 8, 2000 (noting that ‘‘many

banks and securities firms had already merged via

regulatory loopholes.’’)

268See U.S. General Accounting Office, Report to

Congressional Requesters: Bank Mutual Sales

Practices and Regulatory Issues GAO/GGD–95–210,

at p. 52 (Sept. 1995); U.S. General Accounting

Office, Report to Congressional Requesters: Banks’

Securities Activities—Oversight Differs Depending

on Activity and Regulator, GAO/GGD–95–214, at p.

25 (Sept. 1995).

269See Testimony of Andrew C. Hove, Jr., Acting

Chairman, Federal Deposit Insurance Corporation

on Financial Modernization Before the

Subcommittee on Finance and Hazardous Materials,

Committee on Commerce, United States House of

Representatives, July 17, 1997, supra at note 187.

5, 3a4–6, 3a5–1, and the definition of

trustee in Rule 3b–17, provide

exemptive relief for certain practices or

activities where we have determined

that an exemption is consistent with the

intent of a functional exception. Rules

15a–7 and 15a–8 provide additional

exemptive relief to banks to give them

sufficient time to adjust their securities

activities to comply with the new

regulatory scheme of the GLBA. Finally,

Rule 15a–9, extends the banks’

exceptions and exemptions from the

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

savings associations and savings banks.

Accordingly, these rules do not

expand the obligations of banks under

the new statutory definitions of

‘‘broker’’ and ‘‘dealer.’’ Rather, they

provide guidance and relief to banks

that have not previously been subject to

our jurisdiction. They either clarify the

Commission’s interpretation of certain

statutory definitions or provide

exemptive relief from those definitions.

In our view, the limited scope of the

rules reduces the need for pre-issuance

comment.

Finally, we note that these are interim

rules. While the rules will become

effective on May 11, 2001, we are

interested in receiving written

comments on the rules within 60 days

after the date they are published in the

Federal Register. We will carefully

examine the comments that we receive,

and we will revise or amend the rules

as necessary in light of those comments.

Because of the immediate need for

guidance on the GLBA amendments to

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

prior to the May 12, 2001 statutory

effective date, the input we have

received from the industry, the limited

scope of the rules, and the fact that the

rules are interim in nature, we find,

consistent with the APA, that good

cause exists to issue these interim final

rules without notice and comment and

without a delayed effective date.

Although we have dispensed with

notice of proposed rulemaking for the

reasons set out above, we are soliciting

written comments on the rules within

60 days after their publication in the

Federal Register. We will consider

carefully those comments and make

changes to the rules as necessary.

We seek comments on the

interpretations and the exemptions set

forth in this release. In addition to the

requests for comments throughout the

release, we seek comment on the

following: (1) Whether these rules

operate to regulate the banks’ brokerdealer operations in the same manner as

broker-dealers subject to our jurisdiction

prior to the exclusion of a bank from the

definition of a broker or dealer; and (2)

whether the fiduciary principles

triggered by these interim final rules

create a standard of conduct or

disclosure by banks to which other

registered broker-dealers may not be

subject. Commenters should also

address whether there are any legal or

policy reasons why the we should

consider different approaches or

exemptions, including but not limited

to: (1) A description of the issue to be

addressed; (2) a description of the

necessity of any alternate approach

suggested; and (3) a recommendation as

to how to remedy the problem

identified, if any, as well as the

feasibility of adopting and enforcing

such remedy. Commenters should,

where possible, provide us with

empirical data and/or describe specific

actions the commenter would suggest

we take.

B. Paperwork Reduction Act

These interim final rules do not

impose recordkeeping or information

collection requirements, or other

collections of information that require

approval of the Office of Management

and Budget under 44 U.S.C. 3501, et

seq. Accordingly, the Paperwork

Reduction Act does not apply.264

C. Consideration of Costs and Benefits

1. Introduction

When the broker-dealer registration

provisions of the GLBA become

effective, many banks will need to

restructure aspects of their securitiesrelated business to comply with the new

statutory requirements.265 The interim

final rules, which will become effective

May 11, 2001, define statutory terms

and provide banks with conditional

exemptions. While these rules may

affect how the banks’ restructuring

occurs, we believe that most of the

restructuring will stem from the statute

and not from the rules themselves.

Moreover, the extent to which banks

need to restructure may be limited by

the way they already do business.266

The majority of banks conduct most of

their securities activities through

registered broker-dealers that are

already regulated by the Commission.267

Indeed, in 1995, the General Accounting

Office ‘‘estimated that approximately 87

percent of all sales of securities on bank

premises are effected by SEC-regulated

broker-dealers.’’ 268 The FDIC confirmed

the findings of the GAO in 1997,

explaining that very few banks sold

securities directly using unregistered

bank employees.269

In considering the potential costs and

benefits of these interim final rules, we

have considered the historical securities

activities of banks, and how those

activities have expanded in recent years.

We also have considered the decisions

many banks will face in determining

how to best restructure their businesses

to comply with the new requirements of

the GLBA. Finally, we have identified

specific costs and benefits, and

requested comment on additional costs

or benefits that may stem from these

interim final rules.

Federal Register / Vol. 66, No. 97 / Friday, May 18, 2001 / Rules and Regulations 27791

270The Bank Holding Company Act is codified at

12 U.S.C. 1841 et seq. 271Congress placed a large amount of blame for

the Great Depression on commercial banks’

securities activities conducted through ‘‘so-called

bank securities ‘affiliates.’ ’’ As a result, Congress

enacted the Glass-Steagall Act in an attempt to

achieve the complete separation of commercial and

investment banking. Jonathan R. Macey, Special

Interest Groups Legislation and the Judicial

Function: The Dilemma of Glass-Steagall, 33 Emory

L.J. 1, 3 (Winter 1984). 272Section 16 is codified at 12 U.S.C. 24

(Seventh); Section 20 is codified at 12 U.S.C. 377;

Section 21 is codified at 12 U.S.C. 378; and Section

32 is codified at 12 U.S.C. 78. 273Public Law 106–102, Section 101 repealing

Section 20 (12 U.S.C. 377) and Section 32 (12 U.S.C.

78) of the Banking Act of 1933. The GLBA retains

Sections 16 and 21 of the Banking Act of 1933. 12

U.S.C. 24 (Seventh); 12 U.S.C. 377. Section 16

prohibits national banks from underwriting, selling,

or dealing in securities, except for certain bankeligible securities such as U.S. government

securities. See, 12 U.S.C. 24 (Seventh); see also 12

U.S.C. 335 at 5(c) (applying Glass-Steagall Act

Section 16 restrictions to state-chartered banks in

the Federal Reserve System). However, Section 16

excludes from its prohibitions securities

transactions in which the bank acts as agent for its

customers, considered agency activity. Under state

law, insured state banks generally may act as agent

for their customers although insured state banks are

prohibited from engaging as principal in any

activities that are not permissible for national banks

unless the state banks comply with applicable

capital standards and the FDIC has determined that

the activity will not pose a significant risk to the

appropriate insurance fund. Federal Deposition

Insurance Corporation Improvement Act of 1991,

Pub. L. 102–242, Title III, Section 303, 12 U.S.C.

1831a. Section 21, also still in effect, prohibits

investment banks from offering checking or savings

accounts. 12 U.S.C. 378a. 274 12 U.S.C. 377. The Supreme Court interpreted

the term ‘‘engaged principally’’ to mean that bank

affiliates could engage in some ineligible activities

so long as they were not the primary activities.

Board of Governors v. Agnew, 329 U.S. 441, 447–

49 (1947). The FDIC’s interpretation that section 21

did not apply to subsidiaries of state nonmember

banks and thus that these subsidiaries could engage

in underwriting securities was upheld by the U. S.

Court of Appeals for the D.C. Circuit in 1987.

Investment Company Institute v. FDIC, 815 F.2d

1540 (D.C. Cir. 1987).

275 12 U.S.C. 78.

276The Federal Reserve initially approved bank

holding company subsidiaries to underwrite

municipal revenue bonds, mortgage related

securities of investment quality on 1–4 family

residential and large denomination commercial

paper as long as the underwriting revenue from

these activities did not exceed five percent of the

subsidiary’s gross revenue of average calculated on

a two year period. See Orders Issued Under Section

4 of the Bank Holding Company Act, Citicorp, J.P.

Morgan and Co. Inc., Bankers Trust New York

Corp., Order Approving Applications to Engage in

Limited Underwriting and Dealing in Certain

Securities, 73 Fed. Res. Bull. 473, 485 (1987).

