Source: https://www.fdic.gov/news/news/press/2004/appendix_pg1.html
Timestamp: 2019-04-26 08:15:47+00:00

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The Proposed Rules, however, establish a chiefly compensated test that does not work for the diverse trust and fiduciary businesses of banks, is overly complex and burdensome, and would significantly disrupt the trust and fiduciary operations of banks that the statutory exception was designed to protect. In so doing, the Proposed Rules fail to recognize that the statutory ban on advertising and the Banking Agencies regular examination process already effectively prevent banks from circumventing the Trust and Fiduciary Exception and conducting a retail securities brokerage business in the bank.
Second, the Proposed Rules establish an overly complex formula for determining whether a bank meets the chiefly compensated test. In this regard, the Proposed Rules provide that a bank meets the chiefly compensated standard with respect to an account if the bank received more relationship compensation than sales compensation from the account during the preceding year. In order to make this calculation, however, a bank actually must classify each of the fees it receives from every trust or fiduciary account into one of three categoriesrelationship compensation, sales compensation, and other compensation. The other compensation category arises because the definitions of relationship compensation and sales compensation in the Proposed Rules do not include some common forms of compensation that banks receive from their trust and fiduciary customers, e.g., fees for tax preparation, bill payment, and real estate settlement services, and certain types of payments received from mutual funds for personal services or the maintenance of shareholder accounts. The plain language of the statute, however, provides that a banks compliance with the chiefly compensated test should be determined by comparing the relationship compensation the bank receives from all of its trust and fiduciary accounts to the total compensation that it receives from these accounts.
In light of these interpretations, the Commissions chiefly compensated test simply would not work for many banks and many important and traditional trust and fiduciary business lines. In addition, the Commissions proposed interpretation would impose substantial costs on banks that seek to comply with its terms. For example, banks generally do not have the systems in place to track the compensation that they receive from each trust and fiduciary account, nor do banks generally have the systems in place that would allow them to classify the fees they receive from each trust and fiduciary account into one of the three categories required by the Proposed Rules (relationship compensation, sales compensation and other compensation).8 This is especially true because the Proposed Rules source-of-fee limitation may well require banks to individually review each of their trust or fiduciary accounts in order to determine what person or account is billed and pays for the banks services.
Moreover, the account-by-account approach is inconsistent with the manner in which banks receive certain fees. For example, banks typically receive 12b-1 and service fees from mutual funds on an aggregate basis for all of the banks accounts invested in the relevant fund. While the Commission itself has proposed a methodology that would allow banks to allocate the Rule 12b-1 and servicing fees that they receive to individual accounts, this methodology itself creates problems. For example, as the Commission has recognized, this methodology could result in a substantial and inappropriate amount of fees being allocated to a trust and fiduciary account that is opened late in a year, which could cause the account to fail the chiefly compensated test due to the Commissions account-by-account interpretation of this test.
We do not believe it is reasonable to interpret the statutes chiefly compensated standard in a way that would not work for major aspects of the trust and fiduciary operations of banks and that would significantly disrupt the normal trust and fiduciary operations of banks. While we appreciate the Commissions efforts to mitigate the disruptions that would be caused by its interpretation through the adoption of administrative exemptions, we believe these administrative exemptions would be unnecessary if the statute itself was properly implemented. Furthermore, as discussed below, the administrative exemptions proposed by the Commission are subject to a variety of SEC-imposed conditions that are not consistent with the diverse nature of bank trust and fiduciary operations and would create an overly complex and burdensome regulatory framework that is well beyond what Congress contemplated or authorized.
The Banking Agencies strongly urge the Commission to modify its interpretation of the statutes chiefly compensated standard in order to give effect to the language and purposes of the Trust and Fiduciary Exception and not disrupt the trust and fiduciary activities and customer relationships of banks. Specifically, the statute itself permits a bank to calculate its compliance with the chiefly compensated test on an aggregate, bank-wide basis for all of the banks trust and fiduciary accounts. In addition, the statute provides that a bank meets the chiefly compensated test if the total relationship compensation the bank receives from all of its trust and fiduciary accounts exceeds 50 percent of the total compensation the bank receives from these accounts.9 As noted above, banks already report the total compensation they receive from their trust and fiduciary accounts for bank supervisory purposes. Finally, relationship compensation should be defined to include all of the permissible fees set forth in the GLB Act, including Rule 12b-1 and servicing fees, regardless of whether the fee was received from the assets of the account, a beneficiary or another source (such as a mutual fund).
We believe this interpretation of the statutes chiefly compensated test is fully consistent with both the language and purposes of the GLB Act. In addition, because this approach is significantly less complicated than the approach embodied in the Proposed Rules, adoption of this interpretation would substantially reduce the costs and disruptions that would be imposed on both banks and their customers.