277As noted above, Section 20 prohibited a

member bank from affiliating with a securities firm

if the securities firm was ‘‘principally engaged’’ in

underwriting and dealing.

278The revenue test distinguished between ‘‘bank

eligible’’ securities (that is, securities that a bank

itself would be allowed to underwrite or deal in)

and ‘‘bank ineligible’’ securities. ‘‘Bank eligible’’

securities included government securities, as well

as any securities issued in private placements.

‘‘Bank ineligible’’ securities were any securities that

were not ‘‘bank eligible.’’ Under the test, a bank was

permitted to affiliate with a securities firm as long

as the securities firm did not derive more than 5%

of its gross revenues from bank-ineligible securities.

In 1989, the Federal Reserve raised this restriction

to 10 percent of total revenues (and later increased

it again, effective in 1997 to 25 percent), and

increased the types of securities allowed to include

debt securities, including sovereign debt securities,

corporate debt, convertible debt securities,

securities issued by a trust or other vehicle secured

by or representing interests in debt obligations and

equity securities. See Review of Restrictions on

Director, Officer and Employee Interlocks, CrossMarketing Activities, and the Purchase and Sale of

Financial Assets Between a Section 20 Subsidiary

and an Affiliated Bank or Thrift, 61 FR 57679,

57683 (Nov. 7, 1996); see also 75 Fed. Res. Bull. 192

(1989). Investment banking income derived from

‘‘bank eligible securities,’’ such as U.S. government

securities and general obligation municipal bonds

that banks were expressly allowed to deal in under

section 16 of Glass-Steagall, were not counted as

securities for the purpose of calculating the revenue

limit. Riskless principal and private placement

securities activities also were not deemed to be

‘‘ineligible’’ securities for these purposes. Bankers

Trust New York Corporation, 75 Fed. Res. Bull. 829

(1989). Thus, under the test, the more gross revenue

the Section 20 subsidiary derived from bank eligible

securities, the more income they could also derive

from bank ineligible securities. In other words, bank

holding companies had an incentive to ensure that

bank eligible securities activities were handled in

a Section 20 broker-dealer subsidiary, rather than in

the bank itself. See generally Revenue Limit on

Bank-Ineligible Activities of Subsidiaries of Bank

Holding Companies Engaged in Underwriting and

Dealing in Securities, 61 FR 68750, 68752 (Dec. 30,

1996).

279 12 CFR 5.34, 61 FR 60342 (Nov. 27, 1996);

Comptroller News Releases NR 96–129 (Nov. 20,

1996) (‘‘Questions and Answers on Part 5’’); NR 96–

128 (Nov. 20, 1996) (‘‘Part 5 Fact Sheet’’).

280The exceptions from the Exchange Act

definitions of ‘‘broker’’ and ‘‘dealer’’ are only

available to the bank itself. See supra note 10,

regarding current definitions of ‘‘broker’’ and

‘‘dealer.’’

281Comptroller Conditional Approval No. 262

(Dec. 11, 1997) (approval to Zion’s First National

Bank to engage through an operating subsidiary in

underwriting and dealing in municipal revenue

bonds); Comptroller Conditional Approval No. 331

(November 3, 1999) (approval to National Bank of

Commerce to engage through an operating

subsidiary in underwriting and dealing in corporate

bonds, dealing in and privately placing trust

preferred securities and buying and selling

collateralized mortgage obligations).

282Economists describe the common

characteristic of nontraditional activities as being

that they produce fee income rather than interest

income. Kevin Rogers and Joseph F. Sinkey, Jr., An

Analysis of Nontraditional Activities at U.S.

Commercial Banks, 1 Review of Financial

Economics, Jan. 1, 1999, at 25. Commercial banks’

non-interest income has risen from 30% in 1988 to

43% in 2000. FDIC, Trends in Commercial Bank

Income and Expense 1988–2000 available at

http://www2.fdic.gov/qbp/2000dec/ctrends.html.

283 Id.

2. Banks’ Securities Activities Before the

GLBA

The Glass-Steagall Act, the Bank

Holding Company Act and its 1970

amendment 270 restricted banks’ ability

to engage in many businesses, including

the securities business.271 As a result,

commercial and investment banking 272

in the U.S. were separated for over 60

years.

The GLBA repealed Sections 20 and

32 of the Banking Act of 1933.273

Section 20 forbade affiliations between

commercial banks and securities firms

that were ‘‘engaged principally’’ in the

investment banking business.274 Section

32 prohibited persons involved ‘‘in any

aspect of the investment banking

business’’ from serving as an officer,

director, or employee of a bank that was

a member of the Federal Reserve

System.275

Prior to their repeal, however, these

prohibitions had already eroded over

time. In 1987, Section 20 of the GlassSteagall Act was significantly

liberalized, with the regulatory

expansion of bank holding companies’

abilities to underwrite corporate debt

and equity through their registered

broker-dealer affiliates (known as

‘‘Section 20’’ affiliates).276 The Federal

Reserve established a revenue test to

determine if a Section 20 affiliate was

‘‘engaged principally’’ in underwriting

and dealing.277 That revenue test

created an incentive for banks to shift

permissible securities activities into

affiliated broker-dealers.278

Commercial banks also benefited from

using broker-dealers to effect securities

transactions. Commercial banks entered

the brokerage business by licensing

operating subsidiaries as registered

broker-dealers. In 1996, the OCC

permitted national banks to own

majority interests in certain operating

subsidiaries that engaged in activities

that were impermissible for national

banks.279 In the case of securities

activities, these operating subsidiaries

were required to register as brokerdealers.280 Subsequent national bank

operating subsidiary approvals included

underwriting and dealing in municipal

revenue bonds and corporate debt

securities.281

We have studied aggregate data

showing that, while banks’ traditional

activities (described as the financing of

loans with deposits) have been

declining, banks’ non-traditional

activities (described as fee-generating

activities, including underwriting, cash

management, and custody services)

have been rising.282 In addition to the

bank securities activities described

above, these non-traditional activities

would include the provision of trust and

investment services to high net worth

individuals.283

In sum, banks today may engage in a

wide range of securities activities

arising from their roles as custodians of

fiduciaries, as well as separately for a

fee. Banks engage in these activities

either directly or through affiliated

broker-dealers. These activities include

brokerage and dealing, as well as

27792 Federal Register / Vol. 66, No. 97 / Friday, May 18, 2001 / Rules and Regulations

284Banking and Financial Services Policy Report,

Volume 19 (Oct. 2000), ‘‘Banks as Securities

Lending Agents: To Register or Not as a Broker’’

(discussing decisions to be made by bank upon

determination of GLBA to banks’ own securities

activities).

285Barbara A. Rehm, No Merger Wave, But Money

Saved, The American Banker, Nov. 7, 2000, at 1,

noted that most banks would continue to do

business as usual, except that the bank, would no

longer require specific ‘‘loopholes to sell insurance

or underwrite securities.’’ The article further noted

that the biggest change for the banking industry was

‘‘it put an end to 20 years of battling over who

could do what.’’

286Broker-dealers may also have to register with

the states in which they do business.

287The Securities Investor Protection Act of 1970

created the Securities Investor Protection

Corporation (SIPC). 15 U.S.C. 78aaa, et seq. SIPC is

a nonprofit membership corporation funded by its

member securities broker-dealers. Most brokerdealers (excluding broker-dealers whose business is

limited to the following: Distributing shares of

mutual funds, selling variable annuities, providing

investment advice, or selling United States

Government securities) registered with the

Commission are automatically members of SIPC.

SIPC provide investors with certain protections in

the event of a bankruptcy or loss of securities by

a broker-dealer.

288For unsecured receivables, such as a

commercial loan, a bank is generally required to

reserve an amount of capital equal to as much as

8% of the loan amount. In contrast, a broker-dealer

would be required to reserve an amount of capital

equal to 100% of unsecured loan. For certain fully

secured loans, such as a margin loan, a bank would

be required to reserve as capital up to 8% of the

loan. A broker-dealer, however, would not be

required to reserve capital for the loan, provided the

account meets regulatory margin requirements. To

remain in capital compliance, a bank registered as

a broker-dealer would need to meet the greater of

the banking or securities regulatory capital

requirements for credit risk. Also, the customer

protection rule applicable to broker-dealers that

requires customer assets to be held separately from

proprietary assets would be virtually impossible for

a bank to comply with it if it accepts customer

deposits (the core business of commercial banking).

Therefore, in most cases, it would be prohibitively

expensive for a bank to engage in traditional

banking activity, such as unsecured lending, and for

a broker-dealer to conduct traditional securities

activities, such as extending margin loans.

289 Dual employees who are registered

representatives for a bank have certain obligations

created by SRO rules. For example, transactions for

bank customers must comply with NASD Rule 3040

effecting private placements and riskless

principal transactions.

Once the broker-dealer registration

provisions of the GLBA become

effective, banks that engage in the

securities activities described above will

need to determine whether they can

continue to engage in those activities in

the same way, or whether they will need

to restructure their businesses to comply

with the new statutory requirements.

The interim final rules adopted today

are designed to provide banks with

guidance in this process. The new

definitions should clarify the

parameters of the new statutory

exemptions from the definitions of

broker and dealer. In addition, the

interim final rules provide banks with

additional specific exemptive relief.

As always, we are mindful of the costs

imposed by our rules. We believe the

rules are consistent with Congress’s

intent in enacting the GLBA. Congress

determined that all securities activities

should be functionally regulated to

ensure investor protection, regardless of

the entity in which the activities occur.

Thus, the majority of regulatory costs

arise from Congress’s determination that

amendment of the Exchange Act was

necessary in light of the liberalization of

banking laws, such as Glass-Steagall.

Otherwise banks that engaged in

underwriting corporate securities would

be subject to a fragmented securities

regulatory scheme.

Banks that fall outside the scope of

one of the exceptions enumerated by

Congress in amended Exchange Act

Sections 3(a)(4) and 3(a)(5), as further

refined through these interim final

rules, may incur costs from the GLBA.

Even banks that have existing

relationships with registered brokerdealers may incur costs in connection

with discrete lines of securities business

that have nonetheless been conducted

directly by those banks. These costs

could relate to restructuring their

business operations, to transferring their

non-excepted securities business to

registered broker-dealers, or to entering

into networking arrangements with

registered broker-dealers. As noted

earlier, most of banks’ securities

activities are currently effected by SEC

regulated broker-dealers. In the

following section, we outline some of

the choices banks may have in

determining how they can best comply

with the new requirements of the GLBA

as well as the interim final rules.

3. Options for Compliance With the

GLBA Under the Statute in Light of

These Interim Final Rules

Banks will have a number of

preliminary decisions 284 in determining

how to comply with these interim final

rules and the amended definitions of

broker and dealer under the Exchange

Act.285 While most banks already

conduct their securities activities

through registered broker-dealers, the

GLBA may require some banks to shift

some securities activities formerly

conducted internally to registered

broker-dealers.

A bank that engages in securities

activities that are not covered by an

exception in the GLBA definitions of

broker and dealer may choose to shift

those activities to a registered brokerdealer. The registered broker-dealer

could be a broker-dealer with which the

bank already has a relationship.

Alternatively, the bank could enter into

a new relationship. One form of

relationship could be contractual—that

is, a bank could enter into a third-party

brokerage arrangement with a registered

broker-dealer. Alternatively, a bank

could choose to register an affiliate as a

broker-dealer.

If a bank registers a broker-dealer

affiliate, the bank has additional

choices. A banking group may register a

broker-dealer affiliate that is a

subsidiary of the bank holding company

or a financial holding company.

Alternatively, a bank may register a

broker-dealer that is an operating or

financial subsidiary of the bank. In all

cases when a bank uses a registered

broker-dealer, a bank may effect

securities transactions using bank

employees who also are associated

persons of the registered brokerdealer.286 Most non-bank registered

broker-dealers must also become

members of the Securities Investor

Protection Corporation.287

As a final option, a bank that wishes

to act as a broker-dealer may register

with the Commission and with at least

one SRO. To begin the registration

process, a broker-dealer completes the

uniform form for broker-dealer

registration, Form BD. The completed

Form BD is submitted to the Central

Registration Depository (CRD), which is

operated by the NASD. Broker-dealers

seeking to become members of the

NASD must also provide certain

information. This includes a detailed

business plan, as well as descriptions of

their financial controls, their

communications and operational

systems, their supervisory systems and

written procedures, their recordkeeping

systems, and their continuing education

plans. The NASD conducts in-person

membership interviews with all

applicants. Approval for membership

with the NASD is contingent upon the

submission of a written membership

agreement. Broker-dealers also must

register their personnel. Registration of

personnel is accomplished by

submitting a Form U–4 and a fingerprint

card. Registered personnel also need to

successfully complete qualification

examinations. We believe, however, that

most banks will not utilize this final

alternative, finding it impracticable due

to the disparate capital and customer

protection regulatory requirements 288

applicable to banks and securities firms,

including employment prohibitions.289

Federal Register / Vol. 66, No. 97 / Friday, May 18, 2001 / Rules and Regulations 27793

that restricts the ability of any person associated

with a member to participate in a ‘‘private securities

transaction,’’ which is defined as ‘‘any securities

transactions outside the regular course or scope of

an associated person’s employment with a

member,’’ subject to limited exceptions. NASD Rule

3040 requires broker-dealers to review all

transactions in which a registered representative

participates, including transactions where the

registered representative acts as an investment

adviser. The registered broker-dealer must develop

and maintain a record keeping system ‘‘to enable

the member to properly supervise the RR/IA by

aiding the member’s understanding of the nature of

the service provided by an RR/IA, the scope of the

RR/IA’s authority, and the suitability of the

transactions. NASD Notice to Members 96–33.

We, therefore, expect that most banks

will either enter into networking

arrangements or create broker-dealer

affiliates.

We are setting forth below additional

benefits and costs that we believe arise

from the promulgation of these interim

final rules. We note, however, that due

to the multitude of banking charters that

distinguish a ‘‘trust bank’’ from a

‘‘commercial bank’’ from a ‘‘savings and

loan,’’ we have delegated authority to

the Division of Market Regulation to

consider and to process a bank’s or

savings and loan’s request for additional

relief not encompassed within either

these interim final rules or the GLBA.

a. Benefits. We believe that these

interim final rules will provide legal

certainty for banks in connection with

their determination of whether they

meet the terms and conditions for an

exception to the definitions of broker

and dealer under the Exchange Act. By

adopting specific objective criteria, with

particular dollar limitations, business

activities, and time conditions, we have

provided banks with a basis to assess

accurately if and when they may need

to register as broker-dealers.

As discussed earlier, the GLBA

replaced the general exception for banks

from the definitions of broker and dealer

with specific functional exceptions for

certain bank securities activities. These

interim final rules clarify exceptions to

these amended definitions by defining

key terms used in the new functional

exceptions.

Moreover, Rules 3a4–2, 3a4–3, 3a4–4,

3a4–5, 3a4–6, and the definition of

trustee in Rule 3b–17 provide targeted

exemptions for certain banks from these

new definitions of broker and dealer.

Banks that meet the provisions of those

exemptions need not transfer their nonexcepted securities business to

registered broker-dealers.

Rule 15a–7 extends the date for banks

to comply with the requirements of the

exceptions. This alleviates the need for

banks to apply individually to us for

specific relief. To promote certainty in

commercial markets as to the legal

validity of contracts, Rule 15a–8

conditionally exempts banks

temporarily from risk of rescission

rights under Exchange Act Section 29.

Finally, new Rule 15a–9 exempts

savings associations and savings banks

from the terms ‘‘broker’’ and ‘‘dealer’’

under Exchange Act Sections 3(a)(4) and

3(a)(5) on the same terms and

conditions that apply to banks.

These interim final rules were written

in response to requests from the banking

industry for guidance. By clarifying

terms in the GLBA, these interim final

rules provide legal certainty to banks

seeking to conform their business

activities to the exceptions from the

definitions of broker and dealer. This, in

turn, will assist banks in planning their

ongoing business operations. In the

event they need additional time, we

have provided temporary exemptions

from compliance with the new terms.

These interim final rules, including

the temporary exemptions from

registration as a broker-dealer and the

temporary exemption from liability

under Section 29 for banks that would

have been required to register as a

broker-dealer, will enable banks to plan

and structure their business operations

to fully comply with the statute. This

latter exemption, in particular, will

eliminate costs that banks might have

otherwise incurred from actions to

rescind securities transactions during

the transition to compliance with the

new GLBA requirements.