The GLB Acts Trust and Fiduciary Exception is available for any securities transaction that a bank effects in a trustee capacity . . . or in a fiduciary capacity. The GLB Act also specifically provides that a bank is deemed to act in a fiduciary capacity for purposes of the Exception whenever the bank acts (i) as a trustee, executor, administrator, registrar of stocks and bonds, transfer agent, guardian, assignee, receiver, or custodian under a uniform gift to minor act, (ii) as an investment adviser if the bank receives a fee for its investment advice, (iii) in any capacity in which the bank possesses investment discretion on behalf of another, or (iv) in any other similar capacity.10 This definition of fiduciary capacity purposefully was drawn from and based on Part 9 of the OCCs regulations (12 C.F.R. § 9.2(e)), which governs the trust and fiduciary operations of national banks.
We support the Commissions decision to withdraw the exemptions contained in the Initial Rules that purported to define certain types of trust relationships (i.e., indenture trustee, ERISA trustee, and IRA trustee) as being a trustee capacity for purposes of the GLB Act. These exemptions created ambiguity concerning the scope of the term trustee capacity by suggesting some parties that act as trustees under Federal and state law would not qualify as trustees for purposes of the Trust and Fiduciary Exception. As indicated in our previous comment letter, we believe that the term trustee capacity is not ambiguous and that this term includes a bank when it is named as trustee by written documents that create a trust relationship under applicable law. The Commissions decision to withdraw these exemptions, as well as its statement that banks acting as a trustee may effect transactions under the Trust and Fiduciary Exception even if they do not assume significant fiduciary responsibilities as trustee,11 should provide banks appropriate certainty concerning the status of their trust relationships under the GLB Act.
2. Investment Advice for a Fee.
The GLB Act itself provides that a bank acts in a fiduciary capacity whenever it acts as an investment adviser [and] receives a fee for its investment advice. Accordingly, we support the Commissions decision to eliminate the provisions of the Initial Rules that would have required a bank to provide continuous and regular investment advice to a customer in order to be acting in a fiduciary capacity.
It is well settled that banks that provide investment advice to customers owe their customers a duty of loyalty under established principles governing fiduciary duties. However, our Agencies do not believe that such a duty can or should be imposed on a bank under the Exchange Act. The plain language of the GLB Act provides that a bank is considered to be acting in a fiduciary capacity whenever the bank provides investment advice to a customer for a fee. Thus, Congress itself has declared that banks providing investment advice for a fee are fiduciaries for purposes of the Trust and Fiduciary Exception. We see no basis for the Commission to provide that a bank acts as an investment adviser for a fee, and thus is considered to be acting in a fiduciary capacity, only if the bank has a fiduciary relationship with the customer pursuant to which the bank has a duty of loyalty to the customer. Indeed, the Commissions definition is circular given Congress own definition of when a bank is deemed, by operation of law, to be acting in a fiduciary capacity.
Moreover, as the courts have long recognized, the duty of loyalty that a bank or other entity providing investment advice owes to its advisory customers arises from the fiduciary nature of the advisory relationship itself and exists independently from the Federal securities laws.15 While Congress decided in 1940 to provide the Commission with the authority to enforce this duty under the Advisers Act with respect to registered investment advisers, Congress also specifically exempted banks from the definition of investment adviser in the Advisers Act.16 Congress did so in recognition of the fact that banks providing investment advice for a fee already have a duty of loyalty under fiduciary law and that compliance by banks with this important duty already was effectively monitored and enforced by the Banking Agencies through the bank regulation and examination process.
3. Other Fiduciary and Similar Capacities.
As noted above, Congress purposefully based the definition of fiduciary capacity in the Exchange Act on the definition of that term in Part 9 of the OCCs regulations governing the trust and fiduciary activities of national banks. Thus, while the Adopting Release correctly points out that the same term does not necessarily have the same meaning when used in different statutes, we believe that the OCCs interpretations and rulings concerning when a bank acts in a fiduciary capacity for purposes of Part 9 should be given great weight in construing the same term in the Exchange Act. Indeed, because Congress intentionally incorporated the definition of Part 9 into the Exchange Act, construing these terms harmoniously would promote and further the intent of Congress.
We support the Commissions decision to rely on the Banking Agencies to ensure that banks meet the statutes examination requirements. The securities transactions that banks effect on behalf of their trust and fiduciary accounts currently are subject to regular examination by our Agencies for compliance with fiduciary principles and standards. In this regard, the Banking Agencies have established detailed and rigorous examination procedures for the trust and fiduciary activities of banks. In accordance with these procedures, our examiners, among other things, review the information reported by banks on a quarterly basis concerning their trust and fiduciary accounts, interview management and key employees responsible for trust and fiduciary activities to understand any material changes to the banks business, review the policies and procedures banks employ to help ensure that they meet their fiduciary obligations to customers and comply with applicable law, including the results of internal audit or other reviews assessing the effectiveness of these policies and procedures, and periodically engage in transaction testing involving individual account files and documents.