In addition, Rules 3a4–2, 3a4–3, 3a4–

4, 3a4–5, 3a4–6, 3a5–1, and the

definition of trustee capacity in Rule

3b–17 exclude certain bank activities

from the scope of the GLBA’s amended

definition of broker-dealer. They,

therefore, provide relief to banks from

potential costs they might incur in

registering as a broker-dealer, registering

an affiliate as a broker-dealer, or

entering into a third-party brokerage

arrangement with a broker-dealer. These

costs could include engaging securities

counsel, registering as a broker-dealer,

paying personnel to study for and pass

applicable securities examinations, and

joining a SRO. Indeed, Rules 3b–17 and

3b–18, and the four limited exemptions,

clarify the permissible activities in

which banks may engage without

triggering the statutory requirement to

register as a broker or dealer under the

Exchange Act after May 12, 2001. As

noted earlier, most of banks’ securities

business is currently effected through

SEC-registered broker-dealers.

Consequently, we do not anticipate that

banks will derive a large benefit from

this rulemaking in relation to their

current securities business.

However, failure to adopt these

interim final rules could result in

additional costs. Without the certainty

and uniformity these interim final rules

provide, banks would have more

difficulty planning and operating their

existing businesses in compliance with

the GLBA. This, in turn, could result in

disruption of their securities business.

In addition, banks could be subject to

regulatory costs if their activities were

later determined to fall outside of the

scope of the GLBA’s exceptions.

In addition, the extension of time in

Rule 15a–7, and exemptions in Rules

3a4–2, 3a4–3, 3a4–4, 3a4–5, 3a4–6, 3a5–

1, and the definition of trustee capacity

in Rule 3b–17 benefit banks that may

not otherwise be able to comply with

the statutory deadline of GLBA. Most

banks that need additional time to

restructure their operations may rely on

these temporary exemptions and not

need to seek individual relief from our

staff. Banks seeking individual relief

may request a specific exemption from

us.

b. Costs. We believe that, regardless of

how a bank chooses to comply with the

GLBA in light of these interim final

rules, it will likely incur certain costs.

We believe, however, that almost all of

these costs will be necessary because of

the statutory change and not because of

the interim final rules.

Interim final Rules 3b–17 and 3b–18

are intended to clarify the meanings of

certain terms in the exceptions to the

definitions of broker and dealer, as

amended by the GLBA. Although they

are not intended to impose costs on any

market participant, we expect that some

banks may experience some de minimis

costs from the determination of how to

best comply with the GLBA. In

ascertaining this de minimis impact, we

reviewed the number of banks that are

already heavily involved in securitiesrelated activities.

Some banks seeking to meet the

exceptions to broker-dealer registration

could incur de minimis administrative

costs. For instance, Rule 3b–17 provides

an objective test for determining

whether a bank is ‘‘chiefly

compensated’’ through securities

activities as excepted by Exchange Act

Section 3(a)(4)(B)(ii). Banks seeking to

qualify for this particular exception will

need to undertake a financial

accounting review to determine their

compliance with this objective

compensation test. Some banks may

already keep and analyze the data

required to perform this analysis in

accordance with their customary audit

and reporting procedures under

applicable banking regulations. It is

possible, however, that some banks may

27794 Federal Register / Vol. 66, No. 97 / Friday, May 18, 2001 / Rules and Regulations

290 Depending on the number of accounts in the

bank, the accounts affected by the definition of

‘‘chiefly compensated,’’ and the number of accounts

resident, a bank may need to customize its

computer software to match the bank’s specific

accounts and data.

291 15 U.S.C. 78c(f).

292 15 U.S.C. 78w(a)(2).

293 Indeed, these rules actually enhance

competition by providing relief to savings

associations and savings banks as well as

‘‘commercial banks.’’ Letter from Scott M. Albinson,

Managing Director, OTS, to Annette L. Nazareth,

Director, Division of Market Regulation,

Commission and Paul F. Roye, Director, Division of

Investment Management, Commission (Mar. 20,

2001).

need to supplement their existing

accounting or financial procedures and

activities to perform this calculation on

an annual basis. Moreover, some banks

may incur similar costs in calculating

compensation on an account-by-account

basis.

Banks also may need to make limited

software changes to make the ‘‘chiefly

compensated’’ calculation.290 Because

of the differences in banks’ existing

computer systems, the types of account

information resident in those systems,

and the range of ways in which they

may choose to alter those systems, we

cannot estimate this cost with

specificity. We believe, however, that

the costs of computer alterations could

include the cost of purchasing new

computer hardware, as well as new

computer software. Banks also could

incur the costs of personnel time to reprogram software. As noted previously,

almost all of these costs arise from the

functional regulation mandated by the

GLBA and not from these interim final

rules.

We also expect that many banks may

incur costs for legal and other

professional accounting review. Many

banks will utilize their in-house

counsel, accountants, and compliance

officers. Banks that have provided cost

information have estimated their inhouse legal resources to range from

$75.00 to $125.00 an hour as a

composite rate based upon the yearly

salary of in-house counsel. Estimates of

legal counsel review time include the

hours spent by in-house counsel on

review and compliance with the GLBA.

Discussions with banks offering services

impacted by the GLBA indicate that

some banks have estimated the review

time of attorneys to fall within the range

of 30 to 60 hours. We expect that most

banks affected by the functional

regulation provisions of the GLBA will

either use in-house counsel or bank

officers for this review. We believe that

most of these costs arise from the

requirements of GLBA rather than from

our interim final rules.

Some banks may choose to utilize

outside counsel, either exclusively or as

a supplement to in-house resources. We

estimate these costs as the high end of

the in-house range.

If a bank affiliates with a registered

broker-dealer or enters into a third-party

brokerage arrangement, it may also

incur certain other costs. In making

these changes, the costs arise from the

statutory language of the GLBA, which

removed the exception banks had for

certain securities operations. These

costs could include, for example, the

cost of training, examining, and

licensing associated persons of the bank

as registered representatives of the

broker-dealer. In addition, banks may

incur additional expenses to establish a

relationship with a broker-dealer or to

inform their customers of their changes

in operating procedures. Since most

banks operate their securities related

business through broker-dealers

registered with us, we believe that these

costs, if any, would be quite small.

We request comments on the costs

and benefits of the interim final rules,

and ask commenters to provide

supporting empirical data for any

positions advanced. Commenters should

address in particular whether any of the

new rules will generate the anticipated

benefits or impose any costs on

investors, banks, registered brokerdealers or other market participants. As

always, commenters are specifically

invited to share quantifiable costs and

benefits.

D. Consideration of Burden on

Competition, and on Promotion of

Efficiency, Competition, and Capital

Formation

In accordance with our

responsibilities under Section 3(f) of the

Exchange Act, we have considered both

the protection of investors and whether

the interim final rules will promote

efficiency, competition, and capital

formation in determining whether they

are consistent with the public

interest.291 In addition, Section 23(a)(2)

of the Exchange Act 292 requires us, in

adopting rules under the Exchange Act,

to consider the anticompetitive effects

of such rules, if any, and to refrain from

adopting a rule that will impose a

burden on competition not necessary or

appropriate in furthering the purpose of

the Exchange Act.

We do not believe that the

interpretations, definitions, and

exemptions will result in any burden on

competition that is not necessary or

appropriate in furtherance of the

purposes of the Exchange Act or

Congress’s intent to impose functional

regulation upon banks that conduct a

brokerage business outside a statutory

exception in the GLBA. These interim

final rules define terms in the statutory

exceptions to the definitions of broker

and dealer added to the Exchange Act

by Congress in the GLBA, and provide

guidance to banks as to the appropriate

scope of those exceptions. These interim

final rules, therefore, do not impose any

additional competitive burdens on

banks engaging in a securities business,

other than those imposed through by

Congress through functional regulation

in the GLBA.

The conditional exemptions from

broker-dealer registration granted

through these interim final rules permit

banks more time to fully comply with

the statutory requirements of GLBA and

therefore do not impose any burden on

banks seeking to avail themselves of

those limited exemptions.

We do not believe that the new

definitional rules will adversely affect

capital formation. Nothing in the

interim final rules is intended to

adversely affect banks’ compliance with

the GLBA. Banks that alter their

securities-related activities in

accordance with the GLBA will

continue to be able to provide securities

services to their customers. In enacting

the GLBA, Congress determined that

functional regulation was appropriate—

that is, when a bank was conducting a

securities business outside of the

enumerated exceptions, that bank

should be registered as a broker-dealer.

In the interest of protecting the public

and ensuring orderly markets, Congress

determined that banks, with a broad

securities business, should be subject to

the same regulatory oversight as brokerdealers conducting the same types of

activities. These interim final rules

promote Congress’ intent.