The Banking Agencies have adopted a risk-focused approach to examining banks, including their trust and fiduciary activities. Under this approach, our ongoing monitoring of a banks trust and fiduciary activities allows for strategic targeting of examiner resources. As a result, the frequency and scope of our examination of the trust and fiduciary activities of a particular bank varies based on the size and complexity of the banks trust and fiduciary activities and the risks such activities pose to the bank.21 Of course, examiners assessment of a banks past performance in effecting securities transactions on behalf of trust and fiduciary customers is a key determinant considered in setting the timing and scope of the next trust and fiduciary examination.
In light of the foregoing, we believe that the Commission should affirmatively state that the Trust and Fiduciary Exception is available to banks whose trust and fiduciary activities are examined in accordance with the examination procedures employed by the Banking Agencies. We believe this would provide important certainty to banks concerning this aspect of the Trust and Fiduciary Exception.
We also believe that the Trust and Fiduciary Exception is available to a bank even if it uses a registered broker-dealer, investment adviser or other entity to assist it in effecting securities transactions on behalf of its trust and fiduciary accounts. If a bank uses a third party service provider to perform (on behalf of the bank) securities transaction services for the banks trust and fiduciary customers, examiners review the banks relationship with the service provider and the systems the bank has in place to ensure that the services being provided are consistent with the banks fiduciary obligations to its customers. Moreover, if an examiner has concerns about the services being provided, the Banking Agencies have authority under the Federal banking laws to examine the service provider, subject to certain limits where the provider is a functionally regulated affiliate.22 Accordingly, the services that a third party provides to a banks trust and fiduciary customers on behalf of the bank are regularly examined for compliance with fiduciary principles.
The GLB Act defines relationship compensation to include a flat or capped per order processing fee equal to not more than the cost incurred by the bank in connection with effecting securities transactions for trustee and fiduciary customers. While the Commission would allow a per-order processing fee to include some of the costs associated with shared trading desks and other resources that are not exclusively dedicated to trust and fiduciary customers, the Proposed Rules, allow an authorized per-order processing fee to include only the direct marginal costs of shared resources (such as common trading desks or trading platforms) that are used for the execution, comparison and settlement of transactions for trust and fiduciary customers. In addition, the Proposed Rules allow a bank to include these direct marginal costs only if the bank makes a precise and verifiable allocation of these resources according to their use.
Banks, of course, may incur both marginal and fixed costs in developing and maintaining shared systems for handling securities transactions for trust and fiduciary and other customers. Prohibiting banks from including a portion of the fixed costs associated with such shared systems in a per-order processing fee does not allow banks to recover the cost incurred by the bank in connection with executing transactions for trustee and fiduciary customers.24 It is, therefore, an interpretation that is contrary to the language of the GLB Act. This is especially true if the bank incurred significant fixed costs to develop the shared resources (such as software) and these resources are used primarily (but not exclusively) to support the banks trust and fiduciary operations.
The precise and verifiable requirement also is not mandated by the statute, may be unjustifiably costly to implement, and reflects unnecessary micromanagement of bank systems. We are concerned that many banks may not be able to make a precise and verifiable allocation of their resources in the manner contemplated by the Proposed Rules. If this is the case, then the Rules accounting restrictions would essentially prevent banks from including the costs of any shared resources in a per-order processing fee. We believe that a bank should be permitted to include its average total cost for effecting securities transactions for trust and fiduciary and other customers in a per-order processing fee if the bank has reasonable procedures for determining its average total per transaction cost. We believe this approach would give effect to the statute without imposing unnecessary burdens on banks.
1 15 U.S.C. § 78c(a)(4)(B)(ii) (“Trust and Fiduciary Exception”).
2 See id. at § 78c(a)(4)(C).
3 See Proposed Rule 242.724(a).
4 See Letter from the Banking Agencies to Jonathan G. Katz, Secretary of the Commission, dated June 29, 2001 (“2001 Comment Letter”), at Appendix p. 6-7.
5 See Proposed Rule 242.724(h). Because of the statute’s plain language, we support the Commission’s decision to treat an asset under management fee as relationship compensation even if the fee is separately charged on real estate or other non-securities assets.