Since these interim final rules define

statutory exceptions mandated by

Congress and provide temporary

exemptive relief for banks unable to

comply with certain of the exceptions

by the effective date of GLBA, we do not

believe that the rules impose any extrastatutory adverse effects on efficiency,

competition, or capital formation.293

Once Congress passed the GLBA,

Congress determined that regulation of

banks conducting a securities operation

outside of certain exceptions was

necessary and appropriate and in the

public interest.

We are, however, interested in

receiving comments regarding the effect

of these interim final rules on efficiency,

competition, and capital formation. We

will consider those comments in making

Federal Register / Vol. 66, No. 97 / Friday, May 18, 2001 / Rules and Regulations 27795

294 5 U.S.C. 601 et seq. See also 5 U.S.C. 603

(requiring the preparation of an IRFA). 295Although the requirements of the RFA are not

applicable to rules adopted under the

Administrative Procedures Act’s good cause

exception, see 5 U.S.C. 601(2) (defining ‘‘rule’’ and

notice requirements under the APA), we

nevertheless prepared an Initial Regulatory

Flexibility Analysis because we may supplant the

interim final rules with final rules.

296See Joint Release of the Board of Governors of

the Federal Reserve System, the Federal Deposit

Insurance Corporation, Office of the Comptroller of

the Currency and Office of Thrift Supervision,

‘‘Interagency Guidelines Establishing Standards for

Safeguarding Customer Information and Rescission

of Year 2000 Standards for Safety and Soundness,’’

65 FR 39471 (June 26, 2000).

297See FDIC, Statistics on Banking, available at

http://www.fdic/gov/bank/statistical/statistics/

0009/cbrc01a.html. There may be additional banks

that fall within the Exchange Act’s definition of

‘‘bank’’ under Section 3(a)(6) that may be subject to

GLBA that are not reflected in these figures. For

example, U.S.-licensed branches and agencies of

foreign banks may not be included in the FDIC’s

tally because they typically are not insured.

Nevertheless, we do not believe that any such

omissions are material to the analysis set forth in

the IRFA.

any changes to the interim final rules as

necessary.

We also solicit comment on the

potential effect of these interim final

rules on the U.S. economy on an annual

basis. Commenters are requested to

provide empirical data to support their

views.

E. Summary of Regulatory Flexibility

Analysis

We have prepared an Initial

Regulatory Flexibility Analysis

(‘‘IRFA’’) in accordance with the

Regulatory Flexibility Act (‘‘RFA’’) 294

regarding the interim final rules under

the Exchange Act that define certain

terms in the GLBA’s amendments to

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

Exchange Act and provide exemptions

from broker-dealer registration for

certain banks and savings and loan

associations.295 The following

summarizes the IRFA:

Rules 3b–17 and 3b–18 are intended

to provide banks with guidance on how

to interpret the exceptions to the

definitions of broker and dealer in

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

Exchange Act. This guidance is

intended to assist banks in structuring

their securities activities so as to

continue to fit within the exceptions for

their securities activities, as well as to

provide more certainty as to when

broker-dealer registration would be

required if they choose to engage in

more extensive securities activities.

Rule 15a–7 provides certain limited

time periods for banks to determine

whether they should register as brokerdealers or restructure certain of their

securities activities so as to continue to

be exempted from registration. Rule

15a–8 temporarily exempts banks from

liability under Exchange Act Section 29

by providing that no contract into which

a bank enters before January 1, 2003 will

be void or considered voidable because

the bank violates the registration

requirements of Exchange Act Section

15(a) or any rule under the Exchange

Act based solely on the bank’s status as

a broker-dealer. New Rules 3a4–2, 3a4–

3, 3a4–4, 3a4–5, 3a4–6, 3a5–1, and the

definition of trustee capacity in Rule

3b–17 provide exemptive relief that

permits banks that meet the conditions

in the exemptions to continue to effect

brokerage transactions for customers in

specified circumstances without

registering as broker-dealers under the

Exchange Act.

Specifically, Rules 3a4–2 and 3a4–3

provide that, under certain conditions,

banks will not be deemed to be brokers

under the trust and fiduciary activities

exception if the bank fails to satisfy the

compensation requirement, as long as

the bank complies with the other

requirements of the exception. Rule

3a4–4 conditionally exempts small

banks effecting transactions in

investment company securities for taxdeferred custody accounts. Rule 3a4–5

conditionally exempts banks effecting

transactions in securities for taxdeferred custody accounts. Rule 3a4–6

permits banks to process transactions in

investment company securities through

the NSCC’s Mutual Fund Services,

including Fund/SERV. Rule 3a5–1

provides that a bank will not be

considered a dealer if it engages in

riskless principal transactions as long as

the number of those transactions,

combined with any agency transactions

effected by the bank, is less than 500.

The definition of trustee capacity makes

clear that banks acting as indenture

trustees and trustees for tax-deferred

ERISA and IRA accounts will be eligible

for the trustee exception if they meet its

requirements.

Some banks affected by these interim

final rules would fall under the

definition of small entities for purposes

of the Regulatory Flexibility Act

(‘‘RFA’’). As discussed more fully in the

IRFA, unlike for broker-dealers and

other entities that historically have been

subject to our jurisdiction, we do not

have a definition of ‘‘small entity bank’’

for purposes of the RFA. The banking

regulators have defined small entities

for purposes of the RFA to include

banks with less than $100 million in

assets.296 For purposes of this analysis,

we have used the banking regulators’

definition of small entity. According to

information from the FDIC, there are

approximately 8,375 FDIC-insured

commercial banks; of these, 4,922 are

small entity banks with less than $100

million in assets.297 As explained more

fully below, one of the interim final

rules provides only small entity banks

with an exception from the definition of

broker. All of the other rules apply

equally to all banks. Thus, all banks

could be affected by the interim final

rules.

The clarification of statutory terms set

out in Rules 3b–17 and 3b–18 provide

additional guidance to all banks in

connection with their determination of

whether they fall within the terms and

conditions for the exceptions to the

definitions of broker and dealer under

the Exchange Act as amended by the

GLBA. These interim final rules provide

uniform definitions that will enable

banks to accurately assess whether they

are subject to our jurisdiction. The

extensions of time in Rule 15a–7 give

limited relief to certain banks that

cannot comply with the GLBA

provisions by the statutory effective date

of May 12, 2001.

In addition, Rules 3a4–2, 3a4–3, 3a4–

4, 3a4–5, 3a5–1, and the definition of

trustee capacity in Rule 3b–17 provide

exemptions from the definitions of

broker and dealer under the amended

Exchange Act. Rule 3a4–4 benefits small

entity banks that may not readily have

access (through affiliation or otherwise)

to a registered broker or dealer to

establish a networking arrangement

meeting the criteria of the GLBA, and

that maintain custody accounts for the

convenience of their customers. Under

this interim final rule, small banks may

engage in minor securities transaction

activities as an accommodation to their

customers in limited circumstances and

still fall outside of the definition of

broker under the Exchange Act.

Rules 3a4–2, 3a4–3, 3a4–4, 3a4–6,

3a5–1 and the definition of trustee

capacity in Rule 3b–17 are not limited

to small entity banks, but rather exempt

all banks. Rules 3a4–2 and 3a4–3 are

discussed above. The definition of

trustee capacity makes clear that banks

acting as indenture trustees and trustees

for tax-deferred ERISA and IRA

accounts will be eligible for the trustee

exception if they meet the other

requirements of the trust and fiduciary

activities exception.

As definitional and exemptive rules,

the interim final rules should not have

a significant regulatory impact on banks,

including small entity banks. Moreover,

we do not anticipate that the rules will

impose any additional recordkeeping

requirements on banks other than

recordkeeping currently required under

27796 Federal Register / Vol. 66, No. 97 / Friday, May 18, 2001 / Rules and Regulations

applicable banking statutes and

regulations.

As described in the IRFA, we have

considered and will continue to

consider alternatives to the interim final

rules that would accomplish our stated

objectives. These objectives are to

implement the Congressional

requirement to provide for functional

regulation of securities activities, to

provide banks with clear guidance on

whether they are subject to brokerdealer registration, and to provide

exemptive relief to banks that require

additional time to restructure their

business operations to comply with the

GLBA.

Congress did not exempt small entity

banks from the application of the GLBA.

Because the interim final rules are

intended to provide guidance to all

banks that are subject to the GBLA, it

would not be appropriate to exempt

small entity banks from operation of

these interim final rules. Nevertheless,

because we recognize that small banks

may not have established networking

relationships with broker-dealers for

purposes of the GLBA amendments, we

have provided an exemption for small

entities that maintain custody accounts

through Rule 3a4–4.