6 Bank trust departments frequently are called upon to develop complex and individualized solutions to multi-faceted estate, inheritance, business-transition, corporate transaction and other wealth-preservation issues involving several parties. In responding to these needs, banks may establish complex payment and account structures that allow for the fees related to a trust or fiduciary account to be paid by someone other than the customer or beneficiary or by a source other than the account itself.
7 We recognize that the Commission has expressed special concerns regarding the prevalence and growth of Rule 12b-1 fees and other fees in the mutual fund industry and the conflicts that these fees may create for broker-dealers, investment advisers, banks and other entities that manage or handle customer investments. However, we believe that existing trust and fiduciary principles, combined with our Agencies’ rigorous examination programs, adequately protect the trust and fiduciary customers of banks from these conflicts. To the extent that the Commission has more general concerns regarding the Rule 12b-1 and other fees currently being paid by mutual funds, we believe it would be more appropriate for the Commission to address these concerns through action under the Investment Company Act of 1940 that would apply equally to all financial intermediaries that receive these fees.
8 Banks that engage in trust or fiduciary activities currently are required to file a quarterly report with the appropriate Banking Agency indicating the total income that they receive from (i) all of their trust and fiduciary accounts, and (ii) all of their trust and fiduciary accounts within five identified business lines. For reporting purposes, these business lines are defined as personal trust and agency accounts; retirement related trust and agency accounts; corporate trust and agency accounts; investment management agency accounts; and other fiduciary accounts. This information is reported on Schedule RC-T of a bank’s call report (Forms FFIEC 031 and 041).
9 Alternatively, a bank could establish that it met the chiefly compensated test by demonstrating that the total sales compensation it received from its trust and fiduciary accounts, in the aggregate, constituted less than 50 percent of the bank’s total compensation from those accounts.
10 See 15 U.S.C. § 78c(a)(4)(B)(ii).
11 See Adopting Release at 39,700.
12 See Proposed Rule 242.724(d).
13 See 69 Federal Register 29,682, 39,733 (2004).
15 See, e.g., SEC v. Capital Gains Research Bureau, 375 U.S. 180, 194 (1963) (recognizing that investment advisers have a fiduciary relationship with their clients and that the courts, under the common law, have imposed on advisers an “affirmative duty of ‘utmost good faith, and full and fair disclosure of all material facts’”.) (citation omitted); Spear & Staff, Inc., Investment Advisers Act Rel. No. 188 (1965) (“It was judicially recognized long prior to the [Advisers] Act that investment advisers stand in a fiduciary relation to their clients.”); 2 Frankel, The Regulation of Money Managers: Mutual Funds and Advisers § 13.01[A] (2d ed. 2001).
16 See 15 U.S.C. § 80b-2(a)(11)(A). In the GLB Act, Congress amended this exemption to provide that a bank would be considered an investment adviser for purposes of the Advisers Act to the extent it served as an investment adviser to a registered investment company.
17 As a technical matter, we note that the Proposed Rules suggest that a bank acting as an investment adviser only has a responsibility to effect a securities transaction for a customer “if the customer accepts [the bank’s investment] selections or recommendations.” See Proposed Rule 242.724(d)(2). Banks typically have an obligation to execute securities transactions for their non-discretionary advisory customers whether or not the customer accepts the bank’s investment advice and the text of the Proposed Rule should be amended to reflect this fact.
18 The Adopting Release elaborates that “all aspects” of a securities transaction include: (i) identifying potential purchasers of securities transactions; (ii) screening potential participants in a transaction for creditworthiness; (iii) soliciting securities transactions; (iv) routing or matching orders, or facilitating the execution of a securities transaction; (v) handling customer funds and securities; and (6) preparing and sending transaction confirmations. See Adopting Release at 39,703; Initial Rules at 27,772-73.
19 Although the text is not entirely clear, the Adopting Release appears to suggest that a bank would not lose its ability to rely on the Trust and Fiduciary Exception if certain aspects of a securities transaction are done by a SEC-registered investment adviser. See Adopting Release at 39,704, n. 201. For purposes of this discussion, we have assumed that the Commission intended this result.
20 12 C.F.R. Part 12 (OCC); § 208.34 (Board); and Part 344 (FDIC).
21 For example, the material fiduciary business lines of banks with large and complex trust and fiduciary operations are examined, at a minimum, over a one- to two-year period or examination cycle as part of the continuous supervision process. Smaller banks and those with less-diverse trust and fiduciary operations are examined for compliance with trust and fiduciary principles at least every other exam cycle.
22 See 12 U.S.C. §§ 1867, 1844(c) and 1831v.
23 Of course, we agree that an entity that provides securities transaction services to a bank cannot itself rely on the bank exceptions in section 3(a)(4) of the Exchange Act unless that entity is a bank.
24 See 15 U.S.C. § 78c(a)(4(B)(ii)(I).

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