Because Rules 3b–17 and 3b–18 are

definitional and clarify the securitiesrelated activities in which banks may

engage without registering as brokerdealers, these interim final rules must

apply to all banks engaged in securities

brokerage activities. Accordingly,

providing different compliance and

reporting requirements under, or

exemptions from any of the

requirements pursuant to, these rules for

small entities would not be practicable

or promote the purposes of functional

regulation adopted by Congress.

The new interim final rules and

exemptions provide banks with more

legal certainty and additional flexibility

in determining how to structure their

operations to comply with the

provisions of the GLBA. This flexibility

benefits all banks, including small

entity banks, that wish to continue to

provide securities activities without

being required to shift those securities

activities to registered broker-dealers.

As noted in the IRFA, we encourage

the submission of written comments

with respect to any aspect of the IRFA.

Comment is specifically is requested on

the costs of compliance with these rules

and suggested alternatives that would

accomplish the objectives of these rules.

Comments received will be considered

in the preparation, if required, of a Final

Regulatory Flexibility Analysis.

A copy of the IRFA may be obtained

from Nancy Appel, Attorney, Office of

Chief Counsel, Division of Market

Regulation, Securities and Exchange

Commission, 450 Fifth Street, NW.,

Washington, DC 20549–1001; (202) 942–

0073.

XI. Statutory Authority

The Commission is amending Title

17, Chapter II of the Code of Federal

Regulations by amending Section

200.30–3, and by adding, as interim

final rules, Rules 3a4–2, 3a4–3, 3a4–4,

3a4–5, 3a4–6, 3a5–1, 3b–17, 3b–18, 15a–

7, 15a–8, and 15a–9 [Sections 240.3a4–

2, 240.3a4–3, 240.3a4–4, 240.3a4–5,

240.3a4–6, 240.3a5–1, 240.3b–17,

240.3b–18, 240.15a–7, 240.15a–8, and

240.15a–9, respectively] pursuant to

authority set forth in Sections 3(b), 15,

23(a), and 36 of the Exchange Act (15

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

respectively).

XII. Text of Rules and Rule

Amendments

List of Subjects

17 CFR Part 200

Administrative practice and

procedure, Authority delegations

(Government agencies), Organization

and functions (Government agencies).

17 CFR Part 240

Broker-dealers, Reporting and

recordkeeping requirements, Securities.

Text of Amendment

For the reasons set forth in the

preamble, Title 17, Chapter II of the

Code of Federal Regulations is amended

as follows:

PART 200—ORGANIZATION;

CONDUCT AND ETHICS; AND

INFORMATION AND REQUESTS

Subpart A—Organization and Program

Management

1. The authority citation for Part 200,

subpart A, continues to read, in part, as

follows:

Authority: 15 U.S.C. 77s, 78d–1, 78d–2,

78w, 78ll(d), 78mm, 79t, 77sss, 80a–37, 80b–

11, unless otherwise noted.

* * * * *

2. Section 200.30–3 is amended by

adding paragraph (a)(72) to read as

follows:

§ 200.30–3 Delegation of authority to

Director of Division of Market Regulation.

* * * * *

(a) * * *

(72) Pursuant to Sections 15(a)(2) and

36 of the Act (15 U.S.C. 78o(a)(2) and

78mm), to review and, either

unconditionally or on specified terms

and conditions, to grant or deny

exemptions to any bank, savings

association, or savings bank from the

broker-dealer registration requirements

of Section 15(a)(1) of the Act (15 U.S.C.

78o(a)(1)) or any applicable provision of

this Act (15 U.S.C. 78c et seq.) and the

rules and regulations thereunder based

solely on such bank’s, savings

association’s, or savings bank’s status as

a broker or dealer.

* * * * *

PART 240—GENERAL RULES AND

REGULATIONS, SECURITIES

EXCHANGE ACT OF 1934

3. 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, 78f, 78i, 78j, 78j–1,

78k, 78k–1, 78l, 78m, 78n, 78o, 78p, 78q, 78s,

78u–5, 78w, 78x, 78ll, 78mm, 79q, 79t, 80a–

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

and 80b–11, unless otherwise noted.

* * * * *

4. Sections 240.3a4–2, 240.3a4–3,

240.3a4–4, 240.3a4–5, and 240.3a4–6

are added to read as follows:

§ 240.3a4–2 Exemption from the definition

of ‘‘broker’’ for bank calculating

compensation for effecting transactions in

fiduciary accounts.

(a) A bank that meets the conditions

for exception from the definition of the

term ‘‘broker’’ under Section

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

78c(a)(4)(B)(ii)), except for 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)), is exempt from the

definition of the term ‘‘broker’’ under

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

78c(a)(4)) solely for effecting

transactions in securities pursuant to

Section 3(a)(4)(B)(ii) of the Act (15

U.S.C. 78c(a)(4)(B)(ii)) if:

(1) The bank can demonstrate that

sales compensation, as defined in

§ 240.3b–17(j), received during the

immediately preceding year is less than

10% of the total amount of relationship

compensation, as defined in § 240.3b–

17(i), received during that year;

(2) The bank maintains procedures

reasonably designed to ensure

compliance with 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)) with respect to a trust

or fiduciary account:

(i) When the account is opened;

(ii) When the compensation

arrangement for the account is changed;

and

(iii) When sales compensation, as

defined in § 240.3b–17, received from

the account is reviewed by the bank for

Federal Register / Vol. 66, No. 97 / Friday, May 18, 2001 / Rules and Regulations 27797

purposes of determining an employee’s

compensation; and

(3) The bank complies with Section

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

78c(a)(4)(C)).

(b) For purposes of this section, the

term year means either a calendar year

or other fiscal year consistently used by

the bank for recordkeeping and

reporting purposes.

§ 240.3a4–3 Exemption from the definition

of ‘‘broker’’ for bank effecting transactions

as an indenture trustee in a no-load money

market fund.

A bank that meets the conditions for

exception from the definition of the

term ‘‘broker’’ under Section

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

78c(a)(4)(B)(ii)), except for 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)), is exempt from the

definition of the term ‘‘broker’’ under

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

78c(a)(4)) solely for effecting

transactions as an indenture trustee in a

no-load money market fund, as defined

in § 240.3b–17(f) and § 240.3b–17(e),

respectively.

§ 240.3a4–4 Exemption from the definition

of ‘‘broker’’ for small bank effecting

transactions in investment company

securities in a tax-deferred custody

account.

(a) A small 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)) solely for effecting

transactions in securities of an open-end

management investment company

registered under the Investment

Company Act of 1940 (15 U.S.C. 80a–1

et seq.) in a tax-deferred account for

which the bank acts as custodian under

Section 3(a)(4)(B)(viii) of the Act (15

U.S.C. 78c(a)(4)(B)(viii)) if:

(1) The bank is not associated with a

broker or dealer and does not have an

arrangement with a broker or dealer to

effect transactions in securities for the

bank’s customers;

(2) Any bank employee effecting such

transactions:

(i) Is not an associated person of a

broker or dealer;

(ii) Primarily performs duties for the

bank other than effecting transactions in

securities for customers; and

(iii) Does not receive compensation

for such transactions from the bank, the

executing broker or dealer, or any other

person related to:

(A) The size, value, or completion of

any securities transaction;

(B) The amount of securities-related

assets gathered; or

(C) The size or value of any

customer’s securities account;

(3) The bank complies with Section

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

78c(a)(4)(C));

(4) The bank makes available to the

tax-deferred account the securities of

investment companies that are not

affiliated persons, as defined in Section

2(a)(3) of the Investment Company Act

of 1940 (15 U.S.C. 80a–2(a)(3)), of the

bank and that have similar

characteristics to the securities of

investment companies made available

that are affiliated persons;

(5) The bank does not solicit

securities transactions except through

the following activities:

(i) Delivering advertising and sales

literature for the security that is

prepared by the registered broker-dealer

that is the principal underwriter of an

open-end management investment

company registered under the

Investment Company Act of 1940 (15

U.S.C. 80a–1 et seq.), or prepared by an

open-end management investment

company registered under the

Investment Company Act of 1940 (15

U.S.C. 80a–1 et seq.) that is not an

affiliated person, as defined in Section

2(a)(3) of the Investment Company Act

of 1940 (15 U.S.C. 80a–2(a)(3)), of the

bank;

(ii) Responding to inquiries of a

potential purchaser in a communication

initiated by the potential purchaser;

provided, however, that the content of

such responses is limited to information

contained in a registration statement for

the security of an investment company

filed under the Securities Act of 1933

(15 U.S.C. 77a et seq.) or sales literature

prepared by the investment company

security’s principal underwriter that is a

registered broker-dealer;

(iii) Advertising of trust activities, if

any, permitted under Section

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

78c(a)(4)(B)(ii)(II)); or

(iv) Notifying its existing customers

that it accepts orders for investment

company securities in conjunction with

solicitations related to its other

activities concerning tax-deferred

accounts; and

(6) The bank’s annual compensation

related to effecting transactions in

securities pursuant to this exemption is

less than 3% of its annual revenue.

(b) Definitions. For purposes of this

section:

(1) The phrase compensation related

to effecting transactions in securities

pursuant to this exemption means the

total annual compensation received for

effecting transactions in securities

pursuant to this exemption, including

fees received from investment

companies for distribution.

(2) The term networking arrangement

means a contractual or other written

arrangement with a broker or dealer to

effect transactions in securities for the

bank’s customers.

(3) The term principal underwriter has

the meaning given in Section 2(a)(29) of

the Investment Company Act of 1940

(15 U.S.C. 80a–2(a)(29)).

(4) The term revenue means the total

annual net interest income and

noninterest income from the bank’s

most recent Consolidated Reports of

Condition and Income (Call Reports) or

any successor forms the bank is required

to file by its appropriate Federal

banking agency (as defined in Section 3

of the FDIA (12 U.S.C. 1813).

(5) (i) The term small bank means a

bank that:

(A) Had less than $100 million in

assets as of December 31 of both of the

prior two calendar years; and

(B) Is not, and since December 31 of

the third prior calendar year has not

been, an affiliate of a bank holding

company or a financial holding

company that as of December 31 of both

of the prior two calendar years had

consolidated assets of more than $1

billion.

(ii) For purposes of this paragraph

(b)(5) the terms affiliate, bank holding

company, and financial holding

company have the same meanings as

given in the Bank Holding Company Act

of 1956 (12 U.S.C. 1841 et seq.).

(6) The term tax-deferred account

means those accounts described in

Sections 401(a), 403, 408, and 408A

under Subchapter D and in Section 457

under Subchapter E of the Internal

Revenue Code of 1986 (26 U.S.C. 1 et

seq.).

§ 240.3a4–5 Exemption from the definition

of ‘‘broker’’ for banks effecting transactions

in securities in a custody account.

(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)) solely for effecting

transactions in securities in an account

for which the bank acts as custodian

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

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

(1) The bank does not directly or

indirectly receive any compensation for

effecting such transactions;

(2) Any bank employee effecting such

transactions:

(i) Is not an associated person of a

broker or dealer;

(ii) Primarily performs duties for the

bank other than effecting transactions in

securities for customers;

(iii) Does not receive compensation

for such transactions related to:

(A) The size, value, or completion of

any securities transaction;

27798 Federal Register / Vol. 66, No. 97 / Friday, May 18, 2001 / Rules and Regulations

(B) The amount of securities-related

assets gathered; or

(C) The size or value of any

customer’s securities account; and

(iv) Does not receive compensation for

the referral of any customer to the

broker or dealer;

(3) The bank complies with Section

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

78c(a)(4)(C));

(4) The bank makes available to the

account the securities of investment

companies with similar characteristics

that are not affiliated persons, as

defined in Section 2(a)(3) of the

Investment Company Act of 1940 (15

U.S.C. 80a–2(a)(3)), of the bank, if the

bank makes available the securities of

investment companies that are affiliated

persons, as defined in Section 2(a)(3) of

the Investment Company Act of 1940

(15 U.S.C. 80a–2(a)(3)); and

(5) The bank does not solicit

securities transactions except through

the following activities:

(i) Delivering advertising and sales

literature for the security that is

prepared by the registered broker-dealer

that is the principal underwriter of an

investment company, or prepared by an

investment company that is not an

affiliated person, as defined in Section

2(a)(3) of the Investment Company Act

of 1940 (15 U.S.C. 80a–2(a)(3)), of the

bank;

(ii) Responding to inquiries of a

potential purchaser in a communication

initiated by the potential purchaser of

the security; provided, however, that the

content of such responses is limited to

information contained in a registration

statement for the security filed under

the Securities Act of 1933 (15 U.S.C. 77a

et seq.) or sales literature prepared by

the principal underwriter that is a

registered broker-dealer;

(iii) Advertising of trust activities, if

any, permitted under Section

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

78c(a)(4)(B)(ii)(II)); and

(iv) Notifying its existing customers

that it accepts orders for securities in

conjunction with solicitations related to

its other custody activities.

(b) For purposes of this section, the

term principal underwriter has the

meaning given in Section 2(a)(29) of the

Investment Company Act of 1940 (15

U.S.C. 80a–2(a)(29)).

§ 240.3a4–6 Exemption from the definition

of ‘‘broker’’ for banks that execute

transactions in investment company

securities through NSCC Mutual Fund

Services.

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 solely for

transactions in investment company

securities effected through the National

Securities Clearing Corporation’s

Mutual Fund Services.

5. Section 240.3a5–1 is added to read

as follows:

§ 240.3a5–1 Exemption from the definition

of ‘‘dealer’’ for bank engaged in riskless

principal transactions.

(a) A bank is exempt from the

definition of the term ‘‘dealer’’ solely for

engaging in riskless principal

transactions if the number of such

riskless principal transactions during a

calendar year combined with

transactions in which the bank is acting

as an agent for a customer pursuant to

Section 3(a)(4)(B)(xi) of the Act (15

U.S.C. 78c(a)(4)(B)(xi)) during that same

year do not exceed 500 transactions.

(b) For purposes of the 500-

transaction limit in paragraph (a) of this

section, a riskless principal transaction

counts as:

(1) Two transactions if neither

transaction comprising the riskless

principal transaction is with a broker or

dealer; or

(2) One transaction if either

transaction comprising the riskless

principal transaction is with a broker or

dealer.

(c) For purposes of this section, the

term riskless principal transaction

means a transaction in which, after

having received an order to buy from a

customer, the bank purchased the

security from another person to offset a

contemporaneous sale to such customer

or, after having received an order to sell

from a customer, the bank sold the

security to another person to offset a

contemporaneous purchase from such

customer.

6. Sections 240.3b–17 and 240.3b–18

are added to read as follows:

§ 240.3b–17 Definitions of terms used in

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

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

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

(a) The term chiefly compensated

means that the ‘‘relationship

compensation’’ received by a bank from

a trust or fiduciary account exceeds the

‘‘sales compensation’’ received by the

bank from such account during the

immediately preceding year, which is

either a calendar year or other fiscal

year consistently used by the bank for

recordkeeping and reporting purposes.

(b) The term flat or capped per order

processing fee equal to not more than

the cost incurred by the bank in

connection with executing securities

transactions for trustee and fiduciary

customers means a fee that is no more

than the amount a broker-dealer charged

the bank for executing the transaction,

plus the costs of any resources of the

bank that are exclusively dedicated to

transaction execution, comparison, and

settlement for trust and fiduciary

customers.

(c) The term indenture trustee means

any trustee for an indenture to which

the definition given in Section 303 of

the Trust Indenture Act of 1939 (15

U.S.C. 77ccc) applies, and any trustee

for an indenture to which the definition

in Section 303 of the Trust Indenture

Act of 1939 (15 U.S.C. 77ccc) would

apply but for an exemption from

qualification pursuant to Section 304 of

the Trust Indenture Act of 1939 (15

U.S.C. 77ddd).

(d) The term investment adviser if the

bank receives a fee for its investment

advice means a bank that has a

relationship with the customer paying

the fee in which the bank:

(1) Provides, in return for the fee,

continuous and regular investment

advice to the customer’s account that is

based upon the individual needs of the

customer; and

(2) Under state law, federal law,

contract, or customer agreement owes a

duty of loyalty, including an affirmative

duty to make full and fair disclosure to

the customer of all material facts

relating to conflicts.

(e) The term money market fund

means an open-end management

investment 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 § 270.2a–7 of this chapter.

(f)(1) The term no-load in the context

of an investment company registered

under the Investment Company Act of

1940 (15 U.S.C. 80a–1 et seq.) means:

(i) Purchases of the investment

company’s securities are not subject to

a sales load, as that term is defined in

Section 2(a)(35) of the Investment

Company Act of 1940 (15 U.S.C. 80a–

2(a)(35)), or a deferred sales load, as that

term is defined in § 270.6c–10 of this

chapter; and

(ii) The investment company’s total

charges against net assets for sales or

sales promotion expenses and personal

service or the maintenance of

shareholder accounts do not exceed 0.25

of 1% of average net assets annually and

are disclosed in the money market

fund’s prospectus.

(2) For purposes of paragraph (f)(1) of

this section, charges for the following

will not be considered charges for

personal service or for the maintenance

of shareholder accounts:

Federal Register / Vol. 66, No. 97 / Friday, May 18, 2001 / Rules and Regulations 27799

(i) Transfer agent and subtransfer

agent services for beneficial owners of

the investment company shares;

(ii) Aggregating and processing

purchase and redemption orders;

(iii) Providing beneficial owners with

statements showing their positions in

the investment companies;

(iv) Processing dividend payments;

(v) Providing subaccounting services

for investment company shares held

beneficially;

(vi) Forwarding shareholder

communications, such as proxies,

shareholder reports, dividend and tax

notices, and updating prospectuses to

beneficial owners; or (vii) Receiving,

tabulating, and transmitting proxies

executed by beneficial owners.

(g)(1) The term nominal one-time cash

fee of a fixed dollar amount means a

payment in either of the following forms

that meets the requirements of

subparagraph (2):

(i) A payment that does not exceed

one hour of the gross cash wages of the

unregistered bank employee making a

referral; or

(ii) Points in a system or program that

covers a range of bank products and

non-securities related services where

the points count toward a bonus that is

cash or non-cash if the points (and their

value) awarded for referrals involving

securities are not greater than the points

(and their value) awarded for activities

not involving securities.

(2) Regardless of the form of payment,

the payment may not be related to:

(i) The size, value, or completion of

any securities transaction;

(ii) The amount of securities-related

assets gathered;

(iii) The size or value of any

customer’s bank or securities account;

or

(iv) The customer’s financial status.

(h) The term referral means a bank

employee arranging a first securitiesrelated contact between a registered

broker-dealer and a bank customer, but

does not include any activity (including

any part of the account opening process)

related to effecting transactions in

securities beyond arranging that first

contact.

(i) The term relationship

compensation means any compensation

received by a bank in connection with

activities for which the bank relies on

an exception under Section 3(a)(4)(B)(ii)

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

that is received directly from a customer

or beneficiary, or directly from the

assets of the trust or fiduciary account,

and consists solely of an administration

or annual fee (payable on a monthly,

quarterly, or other basis), a percentage of

assets under management fee, or a flat

or capped per order processing fee equal

to not more than the cost incurred by

the bank in connection with executing

securities transactions for trust and

fiduciary accounts, or any combination

of such fees.

(j) The term sales compensation

means any compensation received by a

bank in connection with activities for

which the bank relies on an exception

under Section 3(a)(4)(B)(ii) of the Act

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

(1) Is a fee for effecting a transaction

in securities that is not a flat or capped

per order processing fee equal to not

more than the cost incurred by the bank

in connection with executing securities

transactions for trustee and fiduciary

customers;

(2) Is compensation that if paid to a

broker or dealer would be payment for

order flow, as defined in § 240.10b–10;

(3) Is a finders’ fee received in

connection with a securities transaction

or account, except a fee received

pursuant to Section 3(a)(4)(B)(i) of the

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

(4) Is a fee paid for an offering of

securities that is not received directly

from a customer or beneficiary, or

directly from the assets of the trust or

fiduciary account;

(5) Is a fee paid pursuant to a Rule

12b–1 plan under the Investment

Company Act of 1940 (15 U.S.C. 80a–1

et seq.); or

(6) Is a fee paid by an investment

company for personal service or the

maintenance of shareholder accounts,

except a fee that is not part of a Rule

12b–1 plan under the Investment

Company Act of 1940 (15 U.S.C. 80a–1

et seq.) for:

(i) Transfer agent and subtransfer

agent services for beneficial owners of

shares in the investment company;

(ii) Aggregating and processing

purchase and redemption orders;

(iii) Providing beneficial owners with

statements showing their positions in

the investment companies;

(iv) Processing dividend payments;

(v) Providing subaccounting services

for shares in the investment company

held beneficially;

(vi) Forwarding shareholder

communications, such as proxies,

shareholder reports, dividend and tax

notices, and updating prospectuses to

beneficial owners; or

(vii) Receiving, tabulating, and

transmitting proxies executed by

beneficial owners.

(k) The term trustee capacity in

Section 3(a)(4)(B)(ii) of the Act (15

U.S.C. 78c(a)(4)(B)(ii)) includes an

indenture trustee or a trustee for a taxdeferred account described in Sections

401(a), 408, and 408A under subchapter

D and in Section 457 under subchapter

E of the Internal Revenue Code of 1986

(26 U.S.C. 1 et seq.).

§ 240.3b–18 Definitions of terms used in

Section 3(a)(5) of the Act.

For purposes of Section 3(a)(5)(C) of

the Act (15 U.S.C. 78c(a)(5)(C):

(a) The term affiliate means any

company that controls, is controlled by,

or is under common control with

another company.

(b) The term consumer-related

receivable means any obligation

incurred by any natural person to pay

money arising out of a transaction in

which the money, property, insurance,

or services (being purchased) are

primarily for personal, family, or

household purposes.

(c) The term member of a syndicate of

banks means a bank that is a participant

in a syndicate of banks and contributes

no less than 10% of the money loaned

by the syndicate.

(d) The term obligation means any

note, draft, acceptance, loan, lease,

receivable, or other evidence of

indebtedness that is not a security

issued by a person other than the bank.

(e) The term originated means

initially making and funding an

obligation.

(f) The term pool means more than

one obligation or type of obligation

grouped together to provide collateral

for a securities offering.

(g) The term predominantly originated

means that the bank or its affiliates, not

including any broker or dealer affiliates,

originated no less than 85% of the value

of the obligations in any pool. For this

purpose, the bank and its affiliates

include any financial institution with

which the bank or its affiliates have

merged but does not include the

purchase of a pool of obligations or the

purchase of a line of business.

(h) The term syndicate of banks

means a group of banks that acts jointly,

on a temporary basis, to loan money in

one or more bank credit obligations.

7. Section 240.15a–7, 240.15a–8,

240.15a–9 are added to read as follows:

§ 240.15a–7 Exemption from the

definitions of ‘‘broker’’ or ‘‘dealer’’ for

banks for limited period of time.

(a) A bank is exempt from the

definitions of the term ‘‘broker’’ under

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

78c(a)(4)) and the term ‘‘dealer’’ under

Section 3(a)(5) of the Act (15 U.S.C.

78c(a)(5) until October 1, 2001; and

(b) 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 January 1, 2002, for

activities that meet the conditions of an

27800 Federal Register / Vol. 66, No. 97 / Friday, May 18, 2001 / Rules and Regulations

exception or exemption for banks from

the definition of the term ‘‘broker’’

except for those conditions of Section

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

and the rules thereunder relating to

compensation of the bank or its

employees.

§ 240.15a–8 Exemption for banks from

Section 29 liability.

No contract entered into before

January 1, 2003 shall be void or

considered voidable by reason of

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

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 any applicable

provision of the Act (15 U.S.C. 78a et

seq.) and the rules and regulations

thereunder based solely on the bank’s

status as a broker or dealer when the

contract was created.

§ 240.15a–9 Exemption from the

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

savings associations and savings banks.

Any savings association or savings

bank that has deposits insured by the

Federal Deposit Insurance Corporation

under the FDIA (12 U.S.C. 1811 et seq.),

and is not operated for the purpose of

evading the provisions of the Act (15

U.S.C. 78a et seq.), is exempt from the

definitions of the terms ‘‘broker’’ and

‘‘dealer’’ under Sections 3(a)(4) and

3(a)(5) of the Act (15 U.S.C. 78c(a)(4)

and 15 U.S.C. 78c(a)(5)), based solely on

the savings association’s or savings

bank’s status as a broker or dealer on the

same terms and under the same

conditions that banks are excepted or

exempted, provided that if a savings

association or savings bank acts as a

municipal securities dealer, it shall be

considered a bank municipal securities

dealer for purposes of the Act (15 U.S.C.

78a et seq.) and the rules thereunder,

including the rules of the Municipal

Securities Rulemaking Board.

By the Commission.

Dated: May 11, 2001.

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 01–12388 Filed 5–11–01; 4:21 pm]

BILLING CODE 8010–01–P